China Merchants Bank is a commercial bank incorporated in 1987 based in Futian , China with more than five hundred branches all over the country. This bank is the first commercial bank in China that is completely owned by corporate entities and awarded as the Bank of the year in 2016. The bank offers its financial services to SME’s, and personal and corporate businesses (China Merchants Bank, 2019). The award shows the right strategic position of the company but to sustain this position, it is important for the company to analyze the banking industry in China from multiple perspectives. Porter’s five forces analysis is presented for the Chinese Banking industry to provide the company with an analysis by using five different aspects
Competitive rivalry in the market
The competition among the Chinese banks in the industry is high but the local banks have an advantage over foreign banks due to government focus and policies of prioritizing local banks over foreign banks. The total assets of the Chinese banking industry are 254.3 trillion yuan in 2018 with 5 banks taking the major share of 35.5% of the whole assets. Those five banks are the Agriculture Bank of China, China Construction Bank, the Industrial and Commercial Bank of China, Bank of China and Bank of Communications (Xinhua, 2018). On the other hand, foreign banks only account for 1.9 % of total 3,747 banks in China (Statista, 2015). This has provided a favorable condition to local banks such as China Merchants Bank to compete. Therefore, the overall competition of the Chinese Banking Industry is moderate due to the lack of a significant presence of foreign banks.
The threat of new entrants
The banking business is capital intensive requires a large amount of capital with a feasible backup capital for a few months and years. This creates massive hurdles in terms of capital for investors and companies to enter into the banking sector. One of the biggest hurdles for the foreign banks is the Chinese government support towards local banks decreasing the probability of success for foreign banks (Xinhua, 2018). Another hurdle is the lack of valuable innovation or differentiation in products making it difficult to attract the customers from existing players (BSA, 2017). Therefore, the presence of these unavoidable and difficult to overcome hurdles have decreased the threat of new entrants and keeping it low.
Threat of substitutes
The threat of substitute for the banking and financial services is low due to its almost impossible replacement. The need for financial services can never be neglected, ignored, and replaced by other services. The forms of financial and banking services have evolved and revolutionized but the financial services have been there since ages. It is not possible for a business to conduct its business activities without banking services and this need is injected in today’s era business organizations. There has been a continuous innovation from traditional banking to online banking along with offering several new types of credit services based on technology but the service and the industry remains there. This is a positive sign for a banking company that keeps up with the pace of changing the business environment to cop up with the latest trends (McWaters et al, 2015).
Bargaining power of buyers
There are more than 3000 Chinese banks along with 300 plus foreign banks working in the Chinese banking industry. The service and products of no bank are completely different from one another but the basic product is standardized all across the industry that leaves little room for innovation by a single bank. Whenever there is an innovation, the whole industry picks it up and it cannot be sustained. This multiple option factor along with little innovation decreases the switching cost of buyers ultimately leading to high barraging power of buyers. The customers bargain with power for the better service at competitive cost-effective pricing (Clens et al, 2010).
Bargaining power of suppliers
The major suppliers of the banking industry are employees, deposits of customers, and other financial institutions that lend money to the bank. The customers are already strong in setting their terms and financial institutions also understand the value of their services. The supply of employees for banking service is sufficient which keeps the strength towards the bank. Therefore, the overall supplier bargaining power is moderate.
References
BSA. (2017).Review Of Barriers to Entry, Expansion, and Exit in Retail Banking. Available at: https://www.bsa.org.uk/BSA/files/97/97d78dbb-e8aa-4f8c-8b26-8c7ea7d95ce9.pdf
China Merchants Bank. (2019). Home. Available at: http://english.cmbchina.com/
Clemes, M. D., Gan, C., & Zhang, D. (2010). Customer switching behavior in the Chinese retail banking industry. International Journal of Bank Marketing, 28(7), 519-546.
McWaters, J., Bruno, G., Lee, A., & Blake, M. (2015). The Future of Financial Services-How disruptive innovations is reshaping the way financial services are structured, provisioned and consumed. In the World Economic Forum. Junio de (Vol. 2105).
Statista. (2015). Banking Industry in China- Statistics and Facts. Available at: https://www.statista.com/topics/1552/banks-in-china/
Xinhua. (2018). China banking sector’s assets up 7.5%. CHINADAILY. Available at: http://www.chinadaily.com.cn/a/201808/27/WS5b83e160a310add14f38804c.html