Two months ago, Michael Barrett stood before a group of over 20 Chinese bank employees in a Guangzhou conference room. Barrett, the CEO of GE Money China, was there to direct what General Electric calls a “workout session”— the lively brainstorming meetings the U.S.-based company holds to wring inefficiencies out of processes. GE Money had just launched a credit card with Wal-Mart and Shenzhen Development Bank (SDB), a Chinese bank in which GE has agreed to invest U.S.$100 million (a stake equal to 7 percent). Chinese financial institutions aren’t known for speedy customer service — it generally takes them over a month to put a new credit card into a consumer’s hands — and GE was eager to get these cards out faster.
The partnership with SDB has gotten off to an uncertain start — GE’s share purchase has been delayed, caught in a tangle between different sets of stockholders. Undeterred, Barrett and his team are racing ahead, working with their new partner to build a set of financial products aimed at Chinese consumers.
The session’s progress was halting. Bank employees were unfamiliar with GE’s interactive style, which calls for employees to step up, share stories, and scrawl their thoughts on flip charts. Barrett, 39, hails from Long Island, New York. Built like a linebacker, he speaks with the confidence of someone who has risen quickly through GE’s ranks. Would his approach win hearts and minds in southern China? Barrett threw himself into it, jotting down ideas and pasting them up on the wall.
The Chinese participants, it turns out, had plenty of stories to tell. The bank’s system for credit-card approvals frustrated them. Application forms were cumbersome. Many came back incomplete. When one shift finished its work and the next began, delays were the rule. “After an hour, people were very excited and participating actively,” says Barrett. “That’s what we want.” By the end of the day, the group had a list of steps for tightening the process, from streamlining application forms to assigning every pending application to a particular agent.
No Time to Lose
GE Money’s eagerness to press ahead in the face of uncertainty should come as no surprise. This year, China swings open the doors to its financial-services market, fulfilling one of its commitments as a member of the World Trade Organization. In anticipation, global banks such as Citibank, Standard Chartered, HSBC, and Bank of America, along with non-bank players such as GE Money, have been buying stakes in China’s banks.
None of these buyers will have an easy time. China’s reforming banking sector is in perilous shape, weighed down with bad loans, bloated payrolls, and unhappy customers. But for the company that can make its Chinese partnerships work, there is a tantalizing prize: a chance to tap into what could easily become the world’s biggest consumer-finance market.
The consumer-finance arm of U.S.-based GE, GE Money is one of the fastest growing divisions of what is still one of the world’s most respected companies. It has built a business that spans 53 countries mainly by buying or working with local companies that can distribute GE’s financial products. Over the course of hundreds of acquisitions and partnerships, many of them in Asia, GE Money has earned a reputation as a savvy and adroit dealmaker. In particular, the company is admired for its ability to cross cultural barriers and integrate its operations with those of its partners, even in tricky markets such as Japan and Latin America.
Will this integrate-and-grow model work in China, which remains one of the most daunting markets for multinationals? If yes, then GE’s approach is bound to be imitated. If not, it will raise serious questions about the prospects for other financial institutions that have hitched their China strategies — and hence a big part of their future growth — to China’s rickety banks.
Coming Back to China
This is hardly GE’s first foray into China. The company, which started doing business there as early as 1906, returned in 1979 after China reopened to foreign investors. But it wasn’t until then-CEO Jack Welch visited the country 1992 that GE made China a priority. GE certainly wasn’t alone, but its caution set it apart from its peers. It wasn’t enough for an investment to be “strategic” — it had to beat the company’s 20 percent to 25 percent hurdle rate. The result has been many small, but mostly profitable, projects.
There have been hiccups. GE Capital (GE Money’s predecessor) began offering consumer financing for electronic appliances in southern China with a Chinese partner in 1998. But two years later, GE had shut down the operation, citing tepid interest from Chinese consumers. “It had been almost impossible to create enough of a market for GE’s consumer lending business in Guangzhou,” said the head of GE Consumer Finance at the time.
Now GE Money is trying again. Conditions have certainly improved. The consumer-finance market has liberalized — this year, foreign-owned banks can begin lending directly to Chinese customers. And, according to analysts, consumer finance in China is finally ready to take off. Less than 5 percent of the population holds a credit card today, but McKinsey research predicts that card profits could reach U.S.$1.6 billion by 2013. The country’s growing car market is creating demand for auto loans. And now that urban Chinese can buy their own houses and apartments, mortgages are another area of growth. Mortgage volume grew an estimated 18 percent in 2006, according to May Yan, a vice president with Moody’s, who expects much higher growth in the coming years.
Barrett is optimistic. “This country is in its infancy stage in terms of consumer financing,” he says. “It’s a tremendous opportunity for us.” Whether GE can make the most of that opportunity will depend largely on what happens in Shenzhen.
A Stairway to Profitability?
Shenzhen Development Bank is based in the heart of its hometown, a city of 10m that has sprung up from virtually nothing in the past 25 years. Like Shenzhen itself, the bank is young — it was one of several privately owned banks established in the late 1980s. As if to make the point that it is a part of a newer breed of Chinese financial institutions, the bank has built for itself one of the city’s most unusual office buildings: a postmodern structure that resembles a giant set of stairs.
Despite outward appearances, however, the bank suffers from some old-fashioned woes. For many years, it operated in a decentralized manner, with branch managers making ill-considered loans with little, if any, oversight from headquarters. The result is a big burden: 7.9 percent of its loans are probably uncollectible (overall, 9.2 percent of loans held by commercial banks in China are considered “non-performing”). Furthermore, it has little cash. Chinese banking law requires banks to maintain at least an 8 percent capital adequacy ratio but SDB has only 3.7 percent, meaning that it’s not permitted to expand into new cities. Moody’s gives it a financial strength rating of just E . “That’s one of the lowest ratings for a Chinese bank,” comments Yan.
But the bank is a suitable partner for GE Money in one important way. SDB, which has U.S.$25 billion in assets, has the distribution network GE needs: 242 branches around China.
Furthermore, the bank’s health is improving. In 2002, private-equity firm Newbridge Capital bought a controlling 18 percent of the bank. Newbridge installed a new management team and has moved aggressively to clean up the bank’s balance sheet. The investment firm shares GE’s interest in growing the consumer side of the business and was willing to grant GE a remarkably free hand to fix up bank operations. GE Money has 30 employees working in the bank and is now involved in areas such as strategic planning, new-product introduction, customer service, and risk management.
“Part of the idea behind this partnership was that GE would invest both financial and intellectual capital,” says Frank Newman, SDB’s chairman and CEO. “There were plenty of people who wanted to invest financially in the bank. But GE wanted to bring in experienced people to help.”
Certainly, GE’s U.S.$100 million investment would also help, given the bank’s financial condition. But a year-and-a-half after GE agreed to buy 7 percent of the bank, it has been unable to close the deal. In order for the shares to be released for sale, the bank has to complete a reform of its shareholder structure, which would convert non-tradable shares into tradable stock. Shareholders voted down a reform plan last July, apparently because the shareholders wanted more compensation for allowing their non-tradable shares to float freely. Bill Stacey, a China banking analyst with Credit Suisse First Boston, expects this to be resolved eventually. “I assume that at this point it’s just a question of price,” he says.
Until then, GE and SDB have devised a way around the problem: GE Money will be a consultant to the bank but treat the partnership like any other, which is to say that it is applying its post-deal integration process.
Barrett has acted quickly. Shortly after signing the agreement with SDB, he introduced the bank to Wal-Mart, which has a global relationship with GE Money. GE dispatched a team to SDB to help the bank launch a joint SDB/Wal-Mart credit card. Since then, GE has helped SDB launch another card with French hypermarket retailer Auchan in February and a mortgage product last year.
For the Wal-Mart project, GE’s experts worked closely with the bank to refine the processes required to run a successful card operation — particularly the customer-support function. That’s significant. Chinese banks don’t pamper their customers. Not only does a customer have to wait over a month for a new credit card; when she visits a bank outlet, she may have to wait standing up — branches often don’t provide enough chairs for customers. “There’s a great opportunity for the first Western investor who can improve customer service at the Chinese banks,” comments Stacey.
GE has placed its managers in SDB’s offices to work alongside their local counterparts. They have run Lean/Six Sigma workout sessions — such as the one in Guangzhou — with SDB employees to get new credit cards out faster (see “Six Sigma in Shenzhen”, at the end of this story). GE has set up a high-tech customer-service support center that’s run by GE managers but has SDB employees working alongside them, with the idea that the bank will ultimately take over from GE. It has sent SDB customer-service managers to its operations in India so that they can learn how card operations are run elsewhere. And the company has measured the results of such efforts carefully.
In miniature, that effort mirrors the approach GE takes to all of its partnerships. Many things GE Money does have become standard among frequent dealmakers. But several of the company’s tactics that continue to distinguish it may give it an edge in China’s consumer-finance market. These include the sheer effort it devotes to getting the two companies working together, the quick pace of integration, a pragmatic way of addressing cultural gaps, and adaptability.
1. Making deal integration a priority. Entering the Chinese market via an alliance or acquisition is notoriously hard. Jeffrey Blount, a partner with law firm Fulbright & Jaworski in Beijing, estimates that 60 percent of tie-ups involving Chinese and Western companies fail to meet even the lowest expectations of the partners (and that’s an improvement — Blount suggests that a few years ago, the number was closer to 90 percent).
The problem often lies with post-deal integration. A new management team must be assembled. Two very different accounting systems may have to be meshed. Employees who speak different languages have to work together. “I tell companies not to underestimate the post-deal problems they may run into in China,” says Michael Thorneman, co-leader of Bain’s China private-equity practice. “But a lot of companies don’t invest in laying out a clear plan for after closure.”
That’s one mistake GE Money has learned to avoid. Post-deal planning starts during the due diligence phase, well before any agreement is signed. The company identifies which managers internally are going to be responsible for the deal, and gets them involved in due diligence and negotiation. There’s an integration leader — who will continue to work in the company as a senior manager after the integration is done — and a cross-functional team of 25 to 30 people. Senior management keeps close tabs on the progress, lending support where needed.
For its SDB alliance, GE has assembled a team of cross-functional specialists — representing areas such as finance, HR, and IT — that draws heavily on its other operations in Chinese-speaking countries such as Taiwan and Singapore. Barrett, as CEO for China, has been closely involved, as has GE Money Asia COO Ed Pinto, who oversees deal integration for the region.
2. Speed and focus. Advance planning means that GE can move fast once an agreement is in hand. That helps morale, but it’s also a competitive necessity. “In China, if you fail to move quickly right at the start, it takes a lot of time to recover,” says Pinto. “Our competitors move quicker because they know that we’re now in the market.”
Before closing, GE works with its partner to pick the projects that deserve immediate attention and maps out 100-day plans to get them done. Some of the projects are what GE terms “non-negotiables”. Those typically include efforts to fix up IT, risk management, financial systems, and HR. Others are contributions the partner requests from GE, such as help in improving CRM processes.
GE Money also moves quickly to get new products into the local market. “The company we’ve acquired will typically have some products already,” says Pinto. “After we come in, we very quickly expand that number. We can usually launch a new credit card within three to nine months.” With SDB, the company began work immediately on the Wal-Mart card and on a new mortgage product.
Just as important as a quick start is knowing when to stop. “There is a real risk that you continue integration too long and it starts to interfere with people’s jobs,” says Pinto. When it starts planning the post-acquisition projects, GE Money defines three sets of measures that will indicate when integration is done. Those include growth (such as launching a certain number of new products), productivity (such as increasing the number of loan approvals the bank can complete in a month), and culture (establishing a new management team that isn’t just GE people, for example).
3. Cultural integration. For GE’s post-deal projects to yield results, employees need to work well together despite their different backgrounds. In China, such differences can be subtle but disruptive. For instance, the two management teams may have strikingly different ways of thinking about growth. “Many Chinese companies are enthusiastic about expanding outside of their core businesses given China’s rapid economic growth,” says Thorneman. “But most Western companies want to stay focused. That can set up a clash of management styles.”
Shortly after signing its agreement with SDB, GE’s integration team sat down with their counterparts at the bank to discuss how the two organizations approach planning. The differences were clear. Compared with GE’s heavily metrics-based planning, the bank made many decisions on gut feel. Plans looked out only one year. “Their 2007 plan would start in January and then end in December,” remembers Barrett. “But when you look at China’s market, you have to anticipate the growth of the marketplace and plan for things like new technology or new products which themselves might take 12 months to launch.”
GE encouraged the management team to push planning out to three to five years, and to think differently about decision-making. In some cases, those efforts have met resistance. “We talked about how we analyze what products we want to create or what markets we want to enter,” says Barrett. “But we heard ‘That’s not how we do it here. We don’t have the data.’” In response, Barrett sat down with the bank managers to figure out how to get the necessary data. For example, while China now has a credit bureau, its information is spotty. So GE and SDB identified other measures they can look at as a proxy for credit- bureau information, such as disposable income, profession, and how long an applicant has lived in one place.
GE also sent an anonymous employee questionnaire to SDB employees prior to starting work. What had employees heard about GE? What did they expect from this partnership? What would they like to see happen? (Some responded that they expected to be working harder for the same pay, given GE’s process focus.) “This gives us a good benchmark for how we should plan the integration,” says Pinto. “We have to force ourselves to listen. We’ve done this so many times that it’s easy to just end up telling the business what to do.” Other surveys get administered periodically during the integration to identify any cultural problems that may be brewing.
The company also sends some of its partner’s managers to GE’s leadership training center in the U.S. And it relies on the integration manager (who is often recruited from an operation that was itself bought by GE) to serve as a cultural bridge between the two companies. “If the president of the acquired company isn’t a GE person, then that person needs a coach who he can talk to in the GE universe,” says Ron Ashkenas, head of consulting firm Robert H Schaffer & Associates who has worked extensively with the company on its M&A processes. “That person can also act as an umbrella to shield the company from all the well-intentioned GE people who want to visit.”
4. Flexibility. GE Money is willing to bend its approach to suit local conditions, a virtue in China where markets evolve rapidly and rules can change overnight. In fact, part of Pinto’s job description as regional COO is to make sure the company does just that. “My job is to take our global approach to deals and make sure we’re modifying it for each particular deal,” he says.
That’s good, says Jay Bourgeois, a professor at the University of Virginia’s Darden School of Business, because hubris is a common pitfall for dealmakers. “There are companies where after their 20th deal, they say, ‘We’ve got it down,’” he says. “Then the next one they buy blows up.” (He cites Bank One of the U.S., which spoiled a reputation as a strong acquirer when it fumbled its purchase of First Chicago in 1998.)
The SDB deal has called on GE’s willingness to make course corrections, most notably with the deal-structure changes GE had to make when its U.S.$100 million investment stalled. Smaller adjustments have been needed, too. For example, when the integration team worked with bank employees on risk management, they heard objections about the case studies GE wanted to use: those cases were all from developed markets, said SDB managers — they weren’t applicable to China. “We agreed with them,” says Barrett. “So now we’re talking to colleagues in markets like Mexico, Thailand, and Indonesia to find out how things are being done there.”
Technology helps GE be more nimble. To help capture and disseminate what it learns about dealmaking worldwide, the company uses an “e-integration” tool. This is an internal website that serves as a project management program as well as a knowledge-sharing portal. Integration managers are required to put their plans online and show what stages they’ve completed. The tool also has an online bulletin board to allow teams to share what they’ve learned with each other. An integration manager in Shenzhen can go online to ask his counterpart in Bangkok how that team dealt with a certain problem.
The Magic Formula
It’s too soon to say whether GE Money’s skills as a partner will bring it success in China’s finance market, but the early signs are hopeful. For example, efforts to improve bank processes are bearing fruit. The time required to issue new credit cards initially fell from 30 to between eight and ten days. Since then, it’s been cut to five. Customers have reacted positively, says Barrett, and GE Money sees its competitors in the market redoubling their own efforts in response.
GE’s efforts to get SDB employees thinking in terms of metrics are taking hold, too. Two important measures are “total time to yes” (TTY), which is the time it takes to approve a loan or card application, and “total time to cash” (TTC), the period before a customer has the money in hand. “Now, if you go into any area where we’re handling mortgages, for example, people are talking about TTY all the time,” comments Frank Newman. “It’s infiltrated the culture and TTY has really come down in mortgages. That’s a GE contribution, no question about it.”
It may take longer for change to reach the bank’s branches. When tellers at SDB’s mostly empty Shanghai branch were asked about the credit card the bank offers with Wal-Mart, none of them had heard about the partnership with the retailer, let alone the co-branded card. To be fair, the card is distributed only at Wal-Mart’s retail outlets in southern China.
The bank’s financial situation is looking up. SDB reported a jump in earnings of 300 percent last quarter, due to a combination of factors, including Newbridge’s work in cleaning up the bad-loan portfolio and the new products GE has launched. Based on such improvements, May Yan of Moody’s says that she has a positive outlook for SDB’s financial strength rating.
For GE at least, the experience with SDB will likely be only the first step in an effort to find out what does and doesn’t work in China. “We’re all trying to figure out the magic formula,” says Pinto. “But I don’t think there is one. It’s all about trial and error.”
Six Sigma in Shenzhen
When Jack Welch embraced Lean/Six Sigma in 1990s, it made perfect sense. GE has long been a company that values perfection and self-improvement, and LSS, as the process is known at GE, is the ultimate perfectionist’s tool.
Three years ago, LSS jumped from GE’s manufacturing operations to GE Money, which applies it to any routine activity you might find in a financial-services operation, such as loan or credit-card application processing. The result, says Angus Bishop, who is in charge of LSS efforts for GE Money Asia, has been “resoundingly positive.” He cites a GE operation in Thailand, where after an LSS workout session, the company was able to cut the processing time for auto loans by 40 percent.
Essentially, the “Lean” part of LSS requires a company to examine a process from the customer’s perspective and strip away any waste and inefficiency. The “Six Sigma” part means refining the process so that you get the same result every time (or at least 99.9997 percent of the time).
Today, GE Money takes all of its acquisitions and partners through the LSS process. That means mapping all of the steps involved in getting a product to the customer. In the case of credit cards, you may find that applications pile up because the company needs documentation from customers. Or, in the case of a card co-branded with a retailer, there may be wasted time because filled-up application forms and documentation have to be put in a store truck and driven back to the processing center.
Through workout sessions, employees devise ways of trimming the fat. That can require some convincing. “Before a meeting, we compile a big dashboard that shows where there’s waste,” says Ed Pinto, GE Money’s COO for Asia. “Then we’ll bring the senior managers in and ask them, ‘Did you know that your process has 51,000 applications just waiting for two days with no one touching them?’ They’ll say ‘No way — that can’t happen.’ And we’ll bring them in to see the process. It’s a real wake-up call.”
Fixing such problems may mean reducing the number of fields on an application form to make it quicker for the applicant, or shuffling desks around in the underwriting unit so that there are fewer handoffs. In the case of the Wal-Mart credit card in Shenzhen, for example, GE and partner Shenzhen Development Bank put bank employees inside Wal-Mart stores so that there was no need to ship forms back to the processing center.
LSS has its critics, to be sure. A study last year by consulting firm Qualpro reviewed the shareholder returns of 58 Six Sigma adherents in the U.S. — only six outperformed the S&P 500. Defenders of the technique have responded that stock price is the wrong way to evaluate process improvement. In any event, GE Money believes it has found a source of competitive advantage. “In some markets you’ll find that customers are happy getting their credit cards in 30 days,” says Pinto. “But get it to them in two days, and they’ll be ecstatic.”