The Financial Times has a style of reportage that I would place somewhere between a newswire and The Economist. The reporters are superb, the coverage is excellent, and I happily pay my monthly subscription for online-only access. But because of that same style, the FT all too rarely delivers stories that can deliver memorable analysis and insight. Those sorts of things tend to get shunted into "special reports" and the opinion section.
But occasionally there is an exception, and Sundeep Tucker and Jamil Anderlini penned one in early July entitled "Exiting the Dragon," which chronicled the recent spate of global banks divesting their China financial holdings, putting that activity into the context of the troubles that the global financial industry has faced in trying to build businesses in China.
M&A is Not Strategy
As frequently happens when journalists dive deep into a topic like this, a host of other issues emerge that, while peripheral to the thrust of the article, are precious nuggets in their own right. The one that stopped me was this paragraph about China and strategy:
"The strategic aspect of these deals was always overstated,” says Lonnie Dounn, formerly of HSBC in Asia but who in 2005 was named chief credit officer of Bank of China, becoming the first foreigner to hold a senior executive position at a top mainland lender. “The Chinese banks did not want to give the foreign banks access to their best customers and the foreign banks did not, going in, have clear strategies for the Chinese market,” says Mr Dounn, who is no longer with BoC."
Dounn makes the single most important point that needs to be learned by both U.S. companies entering China, and by Chinese companies stepping into overseas markets. An investment, an acquisition, or a merger is not a strategy. They are tactics, and to make an investment strategic it must be a logical and necessary component of a clear and practical strategy.
So Much for Guanxi
Notwithstanding the substantial capital gains earned in the process, I would wager that a lot of these investments - Bank of America's (NYSE:BAC) stake in China Construction Bank (OTCPK:CICHF), the Royal Bank of Scotland's (NYSE:RBS) holdings in Bank of China (OTCPK:BACHF), and similar purchases by UBS (NYSE:UBS) and Citigroup (NYSE:C) - were at their core a form of capital-based government relations. By investing a lot of cash for nominal stakes in state-owned banks, western financial institutions were attempting to demonstrate their commitment to China to policy makers who in turn could grant access to China's growing commercial and retail banking sectors.
All of that would have been fine if these investments really purchased any substantive and enduring goodwill. I would suggest that China gained little through these investments in the first place, and as such the banks gained little favor in Beijing for their trouble. Sadly, whatever goodwill there was has been liquidated along with the holdings. Global financial crisis notwithstanding Chinese leaders, businesspeople, and consumers do not appreciate companies that swear a deep and enduring commitment to the market, only to pack up and pull out when things get a little tough.
And memories are long here.
The Accidental Victory
One could argue that the banks that have cashed out of Chinese financial institutions are probably better off taking their profits from their investments than they would be in undertaking a massive and distracting effort to win over Chinese enterprise and consumer customers. That may well be the case, but given that this did not seem to be the motivation behind the original investments - or behind the divestments - the banks simply lucked into this. If the past two years have proven anything, it is that hope is not a dependable strategy for financial businesses.
If the banks in question were hoping to use these investments to root themselves into the Chinese financial industry at a critical point in its development, with a view to being a player in Chinese commercial and retail banking at some point in the future, they have failed utterly.