Feature... Preparing for the downturn

Subprime mortgage meltdown. Crashing car market. Treasury rescues Fannie and Freddie. Since the beginning of last year, America’s newspapers have had good reason to write dramatic headlines.

But should Asia be alarmed that the US, as the Nobel Prize-winning economist Professor Joseph Stiglitz predicted recently, is heading towards the worst recession since the Great Depression? Talk to many clients across the region and it’s clear they are adopting a ‘wait-and-see’ approach.

As much as we’d like to believe otherwise, Asia is far from de-coupled from the West. Should US imports weaken, most Asian markets will suffer. Japan is close to recession already, and marketing budgets are likely to be cut. Even countries with booming domestic economies like India and China are not immune, and marketers there may feel the pinch too.

But just how much pain will we feel as growth in the global economy, according to the IMF, slows to 4.1 per cent this year and 3.9 per cent in 2009? While confidence among marketers in Asia may have taken a knock, Phil Talbot, regional CEO of ZenithOptimedia, says there is no reason to panic just yet. Zenith monitors global advertising spend every quarter, and Talbot’s main observation is that the global slowdown is not actually global.

Zenith predicts that the global advertising market will slow from 6.5 per cent growth this year to 5.6 per cent in 2009, a year when there is no Olympics or World Cup to give the industry a shot in the arm. However, two-thirds of this growth will come from emerging markets, with Asia leading the way.

The Middle East, Central and Eastern Europe and Latin America may be growing faster than Asia, but from a smaller base. With a third of the world’s population, Asia still looks a better bet for marketers.

While Western Europe looks gloomily at the prospect of three per cent growth next year, and North America at even less, Asia-Pacific’s ad market is expected to expand by seven per cent (13 per cent, if you exclude Japan), with India, Indonesia and China still growing as if in a vacuum.

“International advertisers want growth,” says Talbot. “They will be looking at their growth prospects in different markets and will prioritise their budgets accordingly.”

Which is fine in theory. General Motors, Coca-Cola and Anheuser-Busch are just three brand owners to initiate cost-saving measures that will mean cuts to their global marketing budgets. Observers report that these companies would rather protect market share at home than invest overseas, regardless of where the growth is.

Not so for UK-based Diageo, insists the drinks giant’s regional director of marketing and innovation, James Thompson. Diageo Asia-Pacific was set up in February last year, and despite operating profits falling by 12 per cent after net sales grew by just one per cent, the company has doubled its headcount in Asia over the last 12 months. But whether or not the same level of investment will go marketing’s way if economic conditions worsen is unclear.

Though Diageo’s marketing spend thinned by 12 per cent last year, Thompson says that he has a “rigorous” plan in place for the region, with a focus on “priority brands” such as Johnnie Walker and Shui Jing Fang, driving their push into China. “I do believe we should maintain our marketing investment during a downturn.”

Reductions in Western budgets present opportunities for Asia-based brands to grow faster. Singapore’s OCBC Bank, which operates in the sector hardest hit by the global slowdown, has plans to expand further into Malaysia, Indonesia and China as part of its ‘new horizons’ strategy.

The company’s head of group corporate communications, Koh Ching Ching, says that her marketing budget is not likely to slim despite economic uncertainty. “Now that OCBC Bank has been locally incorporated in China, coupled with our plans to grow the business there, we will be increasing our marketing activities in this region,” she says.

But different sectors feel different pressures. For Cathay Pacific, rising fuel prices tarnished an otherwise impressive balance sheet in the first half of 2008, causing the airline to cut adspend as a consequence of an US$85 million fall in profit. Even the eye-wateringly profitable Singapore Airlines is expected to cut spend in the second half of the year to ease the burden of expensive fuel.

But so far this year, the biggest concern for Asia’s marketers has been rampant inflation. Miles Young, the newly installed global CEO of Ogilvy Group, says that when rising food prices mean people can no longer afford to eat, there is a danger of social unrest and, sooner or later, a “psychological recession”.

This has already happened in Thailand. Though the country’s economy still trundles along with GDP growth of 4.8 per cent expected this year (adspend is growing at 4.9 per cent), consumer confidence is unusually low, as rising food prices have compounded ongoing political turmoil.

A psychological recession is a very real danger in Vietnam too. Buzzing with optimism just 12 months ago, the ‘new China’ has not managed rapid economic growth effectively, and now experiences dizzying inflation levels.

This has hit marketing’s most valuable resource. “Our people in Vietnam are significantly out of pocket,” says Mark Patterson, the Asia-Pacific CEO of GroupM. “We’ve had a look at salary levels in Vietnam and have made inflation-related adjustments. We’re trying to ease the pain.”

M&C Saatchi’s regional president Chris Jaques, who has had to make some serious decisions concerning his own staff recently, says inflation is further exposing an industry that still hasn’t recovered from the effects of the Asian financial crisis in 1997. “It has taken 10 years to get back to where we were before 1997, when marcoms was starting to gain credibility as a career choice. During that downturn, agencies could no longer invest in talent. The impact was huge. This downturn is unlikely to hit us as hard. But we will still see the short-termism that we have always seen in Asia.”

Agencies have started to complain that it is becoming even harder to find good people, who are increasingly looking elsewhere for more ‘secure’ careers. Charlie Thomas, Singapore MD of recruitment firm The Talent Business, notes that the recruitment process is now taking longer: “People don’t want to sign on the dotted line without being certain that the job is a sensible move.”

Digital and planning are still where Asia’s real talent crunch is, says Thomas. Also, account managers with experience of packaged goods and technology clients are increasingly sought after. Opinion is divided over which marketing discipline will suffer most if, or when, a downturn hits us. Keith Smith, international president of TBWA, thinks that traditional advertising will be most affected. “We may well see softening above-the-line. There is no sign whatsoever that digital is suffering,” he observes.

Marcel Fenez, a media analyst at PricewaterhouseCoopers, recalls that during Asia’s last recession traditional media fared better than newer media. Marketers stuck to what they knew. But this time, he predicts, “the effect is likely to be constant across all media. Marketers better understand the power and reach of marketing than they did in 1997 and when Sars hit.”

Fenez adds that what is less proven could be most at risk - digital still has lots to do to prove its value to Asia’s notoriously conservative marketers.

The recession a decade ago was a real economic hit, whereas today Asia is looking at more of a psychological dip than a genuine crisis. Miles Young is confident that a slowdown, if one happens at all, will be “much less serious” than the one in 1997. Even if Asia dips to low single-digit growth, it is still on course to eclipse Western Europe as the world’s second largest advertising region in less than two years, according to Zenith figures. What worries Young is the impact of a slowdown on a generation of marketers who have never experienced one before.

“China has not tasted what it’s like to slow down in recent memory,” he says. “If a more serious slowdown was to occur, markets like China would find it very tough to control costs and postpone what they want done immediately. Slow growth is completely alien to a whole generation of managers in China.”

For Asia’s marketers, it’s not so much a question of when a slowdown will hit, or how severe it will be. It is how well they can adapt. “All slowdowns are self-perpetuating. We need to be brave,” adds Young.