In a fundamental shift, a growing number of major marketers and their agencies are deciding that they need to be in Shanghai to get the vast Chinese market right-with 1.2 billion consumers, they can't afford to get it wrong. Ad spending in China totaled $5.1 billion in 2001, according to Zenith Media Asia, and is projected to reach $5.6 billion this year.
Although Beijing is the nation's capital, Shanghai, whose name means "on the sea," is China's largest city with 15 million people. It is home to the country's largest port, biggest industrial base, best shops and restaurants and most fashionable people, a throwback to the city's heritage as the "Paris of the East" in the 1920s and 1930s.
Coca-Cola Co., Siemens and Heineken are abandoning Hong Kong for Shanghai, and the Wm. Wrigley Jr. Co. is considering doing the same. Other multinational marketers who have forsaken Hong Kong for mainland China include PepsiCo, Dulux paint manufacturer ICI, Carlsberg, Alcatel, Eastman-Kodak Co., and Swatch.
Ad agency executives from major international networks, such as TBWA International and Dentsu, Young & Rubicam Partnerships, are also making the switch to Shanghai, a cosmopolitan city strategically located between Beijing, a two hour flight to the north, and Hong Kong on China's southern coast, two-and-a-half hours away by plane. The trend has accelerated since China joined the World Trade Organization in 2001 and continued its fast economic growth this year.
"In the early and mid `90s, when I was managing our China operations," said David Liu, CEO for Asia at Aegis Group's Carat and still based in Hong Kong, "I had to spend at least two or three days a month meeting senior clients in Hong Kong regarding China business. Now, I meet them all in mainland China."
Siemens is in the midst of moving the Asian headquarters of its mobile phone division from Hong Kong to Shanghai because more than half its Asian sales are driven by the mainland Chinese market. Siemens needs to consolidate its marketing and other corporate resources, based on a "driven-by-China strategy," said Tom Doctoroff, area director, Northeast Asia & CEO-China, for WPP Group's J. Walter Thompson Co, agency for Siemens. He lives, of course, in Shanghai.
"We are doing the bulk of Siemens' advertising for the region based out of the People's Republic of China right now," he said. "You will see this trend continue." Especially, he added, in categories "where the China market promises large scale-now, not at some theoretical point in the future."
China is the fastest-growing cellphone market in the world, with more than 170 million cellphone users. A whopping 5 million new subscribers sign up each month.
Marketers now realize they can no longer treat China, or offices in China, as satellites of Hong Kong, because the country has 28 provinces, each a market in its own right. China has 34 cities with a population greater than 1 million.
Even so, the decision to leave Hong Kong isn't easy. Relocating staff is costly and Hong Kong has significant advantages over Shanghai, including a well-developed infrastructure; an experienced, English-speaking work force; low taxes; a fair judicial system and transparent business practices.
Mainland China, by contrast, is a Byzantine maze of restrictions for foreign workers. Corruption is widespread, and office and residential rents have risen as high as in Hong Kong, but with fewer services.
Even so, Shanghai is hot on Hong Kong's heels as a regional marketing hub. Ad agencies whose senior executives were heavily clustered in Hong Kong are following their clients to Shanghai. Bernard Yiu, DY&R's managing director, Hong Kong & China, and Gavin Heron, managing director of Omnicom Group's TBWA, Shanghai, are still unpacking their bags in Shanghai. Previously, Mr. Heron was TBWA's regional planning director for greater China and was based in Hong Kong.
International ad agencies are beefing up their mainland resources to court Chinese companies as well as multinational clients, because local brands dominate China's ad market.
Mr. Yiu, for instance, moved to Shanghai to be closer to DY&R's local clients such as Bright Milk, China Mobile Communications Corp., Eastcom mobile phones, Midea Home Appliances and Arawana Cooking Oil.
Such accounts are crucial. Only two foreign brands, Procter & Gamble Co.'s Safeguard and Crest, ranked among the top 10 most advertised products in China during the second quarter of 2002, according to Nielsen Media Research. The rest were local over-the-counter drugs like tonics, vitamins and stomach medicines. In fact, the most advertised product in the second quarter was a calcium supplement called Gai Zhong Gai that spent a massive $88 million, according to Nielsen figures.
Such is China's immense size and complexity that few Chinese products have national brand awareness and distribution. The handful that approach that status include Legend Computers, Tsingtao beer, Haier white goods and White Rabbit candy.
Even a brand like Tsingtao, found in Chinese restaurants across the U.S., only commands an 11% share of the national beer market in China, the world's second largest behind the U.S.
Now that China has entered the WTO, Chinese companies such as these will have to compete more aggressively against foreign brands, particularly in key sectors like cars, insurance, pharmaceuticals, telecommunications and finance.
Coca-Cola relocated its Greater China marketing team, 20 executives in all, from Hong Kong to Shanghai about 18 months ago, because "only by breathing the same air as our consumer can we get to know them," said David Cox, the company's regional communications director in Hong Kong. "We used to market to China, now we market to individual markets within China based on the size of their population. Being on the ground has enabled us to do that."
Heineken moved its China marketing team from Hong Kong to Shanghai earlier this year, and Hong Kong-based Michael Wong, Wrigley's VP-international, Asia, said his company "is considering such a move." Mainland China is Wrigley's second-largest global market in sales volume after the U.S. and has tremendous growth potential.
Lower costs are one incentive, but the prime benefit is greater market intelligence and understanding.
Brenda Lee, Coca-Cola's public affairs director in Shanghai, said being there "allows us to react more quickly and to have wider on-the-ground activities and more impactful marketing execution." Better insight into consumers helped Coke realize it could create buzz among young Chinese by tapping into their aspirations to own a computer and be more connected with the outside world. The result: a summer promotion called "Vibrant Connections."
Coca-Cola staged the largest Webcast in China, organized hundreds of road shows supported by TV spots from Interpublic Group of Cos.' McCann-Erickson Worldwide and distributed 7,000 computers as prizes.
"All these activities," said Ms. Lee, "are made more effective because the whole team is in China. We are able to respond more quickly to market intelligence and make our marketing more relevant to the consumers."
China's other major urban centers, Beijing and Guangzhou, have also benefited from marketers' desire to be on the ground in China. Viveca Chan, Grey Global Group's chairman-CEO for Hong Kong and China, says "I'm seeing two hot spots: Shanghai and Beijing."
Political hub Beijing has developed as a high-tech corridor, attracting telecom companies such as Nokia and marketers like Mars, which ditched Hong Kong for Beijing to be closer to a local joint-venture partner. P&G and Nike, meanwhile, base their mainland operations in Guangzhou, one of China's wealthiest cities, located just over the border from Hong Kong.
Mainland China is so vast that many ad executives find it impossible to stay in one place more than a few days at a time. Ms. Chan, for example, lives in Hong Kong but keeps apartments in Shanghai and Beijing.
"I come back to make sure my husband is still around," she joked. "And I do love Hong Kong. If I'm in China too long, I get sheltered, I don't know what's going on. When I go back to Hong Kong, I immediately turn on the TV and radio. People in our industry need to feel the pulse of what's going on."
Indeed, a drawback to living in mainland China is the lack of independent local media, compounded by government controls on Internet access and foreign media such as AOL Time Warner's CNN International and Washington Post Co.'s Newsweek.
As China opens its borders to foreign media, however, Hong Kong's advantages lessen. "I believe that in advertising terms China may come to resemble the U.S., with Shanghai, like New York, as the key city, but Beijing, Hong Kong and even Guangzhou-aka Chicago and Los Angeles-still extremely important centers," said Ian Thubron, M&C Saatchi's CEO for Hong Kong and China.