China's staggering double digit growth and recently relaxed regulations have attracted a rush of Western ad folk looking to set up shop. But it's not easy.

The potential in China is staggering: 1.29 billion people, 10% year-on-year growth, 500 million mobile phones, and an expected 100 million bloggers by the end of 2007. But the hurdles to success are also daunting - staffing shortages, bureaucracy, inadequate remuneration, and brand and client loyalty are just some of the issues that foreign companies face in establishing themselves in the world's most populous market.

In the last eight months alone international agencies Bartle Bogle Hegarty and AKQA, as well as London post house Golden Square, have set up shop in Shanghai. This rush has followed a change in legislation in late 2005 that meant that advertising companies could apply to the government for a Wholly Foreign Owned Enterprise (WFOE) license rather than being legally obliged to launch a so-called Joint Venture (JV), buying a minority share in a local Chinese company, as was previously the case. Legislative changes are only part of the impetus for companies to venture East.

"Our big marketers like Coke and McDonalds are premier global sponsors of the 2008 Olympics. There's just a huge influx of money and interest," says AKQA chief executive Tom Bedecarre. "AKQA is very proud of its core DNA and we didn't want to launch on the back of someone else, so we thought we'd start a WFOE. What a nightmare - it took over a year. We had to fill in reams of forms and hire accountants and lawyers to jump through all the hoops." Interminable bureaucracy, he adds, extended to moving office, opening bank accounts and approval of work.

"John Hegarty has said it's a marathon, not a sprint," says BBH, Shanghai CEO Arto Hamopartsoumian, echoing the sentiments of many Western companies. They also opened under a WFOE. "You have a chance of controlling your creative output, your hiring, who you choose to work with or not to, so you live and die by this double-edged sword," he says.

The creative challenge for BBH, and indeed all agencies, is moving from the traditional product-led advertising to brand advertising that builds an emotional connection. Although most foreign agencies have opened with accounts for Chinese branches of international brands, their prize is to bring Chinese brands global notoriety.

But that has been hampered by simple things like staffing. Competition for local talent is fierce, fed by the influx of international companies. "For any one of our hires, we've had 40 or 50 interviews," sighs Hamopartsoumian. "Some of these people are so over-promoted. It's because of our industry. You leave one agency as an account executive, walk across the road to another and become an account manager with a 20% pay rise and go to another as an account director within three years." Relocation costs for foreign employees are also surprisingly high.

Loyalty on every level is also an issue. Brands, particularly Western ones, are consumed with gusto, but brand loyalty is non-existent, and TV-watching habits schizophrenic. "In China, it's more about managing brand disloyalty than it is about brand loyalty," says Hamopartsoumian. That feeds into the agency system, with clients asking agencies to re-pitch on an almost project-by-project basis. It's exhausting, time consuming and ultimately counterproductive to brand building, he adds.

Equally taxing has been justifying remuneration. Ben Leyland, head of London post company Golden Square's Shanghai office, explains. "People here don't really have a sense of worth. For something tangible - a car, a bottle of wine - that's easy. But for something abstract like your time, spending six hours going through an idea... it's difficult getting that across." Golden Square set up a JV with Chinese digital post house Red Dot Profero, as both had worked on the online Mini "White Rabbit" campaign.

Hamopartsoumian agrees. "One of the biggest challenges was getting [local clients] to understand who we are and why we're different from everyone else, and then getting them to understand that it comes at a different cost as well."

Despite cautionary tales of partnerships gone wrong, JV deals do offer their own advantages and have been part of China's ad landscape since the first rush of major network agencies in the early '90s. "Joint Ventures have 'guanxi'," acknowledges Hamopartsoumian. "It means they have government connections. There are ways of getting through things a lot easier, plus they have relationships with existing clients."

The only point of the advertising triangle that hasn't taken the leap East has been foreign production companies - excluding London-based RSA, which is tentatively investigating the idea. Lack of knowledge of the market and the language barrier has engendered a wait-and-see attitude in US production companies, says AICP president Matt Miller. "Production companies are small businesses," adds APA chief executive Steve Davies. "They run on tight margins and every cost has to be necessary to the generation of profits."

Despite the pitfalls, Hamopartsoumian offers a reminder about opportunities for the bold: "If you look at the top 100 brands in the world, not one of them is Chinese - shocking for one of the biggest economies in the world. Everyone's goal is to be the first to take a brand from China out of China."

BBH, Shanghai http://www.bartleboglehegarty.com
AKQA, Shanghai http://www.akqa.com
Profero Golden Square http://www.goldensq.com