SHANGHAI--Foreign ad agencies, particularly creative boutiques and specialists in areas such as direct marketing and real estate advertising, will find it easier to set up shop in mainland China starting this month.
As new regulations in China's agreement with the World Trade Organization go into effect, foreign firms can open wholly-owned subsidiaries in China for the first time. Until now, they had to do joint ventures with local partners.
“The entry barriers will be practically nonexistent. The result will be a more diversified market with deeper pockets of specialized expertise,” said Tom Doctoroff, JWT’s Shanghai-based area director, Northeast Asia & CEO, China.
One of the first Western networks to take advantage of the liberalized marketplace is Bartle, Bogle Hegarty, 49% owned by Publicis Groupe.
"Although it is still uncertain exactly how long it will take us to obtain our license, the WTO legislation is good news for companies like BBH,” said Arto Hampartsoumian, the agency's CEO, China in Shanghai. "So basically, yes, we are extremely happy. We don’t have to sacrifice our prinicples to deal with a local partner or give up control of the creative process."
For now, Bartle Bogle is operating the micro-network's new Shanghai office under the umbrella of Publicis' Leo Burnett Worldwide.
Eliminating the requirement for even a minority local partner will make it easier for foreign agencies to enter China, said Stephan Montigaud, the Shanghai-based managing director, Asia of FullSix, a WPP Group-owned relationship marketing firm based in Paris. "This opens more opportunities for more specialized agencies like us.”
More foreign agencies will be coming, he added, because the 2008 Olympic Games in Beijing and the 2010 World Expo in Shanghai will create huge opportunities for marketing firms. “What this means for our industry is probably more competition.”
Industry giants already operating in China like WPP’s JWT and Ogilvy & Mather, and Interpublic Group of Cos.’ McCann Erickson Worldwide have the option of buying out their local partners, although executives in China say immediate changes are unlikely.
“It's going to be very difficult for any agency to re-negotiate or buy out a joint venture partner,” said Mr. Doctoroff. “Most joint venture partners get very easy income without doing much work. There's no incentive for them to sell.”
In addition, plenty of Western-run agencies see advantages in keeping local partners around.
“A joint venture gives you local connections and helps you get some deals which you normally don’t get into,” said Shanghai-based Joseph Wang, Ogilvy’s vice chairman, Greater China.
“Our local partner has been a huge help in getting things done in China,” said Jesse Lin, managing director of Wieden & Kennedy’s Shanghai office. “We wouldn’t want to lose them."
McCann's Hong Kong-based CEO for Greater China, T.H. Peng, said his agency's joint venture contract expires in two years, "so it's easier and cheaper for us to stick with them until this deal ends naturally, rather than buy out their 49% stake now. Besides, they can be helpful in the meantime."
The changes that took effect this month were written into the law a year and a half ago, according to Zhang Yin, project manager at the China Advertising Association. At that time, the State Administration for Industry and Commerce allowed advertising joint ventures to be majority-owned by foreign enterprises, but ownership was limited to 70%.
WTO-related deregulation in a variety of industries is expected to bring new international companies into China, creating new opportunities for foreign ad agencies.
For example, the banking industry is due to open up in December 2006, and foreign banks are already making their presence felt in China in anticipation of the new opportunities. According to China's WTO commitments, by December 11, 2006, all remaining restrictions on local currency transactions will be removed, and foreign banks will be able to conduct RMB transactions with both Chinese companies and individuals. And significant liberalization is expected in telecommunications and the retail industry. China is also expected to permit wholly foreign-owned architectural and engineering services and insurance brokerages by the end of this year.
"WTO is really about market access," said Ogilvy’s Mr. Wang. "Opening up financial sectors for multinationals to come in and compete on a level playing field requires investments in advertising."
The WTO also regulates trade barriers. According to the organization’s own data, import tariffs have fallen to 9.9% this year from almost 40% in the early 1990s. Partly as a result, Chinese imports rose 25% in 2003 and 30% in 2004. China's national statistics office puts the increase in imports even higher, at 35% in 2003 and 36% in 2004.
In 2004, China ranked third in the world in imports of merchandise, and eighth in imports of services, according to the WTO.
The growth of Chinese brands seeking international sales is also expanding the market for foreign agencies, said Mr. Wang, whose agency works on major Chinese brands like Haier appliances and Lenovo computers. "Chinese brands are going overseas because of narrow margins at home.”
Contributing: Anabela Voi You, Linda Kiang and Normandy Madden
Can establish 100% foreign-owned enterprises in 2006.
Railroad companies can set up 100% foreign-owned subsidiaries in 2007.
Can open 100% foreign-owned enterprises in 2007.
Travel and tourism
Hotels can be 100% foreign owned since 2003.
Travel agencies could take a majority stake in joint venture companies starting in 2004; can establish 100% foreign-owned enterprises in 2007.
In 2004, WTO-mandated tariff reductions for goods took effect, and restrictions were lifted for distribution of imported goods.
Sources: Ministry of Finance, U.S.-China Business Council
For daily new updates about China's entry into the World Trade Organization, the Hong Kong General Chamber of Commerce publishes useful information at chamber.org.hk/wto/content/news_update.asp.