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China: Don't Hold Your Breath Waiting

China: Don't Hold Your Breath Waiting Kevin Ryan

ad:tech returned to China during the breezy and tropical Shanghai month of October last week. The business of interactive marketing is quite the hot topic in the world's leading "capitunist" economy. Would you like to know what has changed since last year?

Absolutely nothing… and everything. There we quite a few more people at ad:tech Shanghai this year (more than double last year's attendance). As is often the case with anything Chinese, there is much more happening behind the curtain than in front of it.

Search is taking off-- but not for the reason you might think. Everyone is talking about mobile (as in SMS spam does not a business model make) and single screen convergence. There is also an air of cautious optimism about the future of the business as many reminisce unhappily about the dot com bubble of 1999.

Here's why there will never be a bubble in China
For the unindoctrinated, Shanghai is a beautiful city (when you can see it through the smog) that over 30 million people call home. The rest of China's billion potential buyers tend to get marketers excited even with the presence of a restrictive government.

Simply put, there can be no bubble because the financial infrastructure (or lack thereof) should never "artificially" inflate. The professional (trade, really) culture is such that no one -- and I mean no one -- trusts anyone else. Cash transactions (as in suitcases full of cash) are common in everything from media buying to multi-million dollar real estate deals. 

I may have said this before: westerners arrive on the scene in China with the exuberance of a teenage boy having recently discovered the opposite sex. That is, they sure are excited about being here, but they have no idea what they are getting themselves into.

What are people in China doing online?
They are watching video, playing games, and they aren't buying much of anything. Marketers love to "do the math" of counting the internet users and defining success potential by .01 percent of users potentially making a product purchase. This phenomenon is called "falling in love with the spreadsheet" and is the most common pitfall in attempting to do business in China.

It will be a long up hill battle to get Chinese consumers to spend more money online. The natural first step would be influencing offline purchase behavior (as does the current king of all-- traditional media) and waiting for the trust relationship (please do not hold your breath) to develop.

In Thursday's panel discussion about the changing Chinese consumer landscape, Neil Runcierman, chief executive officer of Communication Central Group, discussed the evolving Chinese consumer landscape in his presentation entitled, "Do the numbers add up?" Among the reality-shock-inducing statistics he introduced: 77 percent of Chinese families live on less than 25, 000 RMB per year-- that's just a little over $3,000 U.S.

When you consider the Chinese audience has far less disposable income that other markets while traditional media in China remains disproportionately higher than other markets, other problems begin to surface.

The brand and the beastly buyer
Yet another statistic about brand building hopefuls should have marketers stepping back a bit. According to Runcierman, a 10 percent price difference is enough to change the mind of a Chinese Consumer in the buying cycle. Here in the U.S., the price difference can be around three to four times that before a consumer will change his mind.

"There must be balance in representing the brand with a focus on engaging the people within the context of their everyday lives," Mike Amour, Chairman of the Grey Global's said in Tuesday morning's keynote discussion with Drew Ianni, newly-appointed ad:tech chair. "There is tremendous pressure to get in touch with consumers in today's environment, and product marketing is far more diverse."

Amour also suggested that if Asian brands want to compete, then they have to move beyond emphasizing functional excellence.

Next: Functional knock-off brands?

I spent a bit of time in Beijing's Wangfujing shopping district: western brands were everywhere.

In the main part of the shopping area, Nike, Adidas, Rolex, Tag Heuer and Kentucky Fried Chicken were prominently positioned. Yet examine the crowds a bit more closely and you'll find that very few people are actually making purchases in the high end stores.

KFC and McDonald's are packed (we are well on the way to fattening up the locals) but if you want a Rolex (almost a Rolex) you can simply buy one in from the many nearby back alley street vendors for about $20 U.S.

Locals in Shanghai say they rarely, if ever purchase the so-called fake goods. Many of these fakes are simply what we would call "seconds" that come directly from China's many factories producing leading brand apparel, for example. A ray of sunshine for unhappy brands was the recent official closing of the famous Xiangyang Market where one could buy a "fake" anything. Unofficially the market has simply moved to a new location -- near -- The Science and Technology Museum in Pudong.

Advertising, WHAT advertising?
Media that you can literally touch, feel and show your friend sells well. In other words, search.

You can describe search site buying with three words -- Google, Baidu, Ali-Baba -- and not necessarily in that order.

Of course, no one really knows who to trust when trying to determine which site is in the lead, but many claim to be at the top of the heap. There are many firms trying to get their arms around understanding and using third party metrics. The dynamics of doing business in China would require the development of a trust relationship -- and later an understanding of how to use third party tools -- before any conclusions can be drawn.

Industry associations like the Asia Digital Marketing Association headquartered in Hong Kong (led by Upstream's David Ketchum and director Kay Bayliss) and the Interactive Advertising Bureau's arrival in Singapore are positive signs of growth, but both the ADMA and IAB face an uphill battle in establishing standards and getting publishers and marketers to adopt them 

Again, please don't hold your breath waiting for growth
At Thursday's "Harnessing Web Analytics" session (moderated by yours truly), attendees told quite a story about the use of third party resources. An informal survey of 100 or so attendees revealed that only two actually used analytics. Not one person raised a hand when I asked if they felt they had a "good understanding" of their audience.

The "Budgeting and Integrating Search into Digital Marketing Strategy" included some sound advice from the likes of Timothy Peck, global web marketing manager for Tektronix, and Jinwei Dong, interactive marketing lead for IBM China.

Sound advice came in the form of developing strategic plans that included success metrics and keyword selection. Though many of the tools we use to develop keyword plans and manage bids do not exist in the third party application world as we know them in the U.S., the obvious upside to having these tools might be the catalyst for growth in development.

However, given the do-it yourself culture that has slowed the growth of third party research, analytics and tools, we shouldn't expect the same level of sophistication westerners enjoy anytime soon.

His own worst enemy
The moment one sets foot off the plane in Shanghai, one is struck with (aside from the polluted gray sky) a reminder that you may as well be wearing a bulls-eye.

I had Starbucks in the Forbidden City, McDonalds in the Summer Palace and felt absolutely no sadness about the continued degradation of a civilization that led the world in arts and sciences for centuries. A people once known for thought leadership is now famous for producing the lowest quality consumer goods on the planet and a less-than-sound approach to business ethics. 

I spoke with several local businessmen. One described the situation very well, "There are a billion people here; you simply can't compare this to a western professional environment," he said. "You [westerners] work hard to protect your reputation. In the western world, one bad deal and your reputation is damaged to the extent it may not recover. In our world, we have millions of options if a deal goes wrong, and we can certainly do the math."

In the end, it's alright to be excited about the potential in China, but you can't simply hope to arrive on the scene and expect business to come to life as it has in the western world. The alleged rapid growth hype we keep hearing about may take a decade. For exuberant marketers heading east, the growth they are expecting will just have to wait until the marketplace matures.

Kevin Ryan is the Chief Executive Officer of Kinetic Results. Read full bio.

Meet Kevin Ryan at ad:tech New York.

Kevin Ryan founded the strategic consulting firm Motivity Marketing in April 2007. Ryan is known throughout the world as an interactive marketing thought leader, particularly in the search marketing arena. Today's Motivity is a group of...

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