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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