SUN LIFE FINANCIAL: ENTERING CHINA
Please answering the following three questions in your opinions by reading the article above and summarize this case in 1 ½ to 2 pages (>=600 words).
SUN LIFE FINANCIAL: ENTERING CHINA
INTRODUCTION
In early 2000, Dikran Ohannessian, Sun Life Financial’s vice-president, China, was flipping through piles of consultants’ reports on the plane from Toronto,
Canada, to Beijing, China.
As Ohannessian got up to stretch, he thought about what had been achieved: a representative office in Beijing, valuable contacts with the Chinese government
and business people, and an agreement to partner with a well-established Chinese financial services group. He knew there were many major milestones ahead, such as
forming an entry strategy, choosing the geographical market area in which to operate, while keeping an eye on the financial viability as well as all the necessary
hurdles to obtain a business license in China.
HISTORY OF SUN LIFE FINANCIAL
Sun Life Financial of Canada began in 1865, in Montreal, selling insurance policies to Canadians in the process of the country’s creation. By the 1890s, Sun
Life Financial had begun an internationalization process, by expanding into Nicaragua, Ecuador, Peru and Chile and later into Asia, including Japan, India and China.
At the turn of the century, Sun Life Financial looked to diversify its investments and began expanding through growing industries, such as electric utilities and gas,
telephone and transport. Sun Life Financial maintained private ownership and staved off a take-over attempt by a U.S. firm in the 1950s, allowing it to strengthen its
roots within Canada.
In 1999, Sun Life Financial posted revenues of $14.7 billion,1 of which $3.3 billion was life insurance premiums, $1.2 billion was health insurance, $3.5 billion was
annuities, $4.1 billion was net investment income and $2.6 billion was fee income. Sun Life Financial’s net income was $164 million in 1999, up from $54 million
realized on revenues of $12.9 billion in 1998. Net income in 1998 and 1999 had been negatively impacted by the costs associated with pensions sales practices reviews
and increased reserves for guaranteed annuity rates in the U.K. business, as well as a significant increase in reserves in the discontinued accident and health
reinsurance business. By early 2000, Sun Life Financial was a month away from a $2.1 billion initial public offering (IPO) in Toronto, New York, London and the
Philippines. Although there was pent-up demand for Sun Life Financial’s shares in the Canadian marketplace, executives of Sun Life Financial and their advisers (RBC
Dominion Securities and Morgan Stanley) had two tensions to balance — not letting the stock rise too quickly for those policy holders that had decided to take cash
instead of becoming shareholders, while giving the investment community and those policy holders that were to become shareholders a strong initial stock price
increase. The IPO would be the fifth in a string of Canadian life insurance companies that had gone public since the summer of 1999.2
Sun Life Financial had a six-pronged approach to its strategy:
1. Aggressively expand the wealth management business
2. Strategically grow higher return protection business lines
3. Achieve superior shareholder returns while maintaining financial discipline
4. Leverage strong brands across multiple product offerings
5. Capitalize on distribution strengths
6. Pursue expansion in key strategic markets
Exhibit 1 shows Sun Life Financial’s sales by country. By early 2000, the majority of sales for Sun Life Financial were generated by sales in Canada and the
United States. Although Sun Life Financial was not profitable in every country in which it operated, the company was not committed to any business that was not able to
meet 15 per cent after-tax return on equity in the future.3 This low return on equity was the case in the country’s U.K. operations, which some industry observers
believed Sun Life Financial would sell off. Sun Life Financial believed that it would drive revenue growth through its 80 per cent ownership of the Boston-based MFS
wealth management business and, in the longer term, its foray into China.
PRODUCT AND SERVICES
Sun Life Financial’s two principal businesses were wealth management and protection. Wealth management included all asset management, mutual funds, pensions,
annuities, trusts and banking operations. The wealth management business primarily was based in Canada, the United States and the United Kingdom and made up 52 per
cent of the company’s revenues with $7.7 billion and 89 per cent of its assets ($268.9 billion) in 1999. The complete wealth management business served 2.9 million
individual investors and 7,000 institutional investors around the world. Almost all of the company’s wealth management products (97 per cent) were sold through
independent third parties.
The protection business included Sun Life Financial’s insurance products including individual insurance, group life insurance and health insurance making up 46
per cent or $6.8 billion of the company’s revenues in 1999. Principally, the group life and health insurance was based in Canada, the United States and the United
Kingdom, whereas the individual insurance business was in all the company’s markets. Sun Life Financial was ranked second for group and health insurance in Canada and
third in the United Kingdom. For individuals, Sun Life Financial offered whole life, term life, universal life, unit-linked life and corporate- owned life insurance
products. For groups, life, health and disability insurance were available. Exhibit 2 shows definitions of insurance terms.
Sun Life Financial believed it had a winning formula in its protection business, due to its wide range of products backed by the company’s financial strength
and the effectiveness of it customer service and underwriting ability. In North America, Sun Life Financial was competing in a mature industry, however, the company
needed to respond to the mounting pressures from banks, who had entered the insurance industry, often undercutting prices. Due to deregulation in the marketplace,
direct marketers and telemarketers were becoming more common in insurance sales. With greater emphasis on retirement planning in the mature markets, traditional life
insurance products were losing ground against universal life in Canada and the United States and unit-linked life insurance in the United Kingdom. This trend was not
necessarily the case in Asia or South America, where traditional life insurance products were still popular.
Sun Life Financial’s focus in the United States was on high net worth individuals with tailored packages for executive benefit plans. The company had
restructured its sales force in 1997, in the United States, by moving away from a career agency sales force to general agents selling a wide variety of products. In
1999, 65 per cent of U.S. insurance sales were through general agents, and 35 per cent were through third parties, such as banks and investment advisers. The general
shift of sales approach caused a decrease in the number of policies, but through focusing on the high net worth segment, Sun Life Financial was able to increase total
premium revenues.
In Canada, Sun Life Financial believed that it had expertise in selling group life and health insurance to large businesses as it had more than 7,000 policies
representing more than three million individuals. Sun Life Financial marketed and distributed its group life and health insurance through its own sales representatives
and career agents, independent brokers and consultants, Canadian associations, such as professional and alumni organizations, and through the Internet.
For individual life insurance, Sun Life Financial had 627,000 individual life insurance policies in force with 450,000 policyholders. Sun Life Financial had
experienced an increase in premium income, despite a decreasing number of policies, due to success in selling through independent agents who tended to focus on high
net worth individuals, increasing the average size of the policy. Although Sun Life Financial increasingly sold through independent life insurance brokers, such as
financial planners and investment dealers, it still distributed a large portion through career agents, meaning that costs of distributing the insurance were moving
from fixed to variable costs. Four years prior, in 1996, third-party distributors accounted for seven per cent of sales for new individual life insurance, whereas in
1999, 30 per cent were created through independents. In March 1999, Sun Life Financial formed a distribution alliance with Great-West Life, London Life and Investors
Group, where each organization could sell each others universal life and term life insurance products.
HISTORY OF SUN LIFE FINANCIAL’S INVOLVEMENT IN CHINA
In 1992, China opened two geographical market areas in the country to foreign investment — Shanghai and Guangzhou. To create a presence in China, a country
that Sun Life Financial had operated in nearly a century earlier, Sun Life Financial opened a representative office in Beijing. (By 1920, Sun Life Financial had grown
to be the largest foreign insurance company, but like all other foreign-owned insurance firms, it was forced to leave China in 1949, when the Communist party took
power.)4 The purpose of the office was to establish a presence, provide information to the Canadian headquarters, stay abreast of Chinese regulatory policies and lobby
the local and national governments to acquire a license. In May 1999, the Chinese government granted the right for Sun Life Financial to apply for a license. Seven
months later, Sun Life Financial signed a memorandum of understanding for a joint venture with China Everbright Group. Joint venture agreements were required by the
Chinese government to maintain domestic involvement in business expansion within the country.
Sun Life Financial’s strategy was to partner with a respected and prestigious firm that had clout with the national and local authorities. The company wanted to create
an entity that was “Chinese in operation in spirit with Western business practices, management and technology.” Sun Life Financial aimed to enter into the
“strategically higher return protection business lines,” followed by plans to enter the wealth management business. This plan would mean creating a mutual fund and
starting a fee-based asset management business. In the future, Sun Life Financial felt that the pensions business would be attractive. However, both wealth management
and pensions domains were not yet open to foreign companies.5
China Everbright Group and the Joint Venture Agreement
China Everbright Group was founded in 1983, as part of China’s open economic policy. It was a state-owned entity with direct control coming from the State
Council. The group’s primary business was financial services with several divisions including Everbright Bank (the sixth largest bank on a national level) and
Everbright Securities, considered to be the premier brokerage company in the country. China Everbright Group controlled $40 billion in assets and posted profits of
$675 million in 1999.
In making the decision to partner with Everbright, Sun Life Financial had to consider other alternatives. An executive from the insurance company Winterthur gave his
opinion between one alternative and Everbright:
Given a choice, I would prefer the alternative to Everbright. We know [the alternative] well and have done business with them for many years. We like them very much.
They are very sophisticated and professional — and that is hard to find in China. Of course, [they] have on-going business in financial services that may compete with
you later, and given [their] high-level political relations, you have to go forward assuming confidentiality is impossible. But, those high-level political relations
could be very useful.6
An executive with AXA believed Everbright to be a better choice:
Everbright is the best partner, bar none. Its management is tops, and even this recent blip with the chairman [his removal] does not change that. They want to be in
the insurance business, and they want a foreign partner to manage. They are aggressive, and not as bureaucratic as [some others]. Also not as arrogant. They are easier
to deal with. AXA, in my view, made a serious mistake going with Minmetals . . .7
The decision to partner with Everbright was made and a memorandum of understanding with China Everbright was signed in December 1999. The working name for the
joint venture was Guang Da Yong Ming, or Sun Life Everbright in English. The agreement called for both sides to own 50 per cent, with each partner contributing $18
million as an initial capital start-up. In year four, it was predicted that each partner would need to contribute an additional $3 million. Each side split decision-
making duties, with four board members being appointed from each partner. All board-level decisions required their parent partners to give the nod. Everbright had the
right to appoint the first chairman, with partners making the decision on an alternating three-year basis.
For the first five years of the venture, Sun Life Financial was responsible for the day-to-day operations. The foreign partner under Chinese regulations was
required to provide its technology knowledge for free during the start-up period. Sun Life Financial had planned on providing insurance software for free, negotiating
for the new entity to cover the costs of non-insurance software and hardware outlays. In addition to technology, Sun Life Financial was poised to provide management
direction and the sales agent training. In doing so, any expatriate costs over the cost of a comparable local Chinese employee were required to be covered outside of
the partnership by the foreign partner. Everbright was expected to share its distribution network and its management’s local expertise and ability to deal with the
governments in seeking approvals.
Sun Life Financial projected that the operation would show a profit in seven years. In the circumstance that profits were 10 per cent lower than expected, both
sides would need to provide an additional $1.5 million in capital, with the first profit year being pushed back one year.
CHINA
China was geographically the fourth largest country with 9.6 million square kilometres across 23 provinces and had the largest population in the world with 1.3
billion people. The average age was 31.7 years, and the population comprised 23.1 per cent aged zero to 14 years, 69.5 per cent aged 15 to 64 years and 7.4 per cent
aged 65 years and older. On average, the country’s residents were expected to live to 72.2 years, with the average life expectancy being 70.33 years for me and 74.28
years for women. The total fertility rate was estimated at 1.7 children born per woman. The population growth rate was estimated at 0.6 per cent.
China’s communist system had been put in place under Mao Zedong in 1949, and it placed tight controls on the country through political, social and economic
policies. Eventually, some of the economic policies were relaxed in the late 1970s, allowing for some decentralized economic decision making and greater foreign trade.
China was seen as a market with untapped potential due to its population size and under-developed business in some industries. Although its gross domestic product
(GDP) per capita was wedged between Ukraine and Swaziland, ranked at 129th at US$4,400, the country was considered to be second to the United States on purchasing
power parity basis. Ten per cent of the population was considered to be living below the poverty line.
China had quadrupled its GDP since 1978, driven through industry and construction (51.2 per cent of GDP), agriculture (15.2 per cent of GDP) and services (33.6
per cent of GDP) gains. Some of which was attributed to the involvement of foreign enterprises helping to increase domestic goods and exports. The current GDP was
estimated to be more than $5 trillion, second to the United States, and growing at approximately eight per cent. The exchange rate for China’s currency, the yuan or
reminibi (RMB), was pegged at 8.28 to US$1 and inflation was slightly negative at –0.8 per cent. China was criticized for its bureaucracy as well as the growing
disparity in income, due to the influx of new business. The government was seen to periodically loosen and re-tighten its controls, making for uneven operating
conditions. The government had made progress but was not always successful at reducing corruption in business nor keeping its state-owned enterprises in check. Missing
payments or not providing full pension amounts were not uncommon. Approximately 80 million to 120 million rural workers were considered to be surplus, moving freely
between small towns and large cities — this movement was seen to add to problems of maintaining the country’s living standards. While unemployment in urban areas was
estimated to be 10 per cent, unemployment rates of migrant or rural workers was seen to be much higher. It was estimated that the workforce was 744 million people of
whom 50 per cent worked in agriculture, 22 per cent in industry and 28 per cent in services.
Risks of Doing Business in China
Due to the country’s population size and growing economy, management of many foreign firms were excited about the possibilities of benefiting from a largely
untapped marketplace. However, many foreign business people were critical of China for the level of bureaucracy in obtaining the appropriate licenses and being heavily
restricted as to the types of products and services allowed to be offered for sale. As well, corruption and piracy still existed.
China’s pending WTO Membership
As of early 2000, China was not yet a member of the World Trade Organization (WTO). The WTO comprised 145 countries, with the responsibility to set up
standards for international trade and commerce. Through its pending membership, expected to take place in 2001, observers felt that China would be further opened up,
where potential growth could be harnessed. However, the membership also meant pressure on the country’s tight political controls.
CHINESE LIFE INSURANCE MARKET
China’s life insurance market was widely considered to be one of the insurance markets with the largest growth rates over the next 10 years, due to low
penetration (an estimated 1.69 per cent of the population had life insurance, and general insurance was 0.63 per cent).9 China was valued at US$16.8 billion per year
in premium income in 1999. Exhibit 3 shows growth and penetration rates of both life and non-life insurance in China and Exhibit 4 shows comparative data for six
cities. Industry analysts believed that low insurance penetration coupled with economic growth could produce annual compounded growth of 15 per cent over a 10-year
period.10 Within Asia, China was the fourth largest market in premium revenues behind Japan (US$279 billion), Korea (US$56 billion) and Taiwan (US$28 billion).
The Chinese insurance market was divided into life insurance and general insurance. Under life insurance, options were open to group insurance or individual.
Group insurance was open to domestic firms only, while individual insurance was open to both foreign and domestic companies. Thus far, foreign firms were only
permitted to operate in Shanghai (China’s largest city with a population of 14 million), with the exception being American International Assurance (AIA) who was
licensed to do business in Guangzhou as well. Foreign enterprises were able to open representative offices to investigate, research and make contacts with government
officials. It was expected in early 2000 that, in addition to Shanghai and Guangzhou, four more cities would open: Tianjin, Shenzhen, Dalian and Chongqing. However, if
no foreign company showed interest in opening up an office in those markets, the government was not likely to open it up. Furthermore, if a foreign insurer could make
a strong case to open up in a particular city, it could enlist the help of the municipal government with a possibility that it would be granted a license.
China’s entry into the World Trade Organization (WTO) called for the government to completely open up the market by 2005, permitting foreign companies to
operate in any city or province. Some speculators believed that the Chinese government would ultimately control that decision, even after 2005. Domestic competitors
were permitted to operate in 14 cities other than the state-owned People’s Insurance Company of China (PICC), which was not restricted. An industry analyst talked
about the WTO and the benefits for local firms:
We believe existing insurance companies will benefit from the WTO. We do see foreign companies introducing a dose of competition, but, actually, quite a mild
one. There are five significant national domestic insurance groups and around 25 foreign insurers in operation in China. Despite the competition, the five national
players have a near-complete lock on market share, at about 98 per cent of the market. Foreign insurers still face restriction expansions. Nonetheless, their entry to
the market should boost local standards.11
The insurance regulator was the People’s Bank of China until November 1998, when the CIRC (China Insurance Regulatory Commission) was established. The aim of
the CIRC was to approve new regulations and police insurance activity within the country. With just over one year of being in operation, the CIRC was still formulating
its identity. One foreign insurance representative was complimentary of the new organization:
The CIRC is receptive to new ideas. They may like the concept of limiting agency force and using the Internet to distribute products — if you show them how you
are going to create jobs for Chinese.12
Another foreign insurance representative had a different view:
I was chief representative in Beijing for more than five years, and in that time, China’s regulators have not changed. No, maybe they have gotten worse, more
bureaucratic. The new regulators just say “no” to requests, especially if they are about something that PICC does not want to change. [note: the CIRC is led by former
PICC officials]. That said, I think the CIRC wants to implement regulation “by the book” but PICC does not want that if it encourages competition. Our strongest
competitor is PICC.13
Foreign firms participating in life insurance sales were permitted to own up to a maximum of 50 per cent of the venture, forcing them to seek a partnership
with a domestic organization. In the general insurance category, foreign enterprises would be allowed to own up to 100 per cent in 2004.14
Chinese Consumers for Insurance
Generally, as a country’s GDP per capita increases, a broader base of its population is more likely to have insurance.15 China’s consumers in the US$1,000 to
US$10,000 GDP per capita bracket did not have enough to take a risk in the equity market, but still had disposable income, making China a ripe ground for insurance. By
avoiding risk in playing the equity markets, Chinese consumers would typically increase savings in deposits or guaranteed return instruments (usually at 2.5 per cent).
Although sometimes offering lower returns, insurance offered an alternative to these vehicles through greater protection to its policy holders.16 Throughout the mid-
1990s, the composition of an average Chinese household’s financial assets were: savings deposits 67 per cent to 77 per cent, securities nine per cent to 11 per cent,
cash 12 per cent to 21 per cent and insurance less than one per cent.17
The other major change that was occurring was the decreasing dependence on lifelong security through state-operated organizations. Known as the “iron rice
bowl,” this security was fading fast from the employer and moving into the direction of private enterprise. A study performed, in Shanghai, by Watson Wyatt in 1996,
showed that 84 per cent of respondents purchased insurance for reasons of protection, while 10 per cent was for savings, five per cent because it was trendy and one
per cent for other reasons.18
Types of Insurance Products
There were six general classifications for insurance products in China: personal life, property, liability, agricultural, reinsurance and foreign insurance (to
cover persons or objects outside of China). The types of insurance products sold varied greatly on the area within the country. For example, Shanghai sold extensive
individual life insurance, while group life made up less than 10 per cent of total life insurance market. In contrast, Guangzhou’s group life policies represented more
than 60 per cent of the total life insurance market.
COMPETITION
There were several hungry foreign firms that had signed agreements with Chinese domestic firms or were looking for partnerships to enter the insurance market.
One of the differentiating factors would be the channel of distribution — the method of sale of insurance products via door-to-door sales force, telephone sales or
through companies.
There were two distinct camps in the Chinese insurance market: domestic firms or joint-ownership between domestic and foreign companies. All the market leaders
in life insurance in 1999 were domestic firms. PICC had 68.63 per cent of market share followed by Ping An with 20.24 per cent, China Pacific with 7.48 per cent, New
China Life with 1.20 per cent and Tai Kang with 0.71 per cent. PICC was the oldest insurance firm in the country (established in 1949), was government-owned and
provided its policy owners with the perception of stability and history. Its closest competitor, Ping An, was regarded to have strong business practices, a good asset
base (30 per cent in cash and deposits) and was able to retain the right to offer financial services and insurance services, a feat that few other insurance firms were
able to achieve. It was also the first Chinese insurance company to comply with international accounting standards. Although it was considered to be a domestic firm,
Morgan Stanley and Goldman Sachs each owned six per cent of Ping An. China Pacific was attempting to prepare for international competition by signing a joint-venture
agreement with Aetna for life insurance, as well as developing a specialty in insurance for large-scale projects.
Out of the five major established foreign firms, the estimated combined market share was under two per cent. The most established foreign life insurance firm
was American International Assurance (AIA) founded in 1992, with 4,850 sales agents and RMB1,406 million in premium revenues. The following table depicts the other
foreign firms operating joint ventures or companies with representative offices….
??
With licenses taking several years, the process of establishing an insurance business for a foreign firm was arduous. Companies needed to also engage in the
difficult task of contracting qualified individuals as the insurance market in China was less than 20 years old. As such, companies were enacting training programs to
attract strong agents. Actuary work could be outsourced, but selling insurance was seen to be a combination of understanding the products and having the personal
ability to sell with the appropriate cultural manner.
As an employee from Aetna stated, “Under the current environment, Aetna may never make money for 20 years — but it does not matter because Aetna is limiting
costs and waiting for change, and anyway, Aetna is really in China for the chairman’s ego.”20 Opinions from the French firm, Axa, were not much different: “There is no
profit to be made in China for decades or more, unless the regulations change.”21
WHAT DO THE CONSULTANTS THINK SUN LIFE FINANCIAL SHOULD DO?
A consultant’s report dated in September 1999 talked about the business opportunity for Sun Life Financial in China:
Our starting hypotheses was that market constraints and other environmental factors make China a significant challenge to success for Sun Life Financial [as] the main
business is currently the type we want to exit, market access and freedom of action is largely restricted, short-term rewards and economic success is illusionary and
operating risks are high and difficult to control. While we believe that by and large our hypotheses still hold true today, in particular with respect to timing, signs
of sustained and favourable change are evident:
??continued attempts to break the regulatory product gauntlet with indications that the product licensing approach may be abandoned within the coming two years
??two large and distinct segment markets are growing rapidly and offer opportunities in almost every location
??large-scale social asymmetry and lack of long-term security are propelling selectively the health and pension businesses
??distribution alternatives are being recognized by a number of players supported by solid growth in Internet users
We still have to recognize that the industry as a whole [is developing], but governmental and business pressure indicate a move towards a better trained,
qualified and rational participants. This trend does favorably support a player like Sun Life Financial with its ethical business approach.
In the same consultant’s report, three different strategies were outlined for Sun Life Financial’s entry into China: the “Minimalist” approach, the “Full
Speed” development or the “Model Citizen.” The minimalist approach called for the selection of a less advanced city, focusing on traditional insurance products and
containing the capital investment. The idea with this approach was to maintain a presence and “shift gears” when restrictions were dropped and the marketplace became
more favorable. The full speed strategy involved selecting a high-growth city, building a large agency force and developing a full portfolio of products in the
eventuality that regulations would change. The model citizen plan called for selecting a city based more on co-operation, with a focus on building government
relations. This option also called for capital containment and the slow development of new insurance products beginning with the traditional portfolio.
City Selection
There were six cities about to be opened for foreign insurers: Guangzhou, Shenzhen, Tianjin, Dalian, Shanghai and Chongqing. Exhibit 5 shows some comparisons
of the six cities. A consultant’s report defined each market in terms of the foreign companies currently involved on the following grid:22
New Domestic Players
Chinese Set Up/ Products
Traditional Domestic Players
Leading Foreign Players
Foreign
Set Up/Products
Second Wave Foreign & New Domestic Players
Selectivity (upper segments bought)
Based on government relations and market attractiveness, Sun Life Financial narrowed its options down to Shanghai, Guangzhou and Tianjin in order to start its
insurance sales operations. The city selection was seen to be important for several reasons. Once the market opened, the Chinese government required that insurers have
a minimum of RMB100 million (US$12 million) in premium revenues in its entry city before applying for a second license. As well, if the insurer was not successful in
its city of choice, it would risk disappointing its partner, the municipal government and its headquarters. A poor city selection would also put the company further
behind in its breakeven targets.
Sun Life Financial had hired another consulting company to do a complete investigation of Shanghai, Gaungzhou and Tianjin. Along with the consultants, Sun Life
Financial had established the criteria of the city, based on market size, purchasing potential, market growth and market development. The consultants gave a greater
weighting to market size and purchasing potential as they believed that a bigger market would provide a greater opportunity to carve out a niche. Shanghai had the
largest market and strong market growth. Along with Gaungzhou, both were estimated to lead China’s economic growth, while Tianjin would be in line with the national
average. Shanghai and Guangzhou were equal in terms of market development, and Guangzhou was the clear leader for purchasing potential.
With the results of the findings, the consultants’ report suggested that Sun Life Financial enter into the Shanghai market with the following explanations:
Shanghai appears to enjoy significantly higher political support from the central government than does Guangzhou: their closely knit group of senior advisors includes
many former bureaucrats in the Shanghai Municipal Government. Shanghai’s cosmopolitanism should not be under-rated. The city was Asia’s financial services centre
before WWII, and governments and consumers clearly intend for Shanghai to regain that stature. This desire manifests itself in a much more cosmopolitan attitude in
Shanghai, which translates into a greater willingness to experiment with foreign products and services.
We also believe that a market presence in Shanghai is more replicable in other cities than if Sun Life Financial began in Guangzhou. Cultural differences are
greater than those between Shanghai and other provinces: key staff trained in a Shanghai operation are more likely to be able to hit the ground running in other cities
in the future. While there is far greater competition in the insurance industry in Shanghai, this could prove to be a benefit for the company. Competition focuses
business strategy, promotes innovation, increases efficiencies, leads to greater tolerance of risk, and potentially leverages higher returns.
There is no major cost differential between Shanghai and Guangzhou: rents in both cities for Grade A office space are US$40 to $60/m2/day, operating costs are
about the same, local business taxes (eight per cent) and salary costs (US$300 to US$500 for administrative staff, $600 to $1,200 for department managers, and $1,000
to $2,000/month for senior managers) are also likely to be at par.
The same report assessed Tianjin, the lower cost alternative:
We do not believe that Tianjin is a suitable point for market entry into China. Market conditions, under-investment, and structural economic problems will continue to
drag the urban and regional economy of Tianjin with serious unemployment looming as a major challenge. In such a context, we do not believe that a significant number
of consumers will divert comparatively lower discretionary incomes to purchase of insurance products. While establishment and operational costs will certainly be lower
than in Shanghai or Guangzhou, we suggest that, ultimately, the purchasing power of regional markets should dictate the selection of market entry point. In
establishing in Tianjin, Sun Life Financial would admittedly have a low-cost operation in a city with little competition; this is fully understandable given the
inherent weakness in the Tianjin market.
Another consultant’s report had a different view of the attractiveness of each market:
From a supply side point of view, there is ample opportunity for a new player to gain market share in either city although the large incumbent agency base in Shanghai
reduces the outlook for a new entrant. Under almost any growth scenario Tianjin quickly outpaces Shanghai in attractiveness. This can be explained by Tianjin still
being on the “steep” part of the development curve while Shanghai is already on the “flatter” part. Guangzhou is a distant third given the Hong Kong offshore market
factor. Even without a privileged position, Tianjin becomes the first choice under a balanced growth scenario.
Because Tianjin was on the “steep” part of the development curve, the consultant’s report above argued that Tianjin’s life insurance market would grow at a much faster
rate than Shanghai’s or Guangzhou’s. The other part of the equation was the growth of GDP per capita, which was calculated based on historical figures for the next
five years: Shanghai 15 per cent, Guangzhou 23 per cent and Tianjin 12 per cent. Exhibit 6 shows comparative data for the three cities.
CONCLUSION
Now in a taxi amongst the hectic Beijing traffic, Ohannessian had a lot of information to digest about the Chinese market and the opportunity to sell life
insurance products. He wondered about the best way to organize his company’s entry into the country, the first city to choose and the strategy that would provide
long-term viability while not exhausting Sun Life Financial’s or Everbright’s resources.
Read the article and answer the questions with paragraph. One question one paragraph.
1. Was it a good time for Sun Life Financial to pursue China market? Why?
Note you could analyze the following questions using PEST and Porter’s Industry Analysis Framework as guidelines. A good analysis should answer the following
three sub-questions: (1) Is China a strategically important market and why? What are the potential opportunities and threats/costs? (2) Does Sun Life Financial has
internal capability to exploit the opportunities and overcome the threats/entry barriers? Why? (3) Overall, what are the pros and cons of entering China?
2. Why did Sun Life Financial choose Everbright Group to be their partner?
3. If you were Ohannessian, which city would you choose? Why? Specify your criteria to evaluate which city to choose?
