Rabo Bank Group Entering the Chinese Market Finance Essay

The main purpose of this report is to identify and appraise Rabobank Group's entry modes into the Chinese market. This report first gives a brief introduction of Rabobank Group, and then identifies its entry modes into the Chinese market. Through the analysis and appraisement of both advantages and disadvantages of its entry modes, this report offers several recommendations to further develop Rabobank Group's business in China. Rabobank Group is one of the foreign banks entering China at an early time. The unique operating characteristic of Rabobank Group is that it sets up the Credit Department of Agricultural Project to promote their international business. At present, it has representative offices in Hong Kong, Shanghai and Beijing, a branch in Shanghai. Meanwhile, it holds 10% share of the Joint bank of Hangzhou. Based the analysis of Rabobank Group's entry modes into China, this report suggests that Rabobank Group develops business in China at a steady pace which is however slower than other international banks. In the years coming, Rabobank Group should expand its market share in China at a faster rate in ways of establishing subsidiaries and expanding business in rural areas.

2.0 Introduction

Rabo Group is an international financial services provider, offering retail banking, wholesale banking, asset management, leasing and real estate services, with its focus on all-finance services in the Netherlands and on food & agriculture industries. It was set up in 1973, comprised of 152 independent local Rabobanks, Rabobank Nederland and a number of subsidiaries. As the second largest bank and one of the world's 25 largest financial institutions, Rabobank Group has strong power in terms of capital. At present, Rabobank Group has more than 60,000 employees who service about 9.5 million clients across 46 countries (https://www.rabobank.com/content/about_us/). In addition to banking services, Rabobank Group is also involved in all lines of business. It has several specialized financial subsidiaries which deal with residential mortgages, ship mortgages, agents and rental business as well as a co-insurance (Interpolis). Distinguished from other international financial institutions, Rabobank Group aims to become the leading bank offering financial services in international food & agriculture industries and international trade (Kai Huo, 2006). The New York branch of Rabobank Group, as its first overseas branch, has been the third largest financing bank of food and agriculture in America. Currently, based on its international network across Europe, America and the Pacific Rim, Rabobank Group has been implementing its global business strategy.

3.0 The Entry Modes into the Chinese Market

3.1 Setting up Representative Offices

Firstly, Rabobank Group set its representative office in Hong Kong in 1988 which only covered financing business with enterprises. In 1994, another representative office was set up in Shanghai, and one year later, it was allowed by People's Bank of China to set representative office in Beijing (Encheng Liu, 2005). At this period of time, financial institutions in China are under very strict regulations, so establishing representative offices is an appropriate way to develop new market opportunities. The functions of representative office are very limited. It cannot deal with bank business, and the main function of it is to provide local government institutions and enterprises with credit analysis, economic and political information.

3.2 Establishing Branches

In 1998, the first branch of Rabobank Group in China was founded in Shanghai. A professional research team comprised of experts in agriculture and food fields was also founded in order to support the Credit Department of Agricultural Project. Although branches are not independent entities, they are able to handle those businesses allowed by local government. Since China is a promising market with more and more foreign financial institutions rushing into China, Rabobank Group has to establish its branches in China. And Shanghai, as the financial center in China with so many favorable conditions such as large economic scale, abundant human resource of high quality, is the most ideal spot for Rabobank Group to establish its first branch in China.

3.3 Acquisition of shares

Differing from other foreign banks tending to establish wholly-owned subsidiaries in China, Rabobank Group spent 100million RMB buying 10% share of the Joint Bank of Hangzhou in 2006, becoming the first foreign shareholder of the rural cooperative financial institutions. The cooperation agreements cover cooperation in nine modules such as risk management, human resources, IT and so on. In addition, Rabobank Group also signed agreements with the rural cooperatives in Liaoning province and Tianjin city, implying that it would probably become their shareholders in the near feature. The process of Rabobank Group entering the Chinese market has a lot of commons with other foreign financial institutions, like setting up representative offices and branches. The unique of Rabobank Group's strategy is its participation in rural cooperatives by holding shares rather than establishing its own subsidiaries (Shuolong Peng, Juntuo Su, 2007).They expected to expand business by union with local partners, in order to compete with its intro-industry competitors.

4.0 Analysis of the Entry Modes

4.1 Advantages of Acquisition of shares

Less Cost and Combination of ResourcesA¼Å¡Entering foreign market through acquisition of shares of goal companies is quite different from the ways by establish a new wholly-owned subsidiary or a brand new joint venture. Firstly, a new institution requires comprehensive conditions and facilities which are not necessarily required in acquisition of shares. Moreover, compared with establishing a new institution or organization, the examination and approval regulations are much less and simple in acquisition of shares. Secondly, by acquisition of shares, the shareholders can take advantage of existing resources such as network and distribution channels. Overcoming Investment RestrictionsA¼Å¡Since finance in China has not been wholly open to foreign enterprises, acquisition shares of Chinese banks can effectively avoid restrictions during the transitional period (Wenhuan Gao,2008). Through the combination of new product development, innovation of its own and distribution network of Chinese banks and RMB business, Rabobank Group can expand its market share in China more effectively, because it easily avoids business restrictions, particularly the restrictions on the RMB business. Sharing ProfitsA¼Å¡Due to the unsoundness in finance market of China, the commercial banks are reluctant to be involved in financial services in rural areas, which however is a great opportunity for foreign financial institutions. In the long term, the development of rural area will be greatly favored by the Chinese government, therefore as the financial service provider in rural areas, the rural credit cooperatives are abound to be favored by the Chinese government. Through acquisition of shares of the rural credit cooperatives, Rabobank Group can enjoy expanding market shares and even profits after going public if possible(Bin Sun,2006).

5.2 Disadvantages of Acquisition of shares

Less Control of BusinessA¼Å¡Rabobank Group only holds 10% share of the Joint Bank of Hangzhou, which is still quite low. Compared with wholly-owned subsidiary, it has much less control of business. For example, it must follow all the rules, policies and decisions made by the Joint Bank of Hangzhou, which sometimes are not in accordance with its own needs and interests. What's more, since the Joint Bank of Hangzhou is a regional bank, their businesses are greatly limited to the neighborhood of Hangzhou, which is not helpful in expanding markets in northwest areas where may have great business potential. Difficult to AdjustA¼Å¡At the beginning of cooperation, various issues and contradictions may merge, in terms of management concept, knowledge background, behavior way institutional environment, legal environment, policy environment and so on. It is difficulty to come to a result of win-win because it is in fact the gap between two distinct kinds of culture that causes the contradictions. Knowledge SpilloversA¼Å¡There are unconscious knowledge spillovers from foreign companies to local companies, through the channels of competition and demonstration effect, turnover effect and so on. And the knowledge spillover is more significant in joint ventures than in wholly-owned subsidiaries. On one hand, the spillovers of high technology, knowledge management and even some confidential information cannot bring Rabobank Group any economic profits because it cannot charge for that, on the other hand, it would strengthen the competence of its competitors. Low Brand RecognitionA¼Å¡Since Rabobank Group acts as the funds sponsor of the Joint Bank of Hangzhou who is mainly entitled to share profits. The Chinese clients may not very familiar with the existence of Rabobank Group since they are not aware of the relationship between Rabobank Group and the Joint Bank of Hangzhou. This is not favorable to strengthen its brand power and foster the loyalty of clients.

6.0 Recommendations

6.1 Set up Subsidiaries

The differences between branches and subsidiaries lie in the fact that a subsidiary is an independent legal entity which is set up in accordance with the laws and requirements of host countries, with the access to equity financing. A subsidiary can handle all business allowed by host country's laws. Although establishing branches and acquisition of local banks are of great help to develop business in China, it is not enough to implement Rabobank Group's global strategy. After setting up subsidiaries, Rabobank Group can handle many bank businesses which branches are not entitled to engage in, and manage the business and explore new projects in accordance with its own needs and strategies.

6.2 Expanding Market Share

Compared with other international banks such as HSBC, Standard Chartered Bank and Deutsche Bank, Rabobank Group is left behind in terms of development rate, market share and reputation. With the accelerations of financial liberalization in China, it is essential for Rabobank Group to expand its market share at a faster rate. Considering that Rabobank Group has advantages over other banks in agriculture industry and the Chinese government now pays more attention on the agricultural development in rural areas, Rabobank Group should expand its market share, particularly in agricultural field, in the following ways: Developing Business in Northwest RegionA¼Å¡Northwest region in China is less attractive to both domestic and foreign banks due to its poor position and economic performance, however, the market potential there is large and the competition is much lower than the coastal region because most foreign banks are distributed in coastal region. Besides, Rabobank Group can enjoy the preferential policies from the Chinese government (Anpo Fan, 2009) Focusing on Animal HusbandryA¼Å¡Animal husbandry services as the leading industry in northwest region of China. Taking the Inner Mongolia Autonomous Region as an example, the animal husbandry there is very developed, making it a key region to develop in the future for Rabobank Group. Retail BankingA¼Å¡Due to the Chinese contract system in rural areas, there are more individual clients than giant clients in rural areas. Therefore, it is more suitable to run retail banking instead of wholesale banking. Besides, local rural credit cooperatives place so many restrictions on loans that a great number of individual clients have no access to loans, implying there is still a huge market to be explored for Rabobank Group.

Conclusion

Rabobank Group is one of the foreign banks entering the Chinese market at an early time, mainly engaged in agriculture and food industry. Through setting up representative offices in Shanghai and Beijing, an branch in Shanghai, Rabobank Group started its business in China. Later, it succeeded in acquisition of shares of the Joint Bank of Hangzhou and signing agreements with other rural credit cooperatives. However, the development race of Rabobank Group in China is still slower than other international banks. It is essential for Rabobank Group to expand its market share in China at a faster rate. On one hand, it should set up its own subsidiaries in China, in order to be involved in more businesses and more independent; on the other hand, it should take full use of its advantages over other banks in terms of agricultural financing, expand its market in rural regions like northwest region in China, paying more attention on retail banking.

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