The ad campaign left shoemaker Nike Inc. (NKE) flatfooted. The company's "Chamber of Fear" spot featured LeBron James of the NBA's Cleveland Cavaliers battling -- and defeating -- a computer-generated Kung Fu master. It might not have raised eyebrows elsewhere, but Chinese consumers found the concept insulting, and Beijing banned the ad last December.
The bad news for Nike, though, was great news for advertisers. The fact that the ad ignited a national debate highlighted the growing power of advertising in China. The industry has grown from virtually nothing in 1979, when the communist government lifted a ban on ads, to as much as $16 billion last year -- an increase of at least 20% over 2003, according to MindShare (WPPGY), a media buying company. By next year, China will be the third-largest ad market in the world, and the numbers are predicted to keep climbing as the nation gears up for the 2008 Beijing Olympics.
The potential has international ad agencies scrambling for position. Since the market opened 26 years ago, virtually every major industry player has set up shop in China. Until now they have been confined to operating joint ventures with local partners. That restriction, though, will be lifted at the end of this year under commitments China made when it joined the World Trade Organization. While some agencies have good relationships with their local partners and value the cultural background they provide, others feel constrained by the regulations. The rule change "will be liberating for a lot of [agencies] that have been boxed in with a bad or mediocre partner," says David Droga, global creative director for Publicis Group (PUB), the giant ad agency conglomerate.
International ad agencies control the biggest accounts, but there's plenty of local competition. The country has some 80,000 ad shops doing everything from designing fliers and renting space on local taxis to placing ads on the Internet -- and charging cutthroat prices for their services. The best of those agencies -- and myriad companies in other industries hungry for experienced marketing hands -- are also attracting many of the young Chinese execs that the global giants have schooled. "The biggest problem we have is finding more people to hire and keeping the ones we train," says Shelly Lazarus, chairman of New York-based Ogilvy & Mather Worldwide (WPPGY), which has 1,000 employees in four cities in China.
One challenge for global agencies is tailoring ads to the regional sensibilities of China's 1.3 billion citizens. As the divide between the rich coastal cities and the poorer interior grows, companies must make sure their messages fit the audience. "In Shanghai, where women are more cosmopolitan and sophisticated, we cater to a daily regimen of skin care with Oil of Olay," says Alfonso de Dios, media director for Greater China at consumer-goods giant Procter & Gamble Co. "But in Urumqi we sell women Safeguard soap and Crest first. It's a question of needs."
Those concerns have spurred big foreign agencies to seek out local expertise. J. Walter Thompson Co. has taken a 30% stake in Guangzhou's Newsun Insight, while O&M bought Fujian Effort Advertising in Fujian Province. And O&M has signed a deal that allows it to tap the 70 million members of the Communist Youth League for market research. "This gives us the arms and legs and geographical reach to do things on the ground that wouldn't be possible unless you had a mammoth network," says Joseph Wang, O&M's vice-chairman for Greater China.
RISING DOMESTIC BILLINGS
While multinationals have driven the market until now -- P&G's Oil of Olay skin cream was the most advertised brand in China last year -- local clients are coming on strong. Last year four local brands were among the top 10 advertisers in China, according to Nielsen Media Research. And J. Walter Thompson gets about 35% of its billings from Chinese companies today, up from zero five years ago, as it has signed up the likes of computer maker Lenovo (LNVGY), cellular carrier China Mobile, and TV manufacturer Konka.
China's industry, though, remains decades behind the West in sophistication and creativity. Sure, well-heeled shoppers ply the luxury boutiques in Shanghai and Beijing, but most Chinese put the highest value on low price and reliability. That means successful ads need a straightforward message that tells the consumer exactly what to expect. That helps explain the tremendous success of products such as Gai Zhong Gai, a brand of calcium tablets. It was the second-biggest spender on advertising in China last year, buying ad time with a list price totaling $441 million (though most companies receive discounts of up to 50%). Many in the industry pooh-pooh Gai Zhong Gai's simplistic approach and constant repetition of the same message. "They did everything that an advertising textbook in the U.S. would tell you not to do, but it worked," says Quinn Taw, managing partner of MindShare. "They created a whole awareness about calcium and bones."
And what works elsewhere in the world doesn't always translate well in China. KFC Corp. found that Colonel Sanders didn't resonate with consumers, while Nike's "Just Do It" campaign doesn't work because it emphasizes individualistic youthful irreverence -- a no-no in Confucian China. Instead, Nike runs ads such as a 10-second spot that features a school kid impressing classmates by spinning the globe on his finger. While the ad expresses playfulness and a certain bravado, "there's no rebellion," says Tom Doctoroff, CEO of Greater China for J. Walter Thompson, which made the spot.
And as Nike's Kung Fu ad shows, campaigns created for China sometimes fall wide of the mark. Toyota had a similar experience with an ad showing a Land Cruiser SUV towing what appeared to be a Chinese military truck, and another featuring stone lions, a traditional symbol of power in China, bowing down to Toyota's Prado GX. Chinese consumers balked at the perceived insult to their armed forces and at the notion of bowing to anything -- even a car -- representing Japan.
Kung Fu masters. Military trucks. Stone lions. The potential pitfalls are endless. But for the companies trying to make their mark on the mainland, the potential rewards are worth the effort.
By Frederik Balfour in Hong Kong, with David Kiley in New York