The World: Can UK producers solve the Shanghai puzzle?

The location for an Advertising Producers Association forum this month is a contradiction for ad people. John Tylee reports.

Shanghai, visited last week by fact-finding leaders of the UK's commercials production industry, is a Chinese puzzle on a large scale. Once synonymous with opium-fuelled decadence, it has morphed into a steel and glass totem of the country's economic awakening.

Whether or not it is an awakening from which the UK's production and post-production houses will be allowed to profit is an open question. In Shanghai, as in China at large, the pace of change is as fast as it is unpredictable.

Delegates to a forum organised by the Advertising Producers Association couldn't help noticing the manifestations of the transformation the moment they arrived at the city's Pu Dong airport.

Where only rice fields existed ten years ago, cabs now speed visitors along a four-lane highway past 100-storey apartment buildings sprouting like giant bamboo shoots and helping house a population of more than 20 million citizens.

Their destination: a bustling metropolis with a skyline to rival Manhattan's. As Dave Waters, the Freud Communications creative director, remarked, the place looks like the set of Blade Runner.

Nowhere is the contradiction of modern China more apparent than in Shanghai. Designer shops reflect a national adspend that has jumped from $4.7 billion to $14.2 billion in seven years, making it the world's third-largest ad market. And yet such symbols of conspicuous consumption do business cheek-by-jowl with Third World-type poverty and ways of life that have not changed in hundreds of years.

Carol Potter, the BBDO China chief executive, has become accustomed to the street on which she lives being visited by a cheerful man on a bike carrying a basket of quacking ducks. Select the one you would like for dinner and he will happily slit its throat and drain the blood into the bucket hanging from his handlebars.

The story only provides added evidence (were any needed) of the complex and enigmatic market in which Britain's commercials producers are now seeking to make their mark. They are doing so because of the need for new revenue streams brought about by the intensely competitive and oversupplied British market, where margins are relentlessly driven down and too many directors chase too few jobs.

But how hard will it be for them to capitalise on a 1.3 billion-strong market that Norman Tan, the Bates Asia executive creative director, calls "advertising's new frontier"?

The good news is that while TV loses its allure among advertisers in developed markets, in China the reverse is true. "There's a lot of hype about new media," Scott Spirit, the WPP China strategy director, says. "But TV is the reality here." Not only does the medium account for 71 per cent of total adspend (compared with 28 per cent in the UK), it also delivers audiences on a gigantic scale. An estimated 400 million people watched the last series of Supergirl, Chinese television's version of American Idol.

Consequently, the TV output from China's major agencies is prolific. Ogilvy, the country's largest shop, has produced 47 spots for KFC alone over the past year. But while Ogilvy this month became the first Chinese agency to figure in The Gunn Report, Kitty Lun, the Lowe China chief executive, admits: "Our quality isn't close to anything we see in the UK."

However, behind the smile and the courteous reception afforded the APA delegates as they toured Shanghai's agencies, the message from the locals was brutally clear.Their view is that working with UK production companies is almost impossible because client budgets are too low and UK production fees too high. In fact, agencies in China are unlikely to look beyond Hong Kong or Australia (both of which are trying to muscle in on the Chinese TV ad market) for their post-production needs.

"There's a big difference between what clients want to do and what they have to spend," Ben Zhang, the managing director of the Shanghai-based production house Gwanoti, says.

The big question is whether the lowering of production fees by UK companies, and the raising of budgets by Chinese clients, will mean it makes sense for some commercials producers to establish Chinese outposts. "Yes, it's time to come," Yang Yeo, the chief creative officer at JWT Shanghai, advises. "But you must approach with a lot of caution."

Sheung Yan Lo, the JWT North East Asia executive creative director, agrees. But he warns: "Managing your expectations is very important."

Arriving from a commercial environment where transparency rules, into one where corruption is endemic, can be difficult. Local production companies grease agency palms and agencies pay kickbacks to clients. The extent of the bribery is impossible to know, and what some regard as corruption, others call pragmatism.

As one commercials producer puts it: "What's the point of going through the bureaucratic nightmare of getting official permission for a road to be closed for a shoot when you can slip the local policeman a few yuan to close it for you."

At the same time, government censorship is a constant irritant. "It's a reality here," Johnny Tan, the creative chief at Bartle Bogle Hegarty's newly opened Shanghai operation, says. "We always have to bear it in mind."

What's more, decisions can be inconsistent or downright perverse. Yan Lo was not allowed to run a commercial for a fast-food chain featuring a boy addressing his classmates while standing on a desk. But he was given the go-ahead for a soft-drink spot showing a woman and a window cleaner despite its heavy sexual innuendo. The censor okayed it because the ad was "glorifying the labourer".

If censors are not making ad people's lives a misery, there are plenty of clients to do so. Senior agency managers curse their constant mind-changing and obsession with research that means meetings with agencies can last for up to eight hours. Lun claims it is not unusual for her agency to be given just four weeks to complete a major production. Indeed, Potter complains: "Some clients will make demands that leave you speechless."

Many of the problems are blamed on the Cultural Revolution, which meant the country never trained the new generation of business managers now vital to it.

"Advertising is an industry run by kids," Chien Huang, the executive creative director of TBWA\Beijing, says. "There's a real talent shortage - and it isn't just in agencies. Clients, too, are young and inexperienced and want agencies to help them sell to make them look good."

Now, Britain's commercials makers must decide whether long-term benefits outweigh the short-term risks of setting up in China, assuming they can find the right local partner. Although the country's tax laws make it hard to get money out, employment costs are low and ad budgets will rise as the market matures.

There may also be money to be made as China's brands begin to globalise. Jonathan Chajet, the Asia-Pacific strategy director at the Omnicom-owned brand consultancy Interbrand, identifies five Chinese corporations poised to break out of the domestic market, just as Japan's Sony and South Korea's Samsung did before them.

Lenovo, the PC manufacturer, Haier, the white goods producer, Chery, the small-car maker, Tsingtao, the brewer, and Huawei, the hi-tech specialist, are all said to be re-investing profits made as low-cost manufacturers to try to become credible world players.

Meanwhile, Yan Lo offers a blunt piece of advice to commercials producers thinking of renting office space in one of Shanghai's 12,000 skyscrapers. "What you must ask yourselves," he says, "is whether you think you can take all the shit?"