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Charoen Pokphand Group buys share of
Ping An from HSBC Holdings Plc
Critical Strategic Analysis

Prepared for: Mr. Sheikh Morshed Jahan Associate Professor Course Instructor: Business Strategy (W501)

Prepared by: Tabassum Jahan RH 59
Batch 18
Bachelor of Business Administration

Institute of Business Administration (IBA)
University of Dhaka

September 24, 2013
What Happened

* December 5, 2012 | : HSBC announced that HSBC Insurance Holdings and the Hong Kong and Shanghai Banking Corporation Limited, two indirect wholly-owned subsidiaries of HSBC Holdings plc, would sell their entire shareholdings in Ping An Insurance Co. , China’s biggest private insurer, to the Thailand-based Charoen Pokphand Group (CP Group) at 59 HK dollars per share. | * February 1, 2013 | : Wholly owned subsidiaries of the Charoen Pokphand Group Company Limited received regulatory approval from the China Insurance Regulatory Commission (“CIRC”) to purchase the Ping An Insurance’s shares. The 4 buyers are indirect wholly-owned subsidiaries of CP Group - All Gain Trading Ltd, Bloom Fortune Group Ltd, Business Fortune Holdings Ltd and Easy Boom Developments Ltd. |

The whole 15.6% stake was sold for $9.38 billion. HSBC group has already made a $1.9 billion paper profit on the deal as a result of Ping An’s shares being a fifth higher than the HK$59.00 ($7.61) that it agreed to pay.
Concerned parties

About HSBC
HSBC Holdings plc was founded in London in 1991 as a British multinational banking and financial services company by the Hong Kong and Shanghai Banking Corporation to act as a new group holding company. Headquartered in London, HSBC operates through long-established businesses and an international network of some 6,600 offices in around 80 countries and territories serving some 55 million customers.
Ping An is HSBC's second-biggest investment on the mainland of China after Bank of Communications, in which it had a 19.9 per cent stake. It also has an 8 per cent stake in Bank of Shanghai. HSBC has been engaged in a major sell-off of its non-core assets since 2011 when chief executive Stuart Gulliver announced his intention of "streamlining" the bank's operations. This transaction for US$9.4 billion is its biggest divestment in at least 17 years.

About CP
The Charoen Pokphand Group (CP) is a Thai conglomerate that consists of three core businesses that operate in the agribusiness and food, retail and distribution, and the telecommunications industries with investment in 15 countries. After the Asian financial crisis in 1997, C.P. consolidated into three business lines under its main “brand names”: foods (C.P. Foods), retail (7-Eleven), and telecommunications (True). Founded in 1921, the CP Group currently employs over 280,000 people with offices and factories located worldwide.
C.P. Group is the largest company in Thailand not owned by the State with revenues equivalent to over 10% (USD 33 billion annually) of the Thai National GDP (Nominal).
CP Group, known as the Chia Tai Group in China, has a long history in the country: it was the first multinational to invest in China’s agri-business in 1979 and, under Beijing’s latest five-year plan, it was tasked with helping to modernize China’s farm sector. It also operates Lotus supermarkets in Shanghai, according to the company’s website.
CP Group has only limited experience in insurance, though. In May this year, it sold out of a Thai joint venture with German insurer Allianz for about $9.8 million.

About Ping An
The Ping An deal is Asia’s second-biggest acquisition so far this year, behind Chinese oil company CNOOC’s planned $15.1 billion purchase of Canada’s Nexen.
Founded in 1988 as China’s first joint-stock insurer, Ping An has grown into one of the world’s largest, with 74 million clients, more than 175,000 employees, and about 500,000 agents. Ping An Insurance provides casualty, property, life insurance as well as financial services, and they are the China's second largest insurance company.
China’s insurance market expanded an average 19 per cent a year in the past decade to become the world’s sixth biggest, while insurers’ assets jumped tenfold, according to the China Insurance Regulatory Commission. Premiums income slid 1.3 per cent in 2011 as regulators tightened rules on selling coverage over bank counters and insurers adjusted their product mix to improve profitability.

Alignment of the acquisition with environmental forces

To have an understanding of the environment in which Charoen Pokphand group is moving in, a PESTLE analysis has been done.
This analysis reveals that each of the 6 forces is in favor of the CP group investing in Insurance industry of China. The industry has been growing with accelerated rates in the last decades due to policy changes and economic stronghold of China. As a result, new opportunities of growth are emerging in the Chinese territory, and as one of the initial movers, CP will enjoy good growth and market expansion. Further it will help in CP’s penetration in Chinese economy, as it is spreading its investment in and across various industries.

Political

Economic

Socio-Cultural

Technology | Regulatory reform is a major driving force behind the dynamic development of China’s insurance markets. These efforts started in the 1980s and experienced a significant acceleration following China’s accession to the World Trade Organization (WTO) in 2001. Over the past two decades, foreign insurers were admitted to the market, foreign equity participations in major domestic insurers were allowed, compulsory cessions to China Re were dismantled, compulsory lines of business were introduced, and accounting and investment rules were modernized – to name a few regulatory milestones. (Schanz & Yao, 2012) | | -------------------------------------------------
China’s GDP quadrupled from 2000 to 2010, reaching almost CNY -------------------------------------------------
40 trillion, or US$6 trillion, at average 2010 exchange rates. -------------------------------------------------
Within this same decade, China’s property & casualty (P&C) insurance markets expanded at an average annual growth rate of 21%, which is significantly faster than the country’s vibrant economy. Total P&C premium volume for China in 2010 amounted to approximately CNY 403 billion (US$60 billion). (Schanz & Yao, 2012) | | The emphasis of personal relationship or guanxi is strong in China, despite increase in popularity of reliance on laws and contracts. Thus people spend enormous energy to cultivate the personal relationship in long-term and personal trust is the basis of doing insurance business in China (Liu, 2008). This is evident in the approach of Ping An to CP ltd through personal means. CP Ltd will have to depend on its long term existence in Chinese market and associated goodwill and relationship, while expanding business through Ping An in various sectors. | | The compulsory motor insurance sector remains in the red with underwriting Losses. The Chinese government therefore has recently announced that it will open up the compulsory motor third-party liability (MTPL) insurance market to foreign insurers in order to inject new technologies and underwriting skills into the segment. (Schanz & Yao, 2012)The basic purpose of insurance technologies is to reduce the paperwork of proposals and policies and address the customer services effectively in a shorter time than any other traditional methods. | Legal | As recently as April 9, 2013, the China Insurance Regulatory Commission (“CIRC”) issued a notice amending the Measures for Administration of Equity in Insurance Companies to eliminate the long-standing 20 percent ceiling on investment in Chinese insurance companies that have been established for at least three years. The previous limit has been replaced by a new ceiling of 51%, inclusive of equity owned by an investor’s affiliates. Investments in excess of 20% are subject to a three-year lock-up period. (John L. Jacobus, 2013)This allows CP to penetrate deeper into the market through equity investment in local companies. | Environment | Although environmental aspect has little to do directly with a financial industry like insurance, the Chinese regulations has opened up new areas on expansion through environmental causes. In March 2013, China announced that the country will soon require heavy polluting industries —including, mining and smelting enterprises, lead battery manufactures, leather goods firms and chemical factories— to participate in a compulsory program for environmental liability insurance.A pilot program that since 2009 has secured environmental liability coverage for more than 2,000 companies across the country and underwritten nearly 20 billion Yuan ($3.21 billion USD) in environmental risk. (Gordon, 2013)This can be expected to produce positive impact on CP’s investment in Ping An. |

Alignment of acquisition with respect to company competencies

Although the industry setting is in favor of CP group, with respect to core company specialization, the investment seems to be a drawback. Insurance is not one of CP’s core business operations (which are broadly divided into three: food, retail, and telecommunication), neither is any other form of financial services. Its only other venture in insurance business (as mentioned earlier) with German insurer Allianz resulted in a failure and was sold out for about $9.8 million in May 2012.
After this recent result, CP’s continued pursuance to buy Ping An share can be seen either as outrageous, or of an entrepreneurial spirit.
On the other hand, CP’s actions in Chinese economy are different from that in other countries. With the encouragement of CP has ventured out to zones unknown to it, for example automobiles. It is assumed that CP plans to create its own hub in China, just as it did in Thailand. As CP seems to be comfortable in its own diversified skin in mainland China, in that sense its movement into Chinese insurance market seem justified.

Alignment of acquisition with creation of competitive advantage

This factor again is in question. CP’s business so far has been in manufacturing (food), retail and telecommunication. Financial services are not one of the core areas of specialization of CP, thus seems to be secluded and “out of the blue” investment providing no synergic value for the group of companies.
On the other hand, in their press release regarding the buy, Charoen Pokphand Group expressed “its admiration and confidence in Ping An Insurance Company Limited and their talented management led by Dr. Peter Ma (Chairman of Ping An). Charoen Pokphand Group is pleased to have the opportunity to become a major shareholder in this company and hopes to explore the opportunity to create and develop new business ventures with Ping An in the future.”
This indicates that CP has long term plans to expand into new territories, that is other industries. Strong alliance with a powerful financial service provider will provide them a stronghold for their financial needs. As the prospect of Ping An itself is bright, CP will continue to enjoy the revenues meanwhile. This provides a two-way insurance against its competitors.

Role of Acquisition in meeting expectations of Key Stakeholders

Development Partners | UBS (debated) | Society | China | Competitors | e.g
1. China Resources Enterprise Ltd2.Nutreco NV3. Smithfield Foods Inc. | Industry Associations & Chambers | China Insurance Regulatory Commission | Government | People’s Republic of China | Owners | Dhanin Chearavanont | Customers | Of Animal Feed, Retail, Automobile, etc | Employees | Roughly 280,000 | Value Chain Partners | e.g E-Mart |

The above stakeholders are taken in consideration of the discussed strategy so far. In each category, a prominent one or generalized many has been discussed about.

Tertiary stakeholders

Development partner: UBS

Society: China

Secondary stakeholders

Competitors

Industry Associations & Chambers: China Insurance Regulatory Commission

Chinese Government

Primary Stakeholders

Owner : Dhanin Chearavanont

Customers

Employees

Value Chain Partners

In light of the discussion so far, the stakeholder analysis places the parties in this matrix: | HIGH INTEREST | LOW INTEREST | HIGH POWER | Chinese GovernmentChina Insurance Regulatory CommissionSocietyDhanin Chearavanont | | LOW POWER | Employees | UBSCompetitorsConsumersValue Chain Partners |

Thus, the usual high power holders like consumers and employees are placed in the right down corner as this strategy is out of the usual business operations of CP group. Mostly, tertiary stakeholders have a high power here as CP is operating in a foreign land where these parties have high stakes in CP’s investment.

Summary

This essay probed into Charoen Pokphand Group’s decision to venture into Chinese insurance market by buying the whole percentage of HSBC’s share in a leading Chinese Insurer, Ping An.
The sale out provided a huge revenue for HSBC Holdings Plc, whose reason for sale was to streamline its services and going back to its core business operations. CP, on the other hand, invested in a market where it is inexperienced, and with an investment amount really huge and continued to close the deal even without the apparent support of a financial institution.
The reason for investment could be accounted to the Chinese government’s encouragement to CP Group, which has been a pioneer investor when the economy opened up, removal of barriers to investment in financial markets, and introduction of favorable rules and regulations. Also, the performance of Chinese insurance market in recent years has been an attraction for most investors.
Therefore, if CP focuses on building its competencies across various fields, then this is an important move for CP and its stakeholders. In this case, the answer to whether this strategy has given CP a competitive edge, or met expectations of its key stakeholders is yes. If expansion of the group through diversification is not the ultimate objective of the Thai business giant, then the justification of the strategy in the above mentioned view must be questioned.

Alignment of the strategy with key stakeholders | Yes and No | Alignment of the strategy with core competencies | | Alignment of the strategy for creation of competitive advantage | Yes and No | Alignment of the strategy with environmental forces | |

Works Cited
Gordon, A. (2013, March). China Set to Make Environmental Insurance Mandatory. Retrieved September 20, 2013, from AON Risk Solutions: http://www.aon.com/risk-services/environmental-articles/article_china-make-envins-mandatory.jsp
John L. Jacobus, J. T. (2013, May 21). China Insurance Regulatory Commission lifts 20 percent ceiling on investment in domestic Chinese insurance companies and issues rules for private equity investment. Retrieved September 20, 2013, from Lexology: http://www.lexology.com/library/detail.aspx?g=4de34ea5-6cc1-49dc-9727-3adfb3891dcf
Liu, Y. (2008). Export Practice and Management between China and EU market.
Schanz, D. K.-U., & Yao, D. J. (2012, May). China's Insurance Market: More than just growth. Asia Capital Re .