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Which Way Forward for Advertising?

Advertising seems to permeate almost every aspect of modern life, with exhortations to buy coming at us from the TV, newspapers, magazine, billboards and even on the bags in which we carry the goods we have already been persuaded to purchase by advertising.


The looming liberalization of this lucrative sector, opening in line with China's World Trade Organization (WTO) commitments, will lead to stiff competition between Chinese and foreign advertising firms.


Market potential


China's advertising sector will be fully opened to the outside world by the end of this year. This means that overseas firms will be able to set up wholly-owned advertising companies from December 11.


And this is a pie that overseas firms are eager to get a share of.


China's rapid economic growth means that the nation's advertising industry is also expanding at a rate of knots, with ad expenditure surging by 25 per cent to US$23.3 billion in 2004, according to a survey released by leading market and media research company CTR Market Research.


The past two decades have seen China's advertising expenditure rise by an annual rate of almost 40 per cent, one of the highest rates in the world.


But it remains an industry with great growth potential, as advertising turnover still accounts for less than 1 per cent of China's gross domestic product (GDP), as against approximately 3 per cent in developed countries, according to the survey.


Going it alone?


Although foreign firms are expected to set up wholly-owned ad firms in the wake of China's market liberalization, government officials and industry experts maintain that Sino-foreign joint ventures remain the best way for overseas ad giants to expand in the nation.


Chen Gang, president of the Modern Advertising Research Institute affiliated to Peking University, told China Daily that given the unique hallmarks of the ad industry, localization remains very crucial.


"Considering China's vast territory and large population, its market should not be regarded as uniform," Chen pointed out.


Given the distinctive backgrounds, cultures and customs of many parts of China, catering to local tastes may be the ace up the sleeve of local ad firms in this increasingly competitive market.


"Furthermore, local players can take advantage of good relations with government and an extensive local market knowledge, both of which are conducive to the operation of joint ventures," said Chen.


And foreign partners in joint ventures will also find that their costs are reduced and risks hedged thanks to the local partners' social network and client resources.


Beijing Technology and Business University Professor Luo Ziming said that the entry of a group of Hong Kong ad firms and small and medium-sized foreign companies may not have a great impact on the industry's overall structure.


"But they may face two prospects - to be merged or survive thanks to market diversification," said Luo.


Market situation


The current situation in China's advertising industry reflects the viewpoint of these experts, as a group of foreign giants sweep into the market, joint ventures mushroom, and most overseas firms prefer to maintain their co-operation with domestic partners.


The world's top 10 ad companies have already made forays into China by establishing joint ventures with various Chinese partners, such as ad firms, media enterprises and operators in other sectors, according to sources at the China Advertising Industrial Association.


US behemoth Ogilvy, one of the world's leading multimedia and consulting conglomerates, teamed up 10 years ago in a joint venture with Shanghai Advertising Corporation, China's largest ad company, and this partnership has already paid off.


McCann and the Guangming Daily newspaper have already joined forces, while co-operation between ZenithOptimedia and Great Wall, a domestic exhibition company, is enjoying smooth progress.


Ai Meijuan, general manager of Huawen-ASATSU, a joint venture between the People's Daily and ASATSU-DK, Japan's third-largest ad firm, insists that their partnership will continue.


"We have been co-operating well for 10 years, as the business operations of the People's Daily and ASATSU-DK are complementary," said Ai.


Foreign firms' rich experiences in the international market and advanced operation skills, and Chinese partners' local networks help joint ventures enjoy outstanding growth, Ai added.


ASATSU-DK currently has three joint ventures in China, the other two being in East China's Shanghai and South China's Guangdong Province.


Ai cites Guangdong-ASATSU as a good example, as the Chinese firm, Guangdong Advertising Corporation, makes a great contribution to the joint venture in terms of client resources, acquisition suggestions and operations, as well as localized services.


"So far, the majority of their clients are domestic ones," said Ai.


Advertising giants in China generally prefer to grow through mergers and acquisitions, a shortcut in terms of both the sales network and talent resources.


According to a survey conducted last year by the China Advertisement Association, 34 per cent of respondents indicated they will pursue mergers and acquisitions, up 2.8 percentage points year-on-year.


The survey, which covered 440 domestic and 35 foreign ad firms on the Chinese mainland, shows that 14.8 per cent of the Chinese respondents and 14.3 per cent of the foreigners plan to link up with media companies or their clients.


Shi Xuezhi, the association's secretary-general, told China Daily that some Hong Kong-based advertising companies have already set up wholly-funded subsidiaries on the Chinese mainland.


"This is in line with CEPA (Closer Economic Partnership Arrangement), which came into effect on January 1, 2003," Shi pointed out.


Star Group Limited established the first wholly Hong Kong-funded ad firm in Shanghai last June.


(China Daily March 31, 2005)


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