Marketing corruption

Author: Chen Shuangquan, Tan Weifeng
Publisher:
Publish Date: 2006-06-01
Features:
Ad kickbacks In March 2004, major media reported on an incident involving a "Beijing real estate beauty executive receiving kickbacks from her husband's company," sparking a heated debate. According to a March 2, 2004 report by the Beijing Evening News, the basic facts of the case were as follows: Zhao Lei (pseudonym) served as the deputy general manager and sales department manager at her husband Rong Chengfu's (pseudonym) company, a prominent "beautiful executive" in Beijing's real estate industry. In February or March 2003, Zhao Lei negotiated an outdoor advertising contract with an advertising company, agreeing on an advertising fee of 1.7 million yuan. However, Zhao proposed increasing the contract amount to 1.98 million yuan, with the additional 280,000 yuan to be paid as a cash kickback to Zhao after the advertising company deducted a 10% tax. Zhao then presented the 1.98 million yuan contract to her husband, Rong Chengfu, who was hospitalized at the time, and had him sign it. Subsequently, the advertising company paid Zhao 250,000 yuan after deducting taxes.
On March 25, Zhao was dismissed from her company; on April 9, the public security bureau received an anonymous complaint accusing Zhao of embezzlement. The Tongzhou District Court initially sentenced Zhao to five years in prison for embezzlement. Zhao appealed to the Beijing Second Intermediate People's Court, arguing that her actions did not constitute a crime, but the court upheld the original ruling.
The central issue of the public debate was whether Zhao's embezzlement of her husband's company's assets constituted a crime. While we do not wish to delve into the legal specifics, we focus on the broader issue of the "widespread prevalence of ad kickbacks." Ad kickbacks have become an industry-accepted norm. Wu Gaohan, the deputy secretary-general of the China Advertising Association, pointed out the following problems in China's advertising industry:
① Insufficient advertising investment and low public awareness of advertising;
② High ad kickbacks;
③ Widespread hidden operations in advertising fees;
④ High rates of illegal advertising, with rates as high as 20% for pharmaceutical and health product ads;
⑤ Low levels of creativity and production quality in advertising.
After the "husband kickback" incident, some online comments suggested: "In the future, people should not be so blatant about receiving kickbacks!"
Beyond advertising companies, the media also played a role in fueling the "ad kickback" phenomenon. Unregulated competition in the media market has exacerbated the issue. The increasing number of new competitors and the expansion of media outlets have led to substantial distribution subsidies for newspapers, with advertising revenue being the primary source of these subsidies. In recent years, with the government implementing moderately stronger macroeconomic control policies, advertising sources have become relatively tight. This has created a sharp contradiction: on one hand, newspapers are expanding and thickening, increasing costs, while on the other hand, advertising revenue is tight, leading to insufficient funding.
To maintain normal operations, some newspapers have gone to great lengths, engaging in "price wars." At the same time, to secure a share of the limited advertising resources, many newspapers have adopted another tactic—significantly increasing ad kickbacks. Some media have even offered discounts of up to 80% to advertising agencies or media buying companies. This has objectively created a "favorable" external environment for certain individuals within companies to receive kickbacks through their positions.
Ad kickbacks are not a minor issue; they are like termites gradually eroding and wasting a company's resources. Wu Bingxin, the former CEO of the now-defunct Stratech Group, lamented his mistakes in his 1997 book The CEO's 15 Major Mistakes, expressing deep remorse over the severe waste. Some branch managers, for example, had a company car but insisted on renting an additional Santana, incurring a monthly rental cost of 3,000 yuan. Advertising expenses were also severely out of control, with many branch managers creating false reasons to extract ad funds from headquarters, and the practice of receiving ad kickbacks was rampant and persistent. Waste in personnel was also severe, with some companies diverting 70% of their advertising funds into labor costs for salaries.
How to address this "hidden rule" in the advertising industry has led to various solutions from different perspectives. Some argue that "the chaos in the ad market stems from unclear and poorly enforced ad laws," citing Zhang Xiaoping, the general manager of Guangdong Heima Advertising Co., Ltd.: "The state-mandated 15% ad agency fee is well-set, and only with this rate can the advertising industry grow healthily. However, its implementation is far from achieving this. Whether the agency actually receives 15% and the client pays 15% requires supervision. Advanced countries have regulations, and non-compliance with the law results in penalties. China currently lacks such a supervisory body."
Others argue that "the chaos in the ad market stems from the lack of regulation and monopoly in the media," with Huang Qixiong, the general manager of Guangzhou Dongyi Advertising Co., Ltd., stating: "The 'zero agency fee' problem is a focal point. China's media market is not yet open, so how can we guarantee that there are no 'black gold' transactions within it? If media could provide truly fair and transparent quotes, I believe the advertising industry could still grow healthily."
Some point to "the problem of ad agencies and their employees themselves," or blame it on "media agencies." In reality, all segments have issues. At this point, we reiterate the earlier point: when every individual has a problem, it is a problem of the corporate system! There is also the issue of large and small systems. China's current market economy rules are the external institutional environment for ad kickbacks, and improvements in the small system of the ad market cannot be separated from this external environment. In this sense, as long as China's market economy is not fully reformed, issues like ad kickbacks will not be completely resolved.