Localization: It's harder than you think

 

Author: Lub Bun CHONG

Publisher: C Consultancy Limited

 

“Rupert Murdoch gives up on China with sale of Star China TV”, the headline blared on The Telegraph; and James Murdoch conceded at the end of the article that Star China TV had made “tremendous strides” since coming under Chinese control.

 

Bear this in mind: this is THE Mr. Rupert Murdoch giving up in China.

 

So, a foreign executive must not underestimate the difficulties of localization in the advertising and media industry in China.  It’s harder than you think.

 

On this page, we share our insights on the actual experiences of two foreign owned advertising media players in China; and the impact of localization on their respective corporate performances.

 

Both players’ underwent similar development routes during their early days.  Founded in the 1990s, both players experienced significant early stage growth, and secured capital from reputable foreign investors a few years later for funding expansion.

 

Our analysis covers the expansion stage of both players as they prepared to embark on their next stage of development after securing fresh capital.  At that point i.e. Year 1 of our analysis, both players adopted the same strategic competitive position and battled neck to neck without a clear-cut winner:

 

      (a) Player A delivered 400% more audience and 30% more revenue

      (b) Player B delivered 600% higher earnings per share and 300% higher return on equity

 

As can be seen, Player A had the edge in audience and revenue while Player B delivered better profits and return at Year 1.  Over the next few years, Player A’s lead in audience was narrowed to 100% but Player B had overtaken Player B with 50% more revenue; and widened its lead in earnings per share by a whopping 1,300% and return on equity by 70%.

 

In laymen terms, “Player B won hands down” from the shareholder value perspective.

 

What happened?

 

In the advertising and media industry in China, execution of strategy essentially means delivering advertiser value by reaching local consumers, and by navigating the complex local regulatory environment.  To truly deliver competitive advantage in these two key value chain activities, an effective and committed localization strategy is indispensable.

 

Not surprisingly, this was precisely what happened with Player B where local stakeholders’ expertise, knowledge, and relationships were leveraged to the fullest extent possible.  Reflecting its commitment to localization, close to 100% of Player B’s senior management positions including the CEO, were taken up by local Chinese.  Further, Player B also put in place a broad array of incentives for local stakeholders to drive key short-medium term financial targets as well as medium-long term competitive advantages.

 

Many foreign investors have localization strategies in place but do not sufficiently back them with commitment and resources at the corporate level.   Player A was no exception.  Local stakeholders input were not significant and less than 20% of its senior management positions were taken up by local Chinese.  Further, local stakeholders had little motivation for driving competitive advantages in key value chain activities.  In short, local expertise, knowledge and relationship were lacking, as were motivation of the local stakeholders; and this eroded Player A’s strategic competitive position relative to Player B.

 

Drawing on the experiences of Player A and B, the key takeaway for any foreign investor with its sights on the advertising and media industry in China is this – commit to a localization strategy, develop a realistic timeline and allocate corporate resources thereon.  And this needs the “buy-in” of everyone in the company, from the corporate boardroom at the top right down to the foreign executive(s) sitting in his/her room(s) in China.

 

There is no short cut, and no room for lip service.

 

In closing, it is useful to note that what needs to be done for an effective localization strategy will vary from case to case.  Amongst other factors, this depends on the segment of advertising and media industry, as well as the specific circumstances of the company in question.

 

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