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

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

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