Now that the Olympics marketing extravaganza is behind us, let's take a deep breath and ask ourselves whether China is truly poised to emerge as final frontier for multinational advertising and communications companies.
We have a trick. When we want to impress China's glorious opportunities upon colleagues from abroad, we take them to M on the Bund, a glitzy restaurant where power players wine and dine. Situated along the Huangpu River, the location offers a jaw-dropping view of both the stately architecture of Shanghai's colonial heyday and a new, soaring skyline. The scene triggers a Pavlovian response from hungry ad execs, globalists raring to capitalize on an emerging giant's growth potential.
We in China are optimistic about the nation's ability to morph from the Wild East to a civilized brandscape. However, we're also pragmatic. The Olympics did not herald an inflection point. Progress will continue but gains will continue to be incremental, sometimes excruciatingly so. The mainland market remains a touch nut to crack, and realistic expectations must be set very clearly.
Causes for Concern
Several big barriers may preclude China from becoming the next America, circa 1953:
Vicious competition. First, and most fundamental, there are too many agencies--more than 100,000 of all shapes and sizes. This surfeit leads to cutthroat competition, low fees and plummeting profits. Client relationships with advertising "agents" are a promiscuous series of affairs in which short-term contracts are awarded to the cheapest bidder. Making matters worse, most multinational corporation (MNC) shops are hobbled by underinvestment, a severe talent shortage and shoddy creative.
Misleading size. Second, the "real" China advertising market isn't that big. Reported figures highlight an ad spend well above $20 billion, but the figure is inflated because all advertisers enjoy hefty discounts, anywhere from 25 percent to 70 percent off book rates. To boot, the "accessible" client base--local and multinational companies that will pay a premium to achieve deep brand equity--accounts for no more than 20 percent of industry revenue. True, this "normal market" accounts for an increasingly large slice of the pie and is served exclusively by MNC agencies. But the potential of China is still relatively low by Western standards, and will remain so for years to come.
Shallow Chinese brands. Finally, any market's potential ultimately hinges on the strength of its local brands. But the majority of state-owned enterprises (SOEs) are not structured to build equity. There is not one Chinese label actively preferred by mainland consumers. Most are regarded as, at best, "reliable" commodities. Why?
• Senior management is not market-driven; politically tethered corporate governance does not reward long-term shareholder growth.
• Hierarchy impedes the flow of ideas between market-savvy young guns and CEOs, most of them imperial, self-protective Communist Party apparatchiks.
• Marketing is subordinate to sales--the latter controls budgets, while the former churns out promotional ads.
• There's a lack of understanding of how to measure the success and depth of brands.
Causes for Optimism
All this said, we remain excited about the potential of China to evolve into a profitable brand universe with scale. Here are some favorable factors:
Deregualation. First, China's WTO commitments will facilitate a more diverse agency playing field. Independents such as Bartle Bogle Hegarty, Wieden + Kennedy and Nitro, not to mention a raft of integrated communication specialists, have recently entered the market free of joint-venture shackles. These new players will spur many of us to lift our game. Furthermore, the legal barriers to acquisition and diversification, while still complex, are falling, making it easier for traditional "advertising agencies" to evolve into full-service communications "groups." The JWT China Group, for example, generates almost 50% of its revenue from non-traditional servcies such as field marketing, trade consulting, branding and identity design, customer relationship management (CRM), etc. As recently as three years ago, our offering was primarily television and print creative
Bits and bytes. Second, the digital revolution -- China now boasts the nation's largest pool of internet users, currently 250 million and counting -- has dramatically opened consumers' minds to a brand range of new products and services. From home decoration to automobiles, broad internet penetration has accelerated knowledge about products and services, resulting in stunningly rapid adoption curves across a swathe of categories. For example, the PRC currently enjoys the fastest growth rate in flat panel TVCs, despite an antedilivian retail environment. HSBC is poised to harness the power of customer relationship management (CRM), impossible in a pre-digital Middle Kingdom, to educate consumers about financial management and, at the same time, sell Premier accounts.
Microeconomic fundamentals. Third, Chinese enterprises must reform, lest they die a lingering death. China's most daunting structural challenge is production overcapacity. From air conditioners to autos and computers to apparel, supply far outstrips demand. Still bloated from the effect of a decomposing command economy, China is awash with goods. To survive, companies have no choice but to end the vicious cycle of plummeting prices and surging red ink. They must: (a) build consumer loyalty, (b) forge a sustained price premium by cultivating brand equity, and (c) reinvest profits in future growth. In the past couple years, even SOEs (e.g., Yili, COFCO, China Unicom) and "government-supported" companies have begun to restructure, with Lenovo taking the boldest path of "outsourcing" marketing to India to be overseen by world class marketing executives. While none has evolved into a true market-driven entity, progress is impressive and bodes well for the future. (More than 45 percent of JWT's revenue is from local clients, up from nothing seven years ago.)
Consumer motivations. Fourth, and most fundamentally, Chinese consumers--there are currently more than 125 million individuals with middle-class purchasing power--are a potent force. They are also the most brand-friendly people on Earth. All strands of Chinese thought--Confucianism, legalism and Daoism--reject "individual identity" as a threat to stability and order. However, the hearts of Chinese people are conflicted between Confucian demands to both conform to the mandates of a hierarchical social structure and climb a narrow ladder of success. The pull between ambition and regimentation yields a spiky mixture of huge egos and weak self-esteem. Individual identities are repressed. In this fear-based, ultra-aggressive context, brands are instrumental identity surrogates. Consumers hungrily latch on to them as status projectors, particularly publicly displayed labels.
Brands are also embraced because they alleviate the disorientation of an overwhelmed--albeit optimistic--new consumer set. We must never forget that, 15 years ago, there was only one way to place a call: the public phone. Today there are more than 300 models of mobile devices to choose from. Strong brands are, if nothing else, appreciated as efficient, organizing concepts.
Summing up, there is a shining city on a hill, a new horizon that beckons committed brand builders and their ad partners to define and capture category benefits. But it's an often misunderstood opportunity easily squandered.