HONG KONG (AdAgeChina.com) -- Since the sub-prime mortgage crisis in the U.S. tripped a global recession, multinational marketers have eyed China and the other BRIC markets--Brazil, Russia and India--as a lifeboat in a financial storm.
Their optimism about China is logical and there is plenty of good news on the surface. Over the past twenty years, BRIC countries have become a veritable playground for multinationals looking to expand in developing markets, especially China, where the number of urban middle class consumers is rapidly approaching 300 million.
So far, middle class and affluent Chinese haven't been heavily affected personally by the global recession. China's gross domestic product (GDP) is expected to grow by 8.5% in 2009, a figure that would delight economists in western countries right now. Sales of basic items like household goods and food are holding steady, as are marketing budgets for most major companies, say agency executives in Shanghai and Beijing. Some companies, such as PepsiCo, plan to spend even more on advertising in China this year.
"We're so interdependent economically now, it's hard for anyone not to get hit, but we need to nurture the stronger economies like China going forward. They're the ones who are going to lead us out of this recession."
A small drop-off in overall ad spend in China was expected by media buyers in 2009 anyway. Every Olympic host country experiences a small post-games hangover, as sponsors return to normal spending behavior. Also, the global recession has mostly affected poor Chinese, for whom a Nokia smart phone or Starbucks Frappuccino remain an unaffordable luxury.
Recession will hit middle class
While all these factors have kept ad budgets in China high and white-collar layoffs low, the mainland's future isn't as rosy as many upbeat marketing executives in the mainland have indicated in recent months.
China's middle class is not immune to the changes taking place globally and in China, largely because government interests still matter more than free market principles.
Exactly thirty years have passed since China opened its doors to the world and jump-started its ailing economy, through maneuvering by then-vice premier Deng Xiaoping.
By cherry-picking capitalist policies, China's ruling Communist Party has achieved remarkable growth. For the past decade, China's economy has expanded at an astonishing speed, with double-digit GDP growth built on a strong manufacturing sector.
Three decades of accelerating growth have slammed to a halt. The Chinese government said GDP fell below 10% late last year for the first time in five years, a psychological blow to the country's economy.
China's GDP likely grew 6.9% in the fourth quarter of 2008 compared to the same period a year earlier, and rose 9.2% overall in 2008 over the previous year, according to a Dow Jones Newswires survey.
The global sub-prime mortgage crisis that has bled into so many industries in the U.S. and Europe is only partly responsible for the malaise hitting China. For years, economists have warned Chinese investors that the mainland's GDP could not continue to grow at the same breakneck speed indefinitely.
Exports slump slows GDP
An anticipated natural slowdown is turning out to be deeper than expected, due to a slump in exports. About 40% of the country's GDP is based on manufacturing, particularly in Guangdong province near Hong Kong. With consumer spending falling in the U.S. and Europe, demand for those goods has plummeted.
Thousands of factories have closed, putting tens of millions of Chinese out of work. Chinese exports fell 2.8% last month compared to December 2007, the biggest drop in exports since April 1999. In November 2008, exports were down by 2.2% compared to the same period a year earlier.
The number of toy factories alone has shrunk by more than half over the past year, and millions of jobs have been lost. About 4,800 toy factories closed in 2008, according to government statistics.
Chinese factories are manned by migrant workers who return home this month for the annual Spring Festival holiday, as Chinese New Year is known in this officially atheist country.
With fewer and fewer jobs available at Guangdong factories, many of them may not come back after the holiday. The prospect of millions of unemployed, frustrated peasants, as well as a wave of new university graduates looking for work in a shrinking job market, terrifies the China's Communist Party. And with good reason.
"Successive Chinese regimes have always lost power when they coddled the urban elite and ignored the needs of the countryside," said Paul Denlinger, CEO of a Beijing-based consultancy, China Business Strategy.
Rising unemployment threatens social stability
Jobs are the No. 1 concern because 8% growth in GDP as the government is currently forecasting will create roughly eight million jobs. That's a pittance compared to the number of jobs disappearing as factories shut down. To put rural Chinese back to work, the government announced a $586 billion stimulus package in late 2008.
That investment will go towards upgrading infrastructure, particularly roads, railroads, airports and the nation's power grid, and social welfare projects such as affordable housing and environmental protection. The goal is to boost rural incomes (and ensure social stability), but the program will do little for city dwellers--those middle class Chinese so coveted by advertisers.
In order to become a developed nation with a developed economy, China "needs to spend that money on building its own infrastructure and narrowing the wealth gap between the developed cities on China's east coast and the inland countryside. Any Chinese regime which acts otherwise would be making a very risky decision, and would be putting the future of its own rule in jeopardy," Mr. Denlinger said.
With the government focused on rural China, he added, "for the next 15-30 years, [Chinese] cities will stagnate in growth. People will not lose their homes the way they do in the U.S. since China does not have foreclosure laws, but their salaries will not go up."
Sharp drop in car sales
As a result, nervous consumers will likely save more and cut back on spending. Marketers of high-priced items, cars and real estate in particular, have already experienced a sharp drop in sales.
"My pessimism grows each day about the [auto] market's prospects in 2009. In 2007, auto sales grew 22%, but slowed to about 7% last year," said Yang Jian, the Beijing-based managing editor of Automotive News China. "But as the economic situation stands in China, the auto market is likely to end the year with no growth at all. Automakers should brace for a particularly tough 2009."
The car industry is "very tough right now," Doug Pearce, Shanghai-based director of Accenture's media services business in North Asia.
"Surprisingly, the luxury goods sector is still going up despite what's happening in the economy, but overall, 2009 is going to be a year of fear and caution, for consumers as well as advertisers. Companies will delay making decisions."
Advertisers have another worry in China. Despite concern about consumer spending, media inflation is skyrocketing.
"We've seen very aggressive rate increases sought by TV networks, particularly in Beijing and Shanghai. Some advertisers are holding back altogether or taking a wait-and-see approach," Mr. Pearce said.
Consumers still upbeat
There is some good news in China. Mainland consumers remain encouragingly (and surprisingly) upbeat about their country's economy, which will help sustain spending. Fifty-three percent of Chinese believe the coming year will be better than 2008, making China one of the most optimistic countries in a TNS-Gallup survey of more than 45,700 people in 46 countries.
For local manufacturers like Haier Group and Nice Group Co., a Chinese recession could help them win back ground lost to foreign brands, particularly in the premium sector.
"Many local companies are still the major brands in the marketplace, particularly in tier two and tier three markets. They don't have restrictions placed on multinationals to save money globally," Mr. Pearce said. "This is a good opportunity for them to increase their visibility and negotiate strongly with local media and build share at the expense of multinationals."
Multinationals can also take advantage of the extra breathing room in China's fragmented and cluttered media market this year, said TBWA's Mr. Smith. "Everybody is being squeezed on expenditure. The smarter clients are looking at the opportunity rather than harping on about problems everyone can see and those clients who seize the opportunity sensibly are the ones that are going to prosper in the future."
Return to AdAgeChina, click here