While doing business in China is filled with excitement for many foreigners, the road to profitability can be bumpy.
Although Beijing Dentsu Co Ltd - an outlet of the world's largest advertising agency, Dentsu - has been in China's market for eight years, its profits have been meagre. In 2001, earnings for Beijing Dentsu amounted to 1 billion yuan (US$122 million), but year-end profits covered only a fraction of its expenditures for business operations.
That situation troubles Yusuke Inoue, head of the Sino-Japanese advertising agency. During a recent interview, Yusuke said he hoped China's World Trade Organization (WTO) entry and the 2008 Olympic Games would help boost revenues, although he is not optimistic that it will make much difference.
"China's ad market is not as big as it appears, and we still have to wait some 50 years before the market becomes mature and we become really profitable," he said.
Statistics provided by China's Advertisement Association indicate that earnings from China's ad market reached some US$10 billion in 2000, only a fraction of the US$165 billion spent on advertising in the United States. Foreign ad companies in China contributed only 5 per cent to China's ad market.
"The main business for these foreign ad companies still comes from their multinational customers rather than domestic ones, which is why they take up such a small percentage," said Ding Junjie, president of the journalism school at the Beijing Broadcasting Institute.
Like Beijing Dentsu, foreign ad companies have found that China's budding economy and huge market does not necessarily guarantee fast and easy money.
"China's ad market is still in its infancy. It's changing for the better but the business environment has yet to be further opened and standardized," said Yusuke.
Like many other sectors such as telecommunications and financial services, China's advertising industry still poses restrictions to foreign investment.
Although the government allows multinational advertising agencies to set up joint ventures in China, they can only hold limited control of equity.
Also, foreign firms are not allowed to engage in direct media buying. They can do it in two ways, either through setting up a joint venture or going through a media broker, which requires sharing profits with local partners or paying the broker.
This policy has long been the target of complaints because it prevents foreign ad companies from gaining a larger business presence in China through aggressive investments.
Things will soon change, however, as China's recent WTO entry will remove those restrictions once and for all: The government has promised that foreign ad companies will be allowed to set up wholly owned outlets in China in the next two to four years.
Even so, industry observers are dubious about how far foreign ad companies can succeed in the local market over the near term, arguing that they are at a disadvantage in luring Chinese customers.
Their generally high-priced services are a real concern, but even more troubling is their lack of knowledge about the local market and local consumers.
Ogilvy & Mather, the first international ad agency established in China in 1986, has had its problems in wooing local Chinese firms.
The company came under fire last week when an article carried by the Guanzhou-based 21st Business Herald unveiled a number of cases in which the company failed to meet the demands of its customers.
Without directly criticizing the company, the report quoted officials from Chinese companies as saying that ads created by Ogilvy & Mather China had failed to boost sales, despite their high quality and creativity.
In a few cases, Chinese companies nearly went bankrupt because of the failure of the mega-million dollar ads to boost sales.
"Obviously, the article is trying to say that Ogilvy & Mather China has pitfalls in understanding the Chinese customers and in combining its services with the real situation of the local market," said Tian Jin, an account executive from a Beijing advertising company.
The article has triggered hot debates and caused Chinese companies to seriously question the effectiveness of ads designed by foreign companies.
Officials from Ogilvy & Mather China were not available for comment, but T.B. Song, Ogilvy's chairman for China, said recently that the company would continue to step up efforts to seek partnerships with local customers and raise the percentage of local business.
At present, domestic customers account for less than 40 per cent of the company's business, Song said.
"In China, you have to track the Chinese consumers in terms of lifestyles, attitudes and behaviour while promoting the new brand, and that is never easy," said professor Ding.
Foreign ad companies also face such problems as high operational costs and growing competition from local ad firms.
"Foreign ad companies face very expensive labour costs in China because they have to hire top-notch talents to keep the quality of their products," said Ding.
With China's WTO entry, the rivalry faced by foreign ad companies in China is bound to become tougher, as local firms are catching up quickly.
"The WTO entry will urge us to adapt to international practices and learn from the world's best advertising brains. It will help us become more competitive," said Shen Mingchang, director of the Advertising Centre of Shanghai-based Wenguang Media Group.
By the end of 2000, China registered 70,000 advertisement enterprises, employing 640,000 people and recording annual revenues of about 80 billion yuan (US$9.6 billion). Many are small companies with less than 10 employees.
Some big Chinese companies have already turned to leading multinational advertising agencies for improved services.
More than 70 per cent of Beijing Dentsu's earnings came from local companies such as Legend, Haier and China Netcom, according to statistics provided by Beijing Dentsu.
"The Chinese market is currently moving from a non-brand name market to a brand-name market, where advertisements are necessary to build up a company's image," said Zhu Guang, an official from Legend's advertising department. "Foreign ad companies excel in providing services needed by companies as big as ours."
Like Legend, Chinese makers of everything from coke to computers have started buying more ads, a tactic borrowed from their multinational competitors.
They've also started mimicking Western ad campaigns by hiring movie celebrities to tout their products.
Domestic enterprises have relied more on advertising than their overseas counterparts in China, according to reports from ACNielsen, a world renown research organization.
The research showed that in 2000 the top 10 advertisements in China were all for local brands.
As contrast, Coca-Cola, the most popular foreign brand name in China, ranked only 20th.
Domestic advertising sales are also expected to gain a strong boost from government-owned television stations, which have put increasing emphasis on profits in the growing market economy. To attract more ad customers, they have scrambled to offer better programmes and charge more for advertising time, advertisers say.
In addition, marketers are buying more ads in second-and even third-tier cities as wealth spreads from large cities to less-developed regions and new channels for advertising open up, including publications, radio, television and billboards.
As the market grows, leading foreign ad agencies such as Saatchi & Saatchi, McCann Erickson, Leo Burnett and J.Walter Thompson have already seen stable growth in the number of their local customers.
"You're seeing advertisers going after an explosion of consumer spending in China," said Fu Huo, a senior official from J.Walter Thompson. "A lot of money is being invested in this fast-growing market."
While the global economic slowdown continues and ad spending from multinational companies shrinks, China's strong economic growth makes the market even more tempting.
Whatever the case, Yusuke believes his business in China will leapfrog in the future. All he needs now is patience.
"We have to wait. It's worthwhile even if you wait for 50 years before you start to make big money."
(Business Weekly January 31, 2002)