Midea Enters Banking Queue

Midea applies for banking license

Traditional Chinese appliance makers are showing a sudden interest in moving outside their usual comfort zone, with word that sector giant Midea (Shenzhen: 000333) is applying for a banking license. Midea joins a fast-growing queue that has seen rivals Haier (HKEx: 1169) and Gree (Shenzhen: 000651) make similar moves outside their traditional areas, in what looks to me like a typical herd mentality that one often sees in Chinese industries.

In this case the urgency to diversify doesn’t seem that critical, since I don’t expect consumer demand for big appliances like air conditioners and refrigerators to fade anytime soon. That contrasts sharply with a parallel diversification drive in the traditional retailing sector, where companies like electronics seller Gome (HKEx: 493) and supermarket operator Wumart (HKEx: 1025) are facing an unprecedented challenge from a new generation of e-commerce firms like Jingdong and Yihaodian.

Still, I do have to at least commend the traditional manufacturers for their latest initiatives, as it shows they want to innovate and expand their business and profits to benefit their shareholders. Whether I think this latest initiative by Midea will succeed is another matter completely, as I do have my doubts about its ability to run a new business so different from its core manufacturing expertise.

The latest reports cite an unnamed company insider saying Midea was one of the many companies that applied last year to be included in the first group of new privately-run bank operators being selected by Beijing. (Chinese article) The central government is accepting applications from both public and private sector applicants to start new banks, as part of its recent effort to liberalize the sector.

Nearly all of China’s current banks, from national giants like ICBC (HKEx: 1398; Shanghai: 601398) to local lenders like Bank of Shanghai, are state-owned and rely heavily on government connections in their lending decisions. For that reason, they tend to do much of their business with other state-owned enterprises but have few connections or expertise for lending to China’s increasingly important private sector. Beijing hopes to change that with by creating a new generation of private banks that can lend more effectively to the private sector.

Quite a wide array of companies have expressed an interest in entering the financial services sector over the past year, running the range from Internet giants like Alibaba and Tencent (HKEx: 700) to retailers like Suning (Shenzhen: 002024). Midea’s interest follows similar reports last year that Gree was also interested in entering the space. (previous post) Reports at the time indicated Gree was taking a different route from Midea’s, and was simply in talks with a third-party existing bank to set up a new private bank, rather than aiming to set up a lender by itself.

Haier has also been quite active outside its traditional appliance manufacturing, making acquisitions and forming several interesting new tie-ups over the last 2 years in its own expansion bid. In the latest of those, the company announced in December it was forming a major new tie-up with e-commerce leader Alibaba. (previous post) That partnership saw Alibaba invest 3 billion yuan ($500 million) for a stake in Haier’s Hong Kong-listed unit, with the pair forming a joint venture to develop sales and distribution channels for large appliances.

In terms of chances for success, I’ve previously said the Haier deal looks like a good one, while the Gree tie-up with Zhuhai Hengqin Village Bank looked less exciting. Haier has shown a smart strategy of choosing strong partners to help it move into areas related to its core business of making and selling household appliances, and the Alibaba tie-up looked like an extension of that strategy. The Gree tie-up looked like a move into unfamiliar terrain with a minor partner, which made me less optimistic of its chances for success. Similarly, Midea’s planned move into banking services looks equally problematic due to the company’s lack of experience, and I don’t expect the initiative to do very well if it receives a banking license.

Bottom line: Midea’s attempt to open a private bank is likely to fail due to the company’s lack of experience in the financial services sector.

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