ANALYSIS: Brokers - Who holds the aces in China? - Buying power is still in the hands of the local brokers despite P&G's return to Zenith

Procter & Gamble's decision to drop a local broker and resume its relationship with former partner Zenith Media has spotlighted the quality versus quantity debate of media buying in China. While most of us will never know what went wrong with P&G's close to two-year arrangement with Deluxe, speculation revolves around the old chestnuts - the lack of transparency, standards of professionalism and accountability, and quality of media buying versus scale of discount. Trying to deal professionally, and totally above board in the Chinese media buying market is a tough challenge even for amply-resourced international agencies. That this is still the case some 10 years after the advent of commercial advertising, and despite the best efforts of China 4As shops and some of their clients, is testimony to the strength of local players, the invisible forces of 'guanxi' (connections) and the power of kickbacks. It's estimated that it may take at least another five or so years for the power of these distorting forces to subside, giving rise to a more mature and better established industry. These days, China's media scene is even more local and less international than it was five years ago, so working out how better practices might be established is not at all straightforward. In 1996 and 1997, six to seven of the top 10 spending brands were international names, including Coca-Cola, Pepsi, and P&G and Unilever brands. Now only Coca-Cola remains in the top 20. The biggest-spending brands are local, from a variety of industries. Zenith and MindShare estimate that local brands account for some 70 per cent of all ad revenue, and that the majority of media placement goes through local enterprises. Joint-venture advertisers and agencies do not hold the balance of power; local media owners, clients and brokers do. This means that for anything to change, the locals will have to be willing to break old habits - many of which bring them extra personal revenues in the form of kickbacks. So what's the incentive for them to change? Helping to drive change, albeit slowly, are the evolving needs of some local clients. While many remain resolutely local, totally uninterested in GRPs, reach and frequency or efficiency, and are discount-driven, a growing number are beginning to move towards higher levels of professionalism, driven by their transition from provincial to national status. As Chris Walton, chief executive of MindShare China, says: "The first step with local clients is to do the planning and scheduling, and let them do the buying." The hope is when buying doesn't match the schedule, then they may reconsider their approach. Antony Young, chief executive of Zenith Asia, concurs: "Eventually gaunxi will give way to dollar reality." The Media Edge's chief executive director, Michael Jones, adds: "China is also a market where a relationship is very strong if you've got a very big budget. In China we will oscillate between relationships and the size of the budget." Most of China's 4As agencies are generating increasing levels of income from local clients, and when more of them realise that better media performance and business efficiency can outweigh kickbacks, then the momentum for change will gather pace. The key problem is that kickbacks are considered normal business practice at Chinese companies and even in some 4As agencies (although a beneficiary may often become 'marked' in the industry, and in a 4As agency would probably be dismissed). As long as kickbacks are acceptable currency it will be virtually impossible to crack this particular nut. Perpetuating the old habits are many of China's local media brokers, scattered across the country. While some see long-term benefit in becoming more professional and more closely aligned with 4As agencies, all use a variety of tricks and tactics to generate revenue in the more competitive climate. The key advantages a broker offers include the lure of better rates, (two regional brokers said that two-tier pricing definitely remains a standard feature), better local contacts, better on-the-ground knowledge, sometimes better payment terms, and of course, the certainty of kickbacks. The key disadvantages brokers bring for the more professionally-inclined tends to be the lack of transparency, accountability and their quantitative not qualitative approach to airtime. Some local brokers are now facing the risk of losing their cost advantage, however, with the Government's directive requiring TV stations to merge. The desired effect of such consolidations may well be to reduce competition among local TV stations, by fixing (and raising) rates across all stations and offering one non-negotiable rate card. In theory, if this happens, brokers and agencies would be able to buy airtime at the same rates; thus quality of planning and buying will become the key differentiator between them. While it is currently too early to see whether the one-tier pricing will stick, one thing is for certain: brokers are here to stay, and their strong middleman status is causing battle strategies for long-term survival in both agencies and brokers to be rethought. MindShare's Asia-Pacific chief executive Kelly Clark, and Zenith's Young have independently reached the conclusion that, as the market becomes more local, and gradually more professional, both agencies and brokers will be faced with tough investment decisions. Brokers will need to think about investing in research and talent, enabling them to compete in 4As territory, while the joint-venture agencies will need to strengthen their local hand to offer consistent access to better rates and stronger local connections. Both MindShare and Zenith are looking closely at expansion strategies that could include mergers and acquisitions. Kelly doesn't believe there is a viable long-term future for a simple middleman, and that they will have to develop their approach to business or end up being marginalised. "However," he says, "by the same token we will have to maintain a competitive edge on negotiation and relationships with the media owners." At the end of the day, attempting to resolve any of the major structural issues of China's media industry may mean bypassing the ones who hold the balance of power, and enlisting the support of Government and the bureaucrats. But Barry Leung, chief executive of Bates China, feels that the prestigious and internationally visible nature of the 2008 Beijing Olympics will dramatically raise the profile of the whole advertising industry. This, he believes, will provide a very strong catalyst for change, spurring the Government into greater involvement with the industry's modus operandi and rules. Bringing change, professionalism, and discipline into China's media buying scene is not a job for the faint-hearted. It will take time, effort, full industry commitment, and undoubtedly some level of Government endorsement. Even then, as in Taiwan, old habits die hard. CHINA'S BALANCE OF POWER: TOP 20 ADVERTISERS Period: September 2001 YTD Unit: RMB 000's (Rate Card Value) Total YOY% 1 Naobaijin Health Products 567,521 -30.9% 2 Changjia Baixiao Pill 554,321 298.0% 3 Gai Zhong Gai(Ca) 441,265 -51.8% 4 Dongfeng Yanfan 419,425 46.1% 5 Xiuzheng Sidashu 355,143 228.6% 6 Puxue Oral Solution 334,101 -43.6% 7 Danwang Granule 332,328 - 8 China Mobile Telecom Co 310,675 42.6% 9 Hutong Children Suxiao 286,263 - 10 Taita Jingxin Oral Solution 265,132 90.3% 11 Ch Telecom 245,416 87.9% 12 Yandi Medicine 245,329 -38.7% 13 Attack Transparent Soap 240,598 179.8% 14 Gankang Anti-Cold Medicine 218,494 28.1% 15 Coca-Cola 216,982 16.6% 16 Huiren Wuji Baifeng Pill 208,531 -31.6% 17 Neptunus Endophy Tablet 196,512 791.5% 18 Sulite Ganxile Capsule 192,108 435.2% 19 Nice Crystal Soap 190,519 - 20 Nanhua Yifufen Syrup 185,885 - SOURCE: ACNielsen

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