"It's like the Californian gold rush out here," says Simon Holt, the Hong Kong-based managing director of direct marketing agency Arc Worldwide. Arc is just one of several foreign direct marketing agencies jostling for position in the rapidly expanding Chinese market. In China, an early lead in a nascent industry could be turned into a significant foothold. Andrew Kefford, president Asia Pacific of Results International, a mergers and acquisitions consultancy, says foreign agencies will be fighting each other for an early vantage point. "Direct marketing remains under-developed in China," he says. "We can expect to see exponential growth over the next few years, and this will be primarily driven by the international advertising groups."
It helps to start with a splash, but in China, potential clients tend to have smaller budgets, so many foreign agencies start with a "foundation" multinational client. From this base, they expect to win significant amounts of business from larger, Chinese clients. But this is not always straightforward, since many smaller, local direct marketing companies operate from a lower cost base, allowing them to undercut their western rivals.
Cost is not the only obstacle. For the foreign agencies, it's a struggle to find local talent, too. Chris Reiterman, managing director of Ogilvy One, says: "Direct marketing is an almost entirely new concept in China. It's not taught in any of the universities, so we have to hire people who understand marketing and teach them the specifics of direct marketing. While we do that, we have to bring in most of our staff from outside of China."
Another major hurdle is that of data quality and postal reliability. While in the UK direct marketing agencies struggle to find accurate lists of potential customers, in China it is almost impossible. John Minnec, managing director and president of Draft Worldwide, says: "The average Chinese person receives only eight pieces of mail a year and many have no mailbox. On top of this, they tend to be wary of giving away address details. So, even though China Post is working hard to improve its reliability and provide commercial mailing lists, it really is very difficult." On the plus side, according to Kitty Yang, co-ordinator of the China Direct Marketing Association, response rates to direct marketing campaigns are usually two to three times higher in China than they are elsewhere.
Since 2003, the Chinese economy has grown at more than nine per cent a year. According to a study in 2005 by Credit Suisse, China will become the world's second largest consumer market by 2014 (see box, p37). A big growth area for direct marketing in China is digital media, such as the internet, SMS and podcasting. Four hundred million Chinese now own a mobile phone, more than in any other country. There are 110 million people online, making it the second largest online market in the world. E-commerce grew by 32.6 per cent in 2005 and experts expect it to continue to grow at a similar rate for at least the next three years.
But despite the healthy growth, some argue that there are too many legal obstacles to negotiate. Keywords for online searches can be censored, for example, and incentives, such as competition prizes, are strictly controlled. Foreign companies often use a Chinese joint-venture partner to minimise teething problems, but the enthusiasm with which the western agencies are flocking to China suggests that there is more than enough incentive to find a way around them.
Of the well established foreign agencies in China, Ogilvy One in China has three offices, 300 staff and a roster of clients that includes western brands such as Cisco Systems, Michelin and Audi, as well as Chinese companies such as China Mobile and Pingan, the country's largest insurer. One agency, Wunderman, has six offices servicing clients such as Ford. Arc Worldwide set up in China 18 months ago, and it now has five offices. Its Shanghai office has grown from zero to 35 people in just six months. In March this year, Carlson Marketing opened its Shanghai branch on the back of winning a six month contract to renovate China Southern Airlines's frequent flyer programme.
Each firm has its own particular strategy. Some are investing heavily now to reap future rewards. Others are more cautious. Mat Mildenhall, chief operating officer of Proximity Worldwide is not prepared to run his Chinese operations at a loss. He says: "We plan to build a steady sustainable business. It would be foolish to send a lot of people out there, just because everyone is so excited by the potential of the Chinese market."
The potential rewards are huge, but Daniel Morel, global chairman of Wunderman, counsels caution. "China is a long-term game," he says. "People think they can go out there and get rich quick, but it isn't the case. We're out there investing in training, paying people more than we would elsewhere, and getting to know the market. It will take us at least a decade to see the results of that investment, but we're pretty confident it will be worth it."
China: economic update
The country's future depends on economic reform, says Graeme Leach
The Chinese economy is full of contrasts and much depends on whether you view the glass as half full or half empty. China is currently the fourth largest economy in the world but it doesn't appear in the top 100 countries in terms of per capita GDP. Over the coming decades it is fair to assume that Chinese GDP will rise considerably. But for a more tangible picture of China's growing influence, it's worth looking at a sample of investment projects currently underway. These include 50,000 miles of three-lane motorways, 26 different underground railway systems, 30 nuclear power stations, plus plans for 40 airports to be either constructed or expanded over the next five years.
The Chinese economy should be expected to re-balance over the coming decade with a rising share of consumption and a declining share of investment in GDP. Investment accounted for around 50 per cent of GDP in 2005. This massive share is too high and results in a great deal of waste. More efficient investment by inward investors creates far more output from the same amount of investment.
Continuation of the current stellar 10 per cent per annum rates of GDP growth should not however be taken for granted. Considerable economic challenges remain: non-performing loans in the banking system, reform of state owned enterprises, future energy supply, rural-urban migration and inefficient investment. One recent estimate by Ernst & Young stated that non-performing loans in the Chinese financial system amounted to $911bn-more than five times the official government estimate. On the plus side, foreign banks are beginning to take the view that the potential growth in the Chinese financial system outweighs the risk of bad debt.
We think seven to nine per cent growth is more likely, but even at these high rates of growth, the government still fears rising unemployment from lay-offs in state owned enterprises (SOEs) and workers migrating from the countryside to the cities. Agriculture still accounts for half the workforce in China. Over recent years, 20-30 million workers have been laid off from SOEs in a wave of mergers, closures and privatisations. Despite this, 140,000 SOEs remain, employing some 40 million people. More than one-third of SOEs are making no return on investment and need to be closed down or sold-off. But when they have been shut down in the past, paying off workers has been a priority, thereby worsening the non-performing loans position of the banks (since half of all bank loans are to SOEs). Bankruptcy needs to become a bigger phenomenon and banks need to start behaving like banks and lend on commercial terms alone.
As China grows, social stability is becoming a concern. Official statistics indicate 87,000 incidents of unrest for the latest recorded year-many related to the sheer number of unemployed, 150m by some estimates.
The former leader of China, Deng Xiaoping, dismissed the problem of growing income inequality by stating that some people had to get rich first. But current leaders are not so complacent. A recent report found the ratio of average urban to rural incomes had reached 3:2-the worst divide in the history of modern China. One result of this has been vast migration to the urban areas. But the poverty gap remains, often visible alongside extreme affluence. In Dalian, we found a woman begging for money outside a shop selling Japanese designer golf clubs at £10,000 per set of irons and at least £1,000 per driver.
Economic progress, not political reform, is the priority. But, as per capita incomes rise from $1,700 to $7,000 or more, this is almost certain to change. History teaches us that economic liberalisation leads to greater political freedom.
Graeme Leach is chief economist for the IoD. For more information on the recent IoD fact-finding mission to China go to www.iod.com
China: need to know
•China is now the world's 4th largest economy and 3rd largest trading nation.
•The Chinese economy has more than doubled in size over the past decade and output has increased by a factor of nine since the reform process began in 1978.
•Over half of Chinese exports are produced by foreign investor companies and in the high tech sector the proportion is nearer 80%. The basic rate of corporate taxation for foreign companies in special zones is just 15%.
•China has almost 400 million mobile phone users and more than 110 million internet users. China graduates more than 800,000 students a year in engineering and science.
