Growth in China requires a leap of faith

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It is one of the great ironies of modern marketing: The major marketers have had to virtually bully their agencies and media into matching their presence in China. Now that the prize is in sight, something akin to a modern gold rush is developing, with agencies and media desperate to stake their claims.

China is no easy game. Many companies, initially attracted by the low cost of labor in China, actually failed because of the lack of local management. Ten years ago, most companies that were opening a branch in China had to rely on their long-term vision of the market without clear visibility of their return on investment. Eventually, these pioneers found a way to develop local talents; the dividends are now starting to flow.

Meanwhile, agencies and media kept perpetuating a culture of nervous caution and failed to match the development of their clients and advertisers. In a country where the sales of many products have been enjoying double-digit growth for several years, the marketers are now frustrated. They are struggling to find the vehicles and services they need to market their brands and products.

The key next step-especially for media companies-will be to take a leap of faith and start investing human capital in their China ventures. The potential rewards call for bold moves. While China is building an economy that will be bigger than Japan by 2020, the Chinese advertising and media industries should become the second largest in the world within 10 years.

Hence, missing the boat starts today.

The modern facts and statistics of the China market make compelling reading. It is well known that China manufactures 70% of all the toys sold in the world, 60% of the world's bicycles and 50% of the world's microwave ovens.

And China's interdependence with the rest of the world is increasing. By the end of 2006, Wal-Mart plans to build another 42 stores in China to reach 90 outlets. Meantime, the world's largest retailer will buy this year more than $18 billion worth of goods from China. Wal-Mart needs China to fit its image of the "can't beat" prices retailer, and China needs Wal-Mart to distribute its growing production of unbranded products.

To succeed in China, Wal-Mart had to expand its model and bring not only good ideas and cash but also its human capital to develop its local business. It took time and money. Advertising agencies and media companies, which did little but complain about the lack of "good people" in China, are finding themselves in a development gap with their clients and advertisers. China's media industry is still in its infancy, while marketers such as Cartier, L'Oreal and Nike have established a solid presence to ensure their brands do not miss out on the China opportunity. Like Wal-Mart, these marketers have brought to China not only their brands and products, but human capital with their strategy and executives.

With an average 9.5% growth experienced during the last 25 years, a new disposable income has come to the pockets of most of its 1.3 billion population, creating a group of several hundred million demanding consumers, already known to be brand loyal.

The GDP growth has fueled phenomenal advertising spending expansion. ZenithOptimedia's recent Advertising Expenditure Forecasts tips China's advertising industry to reach $10.4 billion in 2005, or five times the size of the market 10 years ago. By 2007, it should reach $14 billion (in constant prices) and become the fifth-largest advertising market.

Several advertising agencies and marketing services companies have followed their clients to China, especially the Japanese agencies of Dentsu and Hakuhodo, but their American and European colleagues have been much slower. The complex Chinese regulatory environment has been blamed as the major barrier to entry. This remains true but the situation is changing. After becoming a member of the World Trade Organization, China has gradually opened its market, and since December 2003 foreign companies are now free to be the majority partner in a Chinese advertising agency (wholly owned agencies will be allowed at the end of this year).

The media industry has a similar attitude. The breakdown of advertising spending in China shows that print media has taken the lion's share of advertising growth. Chinese newspapers have become the largest recipients of advertising spending with a current market share of about 42% among all media. And while outdoor and Internet advertising are expanding quickly, China's magazine industry has been the big winner of the advertising market's redistribution of media spending. Although smaller in volume, advertising spending in Chinese magazines has been growing about twice as fast as the rest of the market and, just in the last two years, has doubled in size (+100.3%). As more and better magazines are coming to the market, this trend is expected to continue at a rate of 30% over the next few years from the current-and still modest-ad spending of about $400 million in 2004. If we take ZenithOptimedia's current expenditure and make projections based on the growth rate expected next year, China's magazine industry will become the second largest ad-spending market in the world by 2014 (see graph).

As in the rest of the world, Chinese marketers are finding magazines more relevant, in terms of price, market segmentation and the ability to deliver a desirable audience. But China's media industry suffers from a serious lack of local qualified executives. Training, or sharing media expertise by Westerners, is the key to success. Yet, most publishers still consider licensing income as pleasant marginal profit and avoid the small investment needed to educate and guide the people who will create their magazine each month.

The Middle Kingdom's media is coming out of the Middle Age. In order to take the next step, China needs the human capital that Western media companies have. This is a highly valuable asset that it can exchange for a position in what will become the second-largest media market in the world within the next 10 years. This opportunity will not last forever.

Didier Guerin ...president-CEO of Media Convergence Asia-Pacific, has launched more than 30 magazines in Asia.

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