Do digital agency joint ventures make sense in China?

Saatchi & Saatchi’s decision to launch a joint venture with Shanghai digital agency Energy Source is the latest attempt by Western agencies to adapt to China’s rapidly expanding digital market.

Energy Source claims to be China’s biggest independent digital agency, with roughly 260 employees. Its speciality has been the automotive sector, with Volkswagen its key client.

According to Diana Jim, who co-founded Energy Source and is currently general manager for Greater China at DraftFCB, it is an agency that routinely attracts takeover interest.

A lot of the big ad and digital groups tried to talk to Energy Source in my time there, she says.
However, given its size, one factor that has deterred suitors has been the price. Local digital agencies have been selling at a premium, and good-sized independent agencies with decent talent and clients are now thin on the ground.

Everyone’s had the same issues talking to Energy Source, says a senior executive at one holding group.

It has pretty unrealistic valuation expectations. I don’t think anyone would meet them.

That may explain why Saatchi & Saatchi has opted for a joint venture tie-up, rather than a full or partial acquisition. The new agencywill be based in Shanghai or Guangzhou and named Saatchi & Saatchi Energy Source Integrated Interactive Solutions. According to Ian Rowden, chairman and CEO at Saatchi & Saatchi, Asia-Pacific, the goal is to tap into Energy Source’s core competence.

We’re open to acquisitions where they make sense, and to this sort of structure where we can reach a financial accord and bring expertise to the table, he says.

For Saatchi & Saatchi, which also counts Volkswagen as a client in China, it makes sense to be aligned with a digital specialist in a market where it has minimal digital coverage. The question is what benefit Energy Source sees in the deal, and how much time and energy it will put into a venture in which it has a minority stake. According to Jim, the lure is greater international exposure for its Chinese workforce. It’s the right time for the agency to step up, she says.

Ken Ying, Energy Source’s vice-chairman, is also looking overseas This will be a true demonstration of… the internationalisation of a local brand and the localisation of a global brand in China, he says.
What will be interesting is how the joint venture will work in practice. Rowden says the two parties are still working on the details and have to develop a structure that will allow management from Energy Source and from Saatchi & Saatchi to be involved. It is still unclear who has the majority stake in the agency.

Joint ventures are hardly new in the market. Before 2005, Western firms were unable to own 100 per cent of local ad agencies. They are favoured by Japan’s Dentsu, which recently set up digital joint ventures in China and India to service the global needs of its Japanese clients. Scott Spirit, China strategy director for WPP, warns they can be risky, given that both sides are dependent on the other’s co-operation. Our order of preference is to build organically, to acquire, then to do a joint venture, he says. There is an added element of risk.

However, Michael Birkin, vice-chairman of Omnicom Group, believes they can work well, pointing to a joint venture with Citic that led to the creation of DDB Guoan. Ultimately, he adds, it comes down to personal relationships.

If you understand what your partner wants, you are more likely to be successful. It really comes down to individuals, he says.

Whether or not the Saatchi & Saatchi deal succeeds or fails is not due to the structural issues.