Thesis on "American Express Strategy in China"

Thesis 5 pages (1812 words) Sources: 1+

[EXCERPT] . . . .

American Express in Asia

Assessing American Express' Potential in Asia

With Specific Focus on China

With a reputation for being one of the most saving-centric regions of the world, Asians in general and Chinese specifically are known for savings rates at 40% or more of their incomes (Rein, 2009). As a result, Asia in general and China specifically has one of the lowest penetrations of credit cards globally. Besides the culturally held belief that borrowing makes a person and family weaker (Rein, 2009) there are significant changes happening in specific demographic and psychographic segments of the Asian and Chinese markets leading to more optimistic forecasts of credit card use throughout this region and country. With a Gross Domestic Product (GDP) that is over $7 trillion, a GDP growth rate of 11.9% and retail savings growth of 6.7%, China's economy is one of the most resilient, yet dependent on westernized nations' continued spending (Maddison, Wu, 2008). With this economic resilience comes an ethic towards saving cash as the primary approach to asset management for individuals and small businesses. The intent of this analysis is to define the potential for American Express in Asia in general, and in China specifically, examining the factors that are contributing to China's exceptional levels of economic growth in the process. The bottom line is that for American Express to succeed in China that will have to rely on joint ventures as they have today with Industrial and Commercial Bank of China (I.B.I.C.) (Bayot, 2004).

Evaluating Asian and Chinese Market Dynamics for Credit Cards

In assessing the potential market for credit cards in general and American Express card specifically, one of the most accurate predictors of adoption of these financial services products is the distribution of household assets by class. Even though the use of credit in the past was viewed culturally as a weakness of individuals and families that did not save enough to live on, there is a shift occurring in the Asian and Chinese cultures (Rein, 2009). Yet today the majority of household assets continue to be held in cash per the household asset distribution shown in Figure 1.

Figure 1: Household Asset Distribution

Source: (Worthington, 2005)

As a result of the sociological factors driving such a high level of asset distribution in cash, the Chinese household asset distribution is inverse to the United States, with over 80% of assets held in cash. Conversely less than 20% of assets in the U.S. are held in cash with the majority held in investments. This distribution of household assets by type also serves as a useful indicator as to the level of credit card usage in this countries as well. When extrapolated across a sampling of nations as tracked by the IMF (Rogoff, 2004) the correlation of Purchasing Power Parity (PPP) to credit cards per capita graphically illustrates how drastically different Asia is relative to the United States. Notice the U.S. has the greatest level of credit card penetration of any other nation by a significant margin. Figure 2, Correlation of Credit Cards Per Capita to GDP Per Capita quantifies and clearly illustrates the many challenges for American Express in penetrating this market.

Figure 2: Correlation of Credit Cards Per Capita to GDP Per Capita

Source: (Rogoff, 2004)

Credit card penetration in Asia and China is a paradox for American Express. On the one hand China is one of the most prosperous and financially growing regions of the world yet its sociological and cultural values traditionally have been against debt. Compounding these sociological factors is the lack of financial services infrastructure in place in these regions of the world (Willis, Worthington, 2006). This includes a lack of support for real-time transaction clearing, support for advanced forms of credit card transactions in the more remote regions of Asia and China, and the need to support two currencies on the same credit card, which is exactly what American Express did when it launched its corporate card in China during 2004 (Bayot, 2004). Compounding these challenges are the controls that the Communist Party, often called the Peoples Republic of China (PRC) has on the Chinese banking system, which was one of most complex factors that drove American Express to create a joint venture with Industrial and Commercial Bank of China (I.B.I.C.) (Bayot, 2004). As a result of the close regulation of the Chinese banking system by the RPC, American Express has found one of their best customers in this region however. Paradoxically the PRC purchased 90% of all traveler's checks that American Express sold in China during the last few years (Monro, 2006). In addition to the sociological, systemic and process-related challenges of operating in a region split between being a 3rd world nation on the one hand and a 21st century nation in the high population areas, American Express can find selectively areas of growth in the Asian region in general and China specifically.

Strategic Implications of American Express' Expansion in Asia and China

Clearly the go-to-market strategies for American Express to succeed in Asia and China must be nearly the inverse of their strategies in the U.S. As the market dynamics are so significantly different. To this point American Express is taking a very long-term view in the region, investing heavily in Corporate Social Responsibility Programs to earn the trust of the PRC so the company can eventually be seen by the Communist party as a trusted advisor in all forms of credit-based transactions. This will take literally years to accomplish. Strategically speaking this is tantamount to creating a partnership with the Chinese government over time, increasing trust and transparency to ensure the company can continue to grow.

Tactically American Express is making significant strides however in the Asian market overall, with success in the more urbanized regions of the country where there is a higher per capita income and a stronger influence on westernized purchasing habits. In addition, these regions have higher concentrations of the market segments American Express must capture to grow over the coming decades throughout the entire region. Research from China Market Research Group (Rein, 2009) shows that usage rates of credit cards are highest in the cities of Shanghai and Beijing. Working professionals between 25 to 40 years of age on average have one more credit cards in these cities and have a higher propensity to carry balances as well. The psychographics of these market segments indicate that they are looking for a sense of empowerment, convenience and professional identity from the use of their cards (Rein, 2009). Consistent with the findings from the China Market Research Group are the longitudinal studies that point to an emerging middle class in Hong Kong and the more prosperous Chinese cities who seek to emulate western values regarding the use of debt for immediate gratification. Slowly the mindset that borrowing or going into a debt is a sign of a lack of financial management and an inability to make ends meet (Worthington, 2003) is changing. The emergence of the middle class is driving the adoption of credit cards, including travel services from American Express. Defined by the need to stay in close collaboration with the PRC, which dictates by region and city foreign multinational corporations can expand into China, American Express lobbied early on to have Travel Related Services offices in the cities that showed the greatest potential growth, and over time American Express was successful with this strategy (Worthington, 2005). As a result Travel Related Services offices are in the national capital, Beijing, also in the very prosperous coastal city of Shanghai, in addition to Guangzhou, just north of Hong Kong. American Express also has banks in Beijing and Shanghai. Figure 3, Economic Region Analysis of China, provides insights into why American Express chose these cities and the many challenges that are ahead in terms of growth. The analysis shows how the coastal areas of North China, East China and South China all have the greatest influence on potential credit products' use. The PRC controls access to these most prosperous regions of the country through tariffs and taxes. Many American executives in fact find it humorously ironic that the PRC, a communist organization, is highly capitalistic in their approach to granting or denying access to their most profitable regions (Worthington, 2005).

Figure 3: Economic Region Analysis of China

Source: based on analysis of (Willis, Worthington, 2006) (Rein, 2009) (Worthington, 2003)

Conclusion

The stigma attached to going into debt and not saving is strong in the previous generation of Asians in general and Chinese specifically, with the demarcation point being those born before 1980 being a strong predictor of their not adopting credit cards or financial products that carry debt (Rein, 2009). For American Express within the region there are also significant infrastructure challenges to overcome, including a lack of scalable financial services networks, lack of consistency in terms of financial services integration, and a lack of support for real-time updates. The exception to these limitations is along the coast of the country, where the… READ MORE

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