Global Business

Give Them Credit

Before GE could reach out to Chinese consumers, it had to learn to work with Chinese banks.
Don DurfeeJuly 1, 2007

Last January, Michael Barrett stood before a group of more than 20 Chinese bank employees in a Guangzhou conference room. Barrett, the CEO of GE Money China, was there to direct what GE calls a “workout session” — the lively brainstorming meetings the company holds to wring inefficiencies out of processes. In October 2006, 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 $100 million — a 7 percent stake. Chinese financial institutions aren’t known for speedy customer service — it generally takes them more than a month to put a new credit card into a customer’s hands — and GE was eager to get these cards out faster.

The session got off to a slow start. Bank employees weren’t accustomed to GE’s interactive style, which calls for employees to step up, share stories, and scrawl their thoughts on flip charts. But Barrett, a New York native with the build of a linebacker and the confidence of someone who has risen quickly through GE’s ranks, threw himself into the task, jotting down ideas and posting them on the wall.

The Chinese participants, it turned out, had plenty to say. The bank’s system for credit-card approvals frustrated them. Application forms were cumbersome. When one shift finished its work and the next began, delays were the rule. “After an hour, people got very excited,” says Barrett. “That’s what we want.” By day’s end, 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 and in anticipation, global banks such as Citibank, Standard Chartered, HSBC, and Bank of America, along with nonbank players such as GE Money, have been buying stakes in China’s banks.

None of them will have an easy time. China’s banking sector is weighed down with bad loans, bloated payrolls, and unhappy customers. But the companies that can make their Chinese partnerships work win a tantalizing prize: a chance to tap into potentially the world’s biggest consumer-finance market.

The consumer-finance arm of GE, GE Money is one of its fastest-growing divisions, with businesses in 57 countries and markets. 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.

If GE’s integrate-and-grow model works in China, one of the most daunting markets for multinationals, its approach is bound to be imitated. If it doesn’t work, the prospects for other financial institutions to work with China’s rickety banks may be called into question.

Early on, GE took a cautious approach to investing in China. GE Capital (GE Money’s predecessor) began offering consumer financing for electronic appliances in southern China with a Chinese partner in 1998 only to shut it down two years later, citing tepid interest from Chinese consumers.

Conditions have certainly improved since then. The consumer-finance market has liberalized — this year, foreign-owned banks can begin lending directly to Chinese customers. According to analysts, consumer finance in China is finally ready to take off. The Chinese consumer-credit market (cards, mortgages, and personal loans) will account for 14 percent of banking-sector profits by 2013, up from around 4 percent now. Credit-card revenues will rise by more than 50 percent a year, reaching $5 billion by 2013. The country’s growing car market is creating demand for auto loans, while 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 in terms of consumer financing,” he says. “It’s a tremendous opportunity for us.”

A Stairway to Profitability?

Shenzhen Development Bank is based in the heart of its hometown, a city of 10 million 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 appearances, 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. As a result, 7.9 percent of its loans are probably uncollectible. (Overall, 9.2 percent of loans held by commercial banks in China are considered “nonperforming.”) 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 is 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: it has $32 billion in assets and 242 branches across 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 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 in fixing up bank operations. GE Money has 30 employees working in SDB 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 $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 nontradable shares into tradable stock. Shareholders voted down a reform plan last July, apparently because they wanted more compensation for allowing their nontradable shares to float freely. Bill Stacey, a China banking analyst with CS First Boston, expects this to be resolved soon. “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 moving ahead with its postdeal integration process.

The GE Way

Barrett has acted quickly. Besides introducing the Wal-Mart project, 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 on the customer-support function. That’s significant, because Chinese banks don’t pamper their 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 with SDB employees to get new credit cards out faster. GE has set up a high-tech customer-service support center that is run by GE managers but has SDB employees working alongside them. 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 tactics GE takes to all of its partnerships. Although many of these practices have become standard among frequent dealmakers, several features distinguish the GE approach. These include the intensity of the effort it devotes to getting the companies to work together, the speed of integration, a pragmatic way of addressing cultural gaps, and adaptability.

1. Emphasis on integration. Entering the Chinese market via an alliance or acquisition is notoriously hard. Jeffrey Blount, a partner with 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 postdeal 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 postdeal problems they may run into in China,” comments Michael Thorneman, who runs Bain & Co.’s China M&A 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. Postdeal planning starts well before any agreement is signed. The company identifies which managers will be responsible for the deal and gets them involved in due diligence and negotiation. There’s an integration leader and a cross-functional team of 25 to 30 people. Senior management keeps close tabs on 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 operations in other Chinese-speaking markets. Barrett, as CEO for China, has been closely involved, as has GE Money Asia chief operating officer 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 “nonnegotiables.” 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 customer-relationship-management (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. “If you continue integration too long, it starts to interfere with people’s jobs,” says Pinto. When it starts planning the postacquisition projects, GE Money defines three sets of measures that will indicate when integration is done. Those include growth, productivity, and culture.

3. Cultural integration. For GE’s postdeal 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 Bain’s 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 its 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 worked with the management team to encourage them 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 United States. 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,” comments 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 adapt 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 that, after their 20th deal, will say, ‘We’ve got it down,’” he says. “Then the next one they buy blows up.” (He cites Bank One, which spoiled its 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 $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 have completed. The tool also has an online bulletin board to allow teams to share what they have learned with one another. An integration manager in Shenzhen can go online to ask his counterpart in Bangkok how that team dealt with a certain problem.

Trial and Error

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 fell from 30 days down to 8 to 10 days, and ultimately to a mere 5 days. 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 CEO 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 trial and error.”

Don Durfee is managing editor of CFO Asia.

Click here to see a list of GE Money’s recent partnerships and acquisitions in Asia.