Transformer challenge

Media giant is awake to changes in digital world and braced for growth in China

In China, Thomas Rabe, chief executive officer of German media giant Bertelsmann SE & Co KGaA, prefers to be called by his Chinese name Han Tao, which he says makes him feel more of a local.

In addition to this scholarly name, which means "great waves", Rabe's business card is also printed in two languages, with one side in English and the other in Chinese.

Those small details reflect the special importance the CEO of Europe's largest media conglomerate by sales attaches to the Chinese market. He predicts that China will soon become the world's second-largest media market after the United States.

Rabe's commitment to growth in China was reinforced in October when more than 100 of Bertelsmann's top executives, including the entire executive board and group management committee, gathered in Beijing for the company's first management meeting outside Germany.

"As the second-largest economy in the world, China is a very attractive market for us," Rabe says.

The CEO says Bertelsmann sees China as one of the most important growth regions and will play a key role in its global expansion plans, particularly at a time of slowing growth in Europe and the US, where the company still reaps the vast majority of its revenue.

According to a market survey released in May by the School of Journalism and Communication at Tsinghua University and the Social Sciences Academic Press, the output value of China's media industry reached 637.9 billion yuan ($102 billion; 77.4 billion euros) in 2011, up 15.2 percent on the previous year. Of this, 42 percent was contributed by Internet-related business.

The survey also predicted that China's media industry will continue to boom and is expected to become a pillar of the country's economy in the next five years, with more capital flowing.

"The eurozone debt crisis has clearly had an impact on the macroeconomic environment, which led to a direct impact on Bertelsmann's business," Rabe says.

"To fuel growth, we are looking to expand business in regions of sustainable high growth."

The group plans to increase its presence in China to consolidate its media empire, which will in return help Bertelsmann to reshape into a more international and digitally leading company over the next five to 10 years.

China is not new ground for Bertelsmann. The company started its business in China in 1992 with call centers and logistics services, becoming one of the first Western media companies to operate in China.

Five years later, it brought its book club system to the nation, offering readers membership discounts and selling books through catalogs, bookstores and online stores. This proved popular among white-collar employees and young people but lost its appeal and declined when online bookstores began to boom in China in 2006.

In 2008, Bertelsmann closed all of its 36 bookstores in 18 cities across China.

In the first half of this year, Chinese operations accounted for only 2 percent of Bertelsmann's total reported revenue of 7.6 billion euros ($9.7 billion).

Rabe says although China currently contributes little to overall revenue, its business in the nation is expected to significantly increase over the next decade.

"Bertelsmann is benefiting from China's emerging urban middle class, with its high purchasing power and affinity for all things digital," Rabe adds. "We are ready for more significant investments to work with local partners, to increase our market share in China."

As a sign of its long-term commitment to the China market, Bertelsmann established Beijing Bertelsmann China Corporate Center in 2006. It was the first of the company's three global centers set up in emerging markets.

"The center in Beijing is a role model for what we implemented in India and Brazil," Rabe says, adding that with more than 20 years of experience in China, it has more advantages than competitors in exploring strategies for business creation and expansion.

Bertelsmann employs more than 4,600 people in the media and service sectors in China and the number is growing.

The company plans to boost its presence in China via investments in new media, education and business process outsourcing through its investment arm, Bertelsmann Asia Investments.

"The media sector is seeing double-digit growth, and the environment for foreign investment has improved in China in recent years. This is especially true in the sectors of digital media and education."

The investment fund was established in 2008 in Beijing with 100 million euros. It has so far acquired direct or indirect shareholdings in 16 Chinese media companies with a focus on niche business fields, including digital publishing, social media platforms, e-commerce solutions and online education.

Three of those investments, involving China Distance Education Holdings Ltd, Phoenix New Media Ltd and Bitauto Holdings Ltd, have already been listed on the New York Stock Exchange.

"The Internet, mobile services, e-commerce, online advertising and gaming are experiencing a real boom in China," says Annabelle Yu Long, head of Bertelsmann Asia Investments.

She says the fund was started as an experiment to understand the Chinese market via investing in startups in sectors that are relevant to Bertelsmann's core businesses.

However, some industry experts suggest Bertelsmann should be cautious due to the nature of the country's publishing industry.

"China's current book publishing market is not standardized and still suffers from rampant piracy," says Cao Yuanyong, an associate editor of Shanghai Literature and Art Publishing Group. "So the business prospects of a foreign investor in China can either be rosy or sour. It totally depends on its knowledge of the local market and whether it knows how to establish good relationships with local content providers to cater to local readers' tastes."

Others believe this is the right time for foreign investors to tap China's huge media market.

"Because China's e-book market is still in the early stage of development, there has been no market leader so far, so Bertelsmann will not face strong local competitors," says Yu Dianli, general manager of Commercial Press.

For Rabe, a constant review of the past is also very necessary. He admits Bertelsmann made a few mistakes in China either in market strategy or business models over the past 20 years. To make improvements by learning from mistakes is vital to ensure Bertelsmann's success in China, he says.

"One mistake in the past is we did not make products that were sufficiently adapted to market requirements, but we've corrected those mistakes and learned from those mistakes," he says.

Rabe says he will not underestimate the complexity of the Chinese market and will be committed to producing products more suited to the needs of the Chinese market.

"We transfer knowledge and expertise from Europe to China, but we don't think what works in the US or Europe will also work in China. That would be a mistake," he said.

To better understand the needs of target customers, Bertelsmann resorts to a very local approach in China by working exclusively with local management.

"We bring expertise, content and brands to China, but what we don't know is the local market. That's why we hire local people."

Bertelsmann also counts on the creativity and innovation of its Chinese employees and will invest heavily in creativity to maintain its market share, he adds.

Industry insiders say Bertelsmann is experiencing a digital revolution in the online age and needs to accelerate the transformation of its media businesses from physical to electronic.

Rabe says he is confident about getting results in China because usage of the Internet and other digital devices is not only more advanced than in Europe, but also the Chinese government is now encouraging the development of the digital industry.

liulu@chinadaily.com.cn

(China Daily 12/28/2012 page22)