Chinese companies slash advertising as COVID slowdown bites

Chinese companies are slashing their online advertising as COVID-19 shutdowns hit consumer spending while a slowing economy dents hopes for a quick recovery.

Internet groups including Tencent and Baidu are warning that their digital advertising revenue tumbled in the first three months of the year and they don’t expect the second quarter to be much better as companies respond to a drop in their own sales by cutting back on marketing budgets.

Tencent, operator of China’s popular WeChat app, said its online advertising business — which accounted for 16% of its total revenue last year — fell 18% to 18 billion yuan ($2.7 billion) in the first quarter.

Search engine Baidu’s ad sales were off 6% in the January-March period from a year ago. Advertising sales account for about 78% of what Baidu calls its “core businesses.”

“The negative impact of COVID is particularly notable on advertising, partly because of the overall pressure on GDP,” James Mitchell, Tencent’s chief strategy officer, told a conference call last month. “Many companies, especially multinationals, run their marketing budgets out of Shanghai.”

China’s financial capital is emerging from a grueling two-month lockdown that confined most of its 25 million people at home while most shops and other businesses were shuttered.

The shutdown brought consumer activity to a near-standstill and sparked logistics snarls as the country battled its worst outbreak since early in the pandemic.

The government’s zero-COVID strategy, which aims to prevent outbreaks at almost any cost with mass testing, lockdowns and quarantines, has been blamed for hitting growth in the world’s second-biggest economy. Some estimates have downgraded growth targets to below 4% this year, well off an 8.1% expansion in 2021 and Beijing’s own 5.5% goal for 2022.

“As a result of lockdowns, we think the second quarter will be worse than the first quarter in advertising revenue,” Ivan Su, a senior equity analyst at Morningstar in Hong Kong, told Nikkei Asia. “Going into the second half, we still see uncertainty relates to the COVID-19 situation in China. Any widespread lockdowns will only further delay the recovery in consumption and thus advertising spending.”

Travel and e-commerce advertising were especially sensitive to the impact of China’s COVID-19 slowdown, Su said, adding that online entertainment and video games — after regulators earlier this year approved the resumption of new game titles following a monthslong freeze — were more resilient.

“Advertisers across sectors have adjusted their budgets to be more conservative,” Cheng Yixiao, chief executive of video-sharing app Kuaishou, said last month. “And year over year growth rate of our ad revenue has moderated since mid-March without a notable recovery until now. … Once the macro situation improves, our advertising business growth will respond in a timely fashion.”

Short video platform Bilibili warned that the prospect of more virus outbreaks, particularly in Shanghai, would have a short-term impact on its advertising and e-commerce businesses.

“Many advertisers had their budgets delayed or put on hold in the first half of the year as a result of the pandemic and the general downturn in the economy,” company CEO Chen Rui said last month. “At the same time, this is causing the advertising industry to reflect on the fundamentals of advertising.”

China has the world’s second-biggest internet advertising market behind the U.S. with revenue totaling some $100 billion in 2021, more than the rest of Asia-Pacific, according to a recent report by consultancy PwC.

While China’s ad sales grew 21.7% in 2021, the pace was on track to slow to 16.4% this year, the report says.

Separately, Beijing-based CTR Market Research said China’s total advertising spending, including online marketing, fell nearly 9% from January to April compared with a year earlier.

“Short-term, our expectations for growth are low given that many tech companies rely on advertising as their largest contribution to revenue,” said Kai Wang, senior equity analyst at Morningstar.

Regulatory changes could also weigh on the ad market. Chinese market watchdogs have proposed new restrictions on digital marketing, including calls for a ban on misleading ads and those targeting medical treatments, cosmetics and online games to young people.

Baidu Chief Executive Robin Li acknowledged that the near-term outlook for his company’s ad sales was bleak.

“(But) looking beyond the near-term turbulence, we believe both China’s economy and Baidu’s business will remain promising for the medium to long term,” he said last month. “We expect our ad business to recuperate once overall economic buoyancy returns.”

Author: CISSY ZHOU, NIKKEI Asia

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