‘Chexit’: Is there a scenario where the agency groups leave China?

As I mentioned in a previous column, China does not make up a huge percentage of the agencies’ revenues. Whereas the country is the second largest advertising market globally, its contribution to agencies’ revenues and profits line is far smaller. As a reminder, most of the agency groups at a global level do not break out the contribution of individual countries. However, for WPP—which both does break out selected countries’ data and which probably has the biggest exposure of all the agency groups to the market—Greater China made up 5% of its 2022 revenues. To put in context, the UK made up 13% while Germany made up 7%. The US makes up 37%.

However, that does mean agencies would ever take such a decision to exit the market lightly. Five percent is still 5% and exiting the market would send a powerful signal. So, under what circumstances would any agency group decide to exit China?

The first scenario would be if the numbers do not work. I do not think we are at this stage. Again, it is hard to tell because there is so little visibility when it comes down too country-specific data but, again to point to WPP (simply because of the transparency it gives), the unit which covers Asia-Pacific—Asia Pac / Latin America / Africa & the Middle East and Central and Eastern Europe—had a 14.8% operating margin in 2022, in line with the group.

Yes, that is a pretty wide geographic region and WPP’s Chinese organic revenue growth in Greater China had a negative organic revenue growth performance in H1. However, given China’s weighting, if it was causing serious issues on the numbers front, it is very unlikely the region’s operating margin would be generally in line with other businesses. 

The second would be if the groups decide operating in the country was more trouble than it was worth. Again, I do not think we are at this point—yet. The raids will undoubtedly focus minds on the potential risks in China and, to quote the FT again, senior business leaders are apparently rethinking plans to visit the country in the light of the authorities not allowing a number of executives to depart. However, China is— still—an important market for the agency groups, if only because their clients see it as such. 

The third scenario would be investors put pressure on managements and boards to exit because the perceived costs of doing business in the country are seen as too high, not only because of factors inside China itself but also the potential risk of US actions such as sanctions and—amongst European investors—environmental, sustainability and government (ESG) factors. Investors tend to be risk averse and are becoming more aware of the geopolitical risks. There is also no doubt investor sentiment towards China is not as positive as it was. 

I suspect the third scenario may play more of a role than seems likely. Investors ultimately decide whether managements keep their jobs and they may question if it is better for the agency groups to be fully exposed in China or whether it would be best to work with local partners, as happens in Japan. I certainly do not think we are there yet but I do think these questions are starting to be asked. Do not be too surprised if, in the near future, talk about a potential exit from the market by at least some of the groups gains traction. 

As usual, this is not investment advice. 

Ian Whittaker is founder and managing director of Liberty Sky Advisors. He writes a regular column for Campaign about the advertising landscape from a financial standpoint. This is not investment advice.