Ties That Bind - Bay Area Council Economic Institute

Bay Area-China Trade: Behind the Numbers
China’s Consumer Purchasing Power
(Share of Chinese Urban Households, %)
100
80
60
40
20
0
0.2
0.5 5.7
99.3
92.9
12.6
77.3
0 0 1.3 0.10.1 0.1
0.5
9.4
0.4
5.6
21.2
49.7
23.2
3.3
7.7
59.4
19.8
1985 1995 2005 2015
9.7
2025
66 109 191 280 373
100%, millions of households
Segments by annual income
Global affluent
( > 200,000 renminbi)
Mass affluent
(100,001–200,000 renminbi)
Upper middle class
(40,001–100,00 renminbi)
Lower middle class
(25,001–40,000 renminbi)
Poor
( < 25,000 renminbi)
Notes: Some figures do not sum to 100%
because of rounding; disposable income =
after-tax income, including savings; real
renminbi base year = 2000; 1 renminbi =
$0.12; base case forcast, Q1 2006.
Small wonder that China’s advertising market has grown from $2–3 billion in the mid-1990s to
$13 billion in 2003, close to $24 billion in 2004 and more than $30 billion in 2005, according to
CTR Market Research (Note: Numbers may be somewhat inflated, to the extent that they represent spending
at published rate levels, before customary discounts). Television ad revenues totaled just under $5 billion
in 2005, according to Xinhua News Service. Online advertising, including search engine ads,
grew 78.4% in 2005 to some $521 million, according to People’s Daily online, surpassing both
magazine and radio ads as a share of the total market. Outdoor advertising increased 79% in
2005 to $1.7 billion. Firms spent an estimated $487 million on market research in 2005, according
to a recent China Daily report.
As in other sectors, foreign firms competing on service have found it difficult to penetrate the
China market. Until recently most Chinese firms viewed advertising as an intangible cost, and did
not value production quality and strategy; selected mostly local agencies based on price; did not
pay on time; and often solicited ideas in pitches from foreign firms and then turned those ideas
over to a local firm for execution. Local agency connections within companies helped ensure
payment, and relationships with local media helped obtain 20–50% discounts off published ad
rates. Gradually the market is evolving, but foreign ad agencies market primarily to larger, listed
companies and while they have begun to win judgments against non-paying clients, they still occasionally
have to take their cases to court.
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Source:
National Bureau of
Statistics of China;
McKinsey Global
Institute analysis
Advertising, marketing, public relations and other related services make up a significant Bay Area
industry sector. China’s advertising market is dominated by the large multinational firms and
their Chinese joint venture partners, plus an estimated 80,000 smaller local and niche firms nationwide.
Two cases, however, reveal interesting and unexpected linkages.
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