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Scott Kronick and Jamie Moeller

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Scott Kronick
President
North Asia
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Jamie Moeller
Managing Director
Global Public Affairs
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China is entering the year of the tiger with an air of cautious optimism and energy. According to one popular geomancer, 2010 will be "a dynamic year of sudden opportunities and bold actions," especially compared to last year's global economic crisis.

But prickly challenges lie ahead for marketers, government officials and consumers. Ogilvy & Mather has ten predictions to help marketers understand key issues shaping China's business environment.

Here are five of those predictions in the first of a two-part special report written by two executives at Ogilvy Public Relations Worldwide, Scott Kronick, president, North Asia in Beijing and Jamie Moeller, managing director, global public affairs in Washington, D.C.

1. It's social stability, stupid
Roll the calendar forward in China, and our adaptation of the old U.S. campaign phrase, "It's the economy, stupid," clearly applies. More than trade friction, more than the debate on devaluing the RMB, more than the many issues involving other regions and countries, it's a sure bet that China's political elite will focus on maintaining stability and avoiding even the smallest risk of unrest during 2010.

Most political decisions in China connect back to social stability.

The government is particularly concerned about unemployment. More than six million university students will graduate this year and join the three million grads from last year who have still not found employment. Marketing messages relating to employment and contribution to jobs are as important in China as they are anywhere else in the world.

The growing income disparity between urban and rural residents is another issue to watch. Over the past decade, the average salary of rural residents grew much more slowly than that of urban Chinese. City dwellers now earn more than two-and-a-half times their rural counterparts and some high-level executives have salaries hundreds of times larger than their own staff. Chinese leaders would like to narrow this gap.

What impact will this have on marketers? Don't expect Facebook, YouTube or Twitter to operate freely anytime soon. Any platform that could be a potential risk for a healthy and stable nation will be blocked. Chinese leaders know that these tools can be used to organize political unrest.

Companies should refrain from meddling in China's goals for social harmony. Google's recent troubles here clearly spell out the government's priorities in China. Maintaining access to google.com.cn is not one of them.

2. The domestic agenda will dominate
President Hu and Premier Wen recently outlined their "People First" policy which will focus on improving quality of life for Chinese residents.

The domestic agenda reigns in China. And the top two issues on that agenda are consumption and utilities -- not exactly sexy but extremely practical. A third key issue is healthcare reform.

In 2010, the government will continue investing stimulus funds into areas that will benefit consumers and lead to increased domestic consumption.

Priorities include funding public utilities, primarily transportation. The goal is to encourage Chinese consumers to buy more while improving their quality of life and building out the country's mass transportation infrastructure. The "appliances to the countryside" program will continue in 2010. Since last year, millions of Chinese consumers have bought televisions, computers and washing machines due to a 10% government discount.

The mass rail system will expand. In December, China launched the fastest train link in the world, connecting the southern cities of Wuhan and Guangzhou with a high-speed train that runs close to 200 miles per hour.

China plans to build 19,000 miles of railroad track by 2015, almost half for high-speed trains. In the next three years, 800 bullet trains are expected to be up and running. The government is supporting new subway lines and fifteen cities are building subway systems.

Healthcare reform is closely tied to domestic consumption, as one-third of Chinese residents have no insurance coverage and save money for a potential health crisis. The government is investing RMB 850 billion ($125 billion) over the next two years on programs including a national health insurance system, prescription drugs, improved rural healthcare, and public hospital reform.

Despite a tightening of the market in China, particularly for multinational firms, foreign companies that fit within China's domestic agenda can reap the benefits in 2010, especially in technology, engineering and healthcare fields.

3. Self-reliant economic nationalism will continue
There is a shift taking place in China which has become very clear for those in joint ventures or in deep discussions with Chinese partners -- favoritism towards domestic enterprises over foreign firms.

For those operating here, it is being labeled as "self-reliant economic nationalism." While leaders do not refer to this directive specifically, many multinationals have expressed concern about it, and this has been reinforced from sources within the government leadership.

As a result, most successful multinationals have a mandate to become even more deeply rooted in China, and part of the fabric of everyday society. That involves true, long-term partnerships focusing on joint innovation projects that move China towards its quest for innovation and self reliance. The challenge is protecting sensitive technologies and intellectual property while doing so.

In 2009, Chinese leaders indicated their overwhelming support for the SMEs that employ 80% of the workforce. These small and medium-size enterprises help the government move away from clumsy, dated state-owned enterprises.

A metaphor we hear often related to China's massive stimulus package that speaks of this shift is: "If the stimulus package is a bowl of soup, let the multinationals drink the broth, while the domestic companies eat the meat." It is similar to the "Buy American" campaign in the U.S.. and means multinational companies must work harder to both succeed and show how they are part of China's long term socio-economic solution.

4. "Made in China" will shift to "created in China"
The government is strongly urging a "created in China" approach. Is this a risk to foreign companies operating here?

There are two lines of thought. First, certain sectors of the U.S. economy are concerned that this movement poses a clear risk to foreign firms by excluding them from the market.

A key worry is a new rule on government procurement which requires Chinese government contracts to be carried out by companies that rely on intellectual property developed in China. In 2010, this will impact numerous products, including computers, software and energy equipment.

Second, China is encouraging foreign companies to work with domestic companies more closely to expand globally.

According to the government, there are multiple ways to achieve indigenous innovation. Companies can buy other companies, create new inventions that bring about value and benefits, and collaborate on new ideas. Protection of intellectual property rights is an essential component of this effort.

Which is correct? The answer is somewhere in the middle. Going forward, foreign companies operating in China must make clear that they are willing to work with the government to benefit the domestic economy.

By forming alliances with Chinese companies, investing in rural areas and raising the bar on Chinese technology and development, multinationals can share best practices, help improve the domestic economy and still develop a robust China business plan. It's clear China no longer wants foreign corporations to simply inject funds into this market.

5. A rocky road ahead for U.S.-China relations
In the Year of Tiger, we enter unfamiliar terrain in U.S.-China relations. There's a new dynamic in the relationship, one in which China is increasingly assertive and confident, while the U.S. becomes dependent on China to fuel its economy and assist it on multilateral priorities. While we anticipate these issues to be irritants between the two super powers, we believe a constructive and cooperative relationship will emerge as it is in the best interest of both countries.

Internet freedom has captured headlines in Beijing and Washington. Google's public threat to leave China and U.S. Secretary of State Hillary Clinton's subsequent speech stirred emotions in both countries.

While we know the U.S. government will support American companies' commercial interests (including Google), this won't translate into a broader political campaign on internet freedom in China.

Posturing on such issues in Beijing and Washington, largely to appeal to domestic political constituencies, isn't likely to derail the world's most important bilateral relationship. The economic issues are likely to cause the greatest friction, but paradoxically create the strongest bonds.

Given China's much more rapid and robust economic recovery and the immense trade imbalance between the two countries, it is increasingly clear that China will be a target of American policymakers.

For its part, the U.S. continues to need cheap imports from China as increased consumer spending will be the only sustainable way to fuel a long-term economic recovery. In addition, the U.S. hopes for greater access to the world's largest market to sell goods and services.

6. Relationships with countries besides the U.S. will need mending
The U.S.-China relationship is not the only one under a microscope. Last year ended on a sour note for China-watchers in the U.K., too. On Dec. 20, The Guardian newspaper published an article accusing China of "hijacking" the climate change negotiations in Copenhagen.

Days later, Chinese Foreign Ministry Spokesperson Jiang Yu said such remarks "contained an obvious political scheme to steer responsibilities towards the developing countries."

Then China executed a British citizen, Akmal Shaikh, on drug smuggling charges despite strong objections by British politicians.

China's relationship "down under" was also under pressure last year, primarily relating to the demand and pricing of natural resources. However, 2010 is expected to be significantly different. Not only has China become Australia's leading trade partner, but there is an unquenchable thirst for Australian products in China, be it energy, resources or agriculture. Bilateral ties are therefore critical.

One area to watch will be China's "outbound" intentions this year. Not only are Chinese companies looking to extend their reach, but Chinese cities and provinces are working to upgrade their "investment" or "tourist" brands with advertising and PR campaigns aimed at the outside world. This type of activity will tell a different story about China, one that steers clear of any political context.

7. Companies will intensify geographic expansion plans
China initiated its "Go West" campaign a decade ago in an effort to reduce the income disparity between the relatively poor western areas and their wealthier neighbors to the east. The campaign has helped grow the economies of such cities as Chongqing into an investment target for domestic and overseas investors.

As China's urbanization moves forward, brands that are reaching maturity in first and second-tier cities will accelerate their move to third and fourth-tier cities and beyond, where disposable income per capita is rising quickly, and the creation of new wealth has had profound impact on consumer behaviors.

In 2010, focused marketing efforts on emerging cities will become the norm. Looking forward, we also expect the flight to cities by rural residents to continue, and small and medium-size cities will feel the impact.

The central government sees such cities as a good choice for migrant workers to settle in. Recently, the government promised to allow more rural people, mainly migrant workers, to settle in cities, increasing their access to social resources.

8. Green will be the new red
During Chinese New Year celebrations, the color red symbolizes luck, but in 2010, green is the color symbolizing China's future.

In December 2009, the Copenhagen climate conference brought global attention to environmental issues, with China playing a major role in the talks. Despite widespread criticism that China, the world's largest emitter of carbon dioxide, has not done enough to meet climate change goals, the government has promised to cut carbon output by as much as 45% by 2020.

China has evolved considerably in terms of recognizing the serious consequences of environmental issues. The 2009 economic stimulus plan, for example, included a special budget for subsidizing consumers willing to upgrade their less energy-efficient home appliances.

China has emerged as the world's largest manufacturer of solar panels, and is well positioned to lead the production of electric cars.

The government also established the National Energy Commission, a "super-ministry" under the direct leadership of Premier Wen Jiabao and Vice Premier Li Keqiang. The move indicates that energy has been identified as key to China's future development, and requires coordination by multiple ministries. In 2010, expect to see China continue to promote a "low carbon society." As part of this, China will continue to encourage eco-friendly innovations and invest heavily in renewable energy.

Despite China's efforts in sustainable development, the disconnect between the country's energy and environmental policies remains an issue. China recently released its first national pollution census to selected audiences. The report, including detailed mapping of the country's environmental issues, suggests China still has a long way to go.

9. Grey will represent gold
The size of China's "grey" population, a group comprised of around 300 million people aged 50+, makes it one of the most important demographics in the world.

What's more, the impact of China's one-child policy and a lower mortality rate are causing this group to grow rapidly in relation to the overall population. Without siblings to share the burden of care, young families in China are under heavy pressure to support two sets of parents; some may even be caring for up to four sets of grandparents.

This year we will see a greater focus on the increasing number of elderly needing support, and the declining proportion of young people.

While the threat this poses to economic growth will cause headaches for China's policy makers, opportunities will emerge as more affluent-yet-busy young earners look to companies they trust to help them care for their graying loved ones.

Despite being such an important demographic, China's older population has been largely overlooked by marketers.

According to the National Seniors Bureau, only 10% of products and services bought by senior citizens are actually targeted at them.

While the elderly are known to be keen savers, China's older generations still spend, with per capita annual spending of senior citizens predicted to increase from $1,620 in 2005 to $4,112 in 2015.

10. The 2010 World Expo in Shanghai will define the future
China's government has reportedly spent over $45 billion on the 2010 World Expo, taking place from May 1 through Oct. 31, 2010 in Shanghai. China hopes the event will bring China as much attention as the 2008 Olympic Games in Beijing.

With the theme "Better City, Better Life," the World Expo is evolving as a platform for companies and countries to impress upon attendees and the media how their products, services and locations address the way we live in an increasingly urbanized world.

The big question for many is who will attend the Expo? Estimates of the number of foreign visitors who will travel to China for the event fluctuate, but there is no question that it will be filled with Chinese tourists.

Of the 14,000 respondents nationwide who took part in an Ogilvy survey in December 2009, 42% say they plan to attend, and 87% of Shanghai residents say they will go.

What is critical to many of the sponsors, however, is the attention given to the Expo by government officials. One insider commented that provincial and municipal officials will come in droves on fact-finding tours that will tell them how best to prepare their locations for the future.

One thing that is certain about working in China is that it promises to be interesting. We believe preparation and being proactive are the best ways to address the challenges.