24 June 2015
Advertising on the Chinese Mainland: Hong Kong Opportunities
Hong Kong marketers are in an ideal position to tap into the mainland’s advertising, the second largest such market in the world.
- Chart: Adspend growth slows down amid softer economic growth
- Table: Adspend growth in China (2014)
- Chart: Market share of traditional and new mediums on the Chinese mainland
- Chart: World’s top ten advertising markets (2014)
- Photo: A mall promotion event at K11, Shanghai.
- Photo: A mall event in Shanghai attracts a flock of people.
- Photo: JCDecaux, a world leading media agency, has considerable market share in Shanghai.
- Photo: Many media and advertising companies are located in a creative industrial park in Shanghai.
China, the world’s factory that has now also emerged as its second largest economy, representing a huge consumer market for both local and foreign sellers. As domestic consumption in China continues to expand alongside the general economy, the derived demand for advertising services has also increased in recent years. With Hong Kong being a long-time and effective gateway to the Chinese mainland, advertising service suppliers or marketers in the city remain well positioned to access the much larger mainland market.
Growth Slows Down but Market Scale Is Significant
After years of impressive growth, China’s economic growth has gradually slowed in recent years. However, it still outpaces most other countries, with its GDP expanding 7.4% in 2014, although the Chinese government is forecasting GDP growth to slow to 7% in 2015.
Essentially, the demand for advertising services is closely related to the business activities of the general economy. As a result, the expansion of China’s advertising market is slowing down alongside the country’s sluggish GDP growth. According to data compiled by CTR Media Intelligence, the advertising spending (adspend) in China showed a marginal growth of 2.2% in 2014, down from 6.4% in 2013. However, the Chinese government’s continued emphasis on boosting domestic consumption and the need for economic rebalancing bodes well for future growth of the advertising market. We can expect to see more pro-growth policies and economic initiatives in the foreseeable future.
It is also worth noting that slower growth in overall adspend is largely due to the sluggishness, and even contraction, in adspend on many traditional advertising mediums, such as television, newspapers and magazines. In contrast, new mediums, including office and commercial building TV and the internet, continue to show robust growth. As a sub-segment of digital advertising, mobile advertising has also been expanding rapidly. According to eMarketer’s estimates, adspend on mobile advertising in China skyrocketed by about 600% in 2014, reaching a total of about US$6.4 billion. This shift from traditional to digital mediums is consistent with the global trend (please read Hong Kong’s Advertising Industry: Digital Evolution). Therefore, Hong Kong marketers are advised to look at these growing areas when considering entering the mainland market.
Despite slower adspend growth, China has overtaken Japan to become the world’s second largest advertising market. According to ZenithOptimedia, a division of Publicis, one of the world’s leading media agencies, total adspend in China was estimated at US$45.4 billion in 2014, ahead of Japan’s US$45 billion and trailing only the US. Put together with the mainland’s large consumer market, this demonstrates considerable opportunities for Hong Kong marketers.
Hong Kong Advertising Companies: Opportunities and Perceived Strengths
In light of the huge advertising market on the Chinese mainland, a number of multinational agencies, such as Ogilvy & Mather and J. Walter Thompson, have set up there, with many of these offices initially being offshoots of Hong Kong operations. The increased presence of foreign advertising agencies has occurred against a background in which more and more Chinese advertising companies have emerged on the mainland market. Despite fierce competition, there is still room for Hong Kong’s advertising SMEs to join the fray. They can attempt to secure a slice of the world’s second largest market through by precise market segmentation and services differentiation. A recent HKTDC field trip to Guangzhou and Shanghai set out to identify the business opportunities, as well as the challenges, for Hong Kong marketers.
Evidently, international consumer brands, such as Procter & Gamble (P&G) usually have designated multinational agency partners to oversee brand development and strategic planning when entering different markets, including China. These consumer product brands have become popular household names on the mainland, and the brand owners tend to deploy more resources for brand management and the staging of frequent, small-scale local campaigns. These localised campaigns provide business opportunities for SME marketers in the downstream segments of the advertising and marketing value chain. For example, the Guangzhou branch of a Hong Kong marketer now handles, specifically, the colour management of advertisements in the print medium for world-renowned French jewellery brand Cartier.
Another observation relating to business opportunities for SME marketers concerns the transition or industrial upgrade confronting many consumer product manufacturers in light of China’s increasingly sluggish export markets and economic rebalancing. The Pearl River Delta (PRD) is a good example. An increasing number of manufacturers, whether indigenous or from Hong Kong, have set out to transform their OEM businesses by establishing their own brands, eyeing the huge potential of the mainland consumer market.
Admittedly, many of these manufacturers have hardly any experience in brand building and their allocated budget on branding and marketing is comparatively small, particularly at the outset. In turn, they tend to approach SME marketers who can flexibly provide them with services at relatively lower cost. Meanwhile, local marketers on the Chinese mainland have become quite sophisticated, although many mainland companies still acknowledge the strengths of Hong Kong marketers relative to their mainland counterparts, particularly in the areas of design, art and creative production. In addition, Hong Kong advertising employees are highly regarded for their attention to detail, as highlighted by a mainland manager during an HKTDC interview in Guangzhou.
Practical Issues to Note
Advertising is a sector that has long been opened up under CEPA. Few restrictions are applied to the commercial presence of Hong Kong service suppliers operating on the mainland. Over the years, a number of Hong Kong advertising agencies, including some SME marketers, have been doing business on the mainland. In addition, many Hong Kong advertising professionals have established themselves in the mainland market.
Liberalisation Measures under CEPA
The CEPA sector of advertising services was first opened up to Hong Kong services suppliers (HKSS) in 2004 with no Supplement measures being added since CEPA’s inception. HKSS are allowed to form wholly owned operations on the mainland in order to provide advertising services. Their application and operational requirements, however, are subject to the mainland regulations governing foreign-invested advertising agencies, with no other positively listed Supplement proviso suggesting otherwise. Nonetheless, Hong Kong advertising agencies have been keen to access the mainland market, and this is reflected in the HKSS rankings over the years. As of May 2015, a total of 139 HKSS certificates had been issued with regard to the advertising services sector. This made it the fifth largest group of HKSS certificate recipients.
In the negative list of the Guangdong Agreement, HKSS are granted a status of national treatment when operating advertising agencies in Guangdong. This means they have been given even greater operational flexibility compared to foreign services suppliers, which are subject to mainland regulations such as “The Provisions on the Administration of Foreign-funded Advertising Enterprise” issued by the State Administration for Industry and Commerce (SAIC).
To gain a better understanding of the business environment of the mainland advertising industry, and to identify relevant practical issues, HKTDC Research conducted a focus group with several Hong Kong advertising and marketing veterans in Shanghai. We also held a series of meetings with both local and Hong Kong marketers based in Shanghai and Guangzhou.
First of all, there appears to be a near consensus that Hong Kong marketers should aim at “talking to the boss” – obtaining and cultivating direct relationships with the senior management of the prospective client or advertiser. Getting in touch with the advertisers is often the beginning of business engagement, with earning the trust of senior staff remaining a major hurdle for Hong Kong SME marketers. To overcome this problem, it is advised that such companies take advantage of a variety of different networking opportunities on the Chinese mainland. This could be achieved, for example, by participating in activities organised by business chambers and industry associations. In Guangzhou, a number of advertising companies organise regular breakfast meetings in order to exchange industry information and explore the possibility of business collaboration among members.
Another key issue lies in the varied expectations, if not cultural differences, between mainland clients and Hong Kong marketers. Many mainland companies, in particular those brand aspirants who have been doing solely OEM business, with hardly any marketing or brand building experience, are initially very cautious about spending on branding and advertising. They are quite mindful of the effectiveness of the advertising and branding exercise on sales performance, even if they may agree on the need for building brands as the way forward for their companies. In such cases, it may take a long time for marketers to communicate with and educate them as to the value of branding and advertising services. According to one Hong Kong marketer working on the Chinese mainland, pre-sale consultancy and communication with this kind of client usually absorbs a considerable amount of the agency’s project resources. It would, therefore, be a waste of resources deployment if clients do not end up accepting the proposed advertising project.
Unlike many well-established international brands, these clients usually do not have a designated department or staff member specialising in branding and marketing. This makes communication between marketers and clients more difficult. To be mutually beneficial, Hong Kong marketers should advise clients on the need to set up a marketing or branding department in the first instance.
Hong Kong advertising and marketing veterans say it is crucial for SMEs new to the mainland’s advertising sector to strengthen their understanding of the local market and consumer culture. A case in point is the differences in Christmas decorations and related advertisements between the mainland and Hong Kong. Those on the mainland are displayed in warm colours, rather than the cool colours seen in Hong Kong. To better gain local market knowledge, Hong Kong advertising professionals have to stay on the mainland for a sufficient length of time and immerse themselves in the local consumer culture. To augment the ability of Hong Kong marketers to satisfy local demand, a practical way to overcome a lack of cultural understanding is to either hire local employees or partner with local advertising agencies.
It should be noted that mainland advertisers, brand aspirants or start-ups have their sights trained squarely on the local market for the time being. There is little interest in expanding overseas, as revealed during meetings with marketers on the mainland and in Hong Kong. In other words, Hong Kong advertising agencies need to be responsive to the shifting trends in consumption on the mainland, as well as to the preferences of mainland consumers.