The World: WPP's Chinese partner elopes with Omnicom

Following a row with Sir Martin Sorrell, Citic Guoan's Yan Gang has switched his agency's allegiance.

In one of the most bitter salvos from a corporate executive in recent years, Yan Gang, the chairman of the Chinese advertising agency Citic Guoan, said of Sir Martin Sorrell earlier this month: "(He) had absolutely no manners, no upbringing and no culture."

Yan was talking to journalists assembled in Beijing for the announcement that Citic Guoan would be ending its 14-year partnership with Grey. When Sorrell's WPP acquired Grey Global Group last year, it inherited the joint venture between Grey and Citic Guoan. Just 15 months later, the Chinese agency has decided to build a future with WPP's rival Omnicom as its strategic partner.

The deal - a real coup for Omnicom - will see DDB China and Citic's Beijing Guoan Advertising merge to form DDB Guoan Communications Beijing, with Yan named the chairman of the new advertising agency.

As part of the huge conglomerate China Citic Group, which had total assets worth £60 billion in 2004, DDB China will double in size overnight, according to Omnicom sources. It will gain a valuable strategic partnership with one of the most influential business entities in a market that both Omnicom and WPP see as being of key importance.

Questions hover over why Yan and WPP split, particularly as Yan continues to allude to wrongdoing by WPP. A WPP spokesman says issues between Sorrell and Yan came to the surface in March this year when the two met in London. A disagreement between the two parties led to calls for an audit, with Yan pushing for a local Chinese company to undertake the exercise. WPP, however, insisted on appointing internationally recognised auditors from Ernst & Young.

WPP says the audit revealed that allegations made by Yan are unfounded.

Nonetheless, Yan continues to make disparaging remarks about WPP and its chief executive in the media, while Sorrell refuses to comment.

A WPP spokesman says: "The allegations made by Yan are completely without foundation."

The new strategic partnership offers much for both DDB and Yan to look forward to. Beijing Citic Guoan Advertising's clients include big Chinese brands such as China First Auto Works, China Unicom and Citic Bank, and the potential is there for DDB to gain access to other Citic-owned entities. DDB brings the global brands Philips, Johnson & Johnson and PepsiCo to the deal. Trading started on 1 July and Omnicom claims the new agency automatically ranks among the top ten in China, based on revenue.

Yan claims WPP has not only lost a valuable partner but now faces an uncertain future in China. But has WPP really lost so much? Exact figures on Citic Guoan's revenues are hard to come by, but it is understood the company accounted for only around 1 per cent of WPP's revenues in the region. Yan denies this, but does not offer an alternative figure.

And although he claims WPP will face hurdles doing business in China if outstanding issues are not resolved to his satisfaction, WPP is understood to have good government relationships in the country it has tried for so long to build into a strategic powerhouse.

Although the loss of Citic Guoan to its main rival will be a setback to WPP's developmental ambitions in China, the holding company is expected to recover and survive in the region, according to sources.

What may have suffered more than anything else during the spat, according to observers of China's ad industry, is the strategic partnership model.The tensions that built up between WPP and Citic Guoan have fuelled the debate about whether foreign companies should pursue the joint-venture route in China, or go it alone by establishing wholly owned operations.

One industry executive says: "Partnerships in China can be a minefield. On the one hand, foreign companies gain access to local knowledge and contacts. On the other, there are so many accommodations to be made on both sides for the different ways of working. It is definitely not the only model for foreign companies to consider."

This is a particularly important question for both Omnicom and WPP, whose strategies include China as a key market.

Michael Birkin, Omnicom's vice-chairman and Asia-Pacific chairman and chief executive, says Omnicom has always pursued the local partnership strategy and will continue to do so.

"Our view is that if we don't have strong local agency partners - and this applies anywhere in the world - it is going to be limiting," he says.

"We're convinced that having strong local partners in China makes for an incredibly powerful combination. Thinking China could be carved up by a handful of companies that are not based there, without local partners, is insane.

"Some multinational companies in China are doing great without local partners, but they're only scratching the surface. We're talking about a very long-term marketplace still in the very early stages. Without local partnerships it would be very limiting," he adds.

One of the biggest differences between Citic's arrangement with DDB and that with its former partner Grey is the fact that DDB will merge fully with Citic Guoan.

Serge Dumont, the senior vice-president and Asia-Pacific president of Omnicom Group, says: "This joint venture is an entirely different animal. With WPP, Citic Guoan was not so involved. It was a minority investor with no management input. Here, it is a joint company with joint account teams that will actually merge."

If nothing else, the episode serves as a reminder of the delicate balance required to operate joint ventures when companies merge or are acquired.

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