Sir Martin Sorrell's visit to China and India earlier this month, part of a European Union trade mission of business leaders, is the latest sign that when it comes to global advertising growth all eyes are firmly fixed east.
The region is thriving -- WPP's reported profit was driven by 22 per cent and 13 per cent growth in the Chinese and Indian markets respectively for the first sex months of the year-- and an agency buying frenzy is set to break out as the major groups look to dominate the most promising markets. WPP's recent acquisition of The Communications Group in Australia and Enterprise in India are the tip of the iceberg as the groups aim to increase penetration of markets outside Europe and North Amercia from 18 per cent to 33 per cent.
The region is thriving -- WPP's reported profit was driven by 22 per cent and 13 per cent growth in the Chinese and Indian markets respectively for the first sex months of the year-- and an agency buying frenzy is set to break out as the major groups look to dominate the most promising markets. WPP's recent acquisition of The Communications Group in Australia and Enterprise in India are the tip of the iceberg as the groups aim to increase penetration of markets outside Europe and North Amercia from 18 per cent to 33 per cent.
"The biggest challenge we have in Asia is coping with the strong organic growth," said Sorrell. "There will be hiccups, bumps along the way and it can't carry on forever. While it does, the challenge is holding on to talent, people."
Main rival Omnicom has so far remained on the sidelines, and Chris Jaques, chief executive of Y&R and Wunderman Asia, is scathing of the group's M&A strategy.
"Omnicom's relatively weak position is because of the flawed strategy which they followed many years ago -- they tried to build networks through the acquisition of local 'best in market' agencies connecting them under common brand names but little else. There was little management control, as Omnicom believed in the value of independence and entrepreneurialism. This was a strategy that made brilliant sense in other parts of the world, where it was a fantastic success, but not in Asia."
He believes that, except for the Indian and Australian markets, acquisition prospects are thin. "The quality of independent agencies is poor in most Asian markets; most are successful because of relationships rather than quality. As a result, there are very, very few good agencies to buy -- and the law of supply and demand means that their price can be massively over-inflated."
Michael Birkin, chief executive of Omnicom Asia-Pacific, has singled out India, a market where he is thought to have been trying to clinch a deal in recent months, as overpriced. Sorrell describes any talk of overpricing as "sour grapes" on the part of rivals. For Jeffrey Yu, president of Bates Asia, size matters when you want to be a serious regional player. Pre-merger, Bates India weighed in at 15th, post-merger with Enterprise it is a top 10 agency. "To qualify as an important network in India, if you aren't in the top 10 agencies, then you aren't in the consideration of the top multinational clients," Yu says.
Birkin admits that the group is poised to enter the buying spree. "I am uncovering opportunities all the time and I believe we will make the right investments with the right partners at the right price. India is growing fast at the moment and my experience tells me that prices can be difficult in such an environment. However, I'm starting to find that there is a difference between the hyperbole and the reality which augurs well for making investments."
He believes that there is a quality pool of agencies ripe for acquisition, although instilling an international reporting regime may be a challenge. "The more established agencies in Asia are every bit as good as agencies in North America or Europe. There are, though, agencies that have not had to think too much about reporting beforehand and therefore need to make changes if they elect to become a part of a larger group."
Looking to the future, Sorrell is bullish about a tranche of new Asian tigers to keep an eye on -- with some caveats. "Vietnam is coming into its own and Indonesia is looking strong, although there are possible challenges given oil prices. Pakistan and Bangladesh are also ones to watch and, if political conditions change, Myanmar."
Birkin believes that it is a "matter of prioritisation" that explains why some groups are acquiring and others are not. IPG has more pressing issues to address and in recent years has been forced to sell off assets. Publicis is the only real contender in a position to tackle Omnicom and WPP.
"In March this year, Leo Burnett's Arc Worldwide rolled out in Asia-Pacific and the group is currently looking at making additional significant acquisitions in China and India to further strengthen its marketing services offering," says Michelle Kristula-Green, president of Asia-Pacific for Leo Burnett.
As margins in above-the-line advertising continue to be mercilessly squeezed, acquisitions in the profitable below-the-line sector, including digital marketing, will be the most hotly-contested battleground. Yu says that WPP is looking to significantly strengthen its 141 network. Omnicom, says Birkin, is also seriously committed to growth in customer relationship marketing.
Aegis decided the best strategy, as a smaller global player, was to quickly capitalise on renewed interest in digital by audaciously creating a new global network. Since last July, the new network, called Isobar, has gobbled up 13 targets including, in Asia-Pacific, One Digital in Australia and Taiwanese digital marketing company World Wide Integrated Net Solutions.
The surge in acquisitions has put the pressure on the remaining independents to keep pace.
"We deliberately avoid large-scale, fat acquisitions; organic growth is honest growth," says Kim Walker, chief executive of M&C Saatchi Asia, which was about to make an India acquisition at press-time. "For all you read about the might of WPP, a lot of clients are fed up with becoming another cog in the WPP wheel." M&C's response will be to open two more joint-ventures in Asia, to add to its existing eight offices, by the end of the year. Sorrell has outlined an aggressive plan to expand WPP's China operations by a third and predicts the country will become its third-biggest market by 2008. With such pressure, is there a certain inevitability that all advertising and marketing business of consequence in Asia-Pacific will eventually be run by a handful of global giants?
"In terms of size of company, revenue, numbers of people and raw statistics, of course (independents) will be left behind," says Jaques. "But in terms of product, people and profitability, they won't. In fact, they have the potential to become competitively stronger than the big boys. Because scale is not nearly as important in creative businesses as quality. In my view, it's far, far better to be small but brilliant than it is to be big and bland."
