China's Leo Group is a manufacturer of pumps for water systems, farm irrigation and power stations. Seeing a new opportunity, it has spent $602 million acquiring some of China's hottest local digital agencies. If that's surprising, recall that the world's biggest agency giant started out as Wire and Plastic Products, a manufacturer of wire baskets, before Martin Sorrell transformed it into WPP.
The agencies in the new Leo Digital Network had been courted by global holding companies for their local expertise in a crucial market, but when Leo came calling they seized a chance to build something themselves -- a Chinese network with digital marketing services from media to creative to e-commerce to mobile to the smart TV sector.
The network has 700 employees and a client list including international heavy-hitters and local startups. Leo's digital strategy and creative agency Amber Communications has Coca-Cola Co. as a longstanding client; social agency Arkr Group works for PepsiCo.
Why link up with a water pump company? Because the manufacturer is giving the agencies freedom, along with cash. Leo Group is listed on the Shenzhen Exchange, meaning more money for acquisitions, hiring and projects. (The stock has suffered a recent steep drop amid generalized turmoil in China's market; as with many stocks, its trading has been suspended temporarily. Despite that, the share price has more than doubled in a year.)
"Nearly 10 big companies approached us before, but Leo Group gives us more room to do whatever we want and create our own digital network," said Dalton Zheng, who heads up MediaV media agency, Leo's first digital purchase. He's also president of Leo Digital Network, directing its strategy and acquisition plans. "It's much different from if a global holding company bought us; then we would be just a little part of a big network."
China's digital chops
Leo's story – turning down foreign takeover offers, banding together with other Chinese agencies -- is symbolic of the growing self-confidence in China's online sector. Once derided as copycats, China's internet giants, including Alibaba Group, are now often lauded as innovators.
Local digital agencies have grown up in China's complex internet landscape, which is tough for outsiders to grasp, giving them an advantage over international players here. Google, Facebook, Twitter and YouTube are blocked on the mainland by China's Great Firewall; the country has its own platforms, from search engine Baidu to all-purpose mobile app WeChat.
Ad Age profiled four hot Chinese digital agencies in 2013, singling them out as M&A targets for foreign holding companies. Young & Rubicam's VML later bought one of them, IM2.0. But two of those four agencies, Amber Communications and Vitamine, are now part of Leo.
Andrew Kefford, regional managing partner for Asia Pacific, the Middle East and North Africa at Results International, said the agencies likely felt cultural differences with global players were significant and chose like-minded partners instead. He predicts more Chinese digital agencies getting together like that: "With the high number of independent agencies in China, we see this trend continuing.
Building a network – fast
One strength of China's digital sector is speed, and that bears out in Leo's story.
MediaV joined first in March 2014. Mr. Zheng of MediaV approached his contact Amber Liu, CEO of Amber Communications; that agency came on board several months later. Though Mr. Liu was in the final stages of two years of negotiation with a global player, he sealed the deal with Leo in three phone calls.
"I didn't even have a lawyer draft the contract; we trust each other, that's it," Mr. Liu said. He borrowed Mr. Zheng's contract and changed the names on it. Mr. Liu is also Leo Digital Network's VP.
Along with digital media agency MediaV and Amber Communications for digital strategy and creative, there is Arkr Group, which does social marketing; internet technology company Wan Sheng Wei Ye; and mobile precision marketing agency Miage. Recently the group invested in e-commerce agency Bi Cheng and Yi Jia, which does smart TV ads. Many of the agencies are preparing to move into a Shanghai office together in a few weeks.
The company is eyeing acquisitions that would complement what it has now. It's also looking internationally, including at U.S. internet technology companies.
The goal is to "close the loop" to offer a full range of digital capabilities to clients. That's in line with a new Chinese government strategy called "Internet Plus" to wrest more growth from China's various online sectors.
Leo's strategy has already led to more work. Siemens home appliances, an 8-year client of MediaV, has now tapped Amber and Arkr too, said Eric Wang, Greater China media and digital marketing manager for the Siemens division. He said Leo allies strategic thinking with execution, a combination that can be hard to find, and he praised its multifaceted approach: "This is what many clients are eager for, a one-stop service of digital marketing."