As WPP Group Plc. CEO Sir Martin Sorrell continues to take centrestage this week in India’s media and advertising world, Mint is bringing a three-part, first person account of his views on what will drive the world of advertising and marketing services in 2007 and beyond.
Every year, Sir Martin, who as head of WPP manages more than 100 group companies and 100,000 employees across the world’s most comprehensive marketing communications group, lays out his vision, mixing research, news, views and analysis in his own inimitable writing style, to provide a road map not just for his team, but also for the industry. And this year was no different, as he gave six reasons why advertising services will continue to remain “increasingly relevant” in a rapidly changing world dominated by the rise of China and India, and new technologies.
In addition to his long years in the advertising industry, there is a particularly good reason to read what he has to say this year. That’s because, for WPP, 2006 was its best year ever with record billings, revenues, gross margins and operating margins.
Sir Martin agreed to let Mint carry edited excerpts from his account, dubbed The Advertising & Marketing Services Industry: China and the Internet. We begin this series with an overview and his thoughts on globalization. Saturday’s Mint will carry Sir Martin’s views on China and India.
The rapid changes in technology continue to be an opportunity. But if we do not respond quickly, they will become a threat even as 2007 will be even stronger as the platform for 2008, a ‘maxi-quadrennial’ year dominated by the US presidential elections (Hillary Clinton for President?), the blockbuster Beijing Olympics and the European Football Championships in Austria and Switzerland.
In the longer term, true globalization and the growth of Asia-Pacific in particular, overcapacity and the shortage of human capital, the Web, the demand for internal alignment (and, as a result, internal communications), retail concentration and the rapid growth of the importance of corporate responsibility should all underline and assure the importance of our industry and its constituent parts—advertising and marketing services.
In 2006, spending on worldwide communications services—or advertising and marketing services—grew by more than 5% to more than $700 billion (Rs32.2 trillion then), putting WPP’s market share at nearly 10%. This year the industry should grow at least 4%.
As a proportion of worldwide GDP, it probably fell during the recession of 2001-03, but stabilized in 2003, 2004 and 2005. It probably grew again in 2006 and will do so beyond—in 2007 and 2008. While the Internet bust of 2000 temporarily clouded the short-term outlook, 2004, 2005 and 2006 highlighted that the long-term future for advertising and marketing services, for innovation and branding, remains very rosy. There are six key reasons why the services we provide will become increasingly relevant...
Commercial life has not worked out as Professor Theodore Levitt predicted some 22 years ago in the Harvard Business Review. The world has not been globalized to the extent he forecast, where consumers around the world consumed similar products, marketed in the same way everywhere. Truly global products only account for around 10-15% of our worldwide revenues. Consumers are probably more interesting for their differences than their similarities. Recent political developments support this—the collapse of the Soviet Union, Yugoslavia, devolution in Scotland and Wales, and Basque nationalism. Indeed, the European Union is really a supply-side-led phenomenon, harmonizing production and distribution, rather than demand. What has been going on may well not be the globalization of world markets, but their Americanization. Not in the sense that upsets the French or the Germans and results in the banning of Americanisms from French commercial language, an objection to the cultural imperialism of Coke, the Golden Arches or Mickey Mouse. More in the sense of the power and leadership of the US.
In most industries, including our own, the US accounts for almost half of the world market. And given the prominence of US-based multinationals, you could argue that almost two-thirds of the advertising and marketing services market is controlled or influenced from there. If you want to build a worldwide brand you have to establish a big presence in the world’s largest market—the US. At WPP, 22 of our top 40 clients are headquartered in the US, 17 in Europe and one in Asia-Pacific.
Moreover, they are almost all located in the North-East corridor created by Chicago, Detroit, New York and Washington.
Failure to understand the importance of North America can be life-threatening. Take the case of the investment banking industry. Fifteen to 20 years ago, strong brands in Europe included SG Warburg, Morgan Grenfell, Schroders and Flemings. Today they have virtually disappeared. Large American banks such as Goldman Sachs, Morgan Stanley, Merrill Lynch, Citigroup and Lehmans dominate the industry.
While strong European talent might have had misgivings about working in American multinationals a few years ago, today these businesses are more sensitively run and offer much more interesting, intellectually stimulating, global opportunities and challenges. The European-based businesses that remain, such as Deutsche Bank, UBS and Credit Suisse, still face the challenge of establishing a good market position in the US.
Neither is it easy to find European-based global companies. BP and Shell certainly get it, as do Unilever and Nestlé. So does DaimlerChrysler, although Jurgen Schrempp’s strategy is being dismantled. Vodafone, GlaxoSmithKline, AstraZeneca, L’Oreal and Sanofi are other good examples, although doubts in some cases remain. There are not many more. American strength is based on three factors.
First, the size and power of the American market; more than 300 million people in a relatively homogeneous market. Despite the European Union being almost twice the size, it is much more heterogeneous. Second, the power and size of US capital markets. If you want to raise debt or equity capital, America still is the cheapest place to go, although more detailed disclosure requirements are discouraging some. Finally, because of its strength in technology. It is hard to think of many areas where it does not lead. Third-generation mobile phone technology is one, but given the prices European companies paid for the privilege, the distinction is a dubious one.
At times in history, when a country or empire seemed to have total political, social or economic hegemony, things changed and the vacuum was filled by another power. At this point, it may well be China that takes this role, in the context of the growth of Asia-Pacific. In fact, we may now be witnessing a change from Americanization to globalization.
In Davos this year and last year, the Chinese and Indians exhibited a larger degree of self-reliance and independence. Both no longer seem to be relying on handouts or support. Both economies have reached, or are reaching a size and rate of growth that may be self-sustaining and certainly more independent of a US base and influence. On my most recent trip to Shanghai and Beijing in April 2007, it seemed that many Chinese companies, with both national and overseas ambitions, were becoming much more confident and less overawed by the capabilities of Western competition. The listening and learning approach has paid off. But we will probably still rely on the strength of the US and if the US sneezes, we all catch cold.
However, increasingly we will see the growth of Asian-based multinationals. Not only the Japanese-based multinationals such as Sony or Mitsubishi, or the South Korea-based chaebols such as Samsung, LG or Hyundai (the Samsung of the car industry), but the Chinese multinationals such as Lenovo, Haier, Konka, Bird, Bright Dairy, China Mobile, China Unicom and CNOOC (they will come again). And the Indian multinationals, such as the two Reliances, Tata, Wipro and Infosys. The latter’s headcount is up from 15,000 to 60,000 in the past four years. It plans to increase by 50,000 more in the next two years. The CEO of Infosys tells me he receives 1.3 to 1.4 million applications for jobs each year.
China will increasingly become a service-based economy. In 2005, the mayor of Shanghai called for the 55 CEOs on his International Business Leaders Advisory Council to advise on how to build Shanghai into the world’s leading services centre. Last year the focus was on innovation. Similarly, India will seek to be a manufacturing centre for the world and not just focused on services. Who would have thought that Ratan Tata would buy Corus, the re-named British Steel, or that the under bidder would be a Brazilian company.
Coming in Saturday’s Mint: Part 2 of Sir Martin’sviews on ‘China and India: a different world’.