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.

Read the full article with useful analysis and graphics here.

Don Durfee is managing editor of CFO Asia.

© CFO Publishing Corporation 2007. All rights reserved.