Service Sectors Will Reign in China, Part II, But Nobody Ever Said It Would Be Easy

I previously blogged, here and here, on how China's economy is ripe for entry of foreign service businesses.  Just this year, as per the WTO, China greatly liberalized its laws allowing entry of foreign service businesses. 

Today's Wall Street Journal, however, has an article that highlights some of the difficulties of operating a service business catering to Chinese companies.  Though the article deals solely with advertising agencies, my own experiences and those of our clients tell me that much of what is said here is true across the board for service industries with Chinese clients.   

The article talks about how Chinese advertising clients usually have little experience with or patience for "the institutionalized 'creative' product traditional ad agencies try to sell them."  The advertising agencies in China "say it takes resources and commitment for their creativity to work -- and are dismayed to see their client relationships sorely tested, with their China shops hired and fired much faster than in other markets." The average agency-client relationship in China lasts just 2.8 years, as compared with 6 years in the U.S. and Europe.  Chinese companies prefer using advertising agencies on project-based contracts, instead of building long-term professional relationships:

"The degree of tolerance is very low as compared to the U.S.," says Pully Chau, the China chief executive of Publicis Groupe's Saatchi & Saatchi. "We cannot afford to take any clients for granted or else they will go elsewhere."

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"Clients are in a start-up mode, and so are unbelievably tight about spending money on an agency," says Michael Wood, CEO of Publicis' Leo Burnett China. He says the recent boom in buying traditional ad spots in Chinese media is "somewhat illusory for creative agencies who can't always keep up with the pace."

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Agencies say the fickle nature of many Chinese clients makes it hard to predict and plan for growth there. "The greater the number of Chinese clients, the less the profit," says TBWA Shanghai's Mr. Heron. "Why? Slow payment -- and then a post-agreement negotiation for discounts. And then, 12 months later, the end of the contract."

Some of the advertising companies are choosing to educate their clients on the ways of advertising in an effort to retain them longer:

In the past year, Interpublic Group's McCann Erickson has put more than half of its clients in China through full or half-day presentations on what it calls its "demand chain process," teaching how to build a brand over time and to measure an advertising strategy's effectiveness.

"China is a results-oriented society, and if they are not sensing results, often the agency gets blamed," says Don Norris, the managing director of McCann-Erickson Guangming China.

Of course, China is hardly the only place where advertisers are clamoring for results from agencies. But in China, creative shops start from scratch in explaining basic advertising concepts to their clients. For instance, the big neon signs all over China's cities may flatter the CEO's ego but they don't necessarily sell products.

I have experienced similar things.  Steve and I met for hours with a Chinese company and negotiated a flat fee for the United States legal work we would be doing for them.  Pursuant to the Chinese company's instructions, I drafted a contract reflecting our agreement.  The Chinese company returned it with a whole host of changes, including a substantial reduction in the fee and a previously never discussed spacing out of the payment.  We incorporated a few of their changes (but not to the fee) and sent it back to them. They then sent us another new contract that barely resembled anything we had ever discussed.  When we then told them we were no longer interested in representing them, they completely backtracked and said they would agree to the last contract we had sent them.  The contract arrived but now with a list of step by step instructions on how we were to handle this U.S. legal matter, the first item on the list being just about the worst thing we could have done in this situation.  At this point we decided to decline the business and we sent an e-mail explaining the importance of a good and trusting lawyer-client relationship. I have heard of numerous similar experiences from professionals in other fields providing services to Chinese companies.  Many have told me of being hired to do something for which they are well known, only to be given a very specific list of exactly how they are to do it. 

Bottom Line:  The service sector will reign in China and the opportunities for growth there are huge.  Chinese company understanding of service businesses will improve. I have seen such maturation occur in Korea and in Russia and it will eventually occur in China as well. 

But, in the meantime, If you are a service business working with Chinese companies, you must recognize the difficulties you will face as you seek to establish the same sort of relationships with your Chinese clients that you have with your other clients.  Your relationship with your Chinese clients will likely be less collaborative than you would like and you must act accordingly.  Do not compromise your fees or anything central to the way you operate.  Do not do this "to get that first project in the door," thinking you wil be able to build a long term relationship.  If you compromise on the first project, your client will almost certainly just push you for more compromises on the next one.  You must be firm and you need to go in with your eyes wide open. 

Are there others out there with similar stories?  Are there readers with a different experience?  The comments section (as always) is open, please share your stories and views with us.

For more reading on service industries in China (especially media and public relations issues) try the blogs Danwei and Imagethief.