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

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