Despite Digital Crackdown, Companies Still See Fast Growth in China

But Google Is Likely to Shutter Search by End of March

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BEIJING ( -- Google's likely shutdown of its Chinese-language search engine, the main portion of its China operation, isn't good news for marketers and their ad agencies -- but it hasn't fazed them about business opportunities for multinational companies in the mainland, either.

"Google came into this country with their eyes wide open and knowing censorship would happen," said Shanghai-based Arto Hampartsoumian, CEO, China at Bartle Bogle Hegarty.

Negotiations between the U.S. search giant and Chinese officials to allow to both remain in China and stop censoring search results for sensitive topics such as human rights appear deadlocked.

"The Google case was a botch," said Tom Doctoroff, JWT's area director, Northeast Asia and CEO, China, because Google's public condemnation of censorship "touched the third rail of government insecurity" in China, where any action that threatens governmental control, including the ability to frame the debate, is approached with zero tolerance.

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"Google committed every sin that China 101 warns against and, in the end, did neither the consumers or [Google's] bottom line any favors," Mr. Doctoroff said.

Google is likely to shut the site down by the end of this month, which will affect the search site's partners in China, such as the portal, for instance, which has a Google search box on its home page. Chinese authorities have warned partner sites that they will also be guilty of breaking local laws if they provide unfiltered search results provided by Google.

Google's departure will also lower the competitiveness of China's search industry, "which will affect advertisers," Mr. Hampartsoumian said. Google's Chinese rival, Baidu, "can charge whatever prices they want now."

Little focus on search ads
While advertisers are increasingly moving to digital media in China, few focus on search ads, veering instead toward Tencent's portal, social-networking sites such as and online retail stores connected with Alibaba Corp.'s e-commerce platform.

Even for companies that do focus on search advertising, Google isn't the country's major player. It only controls about 36% of search revenue in the mainland, according to research firm Analysys International, in Beijing.

Baidu, by contrast, has a 58% share. Google's inability to dominate the market has frustrated the company and contributed to its willingness to pull out, said a long-time ad exec in Beijing, who asked that his name not be used because he has been involved in the negotiations. "It relates to things like protecting their IP, whether they were really making money, finding the right people. There were more things at play."

Nor does the breakdown in negotiations between Google and China "relate to the broader U.S.-China dynamic going on," he added, referring to tensions between the U.S. and China on trade and diplomatic issues. "I don't see the Google debacle as a harbinger of worse times to come. It's true that China has always, and will continue to, vigorously defend its interests, and we must anticipate an increasingly mercantile modus operandi. So they're being marginally tougher on foreign business than in the past, but only marginally."

Mr. Hampartsoumian, whose agency was the first in China to operate independently rather than through the joint venture structure that used to be required for ad agencies to enter the country, said Google's problems in China don't lower his optimistic expectations.

"From an independent business perspective, we work within the laws of the country and we're contributing to China through taxes, employment and training," he said. "China has gone too far forward to step back and undo the laws they've made by joining the World Trade Organization. I don't think they'd go back and make it more difficult for foreign businesses to operate here."

Multinationals certainly don't find China an easy place to operate, but the challenges for most come from the competitiveness of local companies, which usually can manufacture and distribute products more quickly and cheaply than Western rivals. The size and scope of China is also daunting, as the same products, price points and ads don't necessarily work nationally.

Even so, most major marketers have ambitious targets for China, one of the few big, fast-growing markets these days. Ad spending in China jumped 19% in 2009, according to Zenith Optimedia, which expects China to become the fourth-largest global ad market this year.

China is already the world's biggest market for products like cars and mobile phones, and package-goods sales are growing fast. Unilever, China's second-largest advertiser after Procter & Gamble, is counting on a 20% jump in its China sales this year. Similarly, No. 3 advertiser L'Oreal Group has wracked up nine straight years of double-digit growth in China, with 2009 sales of $1.2 billion, up 17.6% year-on-year.

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