Communication problems

Try this question. The following describes which industry: televisions, air conditioners or automobiles?

Over 100,000 competitors of various shapes and sizes litter the PRC landscape. Price wars erupt with alarming frequency, harming profit margins and product quality. Even the strongest competitors strive valiantly, but mostly in vain, to achieve critical mass. Commoditized output yields, shockingly low customer loyalty and promiscuous brand switching.

The answer: none of the above. It's the advertising industry.

China's communications sector, by global standards, is in a sorry state. The challenges shed light on how difficult it will be for the country to move away from export dependency toward a growth model driven by a vibrant service economy.

Stuck in the mud

There are three key factors holding back the communications industry.

First, all service providers, including advertising agencies, remain locked in co-dependent relationships with cash-strapped local manufacturers, resulting in lowest-common-denominator quality.

Most state-owned and private enterprises are driven by short-term sales and aren't equipped with marketing departments able to balance this with long-term brand equity. Local businesses start small and stay small. They engage cut-rate advertising agencies, skilled at churning out sensory-assaulting TV commercials that fail to generate the consumer loyalty required to raise prices, so the vicious cycle continues.

Second, upper-tier multinational advertising agencies, ones capable of raising the standards of the entire industry, are not protected – or trusted – by the political establishment.

Despite WTO agreements, communications companies must grapple with exorbitant tariffs and taxes, intellectual property rights enforced by courts beholden to local interests and nebulous censorship that advance "a harmonious society".

Third, China's Confucian tradition, a unique convergence of hierarchical regimentation and social mobility, does not encourage creative expression. My Chinese advertising colleagues are exceptionally bright, but China's cultural and educational heritage squelches any impulse of proactive public self-expression or challenge to convention, the lifeblood of any vibrant advertising agency.

Progress can only be achieved through the creation of an environment in which risk, paradoxically, is safe and saying "yes" is not.

Despite these hurdles, I am not pessimistic about the future of advertising or the service sector as a whole.

Businesses keen to escape fiscal purgatory have no choice but to end the vicious cycle of plummeting prices and surging red ink. They must build consumer loyalty, forge a sustainable price premium, and reinvest profits in future growth. It all comes down to grasping the difference between "products" (things pumped out of factories) and "brands" ("friends" actively desired and preferred by consumers).

The profit imperative has, indeed, been beneficial to the advertising industry's strongest players. Five years ago, 1% of JWT's revenue came from local companies; today non-MNC clients account for 54%. Creative quality, in terms of both originality and integration, is on the upswing and this will spill over into other service companies.

It is also good to see an easing of the tax burdens and regulatory controls in the service sector.

The Chinese government has grasped the iron link between accountability and efficiency, and this is delivering a national tax scheme, consistent accounting standards, accurate corporate valuations, and a slow acceptance of intellectual property protection.

Generation next

Finally, there is the awesome ambition of China's "new generation". Due to historic, institutionalized linkages with the outside world (the internet, overseas education, foreign employers) young people feel "safe enough" to push new ideas.

Although Western-style individualism – let alone representative democracy – is not in the cards, under-40s are generating quasi-original business models tailored to Chinese needs. The trouncing of Google and eBay by Baidu and Taobao is one example of this newfound confidence.

The centripetal force of "falling China" may ensure service sector development proceeds at a tortoise's pace. But the centrifugal energy released by "rising China" will eventually carry the day.