The World: China opens doors to foreign agency start-ups

campaignlive.co.uk, Friday, 29 October 2004 12:00AM

Under the CEPA agreement, agencies no longer need a local partner to launch on the Chinese mainland, Lucy Aitken says.

China's triple whammy - more than one billion consumers, an expanding middle class and mounting macroeconomic muscle - is an irresistible draw for agencies. The Chinese ad market is predicted to grow by 15 per cent by the end of 2004 to become the third largest in the world after the US and Japan. According to Initiative, its media spend will be $22.7 billion, eclipsing that of Europe's biggest economy, Germany, for the first time.

During the next four decades, China will overtake Japan and, eventually, even the US.

Now, agencies that have been registered for some time in Hong Kong can launch in mainland China without a local partner, thanks to the Closer Economic Partnership Arrangement.

DDB and Rapp Collins, its sister direct marketing network, are taking advantage of CEPA. They are waiting for the city government in Shanghai to rubber-stamp a licence and they plan to open in 2005.

DDB is already established in China, with clients such as Dragon Air, Qiuzhi 360 deg Classified Post and Remy Martin. But while its Beijing and Guangzhou offices are joint-venture operations, it hopes its Shanghai office, which has been run out of Beijing, will become a much bigger, wholly owned entity.

So now that it's possible to enter the Chinese market without a local partner, will CEPA open the floodgates? Aaron Lau, the chairman and chief executive of DDB Asia, thinks that it will. "I would imagine lots of other agencies will follow our example," he says.

"The key objective of setting up our own agency is retaining operational control. In a fast-growing market such as China, if anyone could be 100 per cent wholly owned, everyone would go that way," Lau argues.

Tom Doctoroff, J. Walter Thompson's North-East Asia area director and chief executive of Greater China, thinks CEPA opens new avenues. "CEPA means JWT can set up a conflict agency and bill through that name, while having back-office and administrative functions consolidated within the core agency. With World Trade Organisation deregulation, it will be possible for more agencies to go it alone or at least have a clear majority share," he says.

WTO liberalisation has opened up options for agencies. This year, they were entitled to boost investment in their Chinese operations from 49 per cent to 70 per cent and, by the end of 2005, they will be able to own 100 per cent.

Not all agencies feel constricted by their joint ventures. Doctoroff thinks JWT will maintain its existing 80:20 joint-venture arrangement for its main China office. This sentiment is echoed by David Liu, the chief executive of Aegis in Asia-Pacific. Aegis' main media network, Carat, opened in China four years ago under a co-operative joint venture: Carat is a wholly owned subsidiary, but it remunerates its partner for its assistance with local issues. Liu says: "You need licences in every Chinese city where you operate and we have seven offices in China, so it takes time. We have a fantastic partner that helps us a lot."

However, Nick Debnam, a partner at KPMG in charge of consumer markets, Asia-Pacific, says the sun is setting on Chinese joint ventures. "Recently, we conducted a survey on companies in China and people are preferring to move out of joint ventures. There are a lot of good people in China and it is much easier for multinationals to do it themselves," he says.

China's workforce is highly skilled, but finding people with creative and planning skills remains difficult for agencies. Lau laments: "The smart, experienced people have probably established their own agencies or consultancies."

China has a staggering 60,000 home-grown agencies (although "ad agency" covers related activities such as printing and media) and competition for good people is intense. Networks have access to global talent, but the importance of personal relationships in China means Chinese talent is likely to win local business. Local business is a major prize for networks, as Chinese brands - the biggest spenders - tend to be serviced by local shops.

Richard Hsu, the executive vice-president of Wieden & Kennedy China, hopes the arrival of international players in China will raise the country's creative standards as well as improve its media.

Yet woe betide agencies that are eyeing up China's potential without considering the intricacies of its culture. Hsu warns: "Chinese clients have always been the hardest nuts to crack: you have to be as smart and streetwise as they are."

This article was first published on campaignlive.co.uk

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