CHALLENGES ABOUND FOR ASIAN MARKETERS. HONG KONG MAY REMAIN A REGIONAL HUB, BUT CHINA'S ROLE WILL GROW DESPITE CRIPPLING DEFICIENCIES IN TELECOMMUNICATIONS, DISTRIBUTION AND INFRASTRUCTURE. WELCOME TO...THE NEW ASIA

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Although china accounts for only about 6% of all ad spending in Asia-compared with 60% in Japan-it's seen by advertisers as the hottest spot in the world's fastest-growing region.

Among the factors helping redefine Asia's role in international marketing are China's 1.3 billion potential consumers, as well as next summer's hand-over of Hong Kong-the regional hub for marketers and their agencies. In June 1997, the U.K. is scheduled to return the crown colony to the rule of the mainland government.

Marketers are finding that China is a challenging market and a country of extremes.

For example, when Colgate-Palmolive Co. first entered the Chinese market, the U.S. company found it had to educate consumers to buy Colgate toothpaste to fight cavities rather than view it as a toothache cure. Rarely had product benefit advertising been so needed.

At the other extreme, China-which barely has a functioning mail service and few phone lines-will host its first Comdex, a computer industry trade fair, in February, creating a need for sophisticated marketing.

Most observers agree that China's role as a market will continue to grow, despite deficiencies in telecommunications, distribution and other infrastructure.

More and more companies are relocating their management to China, said Eddie Gonzalez, group managing director for Hong Kong and China at Dentsu, Young & Rubicam. "But a lot of business is still driven out of Hong Kong headquarters."

"Companies will either gravitate toward Singapore-as General Motors, UPS, Gillette and Levi's have-or take the plunge and move into China proper," said Marcio Moreira, McCann-Erickson Worldwide exec VP-regional director for Asia.

Or they may do both. In one model likely to become more common, General Motors Corp. 18 months ago split its regional Hong Kong headquarters, moving management for China to Beijing and the rest of Asian regional management to Singapore.

"The conventional wisdom is that it is in the Chinese govern- ment's self-interest to maintain Hong Kong largely as it is," said Jeff Fergus, chairman of Leo Burnett Co. in Asia. "Hong Kong is 25% of the GNP of an expanded China, and there is a lot of mainland Chinese investment. But Singapore is quietly lobbying companies with Hong Kong headquarters, explaining the advantages of relocating."

Nestle already has six offices in China, and recently moved its headquarters for greater China, including responsibility for Hong Kong, from Hong Kong to Beijing.

"You have to be on the ground," said Bernard Yiu, managing director of McCann-Erickson China, Nestle's agency in that country. "Hong Kong's culture is very different from China's. You can't just fly in and fly out."

Johnson & Johnson and Gillette Co. both manage their China operations from Shanghai.

"Quite a few agencies are going through the painful exercise of trying to segregate their China operations from Hong Kong," Mr. Yiu said. "A lot of people are sitting comfortably in Hong Kong and don't want to move."

AGENCIES FOLLOW CLIENTS

As clients are moving beyond China's three major cities-Beijing, Shanghai and Guangzhou-agencies are following.

Ogilvy & Mather added a fourth China office in April, opening in northeastern Shenyang; two of its major clients, Kimberly-Clark Corp. and Taiwan food group President Foods, are active there. O&M plans to open additional offices next year in Wuhan and Xiamen, said Joseph Wang, vice chairman for China at O&M Worldwide.

"Clients are driving O&M not only into China but throughout China," he said.

McDonald's Corp. sees China as five or six distinct geographic, economic and cultural regions. The U.S. fast-food giant now has about 30 outlets in China and plans 300 or 400 by 2000.

DY&R's Mr. Gonzalez predicts Shanghai will emerge as a key center.

"As the market develops, we will have to manage our resources in the best possible way," he said. "China has 27 provinces. I don't think anyone will end up with 27 offices."

In fact, the size of the Chinese consumer market is hotly debated. Many economists discount as consumers some 72% of the Chinese population, most of whom live in rural areas, leaving a target group of those who live in 30 cities with a population of 1 million or more.

"That market is about 62 million people-just 5% of China's masses," said David Li, deputy chairman-chief executive of the Bank of East Asia. Other estimates put China's middle class at more than 100 million households.

NEW PRODUCTS

Product categories new to Asians are being introduced into China, from breakfast cereals (Kellogg Co. opened its first Chinese factory last fall) to frozen yogurt. U.S. frozen yogurt marketer TCBY Enterprises has opened 1,000 outlets in China in less than two years, after tackling the problem of creating a new name to explain the product to consumers. The solution: Angel Ice Cream King, and an ad slogan in Chinese for "superb American product."

Like many other Western products, TCBY started in sophisticated Shanghai, renowned for its openness to foreign brands.

"In Shanghai, people know all about Mercedes and BMW and Rolex watches," said one luxury goods marketer. "They want to know which is the best and which is the most expensive."

Although Shanghai is quickly embracing the shopping mall culture, some international marketers are cautious about other parts of China. Chanel, for example, is merely sampling the Chinese market, with three beauty and cosmetic counters in Guangzhou, Shenzhen and Shanghai.

"There are too many unpredictable variables," said Graham Barkus, Hong Kong-based director of business development in Asia for Saatchi & Saatchi Advertising. "Something, anything, could happen tomorrow that could put the whole process back three years. One wrong missile at Taiwan ....."

New entrants to fast-growing markets are reaping rewards if they find the secret to success, as Sony Entertainment has in India (see Page 32), or struggling when marketing tactics, like the ones that made Snapple Beverage Corp. a U.S. success, don't travel well (see Page 30).

Asian marketers themselves are looking outward. Even the Japanese, Asia's best established global marketers, are searching for a stronger corporate image. As a top Mazda executive acknowledged: "We have some of the best unknown products in the world" (see Page 40).

Written by Janine Stein, Hong Kong; Laurel Wentz, London.

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