Foreigners encircle China's ad
market By David Pan
GUANGZHOU - China's domestic advertising
companies face an unprecedented foreign invasion,
and increasingly local firms are fighting a losing
battle for market share.
As required by
World Trade Organization regulations, last
December China took the final steps towards fully
opening its advertising market to foreign
competition by allowing wholly foreign-owned
advertising firms. In just six short months,
domestic advertisers say they already sense an
impending crisis.
"It is likely that in
three years the survival space for our home
advertising enterprises will diminish," said Chen
Yong, publisher
of
the Beijing-based Modern Advertising magazine, an
official publication of the China Advertising
Association, as quoted by the China Economic
Times.
Foreign advertisers have
understandably been attracted by the huge business
potential of China's fast growing market. China's
advertising market, nearly non-existent during the
early stages of market reform in the 1980s, grew
at an average annual rate of around 90% throughout
the 1990s. More recently that growth trend has
moderated, but the market is still growing around
20% per year, according to industry statistics.
And experts say there is still plenty of room for
the market to grow as economic activity picks up
in provinces outside the eastern coastal areas.
The advertising industry's turnover
currently accounts for less than 1% of China's
gross domestic product (GDP) - way below more
developed economies' averages. That low percentage
has sparked big new foreign advertiser interest.
Even before last year's full market
liberalization, foreign firms had found back-door
ways to do business in the country in spite of
government restrictions.
In 1979, the
French Publicis Group was the first foreign
advertising group to set up shop in China. As the
government toughened limitations on certain types
of foreign investment in the 1980s and early
1990s, there were veritably no new foreign
entrants in China's advertising market. According
to a recent market study, the top five advertisers
measured by business turnover in the early 1990s
were all domestic companies.
Expanding presence By
1996, foreign advertising firms occupied the
market's top five positions, with only two
domestic Chinese advertisers ranking among the top
10. Since then, multinational advertising giants
have greatly expanded their China-based
operations. After fully liberalizing the market
last year, big multinational advertising firms,
many with large stores of capital, have
strengthened and expanded their market positions
through mergers and acquisitions with big local
advertising companies.
Through May,
official statistics show that the world's top five
multinational advertising firms have formed 38
different joint ventures with local advertising
firms. Of those strategic tie-ups, around half
were concluded by the giant UK-based WPP Group,
followed closely by the world's largest
advertising company, the US-based Omnicom Group,
as well as the US's IPG Group and France's
Publicis Group.
According to 2005 market
research, foreign advertising firms now virtually
monopolize advertising business for major
international companies operating in China. Now,
big up-and-coming local Chinese companies are also
starting to dole out more of their ad-spend
budgets to foreign-owned firms.
The
surviving domestic firms, it seems, are staying
afloat by picking up less lucrative contracts.
According to official statistics, there were
76,210 registered advertising companies throughout
the country in 2004, which employed more than
600,000 workers. Of those, foreign invested firms
represented less than 0.4% of the total. Foreign
advertising firms, meanwhile, represented 21% of
total industry turnover in 2004, and industry
analysts estimate that percentage has since grown.
In terms of efficiency and profitability,
the same study estimated that average business
turnover per company and business turnover per
capita ratios of foreign advertising firms in
China were respectively 52 times and 24 times
higher than domestic firms. Even compared to the
figures of China's most competitive state-owned
advertising companies, per company turnover and
per capita turnover ratios of foreign firms were
respectively 13.4 times and 4.96 times higher.
And as China's economy expands, foreigners
are expected to grab an ever increasingly share of
the market. In 2005, turnover for the US
advertising industry was US$277 billion; by
comparison, the Chinese advertising market's total
turnover was just 140 billion yuan over that same
period. While there's obviously plenty of room for
growth, many local Chinese advertising firms will
find it increasingly difficult to hold their own
faced with the intensifying foreign competition.
David Pan is a Guangzhou-based
freelance writer.
(Copyright 2006 Asia
Times Online Ltd. All rights reserved. Please
contact us about sales, syndication and republishing
.)
