Advertising: Another China Problem

The market is wide open, but foreign agencies in Shanghai are struggling -- largely because clients have a bad habit of not paying

On Jan. 25, after 10 years of doing business in China, J. Walter Thompson-Bridge Advertising's Shanghai office signed its first Chinese client, pharmaceutical giant Sanjiu Group. JWT now says it's ready to complete a contract with a major Chinese electronics company.

Why the long delays? It's not that the ad agency has been sitting on its hands for a decade -- the Shanghai office was originally opened to serve international clients like Unilever (UL ) and Nike (NKE ). The issue: Chinese companies just weren't on the list of most desired clients. "I have been most conservative when it comes to seeking business from state-owned enterprises," says Tom Doctoroff, managing director of JWT's Shanghai office.

Yet a recent ACNielsen study showed that the top 10 big spenders in advertising in China were all local companies -- Coca-Cola (KO ) came in a distant 20th -- and most of that business goes to local agencies. Big international agencies such as JWT and Ogilvy & Mather just aren't rushing to sign up local companies. That's because getting paid is far from a sure thing.


  Even local Chinese advertising agencies admit getting payment for their work can be tough. More than 80% of his domestic clients don't pay on time, says Qiang Wendong, an account manager at Shanghai Advertising Agency. Ad companies sometimes even have to resort to barter. "I know a certain ad agency in Shanghai that was paid in television sets," says Mark Bainbridge, Ogilvy & Mather's group managing director for Shanghai.

Ogilvy hasn't had to go that far, but it has had problems at times. Bainbridge says about 30% of his clients are local companies and from 1996 to 1998, some of its local clients defaulted on payments. Now, the ad agency is more careful in choosing local clients -- listed companies are preferred, for example. And Ogilvy takes nonpayers to court and wins. "We've learned," Bainbridge says.

China's advertising industry is only about a decade old, and that relative immaturity also makes doing business there tough for international agencies. For one thing, Chinese companies often have no idea of what constitutes good advertising. "People don't know what brand equity is," complains Doctoroff. A lack of world-class ads to serve as benchmarks makes it "hard for the marketers to identify if an ad is good or bad," says Bainbridge. Chinese companies also tend to spend disproportionate amounts of their budgets placing ads on China Central Television (CCTV), the government's official station, well-known for its staid programming.


  Differences in business culture are another sticking point. Sanjiu is unusual because it agreed to three terms JWT asks of all its clients: fair pay, a long-term relationship, and exclusivity. Those might seem like par for the course, but Chinese companies tend to dole out small assignments to different agencies. It's common for a company to listen to a pitch from an international ad agency, then take the business to a local firm. "We do all the research and strategy, then at the last minute [the local companies] say they have changed their mind," gripes a Shanghai-based executive at an international ad agency. "They may steal your creative ideas, or adapt them into their own creative ideas."

Relationships, or guanxi, play a big role in China's ad business. Local agencies leverage good relationships with company executives to ensure payment and use connections with local media to save money. A 20% to 50% discount off the published rate is common for television ads placed by local agencies.

Cutthroat competition pushes profit margins down to the single digits in China, unlike mature markets like Hong Kong, where a 17.65% profit margin is the accepted standard. To avoid a price war, many foreign agencies charge Chinese clients a fee for each portion of the job. Chinese ad agencies charge fees, and sometimes commissions, which the Chinese government caps at 15%. Still, some foreign agencies are making money in China. JWT's Shanghai office, for example, earns about $12 million a year, with a "healthy" profit margin, says Doctoroff.


  Change is coming, albeit slowly. Younger Chinese, many of whom have studied overseas, are moving into management positions and pushing for more professional ad campaigns. More competition is also on the way. After China joins the World Trade Organization, expected late this year, currently restrictive rules on wholesale and retail distribution will loosen.

Some industries, like pharmaceuticals and electrical appliances, are already facing stiff foreign competition -- hence Sanjiu's decision to pay for an international firm. "WTO is opening up the gate a little bit for foreign advertising agencies," says Doctoroff.

Local ad agencies are also seeing a change: Companies now evaluate their chances in a market before lavishing tons of money on an ad budget there, says Jacky Tang, media director for the Shanghai Eastern Advertising agency, adding that many his contracts are now for one year. "Clients are more sensible and rational than before," he says.


  But don't expect China's advertising industry to mature overnight. The exec at the international agency in Shanghai estimates it will take 10 years for more professional standards to truly take hold. Meanwhile, foreign ad agencies that must maintain offices in Shanghai to serve their multinational clients will keep trying to attract local clients to help pay the bills.

They're caught in the same bind as Shanghai Advertising's Qiang, who says: "If we don't do the business, we will lose money. If we do the business, our clients won't pay us back." That's a stiff price to pay to be in the China ad market.

By Alysha Webb in Shanghai

Edited by Thane Peterson

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