Agency Bosses Explain the Way Forward in China’s Complex, Troubled Marketplace

Near meltdown has altered the landscape

When the Chinese economy stumbled in recent weeks—its stock market shuddered and sputtered and the Yuan currency plummeted in value in August—the entire global marketplace held its breath for a brief time. The fear was that China's sudden vulnerability would drag the media and ad marketplace in the U.S., Europe and the rest of the world down with it. Likewise, global corporations expecting their biggest growth from the Chinese mainland swallowed empty at the prospect of diminished returns.

Although top executives of major companies worldwide are collectively breathing a sigh of relief, choosing to see the fits and starts of the world's second-largest economy as merely a correction, others point to more systemic changes that are creating challenges as well as opportunities for local and multinational business.

The prognosticators of the marketing, media and tech world generally agree that there's little need to be fearful, that growth can still be achieved. Late last month, eMarketer issued a tempered but still positive forecast for the Chinese marketing climate, projecting that ad spending in China will total $71.05 billion this year, up 13 percent—a slight slowdown versus last year's 15.9 percent growth. As China "gradually transforms to a consumer-driven economy from an export-driven one, total advertising spending will rise as a result of growing consumer sectors such as retail, financial services, telecom and other services that naturally contribute far more to ad spending," eMarketer wrote.

More specifically, eMarketer estimates that digital spending in China (the world's No. 2 digital ad market) will rise to $31.03 billion this year, up 30 percent versus 2014. The firm also forecasts that the country's digital ad outlays will more than double by 2019, when almost 60 percent of total spending will be devoted to digital, making digital investment in China the largest on the planet.

Given the country's recent conversion to digital technology, China has largely skipped the desktop-based digital explosion and shot straight to mobile-based communications. As a result, eMarketer estimates that mobile ad expenditures will more than double this year, climbing to almost $16 billion, while TV ad spending will total around $21 billion. Far more modest increases are called for radio (8 percent), while newspapers and magazines are expected to decline even as their digital offshoots surge in popularity, mirroring the print outlook in the rest of the world. Finally, eMarketer also forecasts that outdoor advertising will grow at a steady pace due to "the burgeoning cinema market and emerging development in Tier 3 and Tier 4 [meaning smaller to midsize] cities."

For his part, John Wren, president and CEO of Omnicom Group, shares the generally bullish outlook on China. The country's economy, he says, "is still growing at a healthy clip that is more stable and sustainable, [and is] now being labeled as the new normal. There remains a long runway for growth ahead."

Omnicom—with more than 30 agency brands operating across China, employing some 3,000 people—sees strong advertising expenditures in categories like telecommunications, travel and personal care, says Wren. A poster child for this growth is Apple, one of Omnicom's largest clients in China. Wren says the tech giant has enjoyed record sales of the iPhone 6 there and is adding 20 new retail outlets over the next year.

Yichi Zhang, Beijing-born co-founder and chief executive of McGann Zhang, a 7-month-old agency based in Los Angeles and Beijing, believes the entry of Apple Music and iTunes into China indicates maturity in the market. Ironically, it's the presence of more regulation in China that makes Apple as a global brand feel more comfortable, says Zhang.

One possible stumbling block, at least as Wren sees it, is "slowing growth rates in China," which he says "mean that clients are facing pressures to cut costs. This will have an impact on ad spending, but in the context of the global advertising business, it will be limited."

Henry Tajer, CEO of IPG Mediabrands, the global media holding company of Interpublic, finds "some paring back in China by local and multinational advertisers. We're seeing a common approach, a common reaction by a number of companies looking at global macroeconomic conditions, including what's going on in Europe as well as the impact on business in China. We expect there will be some correction, recalibrating in China."

Tajer, whose main body of agency experience is in the Asia-Pacific region, believes Mediabrands "is somewhat protected to a certain extent" in China because of its organic growth strategy. "We do not feel overextended in China," he says. "This gives us confidence when we look at macroeconomic conditions."

For Dominic Proctor, president of GroupM Global, holding company of all WPP media agencies, the correction in the Chinese economy is "minor." He adds that this economy "is still growing. We see no major impact to advertisers' global operations.

"As an illustration," he goes on, "consider the case where China is 10 percent of a global marketer's budget. A slowdown in economic growth of a point or less is of negligible impact."

Not everyone familiar with the Chinese market is so optimistic. Among those not so bullish is Bessie Lee, CEO of WPP China, which boasts revenue of $1.2 billion. (WPP's revenue for Greater China, which includes Hong Kong and Taiwan—not part of Lee's remit—is $1.65 billion.) She is also the founder and chief executive of withinlink, an independent, strategic incubator of startups in the mobile, e-commerce and social media sectors that was launched in January of this year.

While "10 to 15 years ago multinational companies considered China as the growth engine," she notes, the economy there began slowing down three years ago and has been hammered by the anti-corruption campaign kicked off in 2013 by President Xi Jinping, which has adversely affected the luxury goods industry in China. Lee estimates that global revenues of luxury goods marketers, which had been deriving some 30 percent of their Chinese sales from gift-giving—now outlawed by the government—have declined 10 to 15 percent as a result of this new policy. Also affected have been Chinese food and beverage companies, as well as the real estate and automotive categories.

Lee, for one, says she doesn't see the Chinese economy returning to double-digit growth anytime soon, and, in fact, anticipates the ad market there will grow only 3 to 5 percent over the next five to 10 years. "People will need to look for new growth areas, which means they will need to acquire Chinese advertising companies, especially in second- and lower-tier cities," she says.

Proctor predicts the chances of new media or agencies successfully entering China have become, to use his word, low.

"Mediawise, China is a very strictly regulated market, and these strict regulations are being expanded to the digital area as the government sees media consumption habits change," such as the country's irreversible embrace of digital technology, he says. "Media, agencies or tech companies not in China already have missed the boat."

According to Wren, "some of the challenges, like talent scarcity, supply chain logistics, IP protection, have always existed. What has changed is the competition is now fierce as agencies and marketers fight for share, both with global companies looking to penetrate, and also with even stronger local Chinese brands and companies."

Wren expects brands "will continue to shift even more of their investment into digital media and e-commerce." He believes the smartest brands "will focus on untapped markets like Tianjin, Xinjiang and Inner Mongolia that have lower per capita incomes but very high growth rates."

Lee couldn't agree more. She believes local Chinese brands are poised for growth, and present opportunities for both Chinese and multinational marketers. Brands are either growing nationally within China, beyond their original, smaller home markets, or expanding internationally. A few examples: Inner Mongolia Yili Industrial Group, a dairy company that is building a milk powder factory in Kansas; Yiwu Jiahua Daily Chemical Company, a maker of sanitary products; Lenovo, the computer company; and Haier, a home appliance brand.

Whether you're talking big China or small-market China, it is a country dominated by e-commerce, which poses its own unique challenges—and opportunities—for marketers. Edward Bell, CEO of Greater China for FCB, believes e-commerce is a bigger part of the retail landscape in China than elsewhere because "it offers a sense of freedom of choice for Chinese people. It gives them a sense of personal empowerment that many feel they don't have in their everyday lives."

According to Lee, e-commerce also enables companies like Xiaomi, one of the world's largest smartphone manufacturers, to sell only online, through its official website, and produce products in batches, for customers who queue up virtually to buy. In a sign of potential concern for ad interests, Lee notes Xiaomi's business strategy rejects "hard-core advertising," relying instead solely on viral marketing. That is a business model multinational firms will have to adapt to, if at all possible, and definitely have to compete against.

And the challenges don't stop there. Another factor, Tajer believes, is "that China is a very state-controlled economy, which means the rest of the world potentially could be surprised by certain things," like the recent devaluation of the yuan. "China doesn't give a lot of notice to the rest of the world. That is why Mediabrands' measured, malleable strategy enables us to deal with the Chinese market positively."

At the same time, Tajer acknowledges that he would rather see Mediabrands in the country, fighting for a share of something huge, than to not be. "There will always be ample opportunity in China, because of the population base," says the executive. "The way in which technology is infiltrating the population base points to tremendous opportunity."

This story first appeared in the Oct. 12 issue of Adweek magazine. Click here to subscribe.

Publish date: October 11, 2015 © 2020 Adweek, LLC. - All Rights Reserved and NOT FOR REPRINT