Trouble in China? This is why Sir Martin Sorrell isn't running for cover
One of the big stories of recent weeks has of course been the apparently parlous state of the Chinese economy, which had a lot of commentators, investors and journalists gnawing at their fingernails early last week.
Sir Martin Sorrell
You can see why. China is the world’s second-biggest economy, and its growth fuels our growth. Our economic wellbeing is perhaps not as dependent on China as it is on the US and the EU, but what happens in China still matters to us.
Now that a fortnight or so has passed, it seems like a good time to sit down and consider what the Chinese slowdown – if it is indeed a slowdown, rather than a blip – means for the marcomms industry.
First of all, I believe that the Chinese slowdown is long-term, but it is more about adjustment rather than signs that something is fundamentally wrong. Truth be told, the spectacular growth enjoyed by the Middle Kingdom (what the Chinese call China) over the past 15 years was unsustainable. It was probably the most spectacular growth the world has ever seen, even outstripping America’s boom in the 19th and early 20th centuries. Now China has to get its own people to spend more, consume more, instead of just making stuff and exporting it.
Growth will doubtless continue for many years, but everyone – including jittery stock markets (as I write this I learned that the US Dow Jones has lost 450 points on the back of further concerns over China) – will have to get used to it. Earlier this week the IMF posted some fairly apocalyptic predictions on the future of the global economy of the world but – and feel free to call me a pie-eyed optimist here – it seems to me that if an economy as large as China’s is growing at 6 per cent a year as opposed to 10 per cent it still has the potential to power global growth. And the Chinese authorities are more experienced than they were 15 or 20 years ago, and the economy is much more diverse and highly developed than it’s given credit for.
Where the risks lie is if the developed economies retreat to the post-2008 model of excessive caution and not investing for growth. Markets are built on sentiment, not logic, and the dangers of conservatism and caution are as acute as those of over-exuberance.
But one person who isn’t buying into the gloom is Sir Martin Sorrell. The sage of WPP, the world’s biggest advertising group, has invested very heavily in China over the past decade. WPP is perhaps more exposed to a downturn in China than its rivals such as Publicis or Omnicom: the region is the third biggest for the business.
But if anything, he seems pretty bullish, and I’m with him. Speaking recently at the unveiling of WPP’s half-year figures, he described himself as still a “raging bull” in China.
He told the assembled media and analyst community: “You have to be an optimist in our industry. China is a 30-year growth story… yet everyone jumps up and down about one quarter of decline.”
Sir Martin added that he thought the Chinese stock market was overvalued and that, with rising Chinese debt and the switch of a consumer, as opposed to solely manufacturing, economy, a period of adjustment was necessary.
“[But] we are still forecasting 3.8 per cent growth for our mainland China revenues this year [against 3.9 per cent in 2014],” he continued.
The WPP chief had good reason to be upbeat – group profits for the first six months of 2015 were up 12 per cent year-on-year to £596m, and billings were up 5 per cent to more than £23bn. He also told his audience that things looked good for the second half of the year – July saw like-for-like growth up 5 per cent. And in 2016, there was the prospect of a “maxi-quadrennial” – an Olympics, Paralympics, the Euro football tournament, and a US presidential election; although the UK’s forthcoming EU membership referendum was a concern for the entire business community.
This optimism was amplified when Sorrell granted a lengthy interview to Jon Rees of The Mail on Sunday. In the interview, which is well worth a read, he answered critics who’d spent the previous few days saying he’d had his head in the sand over the state of the Chinese economy.
In the piece he makes the very good point that while expensive luxury brands might suffer, Chinese consumers will increasingly turn to domestic brands as the quality of those improves – so the low-cost phone maker Xiaomi might gain more share against giants like Apple and Samsung, despite the prestige those brands command. And again, he makes the point that growth is still there – just not at the stratospheric levels everyone’s got used to over the past decade.
In fact, the more I think about it, the less exposed WPP seems – the opposite, in fact. Look at smartphone ownership, which stands at 200 million and is forecast to rise to 400 million before 2020. Mobile advertising – which WPP has been investing in in China – will explode. China is already by some distance the world’s largest automotive market (22 million vehicles sold every year, compared to 17 million in the US) and WPP has some big car makers on its books, notably Ford. It is very strong on data and market research in the region, an offer which growing domestic businesses will be keen to tap into. There are at least 150 million middle-class consumers in the country. While much attention is focused on mega-metropoli like Shanghai and Chongqin, there are scores of “second and third tier” cities like Guiyang and Suqian, which may have smaller populations, but which are ripe for development and which consist of two, three, four or more million souls.
I could carry on quoting these kinds facts but I’m sure you’re getting the picture. The point is that the potential in China remains so huge that it seems bad business to get jittery and run at the first sign of trouble.
And for Sorrell-watchers, there might even be some deals in the offing on the back of the crisis.. He says that China’s problems may drive down the value of the kinds of businesses WPP is interested in acquiring, as well as putting off rival bidders. “It could mean that there’s less competition for the firms we’re looking at, which is good for us,” he said.
I’m convinced that the deal WPP has just signed to move into a vast new state-of-the-art office building is not as foolhardy as some of the doomsayers think.
Andrew Moss is a partner at Green Square, corporate finance advisors to the media and marketing sector
Content by The Drum Network member:
Expert Corporate Finance Advisors to the international marketing, media and technology sectors.Find out more