Ad sector competition heats up
By Jiang Yan (China Business Weekly)
Updated: 2004-09-21 10:44

Although there are unlikely to be a large number of new entrants upon the opening of China's advertising market next year, international and domestic advertising agencies are feeling the increasing heat of competition.

Most of the top international advertising companies are already in China, and domestic players are catching up quickly to challenge the dominance of foreign rivals in one of the world's fastest growing advertising markets, said company officials and industry experts.

They added there will be intensified competition for clients and skills.

Charles Sampson, general manager at the UK-based Saatchi & Saatchi's Beijing branch, last week said that he does not expect many big international names to come, as most of them already have a presence in China.

"The world's top 10 advertising companies have been in China for many years. It will make no fundamental difference whether they can establish a wholly-owned agency or not," Ding Bangqing, vice-president of the Guangdong Advertising Corp, one of the largest domestic advertising agencies.

He said that although currently foreign advertising companies can only participate through joint ventures (JV) in China due to regulatory restrictions, they are the de facto decision-makers.

Sampson agreed that "it is a reality."

Xiao Hu, a professor at the Communication University of China's advertising college, said: "Some international players have already established wholly-owned subsidiaries in the Chinese mainland via Hong Kong."

Under the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA), which came into effect this January, Hong Kong entrepreneurs have been allowed to set up wholly-owned advertising operations on the mainland since the start of this year.

This preferential treatment given to Hong Kong businesses, which is in advance of China's formal opening of its entire advertising market in December of next year according to its WTO (World Trade Organization) commitment, is contributing to the rapidly increasing turnover in the marketplace, which already exceeded 100 billion yuan (US$12 billion) in 2003.

The country will stick to its commitments, Wang Zhongfu, minister of the State Administration of Industry and Commerce reiterated at the recent 39th IAA (International Advertising Association) World Congress in Beijing.

With the removal of all legal barriers, Ding said international players will accelerate their penetration of China.

"We will have hard fights for big projects," he predicted.

Sampson said: "We have established branches in first-tier cities, including Beijing, Shanghai and Guangzhou, and are looking outside to the second- and third-tier cities in the next few years."

These existing players are trying to secure bigger stakes, seeing the fast market growth in recent years.

Although starting up in the late 1970s, China's advertising market has been growing fast. Last year alone, advertising turnover in China reached US$13 billion with an increase of 19.44 per cent, accounting for 0.92 per cent of the nation's gross domestic product (GDP), according to statistics from the China Advertising Association (CAA).

But there is still a big growth potential, comparing that the advertising turnover took up 1.2 per cent and 2.4 per cent of GDP in Japan and the United States respectively.

CAA predicted that, accelerated by China's economic development, the nation's advertising industry will keep developing at a growth rate of 20 per cent over the next few years and will reach its peak at the 2008 Beijing Olympic Games.

Competition is currently mainly between international players in China.

"Domestic players do not possess the financial ability to compete with international rivals," Xiao said.

"Our biggest rivals are large-scale media purchasing corporations, mainly international players," said Tomokazu Jimbo, corporate executive officer and member of the board of Hakuhodo Inc.

The Japan's second-largest advertising firm is considering to establish wholly-owned research and packing enterprise after the country lifts restriction on its advertising sector next year.

Hakuhodo is currently taking various steps to further enhance its business presence in China. Last week, for example, the company's president and chief executive officer Junji Narita visited Beijing to get first-hand feeling about the China market and to promote a reorganization campaign for its resources spread all over the country.

Sampon agreed international agencies are the major competitors in China market, but he added: "That situation could change."

Domestic players have improved rapidly.

"We are learning at home from international rivals quickly," said Ding. "Our company is nearing the international level in terms of creativity and branding capability."

Some of the clients, who used to entrust foreign advertising agencies, are now coming to his company, Ding added. "As a local service provider, we are most familiar with customer demand and the culture of the domestic commercial world."

Sampson admitted that as the company is unfamiliar with second- and third-tier cities, it will encounter some difficulties.

However, long-term competition will not only be restrained in clients, but also in terms of talents.

"Foreign agencies have to localize themselves, but there is a limited pool of local talents," Xiao said.

Sampson agreed, he said Saatchi & Saatchi is seeking local talents to run businesses in important markets.

With 101,800 advertising corporations in China, there are only 871,400 practitioners and not all of them are professionals.

Other problems, including the wide application of personal networks, are not major issues, Sampson said.

"There exists the practice of personal networks in other countries, although not to the same extent," he added. " And it affects the business of other players as well, no matter if they are domestic or international."

As for legal systems, Sampson said it is not a major problem either.

China's Advertising Law took effect in 1995, providing a legal framework for advertising participants.

But Ding complained that the laws are favouring foreign players too much and disadvantage domestic companies.

"We are taxed at 33 per cent of our incomes, but foreign companies only have to pay 15 per cent," he said.

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