News Analysis

China and India: Are They Shelters In a Global Storm?

U.S. Multinationals Selling Big-Ticket Items Like Cars and Luxury Goods Will Become More Dependent On Developing Markets

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Luxury marketers hope a strong performance in China and India will offset a drop in sales in U.S. sales
Luxury marketers hope a strong performance in China and India will offset a drop in sales in U.S. sales Credit: Stephen Shaver
HONG KONG ( -- The disastrous jolt to U.S. financial markets this week -- with the collapse of Lehman Bros., the sudden takeover of Merrill Lynch by Bank of America and the rescue of insurer American International Group by the Federal Reserve Board in the U.S. -- is putting pressure on marketers in developing markets.

With the U.S. heading further into recession and house prices still falling, American consumers are expected to tighten their belts when it comes to disposable spending.

That means multinationals, particularly U.S.-based companies, will depend even more on growth in emerging markets like China and India to offset sluggish performance in the U.S.

Hosting the 2008 Olympic Games will boost China's ad market by 22% this year to $35 billion, according to GroupM. GroupM forecasts 19.5% in ad spending in 2009 to $42 billion.

The WPP Group media division expects India's ad market will increase by 20% this year, reaching $5.6 billion. India will grow another 19% in 2009, making it the world's third-largest developing ad economy behind China and Russia.

GM expects double-digit growth next year
Overseas sales will be especially critical for companies that market expensive or discretionary goods like cars and luxury goods.
Strong auto sales have turned China into the world's second-largest car market
Strong auto sales have turned China into the world's second-largest car market Credit: Claro Cortes
General Motors Corp. recently lowered its forecast for sales in China, the world's second-largest car market after the U.S., because higher fuel prices have curbed demand. But it still expects sales growth to top 10% in the mainland, far better than the dismal scenario facing GM in the U.S.

There are "concerns about how the U.S. market is flowing and in the shift from trucks and SUVs to cars, since that has been our bread and butter in the past," said Steve Betz, general director for Chevrolet at Shanghai General Motors, a joint venture between General Motors and Shanghai Automotive Industry Corp.

GM executives at the company's global headquarters in Detroit are "very appreciative that we are doing so well," said Mr. Betz.

The American luxury marketer Coach, which accounts for one-quarter of all luxury handbag and accessories sales in the U.S., is also investing heavily in Greater China. Coach has opened dozens of new stores in China, Hong Kong and Macau, invested in advertising and created product lines specifically for the Chinese market.
Coach created a legacy bag to celebrate Elle's 20th anniversary in China to push sales in the mainland
Coach created a legacy bag to celebrate Elle's 20th anniversary in China to push sales in the mainland

"Mainland China will become a significant market for luxury brands during the next several years, as income and consumer spending levels catch up to the retail development that is already present in this market," said Thibault Villet, Coach's president, Greater China in Hong Kong.

Inflation is a serious concern across Asia
But it's unclear whether China and India, along with other major emerging markets such as Russia and Brazil, can provide multicultural marketers with a defense against a teetering U.S. economy. If demand for Asian exports tapers off significantly in the West, Asian consumer spending could dry up as well.

"Clearly there is a lot of nervousness," said Nirvik Singh, Grey Global Group's Mumbai-based president, Southeast Asia. Especially if exports from Asia drop. Inflation is already high in some markets like India and Vietnam. China has also experienced rising food and fuel costs and the country's GDP growth began to slow last year.

But Asia experts are divided over just how far and fast the slowdown will be, because other forces besides exports, inflation and GDP growth are also at work.

In Shanghai, there are ominous signs that the city's housing bubble is about to burst. One of Shanghai's largest foreign real estate investors, Morgan Stanley, is trying to sell some of its high-end residential properties, suggesting that market has peaked.
Unilever's Frank Braeken
Unilever's Frank Braeken

China's government sent another warning signal on Sept. 15, when it reduced interest rates for the first time in six years, in response to dire U.S. news and falling stock prices around the world. China also hoped to fend off problems in Shanghai's property market.

Asian advertisers are cautious but optimistic
Despite serious economic concerns inside and outside Asia, advertising executives in the region are surprisingly optimistic.

"We don't see a slowdown yet," said Frank Braeken, Unilever's chairman for Greater China in Shanghai. He believes the impact on purchasing power for China's growing middle class, the target market for most fast moving consumer goods marketers, will be limited, since this segment continues to grow in size and in wealth every year.

Paul Heath, Ogilvy & Mather's president, Asia/Pacific based in Hong Kong, is "cautious" about spending levels next year.

"Definitely, winter is coming, but it's going to be more severe in the U.S. and Europe than in Asia. We're not feeling any dramatic changes in our clients' behaviors," he said. "China and India are continuing to grow at quick rates. Companies can't stop investing in those climates."

While the region's two powerhouses, China and India, will not go into recession, Mr. Heath said, "we may see a slowing down in their growth. How advertisers handle that slowdown depends on their sector and how badly they are hit elsewhere."

Experts widely agree that financial services and the property markets will be the most affected by events in the U.S.

Luxury sales are likely to remain strong
But sales of luxury goods are likely to continue, said Rupert Hoogewerf, publisher of the Hurun Report, a monthly magazine best-known for its "China Rich List", a ranking of the wealthiest individuals in China.

There is no indication spending on luxury goods in China is going down. In fact, I think [economic problems in the West] just make marketers in China even more excited about this market. They have no choice now but to be here," said Mr. Hoogewerf.

There are plenty of rich Asians ready to snap up new cars and luxury goods, particularly in China, which had 800,000 millionaires (in U.S. dollar terms), including 250 individuals worth $1 billion or more, at the end of last year.
O&M's Paul Heath
O&M's Paul Heath
India is also home to a rising middle class as well as seriously wealthy consumers. It now has more than 100,000 millionaires, and is adding to that number faster than any other country in the world.

"I'm not worried," said Prasoon Joshi, McCann Worldgroup's Mumbai-based regional creative director for South Asia and Southeast Asia, even though he acknowledged that many advertisers, particularly American firms, have already cut back in India.

"I've noticed more money is going to short-term rather than long-term brand-building investment, but I'm sensing companies have already cut budgets as much as they are going to in India."

Companies are banking on China's continued growth
Despite the optimism across Asia, there are warning signs that China will not be exempt from the credit crisis in the U.S. as it works its way around the world.

There's a lot of money in China, but a lot of companies have debt and have been banking on China continuing to grow, said Doug Pearce, Accenture's director of media services business for North Asia in Shanghai. "Food prices are rising, Shanghai's property market is flattening out. There comes a point when people will start to do away with little luxuries."

Historically, economists see a correlation between ad spend levels and GDP growth, so there is concern. Recent data about China suggests ad spend will slow down, said James Lee, a research analyst at Sterne Agee in Boston, who specialists in Chinese technology stocks.

"But there's a disconnect in China right now," Mr. Lee said with concern. "Advertisers and new media companies don't feel nervous at all."

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