The Chinese market has been on the radar of Sir Martin Sorrell for decades. The founder of advertising giant WPP was a frequent visitor as he built that agency’s Chinese footprint. Two years ago he set up S4, a ‘digital-only’ advertising and marketing agency, scaling it up quickly with over a dozen acquisitions to a market value of £1.9 billion. Last week S4 announced a maiden pre-tax profit in its first- half results, bucking industry trends with a 6.9% increase in revenues to £141.3 million. Here Sir Martin explains what current ad revenues say about China’s economic recovery from Covid-19 and talks about the growth of S4’s business in the world’s most populous consumer market.
In a normal year, prior to Covid-19, how often would you visit China?
I used to go about six times per year when I was at WPP. When I left WPP a couple of years ago, it went down to around three or four times a year. I’d always go to the China Development Forum. WPP had a big business in China and S4 started an agency there about two years ago in Shanghai. It is doing very well on a smaller scale and we are very anxious to expand there. In normal times – if we ever get back to those – I’d be going four times a year.
Have you made an effort over the years to visit cities beyond Beijing and Shanghai?
Yes, I have visited many other cities like Chengdu and Chongqing, and tried to see more of the hinterland. I also visited the campuses of companies such as Alibaba [in Hangzhou] and Tencent [Shenzhen]. I visited the campus of Huawei pretty much every year, as well as Alibaba and Tencent to get a feeling of what was happening.
TikTok had not really started till the last couple of years – but we are now in close contact with it because it has become an important platform too. Although obviously we don’t know what is going to happen with TikTok…
I didn’t confine my activities to the coastal regions, particularly as the government had encouraged foreign companies to move away from these areas into inner China for development purposes. I remember we did campaigns for Chengdu – it was the panda campaign ‘Chengdu, can do’ – and so I did try to travel widely, though obviously a lot of attention remained on Beijing, Shanghai, Guangzhou and Shenzhen. I am still on the mayor’s International Business Leaders’ Advisory Council in Shanghai.
The other thing about travelling more widely is that it opens your eyes to China as a continent-sized economy – with the consumer marketplace in places like the northeast being very different to those in, say, Guangdong…
Exactly, it isn’t one-country in that sense but a series of provinces with tremendous variations. They are markedly different.
S4 is now in 30 countries. Has China been a big focus for you?
I’ve always looked at the world as being moved by two buckets. One is technology and the other is geography. WPP was based on globalisation and the growth of the internet. And given the fact that S4 is purely focused on digital, China is vital to our future.
Getting to more tender territory, I am very worried about the relationship between the US and China. Or the lack of relationship and the growing tensions. And indeed the tensions between China and the Philippines, India and Australia – or the tension over Taiwan.
I am extremely worried about it. There was a crack in the relationship at the beginning of the Trump regime but the fissure has widened. What was a tiff has become a trade war and some describe it even as a Cold War.
It doesn’t seem to matter who will be in the White House, whether it be a continuation of President Trump’s regime or a new regime – it seems to me that the tension will continue.
It looks to me that we are going to have two systems, certainly from a technological point of view. That is going to be a check on globalisation and global prosperity, and it is going to be increasingly fractious. I am not wise enough to know what the solution is but there seems to be growing resentment in both countries. I’ve also seen decks that show that China-bashing in the US election is good for both Republicans and Democrats in terms of votes.
That said, China is well on its way to becoming one of the two greatest technological powers and there is a growing chasm and it is particularly worrying – especially for a company such as ours which is looking to expand its digital operations, not just in the West but in the East too.
I look at North and South America and Asia-Pacific as being the two bookends of our business. At the moment we are 70% in the US and South America, 20% in Western Europe and 10% in Asia-Pacific. But Asia is growing the fastest and it continues to grow very strongly despite Covid. Our geographic objective is 40, 20, 40, with Asia being the growth engine, particularly China and India.
In your China business, what does the current level of ad spending say about the economy’s recovery from the pandemic?
It is an authoritarian regime and in terms of dealing with Covid they had a slow start – for reasons that are subject to controversy. Till the end of January things were in slow motion, and then the government got its act together and has dealt with it. Whenever there have been second waves they have stamped on them extremely hard and seem to have managed it.
We are a bit different from other agencies and if you look at our stock’s performance we are really more tagged with the tech companies. When we had the SARS epidemic in China I remember Alan Jope, the CEO of Unilever in China at the time, remarking on the changes that took place, such as more Chinese consumers buying online. That induced a permanent change in consumer behaviour and the same is happening now with Covid.
We are totally focused on the digital end, so when Covid hit we saw significant increases in animation, robotics, photography and the shift from live events to online events – and that has become a huge revenue stream for us.
I look at China as first into Covid and first out of it. We got hit there in February and we came out of it in April. I wouldn’t say things will ever return to the old normal; it is very much a new normal.
But having said that, our operations are up and running and people are in the office. And it is much more ‘normal’ than other markets in the world. China is definitely ‘mended’ – from our viewpoint – and in the advanced stage of its recovery compared to most, if not all, of the other nations we operate in.
As your business is focused on digital and so much activity went online because of Covid, were you actually a beneficiary of the disruption?
It’s a terrible thing to say but at a time when the advertising holding companies were down 10-25% in the second quarter, we didn’t have a down month [in terms of sales]. Our lowest month was April globally, where we were down to 3% growth, then back up to 5% in May, and then double digits in June. July was even stronger, as was August. We never went backwards. That’s because we are totally focused on digital, which will be more than 50% of global media spend this year for the first time. Traditional media spend has fallen on its back and digital has held its own.
Is it even more than 50% in China?
Yes, I would say it must be up around the 60% level. China is in the advance because it didn’t go through the analogue phase and jumped the laptop straight to the smartphone. It’s had a tremendous advantage. If you are looking for where the world will be in a few years time, you just need to look at Chinese consumer behaviour and how they communicate, whether it be through WeChat; or how they shop, such as in Alibaba’s Hema stores.
The sophistication of Chinese technology, and the fact there are 1.4 billion people, to my mind means they will win. That’s why I think the US has to find a way, just as China does, of the two top dogs living with each other in a constructive state, rather than a destructive one.
Another trend that was intensified by Covid was livestreaming e-commerce. What are your views on this?
That’s the sweet spot of our business. To give you an example from a different area. We did a deal with the NBA to produce the first 16 games and livestreamed them with very advanced technology on mobile phones. We have tried to apply that to other sports.
What’s happened with Covid is that it has accelerated areas like livestreaming and the relationship it can have with consumers. This is similar to what Alan Jope saw with China around SARS. Covid has had the same impact, with livestreaming.
KOLs like Viya are now selling vast quantities of goods through livestreams…
We are heavily involved in that area, but ironically that is nothing new. You had direct-to-consumer in the US on TV shopping channels. Livestreams are the modern-day equivalent, although the KOL [key opinion leader] shopping channels have become more interesting because they allow manufacturers to have a more direct relationship with Chinese consumers.
In China there are thousands of these livestreaming KOLs. Does your agency advise brands on which ones to work with?
As the marketplace becomes more fragmented and complicated, yes, we try and act as the third party advisor.
For more niche foreign brands these endorsers can be a cost-effective way of entering the China market. And of course you don’t need the traditional distribution channels. There are big opportunities to leverage these platforms in aggressive ways.
How big a problem in China is brushing, i.e. inflating online traffic data?
It is a major issue. I think the big opportunity in China for us is to run a transparent system. I remember going to a Sasac conference in Shanghai about five years ago where the government said these state-owned company bosses would be evaluated on transparency. There was a score for eradicating corruption within their organisations. The media area is one where there are sticky fingers and it is rife with those issues.
So on the digital media side in China there is a big opportunity. If you track a Rmb1,000 spend through the system from publisher to client, there are many middlemen’s hands along the way. As we get more and more involved in China – and I am determined to build our business in China – we will run a totally transparent model. It’s a big, big issue.
Online TV shows like Sisters Make Waves have started to embed scripted dialogue that mentions sponsors’ products. Another show Back to the Field had 14 product placement dialogues per episode. Is this something you see elsewhere or is it more of a China phenomenon?
In Brazil, for example, there’s a three or four hour Sunday evening show that has long done something similar. I remember being told by the head of P&G in Brazil that the host had talked about Crest toothpaste and mentioned that free samples were being given away online. That show literally broke the P&G website because of the number of Brazilians who visited the site in search of the offer.
That happened about eight years ago, so product mentions are nothing new. But the practice is increasingly potent. It’s funny, in some ways there is nothing that’s new, but it is being delivered in a different or more effective form. It’s the same with the use of sponsored product placement – it is nothing new, but it is extremely powerful with Chinese consumers today.
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