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Spotlight on China

Many of the implications and benefits of China’s 12th Five Year Plan (the Plan) for New Zealand companies working in the technology and green space have already been highlighted.  A new report, Spotlight on China by EY, looks at the opportunities presented in the media and entertainment (M&E) industry.

As part of the Plan, the government indicates it wants the “cultural sector”, and by extension the M&E sector, to become an engine for growth.  To this effect the government has begun easing the rules governing the sector and encouraging investment.  As a result, the projected growth of the M&E sector from 2010 to 2015 is 17% per annum, doubling the rate of expected GDP growth.

Many factors have led to the M&E sector’s growing potential.

  • Increased disposable income has led to increased spending on M&E products and services. Spending on entertainment and recreation reached US$547 bn in China last year.
  • Increasing internet penetration, bolstered by the 1bn mobile phone subscribers who are increasingly using their devices to access the internet.  At the end of 2012 there was expected to be 569m users in China, a penetration rate reaching 42%.  Amongst these internet users there are an estimated 308m social media users1 , 350m online video viewers2 , and 330m online gamers4.
  • The reach, speed and capabilities of telecommunications infrastructure are being upgraded. Included in this upgrade is the “tri-network convergence” project, which will be completed in 2015 and is expected to create US$250bn in new M&E demand through subscription internet protocol television and value-added services like video on demand.
  • China’s advertising-to-GDP ratio is lower than the world average of 0.70%.  As most M&E companies in China are advertisement driven, advertising expansion will boost future growth.China’s Tier 2 and Tier 3 cities markets are now 4 times greater than tier 1 cities4.   By 2025 there will be 221 cities in China with over 1 million inhabitants.  This growth of lower-tier cities will lead to increased opportunities through rising demand for M&E products and services as well as advertisers attempt to reach consumers in these markets.
  • Experimentation by digital media companies, particularly in the online video and gaming spheres, which are looking beyond advertising revenue and playing with different models to incentives customers to pay.
  • While restrictions still exist, the government is relaxing its attitude toward private investment.

Kiwi firms active in the M&E industry have the knowledge, experience and the advantage of an FTA which should make them well placed to reap the benefits.

But as with any opportunity there are associated risks and challenges. Common across many industries and often raised is the issues of intellectual property rights infringement and continued government control and high levels of regulation.  By now we are all familiar with the saying that China is not one market, it is many different markets.  With this truth comes the issue of market complexity, and in the digital landscape this market is highly competitive and constantly evolving.  Another issue foreign firms will encounter is price sensitivity which can be significantly higher than in other countries due to the high level of access to pirated materials.

There have already been Kiwi success stories in the M&E sector, with partnerships between New Zealand companies and Chinese TV stations, as well as ongoing work being done in the area of post production and M&E education.  It is therefore clear that despite obvious obstacles, companies can achieve success.

To face the market challenges, Spotlight on China recommends firms focus on four key areas in order to succeed in the market.

  • Build strong brands
  • Succeed in digital
  • Form and operate effective partnerships
  • Navigate the regulatory landscape

The key to getting it right is in receiving effective advice from the experts.  To do this EY are able to connect directly with the local M&E experts through any one of our 15 EY China offices.

The overall message is that companies must be willing to invest in China long term, as well as being able to understand and anticipate both the complexities and possibilities the market presents.  If combined with good advice, then those companies will be well positioned for success.

Joanna Doolan is the chairperson and Florence Wong is the leader of EY New Zealand China Business Group.

Joanna Doolan
Partner - Tax (Auckland)
Contact
Tel: +64 9 300 7075

Florence Wong
Senior Manager - Tax (Auckland)
Contact
Tel: +64 9 377 4790


  1“China Social Network Ad Spending 2010-2014”, China Internet Watch, 22 January 2013, via http://www.chinainternetwatch.com/1903/china-social-network-ad-spending-2010-2014/
  2Tobi Elkin, “Online video viewers in China: a user portrait,” eMarketer, October 2012.
  3“Originality urged as online gamers hit 330m,” Industry Updates, 26 July 2012, via Factiva © 2013 China Daily Information Co.
  4“Study by O&M China shows 2nd-4th tier Chinese cities hold key to world’s economy,” Ogilvy & Mather, 7 January 2013, via http://www.ogilvy.com/News/Press-Releases/January-2013-China-Beyond.aspx.
 

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