French advertising giant Havas has created a joint venture with China’s leading advertising group Guangdong Integrated Marketing Group (GIMC) to set up a new company called Havas GIMC Advertising Company (Havas GIMC). Havas GIMC will pool together a registered capital of CNY 30 million ($4.34 billion), with CNY 14.7 million ($2.12 million) from GIMC, representing 49% of the stake, while Havas will contribute CNY 15.3 million ($2.22 million), taking rest of the 51% stake.
Havas is the sixth largest global advertising agency, headquartered in Paris, with operations in more than 100 countries, including China. GIMC is a leading marketing and communications group in China. Founded in 1979, it is one of the first advertising companies in China and was listed on Shenzhen Stock Exchange in 2010. It has over 110 member companies and provides marketing services to over 300 domestic and global companies.
First major investment in the Chinese ad market
Expansion through mergers, acquisitions, or joint ventures is one of the key growth strategies for ad agencies. However, compared to its big advertising agency peers, Havas have not been as acquisitive as, for example, WPP or Dentsu Aegis. Havas has only made 22 mergers and acquisitions deals between 2007 and 2016, compared to WPP with 238 deals, or Dentsu Aegis with 98 deals made in the same period.
In terms of geographical coverage of the deals, WPP has made 17 deals in China and Dentsu Aegis signed five deals. As for the French ad agency, the deal with GIMC is Havas’s first major investment in China, marking the start of a business expansion in the market. China is the second largest ad market in the world, after the US and the biggest ad market in Asia. According to IHS Markit, the Chinese ad market was worth CNY 442 billion ($67 billion) in 2016, and will represent over 33.8 percent of the ad market in Asia by 2021.
Havas’s 2016 results indicated that the growth of its two largest markets, France and the UK, decelerated to 2.1 percent and 1.3 percent year on year respectively, while organic growth for APAC contracted to 1.8% in 2016. Amid weak performance, Havas is restructuring its business and ramp up its foreign operations. Last month, Havas announced to combine its two divisions, Havas Creative Group and Havas Media Group, into one unit. As part of the restructuring, its former CEO APAC Havas Creative Group, Mike Amour, is now the CEO Havas APAC Group to oversee both the creative and media business in Asia Pacific.
Havas generated $2.5 billion in 2016, and its French domestic market contributed $475 million. While GIMC had smaller revenue of $1.6 billion for the same year, GIMC’s revenue is all generated in its Chinese domestic market. The difference in the revenue sizes of the two domestic markets demonstrates the big scale of the Chinese ad market and explains the rationale behind Havas’s partnership with GIMC.
Incorporation of joint venture is conducive to sustainable business model
Working with a domestic company is an ideal solution for localisation, important for any company that wants to expand to a foreign market. This particularly is the case for China, given its massive territory, diverse cultures, and a unique political system. While it is common for companies to acquire domestic counterparts, Havas has opted for creating a joint venture with GIMC. This means, the newly founded company will retain GIMC’s top leadership and talent. It is not uncommon for an acquired company’s leadership to leave the parent company after acquisition within 48 months, making it difficult to sustain the business.
GIMC to complement Havas’ digital capability
According to the IHS Markit M&A Market Monitor, companies with digital and technology capability are the hot target for investments. Havas does not break down its revenue from digital service, which is part of its Media Group division that was worth $925 million in 2016 by revenue. After GIMC’s investment in several Chinese digital marketing agencies in 2015, including Adsame, JNTinChina, and BlueDoor Digital Group, its digital marketing service has expanded to CNY 2.32 billion ($372 million) in 2015 and grew 40.3 percent in 2016. With GIMC’s digital capability, Havas is going to be in a stronger position manoeuvring around a Chinese digital ad market that is dominated by Chinese online media owners, notably by Baidu, Alibaba, and Tencent.
Capitalise Chinese companies’ that seek business abroad
The joint venture is going to support GIMC’s growth strategy, which is helping its Chinese clients expand overseas. Helping Chinese companies expand abroad has been a goal of leading marketing firms in China. Beijing-based Spearhead acquired ad tech company Smaato to support overseas expansion in 2016. As the Chinese economy growth slows, more Chinese companies are seeking opportunities abroad. By tapping into Havas’ large overseas resource, this is going to help the Guangzhou-based firms to take their service abroad to serve Chinese firms.