Agencies bullish on growth

But execs on the ground in China warn of "speed bumps"

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HONG KONG--The phenomenal pace of China’s economic development has been reflected by steady growth in its advertising market. Between 1980 and 2004, China’s TV ad spend grew almost 440,000% (compared to 384% in the U.S., for example) to nearly $11 billion this year, making it the world’s seventh-largest TV market, according to ZenithOptimedia.

Martin Sorrell, chief executive of WPP Group, was one of the first ad industry execs to recognize the potential of China’s ad market and his early investments have already paid off in scale. Greater China is the company’s fifth-largest market, and one where WPP has a 15 percent share. Its MindShare division, for instance, is the largest foreign-run media agency in China with billings worth $780 million.
Pass Japan in 2008
The 60-year-old head of the world's No. 2 marketing communications company has become one of the country’s most vocal champions: "We will be very disappointed if it isn't our third-largest business--behind the U.S. and the U.K.--by 2008," he said in late August. Mr. Sorrell believes China can replace Japan as the region's biggest market by 2008. While his predictions about China’s growth rate are debatable, he is by no means alone in his enthusiasm about China’s potential.

“The kind of growth numbers being talked about by WPP are not impossible,” said Singapore-based Mike Amour, chairman-CEO, Asia/Pacific for WPP’s Grey Global Group. “The spike we’ll get leading up to the 2008 Beijing Olympics will help.”

Michael Birkin, who relocated to Asia earlier this year as Omnicom Group’s president-CEO, Asia/Pacific, agreed, “Whether it’s the world’s No. 2 or 3 or 4 ad market by 2008 or not, it’s going to be very important [and] it has the potential to be the largest ad market in the world eventually. We completely believe in the fact that China will be crucial to our business going forward.”

Last year, “every office Ogilvy has in China had double-digit growth,” said Tham Khai Meng, Singapore-based regional creative director & co-chairman, Asia/Pacific of WPP's Ogilvy & Mather. "Still, every time I travel there, I'm awestruck by the sheer number of business execs entering the country from overseas. It’s amazing.”

Local clients are risky
However, turning China into one of the world’s top ad markets is a difficult, stressful prospect for execs on the ground in North Asia, even with the expected spike in spending connected with the 2008 Olympic Games in Beijing. The country’s 1+ billion population alone will not automatically translate into success for multinational agencies.

They are hindered from winning and keeping new business from Chinese companies, for example, by the prevalence of short-term relationships that frequently exist in China’s ad market. Local firms tend to appoint agencies on a project basis for tactical promotions, not long term branding initiatives. Few Chinese companies even have a marketing director in the Western sense, and they are not always scrupulous about paying for agency services.

“People in the West think business is just walking in the door, but a lot of clients are trying to cut costs, competition is incredible and there is often very little loyalty from local clients in terms of agency relationships,” complained a Publicis Groupe exec in Hong Kong. “You have to be really careful, because they talk big money then don’t spend, or they do spend but don’t pay. Working with local clients can be quite risky.”

WPP's main competitor is Dentsu
Mr. Sorrell says WPP’s biggest competition in China is not from its Western rivals, but Dentsu, whose Beijing office was No. 1 advertising company in China in terms of revenue ($60 million) in 2004, up 128% from the previous year. The Japanese agency has become one of the biggest players in China both on the media buying side and by establishing joint ventures with Chinese companies like Shanghai Media Group to produce and syndicate content.

Outbreaks of anti-Japan sentiment this year have prompted Dentsu’s Japanese clients to scale back on marketing this year. Even so, the Tokyo-based agency has identified China as the bedrock of its overseas growth strategy, based on the vast business ties between the two Asian neighbors.

Foreign agencies also hope to add revenue, as well as new staff, by hunting for acquisitions among the estimated 10,000 local Chinese ad agencies. The public relations unit of Ogilvy & Mather last week bought the majority of Hong Kong-based financial public relations firm iPR Asia Ltd., for example.

The mainland has very few unpolished gems waiting to be picked up, however, because the Chinese government's relatively recent embrace of capitalism means the local workforce is unschooled in marketing and the industry has had to develop at “light speed,” said one WPP exec, in terms of understanding what it means to create brands and market to consumers. China’s rigid teaching style, which stresses memorization over problem-solving, hasn’t helped either.

“The growth is there, but whether we can take advantage of it remains to be seem. There is a physical limit on how fast we can train people and take up that growth potential,” said a senior exec at a WPP agency in Beijing. “Finding professional expertise to build brands quickly is going to be paramount.”

In fact, the tremendous difficulties faced by ad agencies, both local and Western, in finding talent to staff agency jobs is considered by many marketing execs in China as the leading obstacle to keeping pace with the country’s growth. Companies have even resorted to recruiting creative executives from art schools because they're creative thinkers.

“When I speak with our agency partners, I tell them they need to think outside the box. Go and hire poets and sculptors or other creative people,” advised Austin Lally, Procter & Gamble’s Guangzhou-based VP, beauty care in Greater China.

“There are so many possible speed bumps in China, like finding and training talent, because the country is growing at such high speed. The sheer scale of China’s economy and the inventiveness of its people will grow the country, but there will be corrections and what’s happening in the rest of the world will help determine how severe they will be,” said Omnicom's Mr. Birkin.

“It’s completely unpredictable.”

Contributing: Lisa Sanders and Laurel Wentz.

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