CHINA'S SMOKE-SCREEN: Multinational agencies have made enormous strides in China, but the rewards haven't been felt by all - The market remains acutely price-driven, local business elusive and Chine

<p>At first glance, the advertising agency rankings for 2000 should </p><p>bring some cheer to multinational companies operating in the mirage that </p><p>China has been for a lot of foreign enterprises. </p><p><BR><BR> </p><p>In the years after the mainland opened its doors, multinationals have </p><p>been bruised, even bloodied, in encounters with local competitors. </p><p>Across a broad range of categories, Chinese companies have proven more </p><p>resilient and resourceful than many had anticipated. </p><p><BR><BR> </p><p>Now come figures that show the advertising business has the success </p><p>stories foreign firms have been looking for. In the China Advertising </p><p>Association's (CAA) top 100 agency rankings for 2000, multinationals </p><p>were in the top eight positions. Compiled by the semi-governmental </p><p>industry body,the league is headed by Saatchi & Saatchi, which has </p><p>dominated it since the early 90s. Only two local agencies - Guangdong </p><p>Advertising and the state-owned Shanghai Advertising - have stayed in </p><p>the top 10 rankings, a far cry from the mid-90s. A reverse situation </p><p>prevailed then; seven of the top 10 agencies in 1994 were locals, with </p><p>Shanghai Advertising in third place and Guangdong in seventh. But by </p><p>1996, multinational agencies - particularly the top five agencies - had </p><p>decisively turned the tables on local rivals. </p><p><BR><BR> </p><p>And the billings gap appears to be growing wider all the time. The top </p><p>three agencies pulled in billings of more than one billion renminbi </p><p>(US$121 million) last year. By the 15th ranked agency, Beijing </p><p>Advertising Corporation, which used to be a top 10 agency in the early </p><p>90s, billings slipped to less than 200 million renminbi. For agencies in </p><p>the 90th to 100th positions, it's down to a little over three </p><p>million. </p><p><BR><BR> </p><p>At this rate, it's likely to be a hand-to-mouth existence for agencies </p><p>further down the ladder in a market that is estimated to have as many as </p><p>30,000 agencies nationwide. That they still exist is because the </p><p>majority are low-cost operations, set up with minimal investment and not </p><p>offering core agency competencies which are par for the course elsewhere </p><p>in the world. </p><p><BR><BR> </p><p>Says J. Walter Thompson China chief executive Tom Doctoroff: "At this </p><p>point, I know of no real local advertising agencies." While that may be </p><p>the case with local agencies, are the multinationals all offering the </p><p>depth of services and coverage many say they do? Billings are of course </p><p>easily inflated, which leaves pure billings-based rankings pretty </p><p>vulnerable. </p><p><BR><BR> </p><p>But since the CAA has also tied its rankings to tax payments, it should </p><p>offer a more accurate picture of the agency landscape. </p><p><BR><BR> </p><p>Despite being the top-billing agency, Saatchi ranked fourth in taxes </p><p>paid, while second-ranked McCann-Erickson emerged as the biggest </p><p>taxpayer and the third-placed JWT was second. That said, the top five </p><p>agencies are at worse a couple of places off between billings and tax </p><p>paid. </p><p><BR><BR> </p><p>It's further down the table that the reading gets really interesting: </p><p>the sixth-placed D'Arcy is 22nd in tax payments and the seventh-placed </p><p>Leo Burnett is 14th in the tax rankings. The discrepancy becomes more </p><p>glaring among local agencies such as Shanghai Advertising and Beijing </p><p>Advertising, which are respectively 33rd and 60th in tax payment. </p><p>Interestingly, the 21st placed Jiangsu Dahe was the fifth largest tax </p><p>payer. "There's clearly an obfuscation by agencies, particularly the </p><p>multinationals, to inflate their China side," says an agency source. </p><p><BR><BR> </p><p>What is the motivation for doing so? </p><p><BR><BR> </p><p>In a word: WTO. Tearing down trade barriers should prompt a huge move </p><p>towards efficiency and long-term investment in intangible assets such as </p><p>brand equity. Hence the rush by foreign ad firms to corner network </p><p>resources and bolster their presence ahead of a spending boom, which </p><p>could make China the world's biggest ad market in the coming years. </p><p><BR><BR> </p><p>However, Doctoroff is sceptical that ambitious growth plans by some </p><p>agency networks will happen any time soon: "Multinational agencies are </p><p>not that deep-pocketed. Not many have acquired the critical mass to </p><p>approach international standards in China. And investment is not easy in </p><p>the current global climate; very few agencies are in a position to </p><p>reinvest." </p><p><BR><BR> </p><p>At times it seems like local and multinational agencies live in separate </p><p>worlds in China. But the pressure to boost billings should bring the two </p><p>groups into closer contact, especially when going after key pieces of </p><p>China business. This should take multinationals to a whole new playing </p><p>field, where relationships and price matter first and branding is a </p><p>distant second. </p><p><BR><BR> </p><p>That a number of local agencies also own media properties only adds to </p><p>the degree of difficulty multinationals will face. "There are agencies </p><p>which own media space and they use this to undercut real agencies. They </p><p>offer a better media deal if the client also uses their agency </p><p>services," says Joseph Wang, O&M's group managing director for Hong Kong </p><p>and southern China and vice-chairman, China. </p><p><BR><BR> </p><p>However, Patrick Pitcher, Saatchi's Asia chief executive, believes </p><p>multinational agencies are not "doing a very good job to attract the </p><p>business of local companies". He adds: "We're still seen as different - </p><p>in terms of what advertisers want - and more expensive. The major strong </p><p>point of local agencies is that they have grown on relationships and the </p><p>fact that they are less expensive. I think we could be five times more </p><p>expensive than local agencies and that presents a dilemma for local </p><p>companies - they have to determine whether there is value to paying the </p><p>extra amount." </p><p><BR><BR> </p><p>Among the multinational ranks, the top five agencies have made </p><p>significant headway at the expense of their other networked rivals. The </p><p>smaller discrepancy between their billings and taxes paid provides some </p><p>indication that the top five players are at least of the scale they </p><p>claim to be. Doctoroff believes the top five have achieved critical </p><p>mass, which gives them the necessary resources to expand mainland </p><p>operations. </p><p><BR><BR> </p><p>Viveca Chan, Grey Worldwide's chairman and chief executive for China and </p><p>Hong Kong, adds: "Scale is important in China. The top five agencies </p><p>have it and they have been very steady for the last five years. There is </p><p>still scale at the next level down, but beyond that it's a matter of </p><p>getting one big account and jumping up the rankings." </p><p><BR><BR> </p><p>By comparison, local advertising firms, dependent as they are on the </p><p>business of local companies, have been erratic performers. </p><p><BR><BR> </p><p>For any agency, the business of handling Chinese brands is a </p><p>double-edged sword. On the one hand, Chinese advertisers have shown </p><p>their spending prowess. "Although some of the spending figures are </p><p>overstated due to reporting and monitoring problems, there is no </p><p>question that local companies constitute the vast majority of spending," </p><p>says Doctoroff. </p><p><BR><BR> </p><p>In this year's first quarter, the top 20 advertisers were all Chinese </p><p>companies, according to ACNielsen. However, as ACNielsen research again </p><p>shows, local brands lack crucial staying power. Just 33 per cent of </p><p>local brands remained in its top 500 adspend league between 1998 and </p><p>2000 compared with more than half the foreign brands monitored. </p><p><BR><BR> </p><p>"The point here is that as an agency dealing purely with local brands, </p><p>you can be very unsteady," says Chan. "China is a market where you need </p><p>to have a good mix of international and local accounts." </p><p><BR><BR> </p><p>Adds an agency source: "Part of the challenge with Chinese companies is </p><p>that we don't know how they do their budgets. When they do their annual </p><p>budgets, we don't know the priority and we can't even estimate how much </p><p>they are allocating for marketing." </p><p><BR><BR> </p><p>It's obviously in the agencies' interests to keep spending fluctuations </p><p>to a minimum. Says Pitcher: "We try to tell them that if their spend is </p><p>wildly fluctuating from year to year, it makes it very difficult for us </p><p>to grow the business and have a team constantly looking after their </p><p>account." </p><p><BR><BR> </p><p>The other issue with local brands is that they tend to spread their </p><p>business around, according to O&M's Wang. As such, an agency that has </p><p>put in the hours to secure what looks like an attractive piece of </p><p>business may find that it's not worth the chase. </p><p><BR><BR> </p><p>Still, local companies - facing shallow consumer loyalty as China opens </p><p>its markets wider under WTO rules - offer the best promise for </p><p>growth. </p><p><BR><BR> </p><p>"Despite the difficulties," says Doctoroff, "it's incontestable that </p><p>local brands will remain the largest source of growth for us in the </p><p>medium term." Agencies like Grey, JWT and O&M are keen to bite off a </p><p>bigger chunk - JWT wants to up its share from the current 15 per cent to </p><p>40 per cent in two years and O&M to achieve an even split between local </p><p>and foreign brand business. </p><p><BR><BR> </p><p>That's the plan, but agencies are realistic that the challenge they face </p><p>from local rivals will only grow. "Local agencies will continue to be a </p><p>force in China's advertising landscape for as long as local companies in </p><p>general do not appreciate the value of brand building," says </p><p>Doctoroff. </p><p><BR><BR> </p><p>"Although WTO membership will accelerate a near-religious conversion, it </p><p>will still be a slow proselytising process." </p><p><BR><BR> </p><p>China's famed entrepreneurial spirit has agency bosses fully expecting </p><p>that their staff today could well pop up at a local agency competitor </p><p>tomorrow, bringing with them the benefits of multinational agency </p><p>training and expertise. "Local staff retention is a big challenge," says </p><p>McCann's China chief executive T. H. Peng. "We can train the locals, but </p><p>after the training they will leave for a better offer or they might </p><p>start their own agency." </p><p><BR><BR> </p><p>Pitcher too described local staff retention as a significant </p><p>problem. </p><p><BR><BR> </p><p>"Training and career path development will help but it just puts off the </p><p>inevitable." </p><p><BR><BR> </p><p>- Additional reporting by Alfred Hille </p><p><BR><BR> </p><p>TOP 100 CHINA ADVERTISING AGENCY RANKINGS - 2000 </p><p>Agency Billings Tax Status </p><p> (Rmb 10,000) </p><p>Saatchi & Saatchi Great Wall 138,390 4 </p><p>McCann-Erickson Guangming 137,200 1 </p><p>J. Walter Thompson China 121,109 2 </p><p>Ogilvy & Mather Shanghai 91,333 3 </p><p>Grey Worldwide 79,300 7 </p><p>D'Arcy 73,694 22 </p><p>Leo Burnett Shanghai Advertising 67,558 14 </p><p>Guangdong Advertising Corporation 60,833 23 </p><p>Shanghai Advertising Company 59,400 33 </p><p>Shanghai Lowe Lintas & Partners 49,500 6 </p><p>Beijing Guoan Advertising Crop 37,000 17 </p><p>FCB 22,571 8 </p><p>New Handsome Joint Advertising 21,300 32 </p><p>Shanghai Art-Designing Corporation 20,203 15 </p><p>Beijing Advertising Corporation 19,500 60 </p><p><BR><BR> </p>