Tips for tapping China's explosive growth

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Finding and keeping talented people is the biggest problem faced by companies doing business in China, agreed four leading marketing and media executives who participated in a recent roundtable in Shanghai for Advertising Age's online newsletter AdAgeChina. Marketers are also increasingly moving from the country's sophisticated first-tier cities like Shanghai and Beijing into the less developed second- and third-tier cities and beyond, they said, while facing rising competition from Chinese brands.

An edited transcript follows of the discussion with Dale Sullivan, Shanghai GM's Chevrolet brand director and VP-China of General Motors; Alfonso (Pon) De Dios, Procter & Gamble's media director, Greater China; Hung Huang, CEO, China Interactive Media Group (CIMG); and Kitty Lun, general manager and executive creative director of Havas' Arnold Worldwide.

Advertising Age Editor Scott Donaton, International Editor Laurel Wentz and Normandy Madden, editor of AdAgeChina, led the discussion.

AdAgeChina: How important is China to your company's growth strategy?

Mr. Sullivan: The U.S. is No. 1, China is No. 2.

Mr. De Dios: China is one of our top five global markets and is the fastest-growing at 20% to 30% growth.

Ms. Lun: We work with a lot of beauty brands like Estee Lauder and Clinique in China. It seems like every day we get calls from other cosmetics companies saying they want to advertise in China.

AdAgeChina: Is Chinese media moving into branded content?

Mr. De Dios: It's a big opportunity. We deal with a lot of TV stations, which is much more difficult than working with print partners, because they are less flexible. But they do attempt to create their own business model within the parameters of state-control policies. The farther you are from Beijing, the more autonomy they have to experiment, like [regional TV channel] Hunan, which did [2005 hit reality show] "Supergirl." And they're relying more on advertisers to educate and train them about the value of this model.

AdAgeChina: Are marketers evolving from products that are "Made in China" to brands that are "Created in China?"

Mr. Sullivan: Chinese brands have not been raised to the level they need in order to compete with Western brands. In some industries, they're thought of as cheap, or copies, or low-quality. China will be No. 1 in almost every category there is in the world in the next 10 years, whether you're talking about population, income, ad spend or the number of new products coming out. We launched 10 products [in 2005], and 72 products launched in China's auto industry [in 2004]. But if their quality doesn't get to the level of products from Western countries, they won't succeed.

Mr. De Dios: There are 2,000 hair-care products in China, and about 1,800 skin-care products. The last couple of years, our success was built on massive ad spend. We and our competitors try to outspend each other, but even local rivals are realizing we can't continue to escalate this pattern.

Ms. Hung: One of the key problems for China's media industry is the lack of audited circulation figures. There is gross exaggeration to a point that would be criminal in any other country.

AdAgeChina: How do you market to China's different tiers?

Ms. Lun: We've been in the first tier-Beijing, Shanghai, Guangzhou and Shenzhen-all along, but increasingly our luxury clients are organizing shows and events in cities like Xi'An. We are seeing a shift to the second- and third-tiers, because it's so expensive to cut through the clutter in big cities like Shanghai. Why not be the king in smaller cities?

Mr. Sullivan: As infrastructure, population and income change, we're moving into second- and third-tier cities. The question is how you reach consumers there. A lot of homes in the smaller cities don't have TV sets.

Mr. De Dios: Already half our business comes from the smaller cities and that's where future growth will come from. The brand principles don't change, but the execution of the product offering, packaging or even the actual product will be customized.

AdAgeChina: How do things such as basketball, hip-hop and street dancing fit into an overall youth lifestyle that you market to?

Mr. Sullivan: Look at Chevrolet, that's our brand going after the youthful market, which is not real different from other countries. They like baggy pants, iPods, computer games, dyeing their hair. Youth here want to be a little bit different from their parents. China's first skateboard park just opened up in Shanghai. Extreme games are starting to hit. The launch for our last product tied into all that. We had skateboarders, rollerbladers, basketball players. Trends here aren't any different, it's just very different from what was here before.

Ms. Lun: Affiliation with sports is going to be more and more crazy in the next few years with the Beijing Olympics coming up [in 2008].

Mr. De Dios: We have a consumer insight that labels what you're describing [as] responsible rebellion.

Ms. Hung: They still want to be investment bankers.

Mr. De Dios: Right, they have to conform to a certain mold. ... We're looking more at music marketing, which is still untapped. The next big thing is digital media, online media, blogs, there are thousands of Internet cafes, with at least 150 stations in a warehouse-type location with dancing, singing, network gaming. I'm blown away by this trend.

Our consumer is mobile, very into music and sports, but that's a challenge for us. We're finding in China's top cities TV viewership is down for this segment. ...

AdAgeChina: What are the challenges of marketing local vs. Western brands?

Ms. Lun: There aren't any Chinese brands that have achieved the international status of Western brands, or even Japanese and Korean brands like Sony and Samsung, but it's only a matter of time. The products and infrastructure are here, but Chinese organizations need to come of age. In China, there are a lot of good corporations, but many depend on one leader-one hero everyone worships. If anything happens to him, what's the future of the company?

Ms. Hung: One of the key things prohibiting many Chinese names from becoming a real brand is discipline. To get a brand out there, you need a lot of consistency, coordination and discipline, but Chinese are the most undisciplined people I've ever seen, it's not our strong suit. Everybody wants to improvise a little bit.

AdAgeChina: In ten years, which Chinese brands have the potential to become established global brands?

Ms. Lun: Based on their products and scale, they all do: Lenovo, Li Ning, TCL, Haier ...

Mr. De Dios: Haier tops my list. They do a good job understanding consumers, not just locally but globally. They came up with smaller refrigerators for people with small flats or dorm rooms and they've developed products with different colors and looks. They also know the globe will be their ultimate destination, but to succeed there, they have to do well in China first and create functional and aesthetically pleasing designs.

AdAgeChina: What is the biggest challenge each of you faces?

Mr. Sullivan: You can get ten people to do something, the problem is finding one who's qualified. If something were to cause China to fall in the next two to three years, that could be it. They do not have enough qualified and trained people, especially with marketing, advertising and creative skills.

Mr. De Dios: That's why they're opening so many schools for marketing, finance, the service sector, where you have to think out of the box and innovate.

Mr. Sullivan: We're also moving people so fast. Someone who's purchasing manager today, two years from now can be president of the company. People are developing staff members under them who don't even know how to do their own job.

AdAgeChina: What changes do you anticipate in the next year?

Mr. Sullivan: We'll see consolidation in every industry. In the automobile industry, we have 121 manufacturers and 15 do 80% of the business. The other 106 aren't going to last. Also, income will grow, which will change spending habits and demographics and that will affect how we spend our ad budgets.

Ms. Hung: In the luxury industry, an income disparity is increasingly evident: 0.5% of China, the creme de la creme, is probably worth as much as the entire Japanese market in terms of consumption. On the other hand, if you're reaching to the urban middle class, that's a very loosely defined market with real growing pains.

Mr. De Dios: The scary challenge is whether multinationals are nimble enough to ride these changes in the media landscape. When Chinese companies-those 2,000 local hair-care brands-really get it, they will take a quantum leap, using different models like Internet cafes, digital media, sports marketing. They will overtake us.

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