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Agencies chase China boom

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As multinational corporations expand into the Chinese market, ad agencies that serve them are opening offices, forming partnerships and expanding their presence as well.

With 1.3 billion people, a GDP that will grow at a projected 8% rate this year, preparations under way to host the 2008 Summer Olympics and a thriving technology industry, China is a prime market for new business.

However, ad agency executives say that while it's an exciting, profitable time to be entering China, there are challenges to doing business in the country.

"The market is slowly opening up," said Michael McLaren, exec VP-worldwide director of global accounts at McCann Worldgroup, New York. "For a long time, it was a very, very controlled market."

McCann has been operating in China for 15 years through McCann Erickson Guangming Ltd., a joint venture with Chinese newspaper <i>Guangming</i>. It has offices in Beijing, Guangzhou, Hong Kong and Shanghai, serving clients including Intel Corp., Microsoft Corp., Siemens and United Parcel Service.

Until recently, foreign businesses entering the Chinese market were required under law to operate as joint ventures with Chinese-owned companies. Under more relaxed government regulations, companies entering the country are now able to take stronger equity positions.

It's not just the large agencies that are making inroads in China.

Philip Johnson Associates, a Cambridge, Mass.-based agency with less than $10 million in annual revenue, recently formed a partnership with Chugai, a Japan-based ad agency that this year won the right to operate a shop in Shanghai.

"We know China will be increasingly important to our b-to-b clients," said Mike O'Toole, exec VP-partner at PJA, which serves clients including Boston Scientific Corp., InnoCentive Inc., Invitrogen Corp., Novell Inc. and SSA Global Technologies. "They all have active businesses in China."

McLaren said infrastructure is the first challenge when moving into developing markets. "We take for granted a lot of the support ecosystems such as production facilities and media relationships," he said. "Some of these industries are very young, so it takes a while for the infrastructure to build out."

The technology infrastructure in China is in the building stage.

According to a March report by Forrester Research, 54% of Chinese companies will increase their IT budgets in 2006, compared with 47% in the Asia/Pacific region overall, 42% in North America and 29% in Europe. The report was based on a telephone survey of more than 800 executives in the region conducted in November and December.

The survey also found that Chinese companies will spend an average 48% of their total IT budgets this year on computer hardware and networking equipment, 19% on IT staff, 17% on software licenses and fees, and 13% on IT services.

"A second challenge in China is the scale of the place. With over 200 major cities across the country, how do you manage that?" McLaren said.

He noted clients often break down cities into categories, developing campaigns and marketing strategies for tier 1, tier 2, tier 3 and tier 4 cities.

New campaigns need research

When it comes to launching new campaigns in China, one of the most important factors is research, he said.

"If we're launching a major new product globally, we would first of all try to understand the similarities and differences between the China market and the rest of the world," he said. McCann accomplishes this through market research, often using global partners that have a presence in China.

Next, the agency looks at the key variables it needs to address in each execution and works with local agencies to develop the creative for each market.

"A third challenge is hiring talent," McLaren said. "The reality is there is not a huge talent pool of people with really good experience, and everyone wants them. It is almost a full-time job to manage the talent pool."

McLaren, who has been to China three times already this year, said the job is also very rewarding. "You are building something up that takes your own blood, sweat and tears," he said.

PJA's O'Toole said one of the biggest challenges to doing business in China is cultural differences, particularly when it comes to understanding business decision-making. "You have to throw all your assumptions out the window," he said.

PJA recently did work for InnoCentive, an online community of scientists, to recruit Chinese scientists to join the group. It worked with another agency partner, e21 of Beijing, on market research for InnoCentive.

"Organizations are structured very differently in China. There is a real sense of hierarchy," O'Toole said.

For example, junior scientists need to have the endorsement of a higher-up in order to participate in any kind of research or focus group, which makes recruiting panelists more difficult, O'Toole said. "There is also more of a sense of community or collaborative effort in China," he added, which makes profiling one scientist or organization difficult.

Ali Hussein, VP-global markets and CMO of InnoCentive, said of China: "This is the place to be. In our lifetime, there will be no other opportunity of a market such as this, because of the growing economy, the stable government and the global economy."

Carlson Marketing, based in Minneapolis, opened an office in Shanghai in March, after receiving government approval. It also has a Hong Kong office, which opened in 2003.

Carlson Marketing is an operating group of Carlson Cos., which has been doing business in China since 1992 through its Carlson Hotels group. Other Carlson operating groups that do business in China include Carlson Restaurants, Carlson Wagonlit Travel and Regent Seven Seas Cruises.

"Many of Carlson Marketing's clients have a fast-growing presence in China or are just entering the market," said Gabi Kool, managing director-China and exec VP-Asia Pacific at Carlson Marketing.

"Our long-term client General Motors Corp. in the U.S. has a very large presence in China and generates a significant part of their global profit in China. We want to ensure that we can support their marketing activities here as well as we do for them in the U.S.," he said.

Kool added part of Carlson Marketing's growth plan is to open offices in Beijing and Guangzhou in the next few years.

"For years, Hong Kong was the big daddy, and you'd have satellite operations in Shanghai and Beijing " said McCann's McLaren.

"In the last three to four years, Shanghai and Beijing have developed into strong centers of commerce. If you are serious about doing business in China, you need to have strong offices in both of those markets."

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