International advertising companies would do well to learn from their Chinese counterparts

Publicis, the second-largest advertising firm in the world, recently completed the purchase of its fourth Chinese advertising firm this year. Why the sudden uptake in foreign agencies acquiring local firms?

Firstly, this is not a new phenomenon, and it is one that raises a number of questions. International advertising agencies are constantly expanding their global networks by acquiring local companies. They had merely been slowed by the current recession, and are buying again now that advertising is recovering around the world, partly spurred by this year's Olympic Games.

Although overall economic growth has slowed in China it is still well ahead of most of the rest of the world. Future growth in China will increasingly come from rising consumption, in which increased advertising spending will play a major role, especially in the growing middle class. China is looking to double the GDP contribution from creative industries in the following five years.

In terms of supply, more Chinese agencies are now reaching a minimum critical mass of billings and are available for acquisition. Barriers to entry are low, so it is a very fragmented industry with lots of players coming and going.

The contest between the global leaders — WPP, Publicis and Omnicom — is now also being played out in China. WPP's relative market share in China is way ahead of its global average. Its Chinese clients include many red chips such as China Mobile, Haier, Huawei, and Tencent. Publicis is now running hard to catch up. The back story is that Publicis has had substantial issues with their business in China. In their Q3 2009 analyst call Maurice Levy, chief executive officer of Publicis, admitted "We will never be as big as WPP in China due to the size of their operations".

This led to significant pressure from shareholders over their China strategy and in 2010 Publicis announced a strategy to double their revenue from 200 million euros ($256 million) to 400 million euros in three years. Given their 2011 organic growth rate in China was 8.5 percent this would have to be done via acquisitions.

How has the advertising landscape changed for advertising firms working in China over the past five years? More Chinese brands are expanding regionally and in some cases nationally, so they need international firms that have more resources and expertise. More sophisticated Chinese companies expanding out of China link up with international agencies as a prelude to their overseas expansion.

Do foreign advertisers have an advantage or disadvantage when competing with Chinese firms? This is the same question that faces any type of foreign company. In the case of advertising, foreign agencies have a huge relationship and experience advantage in servicing the local subsidiaries of their existing multinational clients. Most multinationals want to globally coordinate advertising around the world even if the content is quite local. Also, foreign agencies can easily hire local creative talent who can understand the Chinese market just as well as those who work for Chinese agencies.

What advantages do Chinese firms have over their foreign rivals? Probably the only advantage is their greater knowledge of how to service Chinese clients. Personal relations can be important in local agencies getting and retaining business from clients. As foreign agencies expand to serve Chinese companies they will have to develop this kind of expertise.

What are the primary issues and challenges currently facing foreign advertisers in the Chinese market? Chinese customers still love foreign brands despite the rise of Chinese brands. As usual, foreign advertisers have to learn what adaptations are needed for the Chinese market. A general rule is to be more specific and less subtle in advertising messages. This is a less experienced and sophisticated audience.

The author is a professor of management and co-director of the China Innovation Center at China Europe International Business School, based in Shanghai.