Two Chinas

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On Nanjing Road, Shanghai's answer to Madison Avenue, well-dressed women eye designer fashions at a new luxury shopping center, junior executives stop at Starbucks before heading to work in nearby skyscrapers, and chauffeurs loiter near BMW sedans.

A short cab ride away, a different picture of China emerges. Hawkers sell cheap dumplings from roadside stalls alongside crumbling houses with outdoor plumbing and endless rows of bicycle repair shops.

China, 1.2 billion consumers strong, is the world's fastest-growing economy, projected to eclipse Japan by 2020. The world's biggest marketers are pinning their growth projections on China, already one of the top five global ad markets, in its dual role as the world's factory and one of its largest consumers. "If you are a major global player, you have to be in China. If you're not in China, you need to be aware of what's going on here," said Procter & Gamble Co. Chief Marketing Officer Jim Stengel in a visit to China earlier this year. "It's not just a procurement and production center anymore."

But the vast gaps between its urban and rural, rich and poor, educated and illiterate population, combined with its ethnic diversity, make marketing in China a daunting task.

The country's ad spending grew 40% to $14.5 billion last year, ranking it among the top five advertising markets in the world. Yet half the population can barely afford rice, much less Buick sedans and Nokia cellphones.

24 distinct markets

China is made up of two dozen distinct markets sprawling across 2,000 cities. Each has its own culture, and can be reached only through a cluttered, undeveloped media environment. "China is a very decentralized market," said Tom Doctoroff, area director for Northeast Asia and CEO for China at WPP's J. Walter Thompson Co. "It's like operating in an asteroid belt."

"Even Beijing and Shanghai, China's most modern cities, are completely different from each other in language, food, culture and personality," said Quinn Taw, managing director, WPP Group's MindShare, which is based in Beijing, the epicenter of China's economic earthquake.

Yet consumers in Beijing, Shanghai and Guangzhou can be as sophisticated as shoppers in Hong Kong or even New York. Last April, for example, Armani Group opened an 11,000 square foot flagship store on Shanghai's historic Bund and plans to open up to 30 stores in China by 2008.

Multinationals eager to capitalize on China's stunning potential find they must beat back surging local brands or form uneasy alliances with local businesses. "It's painful for foreign marketers to set up an operation in China. The biggest challenges are distribution, management and geographical expansion," said Vincent Digonnet, CEO-Asia/Pacific at Havas' Euro RSCG in Singapore.

Outsiders face tough competition from local firms, including both legitimate companies and copycats, which knock off foreign products, packaging, advertising and growth strategies. China's entry into the World Trade Organization has given foreign companies a more level playing field, but local companies adapt more quickly to market conditions and enjoy a head start from established distribution networks. Now they are also starting to engage consumers with sophisticated brand strategies rather than tactical promotions based on price.

need for structure

"Most Chinese enterprises have one strong leader who decides everything. That's good in the initial growth stage, but afterwards you need a development structure. Some companies are learning," said Kitty Lun, general manager-executive creative director for Havas' Arnold Worldwide Partners, Shanghai.

Among the brands she cited was Lenovo. The company already markets China's top-selling computer, but recently upgraded its sales, marketing and distribution operations and invested more money in research and development. Lenovo was the first Chinese company to sign up as a sponsor for the 2008 Olympic Games in Beijing, a signal it wants to compete on a global stage against manufacturers like Dell Corp. and IBM.

Lenovo is "light years away from competing globally," said an executive familiar with the company, who also noted that Chinese companies "do learn fast, both in terms of product and marketing, and Lenovo wants to use the Olympics to present itself as a global player."

Haier is already a big seller in the U.S., where its air conditioners, refrigerators, freezers and wine cabinets sell well at Wal-Mart Stores, Home Depot and Target. Known more for low prices than quality, Haier is trying to transform its image from cheap Asian knock-off to world-class player through branding, said Viveca Chan, Grey's chairman-CEO, Hong Kong and China, who has helped Haier with marketing assignments.

egos and mistrust

That's a transformation that Japanese and Korean marketers like Sony Corp. and Samsung went through in the past.

Multinational marketers don't just have to compete with local companies. Often they must partner with them, required to invest in China through joint ventures. Such alliances often stir up egos and mistrust.

"Chinese companies don't want to be under the thumb of global players and they are suspicious of foreigners' ability to navigate in the local market," said Mr. Doctoroff.

If the multinational is a minority shareholder, it seldom has the ability to make key decisions. Even in 50/50 joint ventures, there are questions about who is responsible for marketing decisions, because Chinese and foreign companies approach the discipline differently. "Local companies are vertically driven models based on efficiency. They often view marketing as a function of the sales force and see ad agencies as suppliers. The focus is on cost savings, not branding-building," said Mr. Doctoroff.

Global consumer marketers such as Procter & Gamble Co., Unilever and Coca-Cola Co. have, for the most part, taken control of marketing, sales and distribution decisions over time, but relationships are tense in categories dominated by manufacturing.

Harbin Brewing Group grew so dissatisfied with minority investor SABMiller, for example, it courted a second foreign partner, SAB's archrival Anheuser-Busch, leading to a bitter takeover battle for China's fourth-largest brewery.

In China's auto industry, more than one dozen marketers from the U.S., Europe, Japan and Korea have formed joint ventures with Chinese automakers to make passenger vehicles, but the top three, Shanghai Automotive Industry Corp., First Auto Works and Dongfeng Motors account for two-thirds of all production.

Rife with overlapping relationships, the industry is a hotbed of distrust. For example, both Volkswagen and General Motors operate joint ventures with SAIC, and Volkswagen maintains a second joint venture with SAIC's biggest rival FAW.

In fact, Volkswagen nearly abandoned plans to develop its first national brand campaign in China this year because the process had to include the German automaker and both Chinese partners, none of whom work well together.

"Joint ventures cause a lot of problems in China," said a Shanghai-based agency executive. "Sometimes the partners hate each other. Decisions are often made at the expense of the other partner-and the agency often gets stuck in the middle."

image focus

Although Volkswagen remains the market leader, it's in danger of losing that position to General Motors, which locally assembles Buicks for professional Chinese, marketed with upscale, aspirational advertising from WPP Group's Bates Advertising. GM hopes to broaden its appeal by introducing luxury Cadillacs and mass-market Chevrolets over the next year.

With so much emphasis on economic development and foreign investment, even Chinese cities are starting to think about their image. The country's most Western metropolis, Shanghai, launched its first brand campaign earlier this year to promote business and tourism both within China and abroad. A TV spot, created by Bates, compares Shanghai to the romance of Paris, Tokyo's vitality, London's fashion trends, the atmosphere of Venice and New York's creativity. The ad was commissioned by Shanghai Media Group, an aggressive multimedia conglomerate with investments in radio, TV and newspaper outlets as well as sport and culture organizations.

Despite numerous obstacles and the expensive, time-consuming learning curve facing foreign marketers in China, they remain excited about China's future because consumers there have high expectations of their own. Many city kids in Beijing and Shanghai fully expect their future includes a house in the suburbs with an SUV parked in front. In less developed regions, aspirations may be lower, but a growing middle class will, over time, consume more soft drinks, wash clothes with better detergents and be more likely to drive to work in a car than pedal a bicycle.

At least that's what the future marketers are gambling on. "China's a slow build, a long-term promise," said JWT's Mr. Doctoroff. But "it has to rise. The thought of China not rising. ... is a disaster."

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