World ad giants pressured to shape up By Zhang Jin (China Daily) Updated: 2004-04-14 10:01
China, Asia's second-largest advertising market after Japan, is expected to
attract an increasing number of international players in the coming years, as a
result of recent landmark regulations in line with China's World Trade
Organization (WTO) pledges.
As of March 2, foreign advertising agencies have been allowed to hold
majority shares in joint ventures (JVs) according to a set of regulations
jointly issued by the State Administration for Commerce and Industry and the
Ministry of Commerce.
Experts say the move will help fuel the development of the nation's fledgling
and promising sector, and that domestic players can also benefit from the coming
fiercer competition.
The share ceiling for foreign parties in a joint venture is increased from 49
per cent to 70 per cent.
Hong Kong and Macao adverting agencies come out ahead, as they have been
allowed to set up wholly owned advertising agencies on the mainland since
January 1, 2004 under the Closer Economic Partnership Arrangement (CEPA) signed
between the mainland and the two special administrative regions.
The new regulations also say foreign investors will be permitted to establish
wholly owned advertising companies after December 10, 2005, four years after
China joined the world trade body.
The deregulation is hailed by foreign players, who have long been looking to
make a larger foray into the nation's lucrative advertising market.
The market, which expanded by 40 per cent on a yearly basis in the past two
decades, saw total expenditures of 107.8 billion yuan (US$13.04 billion) in
2003.
Aside from the country's robust economic growth, Chinese enterprises are
increasingly becoming aware that publicity will bolster the market.
According to an ACNielsen report, the top 10 advertising accounts were all
domestic brands in 1999.
"Inflows of overseas capital will ensue following the policy-loosening," said
Yu Guoming, a renowned expert on media studies.
"In fact, before the regulations were issued, some of the foreign advertising
agencies has already surpassed the 49 per cent ceiling in different ways," he
added.
"Since the green light has been given this time, they are able to do it
openly," he added.
A number of international advertising giants will take this chance to enter
the Chinese market as they are now allowed to form a JV in which they can have a
final say, Yu said.
Meanwhile some of the foreign advertising agencies that have already had a
presence in China are considering increasing investments.
US-based advertising agency TBWA Worldwide will increase holdings in its two
China operations.
Jean-Marie Dru, the agency's president and chief executive officer, said it
would increase its stake "step by step."
He added that TBWA, part of the giant Omnicom Group Inc, hopes to set up a
wholly owned business in China by 2005 when the country lifts all investment
restrictions on foreign advertising firms.
Currently, TBWA has two ventures in China, one in Shanghai and the other in
Beijing.
Overseas advertising firms will also penetrate into other parts of China.
At present, overseas-invested advertising agencies mainly operate in
first-tier cities such as Shanghai, Beijing and Guangzhou, where local firms
have had to become increasingly competitive to survive.
But the vast Chinese interior will also feel the pinch in the coming five
years, analysts said.
"The market opening will squeeze local players, medium- and small-sized ones
in particular," Yu said.
"Mergers and acquisitions are inevitable in the coming two to three years,"
he added.
And market observers also caution that a brain drain is very likely to take
place.
"This happens to many sectors when they are opened to foreign investors," Yu
said.
Shi Xuezhi, secretary-general of the China Advertising Association, believes
domestic players will not lose out if they properly make use and prepare for the
market opening.
"Chinese players have their own advantages," Shi said.
"Generally speaking, they are more familiar with the Chinese market and
usually have good relations with media and advertisers."
The looming large-scale foreign engagement is conducive to nurturing and
modernizing the fledgling sector, Shi said.
"Currently, Chinese advertising markets are relatively underdeveloped,
operate on a small scale, have low design capabilities and a small number of
products," said Yu.
Foreign giants could help local producers rectify this situation, Shi said.
"They are well-known for their advanced production and printing technologies
as well as their experience in international competition and sensitivity to
market changes," he added.
And some domestic firms are ready to embrace the foreign capital flow,
believing it will help them enhance overall performance and tap the
international market.
"We have good relations with media and advertising consumers," said Wu Huali,
a manager at a medium-sized advertising agency.
"But to be frank," he added, "our design and production are not
satisfactory."
The manager is willing to seek foreign partners, saying he does not care who
will hold the bigger share.
"The market opening is also a good chance for Chinese advertising agencies to
integrate themselves to the international market," said Yu.
"Foreign agencies will also bring some of their resources to China," he
added.
His view is supported by some agencies that have had ties with foreign
investors.
"We learned how to target our readers effectively, how to produce attractive
advertisements, how to organize team work and how to bring novel ideas," said
Huang Ying, director of a Beijing-based public relations agency.
"What Chinese players learn from their foreign partners paves the way for
their participating in the international market someday," Shi
said.
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