I have lived in China since 1994 and in Shanghai since 1998. When people hear this, the most common reaction is, "You must have seen huge changes." I respond, "Perhaps not quite as much as you might expect." Lifestyles, even attitudes, of Mainland Chinese have evolved dramatically. However, the country's cultural and commercial dynamics, once and forever inextricable, remain quintessentially Chinese. So, too, does the communications industry.
When I arrived, China's marketing seas were, yes, primordial. Media prices were cheap. Total spending was approximately $5 billion. Although agencies have never suffered from excessively burdensome government regulation (advertising has never been considered a "strategic" industry), we could not operate without a local joint venture partner. Executive power struggles were endemic, with the Chinese usually focused on fast cash and Westerners hoping to adopt a more long-term focus. Creative was, of course, exclusively mass media or quick and dirty "below-the-line," and the vast majority of ads were adapted from overseas, often to off-putting effect. As a result, the mainland was terra incognita for the vast majority of aspirating creative talent and business leaders. Marketing as a discipline barely existed.
It goes without saying that, across several variables, the nation has emerged. Its people are significant consumers of goods produced by multinational enterprises domestic companies alike. Deng Xiaoping imperial proclamation that "To get rich is glorious!" was made only in 1992, three years after the Tiananmen Square "incident" as a sign that the People's Republic was open for business. Since then, China's middle class, negligible until after the turn of the 21st century, has achieved scaled mass, and now counts approximately 250 million individuals. In category after category, from cars and mobile phones to luxury goods and travel, mainlanders are the world's most avid consumers. Their impact on everything from product design to global marketing strategy is a fact of life and will continue to grow.
On the Client Side: Competent Marketers
As a result, market entrants finally do homework before landing here. Corporate (and agency) marketing structures have been internationalized. Fewer foreign companies make egregious errors. Most realize global brands must be brought into alignment with a Chinese -- a Confucian -- worldview. Back in 2000, eBay crashed and burned because it assumed the "thrill of the auction," a distinctly American individualistic position, would drive consumers to e-commerce sites. In the process, they neglected the importance of dramatizing product range and on-line security reassurance. In 2006, Best Buy entered the PRC and quickly failed. Its model of high-end in-store service and premium prices was flat wrong for China, perhaps the most price sensitive market in the world, particularly for goods consumed in home. Today, retailers such as Uniqlo, Zara and H&M are all making profits. Quintessentially "Western" brands such as Starbucks, Haagen Dazs and Nike have succeeded by bringing their products into alignment with Chinese cultural imperatives.
There are fewer big misfires to report.
The country's marketing landscape has experienced sweeping transformation. China's digital big bang has been jaw dropping. The country now boasts 600 million internet users and 300 million subscribers to WeChat, an innovative group text and video service. E-commerce has upended the power balance between retailers and consumers, particularly in lower-tier cities where bricks and mortar alternatives are less prevalent.
On the Agency Side: International Practices
The communications industry has also been evolved dramatically.
• Local partners are no longer de rigeur, although the Communist government still imposes random restrictions within selective categories (for example, luxury billboards due to political sensitivities).
• Any agency without a digital creative capability -- at JWT, we call it our digital "heartbeat" -- struggles for relevance. I sometimes joke that we are no longer advertising people. Instead, we engineer media-neutral, idea-centric participation platforms...
• Local companies now constitute major revenue sources for successful global agencies. Shops such as Wieden & Kennedy who neglect the growing importance of domestic clients remain also-rans or niche operations.
• Diversified revenue streams have multiplied. JWT's field marketing operation, Always, contributes more to both revenue and profit than any of its creative agencies. The ability to "manage scale" is a uniquely Chinese competitive advantage.
• China has begun to sparkle at creative award show with a few agencies bringing home gold. In 2011, JWT Shanghai won the mainland's first Grand Prix at Cannes for Samsonite.
• Despite the flight of young television viewers to cyber space, media costs have exploded, in both absolute and cost per thousand terms. This is due to both excessive demand and the monopolistic nature of media sales. As a result, the biggest challenge new marketers face is generating enough awareness to get out of the starting gate. For small and medium-sized consumer goods companies -- entities without pockets deep enough to afford massive media investment -- it may be too late to enter China.
A Long Road to Rome
On the other hand, the Chinese communications industry has, in many ways, resisted change and, across several dimensions remains operationally challenging.
Talent crisis. The fact that foreigners -- including expatriate Chinese from Hong Kong, Taiwan, Malaysia and Singapore -- are still reasonably represented at the higher levels of the industry is a disappointment. Of course, there will always be a need for individuals with an international outlook for clients with operations outside of the mainland. But advertising, as an industry, has had difficulty in developing senior local talent. It's neither a question of salary nor a lack of intent on the part of agencies. The biggest challenge is that advertising is not fundamentally respected as a career path for many locals. An adman's key strength is the ability to articulate the abstract and lead clients to embrace what can't be proven. The approach is largely conceptual and this doesn't appeal to many Chinese who tend to take refuge in the concrete. There are too many talented 35-year-olds who abandon the industry for a more "respectable" career. The ones who stick with it, the ones who have the capacity to inspire, are worth their weight in gold.
Vicious price competition. There have always been, and still 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. In fifteen years, I haven't seen a single local advertising agency become a viable competitor to multinational shops -- even though most multinationals are hobbled by underinvestment and a talent shortage. Local agencies have not evolved to address the long-term brand building needs of large corporations, multinational or domestic. Their limitations are common to many industries in China, both manufacturing and services. There has been a chronic underinvestment in mid- and senior-level managers capable of abstract conceptualization, leaders who have the courage to challenge clients. For every million dollars in revenue, there are usually forty to fifty employees, compared with fifteen in international shops, which means competitive strength is a question of quick turn-around and low-price. Relationships with clients are reactive, not strategic, and most profit is derived from media kickbacks.
Misleading size. The "real" China advertising market, now the second largest in the world after the United States, still isn't as large as reports suggest. Official figures highlight an ad spend well above $140 billion, but the figure is grossly inflated because all advertisers enjoy hefty discounts, anywhere from twenty-five percent to seventy percent off book rates. Furthermore, the accessible client base -- local and multinational companies that will pay a premium to achieve deep brand equity -- accounts for no more than thirty percent of industry revenue. Although this market accounts for an increasingly large slice of the pie (and is served exclusively by multinational agencies), the potential of China is still relatively low by Western standards, and will remain so for years to come.
Shallow Chinese brands. Any market's potential ultimately hinges on the strength of its local brands, but the majority of state-owned enterprises are not structured to build equity. Mainland consumers actively prefer few Chinese labels. Most are are regarded as, at best, "reliable" commodities. This is because: senior management is not market-driven and 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; and a lack of understanding of how to measure the success and depth of brands. The result? Local clients are still relatively unprofitable and difficult to manage, despite their importance to our revenue base.
Conservative creative. Our work has become more professional and, on occasion, award-worthy. The major players, both on agency and client sides, grasp the fundamentals of consumer motivations here. But we test ourselves into mediocrity, particularly for "mass" advertising that requires significant, and therefore risky, investment. There is much more adventurism in the digital realm but, unfortunately, most companies are still not structured to harness the power of technological revolution.
Sheer scale and dynamism makes China thrilling. But this is still a market for brave hearts.