With China’s sports industry in flux, foreign companies have more investment opportunities in the sector.by Matt BeyerOn a steamy afternoon this summer in Beijing, members of the sports press, the old guard of China’s basketball coaching community, and select high-ranking PRC General Administration of Sport officials bid farewell to Yao Ming, the now-former center who played for the National Basketball Association’s (NBA) Houston Rockets, at a grandiose retirement ceremony. While Yao was honored for his individual accomplishments, posters emphasizing team spirit and glory for country donned the walls as they have for years. Despite the surroundings, no one questioned that Yao—an international megastar—deserved the attention.
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Though Chinese media mourned Yao’s departure from the NBA as if basketball in China was dead, the same media outlets were tracking and following the trials and tribulations of the NBA lockout in the United States and its potential opportunities for the Chinese sports industry. Because the NBA lockout will likely delay the upcoming NBA season, foreign companies will have food for thought on how to tap the sports market in China, where there are as many business opportunities as there are challenges.
Professional sports is a highly regulated industry in China, but the PRC government is committed to opening it more to the private sector. The government also aims to expand the industry to improve people’s fitness, provide positive social activity outlets, provide world-class entertainment, and create national champions. Companies that help China use sports to boost physical fitness among youths, create profitable sporting events, and develop elite domestic talent will receive strong government support to help raise sports standards in China.
China’s sports system
Yao’s retirement has forced China’s sports regulators to re-evaluate their role, which primarily has been to drive a system that aims to win Olympic gold medals. In China, sports officials and coaches select prospective athletes at a young age and place them into specialized training schools, where they are isolated and focus almost completely on repetition-based training regimens. Outside of this system, few Chinese citizens participate in recreational sports, and spectator-sport culture is generally nationalistic, complemented by entertainment elements surrounding the game.
The current Chinese system dominates in sports such as gymnastics and diving, but it has limited success in team sports, despite many Chinese stars playing professionally in overseas leagues. In basketball, China’s best performances in the 2004 and 2008 Olympic Games earned them eighth place in the world. And the Chinese national soccer team, currently ranked 73 in the world, is an object of derision. PRC Vice President Xi Jinping, who is most likely to become China’s next president, has identified the reform of Chinese soccer as a top soft power priority.
From a business perspective, the government regards sports as a cultural industry; from a political perspective, the government sees sports as an educational tool. Patriotism is at the core of sports. Even if an elderly Chinese person does not follow track and field, he will cheer for Liu Xiang, one of China’s top track and field athletes, because Liu has been lifted up as a national hero for his 2004 Athens gold medal. In contrast to the Chinese entertainment industries (particularly film in recent years) that have gained significant private funding and international attention, Chinese domestic sports are playing catch-up.
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Exceptions exist, however, such as professional tennis player Li Na—Nike, Inc.’s current gold mine in China, who until recently was the domestic sports industry’s persona non grata. The tattooed legend-in-the-making fought for the right to choose her own coach and practice away from official sports authorities. This caused many in the system to ostracize her. Her victory in the 2011 French Open forced even the most conservative system stalwarts to consider reform of the state training system.
Profitable Chinese champions
Yao became China’s first number one draft pick in a major international sports league such as the NBA. A country where soccer was the dominant sport quickly focused on basketball shortly after the Houston Rockets grabbed Yao in June 2002. According to a 2003 Chinese press report, 72 percent of men aged 25-42 identified themselves as NBA fans, and 52 percent of that demographic watched at least one NBA game per week. A 2008 New York Times article reported the NBA had more than 450 million fans in China. Riding in the wake of the Yao phenomenon, the NBA ramped up its presence in China by adding more than 100 employees across the country and creating NBA China, a separate entity from the NBA headquartered in New York.
The NBA has not been the only sponsor to profit from the Yao phenomenon. Nike’s China revenues rose from around $200 million in 2002 (the year Yao was drafted) to $1 billion in 2008. Other international apparel brands, such as Adidas and Reebok (Yao’s apparel sponsor), have also profited from the NBA, bringing their signed star athletes to China for annual tours during the offseason. Chinese brands have caught on quickly, with Li Ning Co. Ltd.—an athletic shoe and apparel company founded in 1990 by former Chinese Olympic gymnast Li Ning—signing Cleveland Cavaliers player Damon Jones in 2006 and Miami Heat megastar Shaquille O’Neal soon after. The Chinese sportswear company Peak Sports Products Co., Ltd. quickly followed, and it now sponsors 14 NBA players. But the largest deal by far went to Anta Sports Products Ltd. in 2010, when Boston Celtics player Kevin Garnett broke his “lifetime” contract with Adidas to sign on with Anta.
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Yao cashed in as well, taking the top spot on the Forbes China Celebrity List each year from 2005 to 2010. He has represented multiple brands, including Apple, Bank of China, China Life, China Unicom, Oreo, and Pepsi.
Observers can draw two conclusions from the Yao phenomenon. First, Chinese champions sell big. If a Chinese player can obtain star status in a league with diehard NBA basketball fans or English Premier League soccer fans, people will idolize them and corporate dollars will follow. Second, though Yao’s emergence on the sports scene was largely due to the state sports authority’s careful planning, China’s market-oriented reforms are driving the industry into a new era where stars will come from outside the government system.
The direction of change
Following the release of China’s 12th Five-Year Plan (FYP, 2011-15) in March 2011, the PRC General Administration of Sport released its own five-year plan in May. The sports administration’s plan aims to raise the share of China’s GDP spent on the sports industry from less than 0.5 percent ($23 billion) to 0.7 percent ($62 billion) over the period. Commentators often contrast China’s sports industry’s share of GDP to that of the United States, which is 2.8 percent ($414 billion). The composition of sports industry spending also differs between China and the United States. The value of China’s sports industry is made up mostly of sporting equipment and apparel production (71 percent), which is export driven. Retail sales (9 percent), ticket sales (7 percent), and recreational league fees (4.5 percent) remain relatively insignificant. In the United States, sporting good sales (50 percent), recreational participation fees (22 percent), and sports medicine (13 percent) make up the lion’s share of the industry’s value.
China’s sports leadership and a select group of central government bodies will focus on expanding the sports services sector aggressively over the next five years as part of the sports administration’s 12th FYP. Related goals are to create a participation-oriented domestic sports culture and provide high-quality sports products to China’s rising group of consumers with disposable income. The PRC government has welcomed foreign companies to help with these initiatives. Top priority items include management of recreational activities and sports facilities and sponsorship.
Expanding recreational sports to foster a Chinese sports culture
Sports play an underappreciated role in China’s educational system. For instance, over the last 15 years, changing eating habits have had a dramatic influence on the figures of Chinese youth. This phenomenon is not unique, however. Young people in the United States are supersizing, despite the strong sporting culture in their country. But China’s health risks could increase, since physical education classes have been replaced by hours of desk work preparing for competitive exams.
Two of the PRC State Council’s main goals are to make education more well-rounded, which includes integrating sports into children’s lives for exercise, and to develop new professional talents. Many of the 4 million sports-related jobs that the government aims to create over the next five years will help reach these objectives. Companies that support programs integrating education and sports will receive a welcoming ear—and in many cases generous funding—from central and local government authorities. The State Council has launched “a national fitness program” for the 12th FYP period, which encourages companies and communities to engage in physical activity. Chinese and foreign businesses that get behind such policy initiatives and organize mass sports events to engage Chinese people are encouraged. For example, in recent years the Chinese sports brand Anta has held an annual long-distance race. Because it matches government fitness objectives, Liu Peng, the minister of the General Administration of Sport, took part in last year’s race as a symbol of the government’s support. These types of events can also increase a company’s brand value and may be regarded as corporate social responsibility activities.
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Creating profitable sports facilities in China
According to the General Administration of Sport, in 2007, China had 812,118 sports facilities, 63 percent of which met PRC government standards to be considered official sports facilities. Out of all the sports venues, only 3.4 percent registered profits: 2.8 percent made profits of ¥100,000 ($15,626) or less, 0.5 percent made profits of ¥100,000-¥500,000 ($15,626-$78,126), and only 0.1 percent of the entire group made more than ¥500,000 per year.
With a glut of facilities functioning as black holes for government funding, the government is on a mission to make these facilities self-sufficient—and profitable. Making facilities available to local recreational leagues could provide revenue to most small facilities. In 2007, 26.8 percent of facilities were open for public use, however, making the execution of this plan a challenge.
Usage restrictions are likely to change, as the PRC government looks to foreign companies to provide management solutions for China’s numerous sports facilities. This will include general operations advising, maintenance and renovation consulting, and event management and booking. Though companies have struck notable deals in Beijing and Shanghai—including sponsorship of the MasterCard Center and Mercedes Benz Arena, both managed by US-based Anschutz Entertainment Group—these deals are just the tip of the iceberg. Companies that can localize effectively will be able to take advantage of many opportunities. The construction of new venues on par with international standards will require multinational corporations’ (MNCs) design and management expertise that is not yet produced by domestic manufacturers.
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Leveraging athletes and events for publicity
China’s sports authorities consider the country’s top athletes, many of which are Olympians, precious resources and are hesitant to relinquish control of the athletes to outside parties—especially foreign companies. This is slowly changing as the PRC government recognizes the need for MNCs to invest in athletes and sports events. For example, New York-based sports and media heavyweight IMG (formerly International Management Group) sponsored Li Na in her rise to fame. Team Yao is also a mix of local and overseas Chinese and foreign players.
The government also hopes athletic marketers will bring the athletes they represent together with corporate sponsorship resources to hold large-scale athletic events. Since China experienced the success of the 2008 Beijing Olympics and the 2010 Asian Games in Guangzhou, the PRC government’s desire to hold large-scale sporting events has only increased. The government will support foreign companies that can bring Chinese athletes major deals and organize global-scale sports events. Ambitious local governments will be increasingly keen to explore new opportunities to feature their jurisdictions in internationally recognized events.
The PRC government is focused on standardizing the sports agency industry, and the General Administration of Sport held its first-ever national sports agent certification exam in January 2011. Though market opportunities continue to expand for Chinese athletes, officials are concerned about the current unregulated nature of athlete management, where “agents” with no credentials endanger the careers and personal finances of athletes. The PRC government will welcome foreign agencies with strong legacies of successful athlete management in the United States and Europe to help raise the marketing values of China’s domestic athletes and raise a class of professional Chinese agents.
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Positive partnerships are key
As long as the sports industry is highly regulated, aligning business strategy with the government’s political and developmental goals is key to any plan to tap the market. MNCs should position themselves as partners for China’s sports industry to facilitate a sports culture and develop Chinese talent. Advising local partners on how to best leverage China’s sports resources as part of a marketing strategy will be important to gain trust and a long-term market presence.
MNCs are seen as the ambassadors of sports culture from abroad in China, partly because they have been more willing to spend big to use athletes to engage consumers. It is important to realize that the days when a company could export a popular foreign athlete to China to sell products by having the athlete stand in front of a screaming crowd with a logo backdrop are coming to an end as consumer demands for two-way brand engagement rise. For example, many NBA fans in China are no longer content to just watch interviews on TV to see their favorite players. Internet companies such as Sina and its micro-blog platform are leading the way by getting NBA players online and in live daily chat sessions with their fans.
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Forming a platform for meaningful exchanges between Chinese and American athletes could boost PRC officials’ status and endear companies to the Chinese people. With the current NBA lockout in effect, many people are exploring various theories on how to leverage the opportunity to bring NBA stars to China. It may be exciting to think of LeBron James dribbling down the court in Hangzhou, Zhejiang, but in the interest of protecting the long-term development of the Chinese Basketball Association (CBA), the government has announced that no players under contract with an NBA team can sign with the CBA. This is different to the Euroleague, as well as other global leagues, which are allowing “NBA outs” for NBA players to return to the NBA when the current lockout is resolved. Though the lockout could have brought big name players to China and record ticket sales, the PRC government was not interested in foreign players using the CBA to make quick money and leave. Some analysts suggest that an effective alternative plan would be to organize a mini-league of star NBA players and China’s top domestic talent playing side-by-side in a series of exhibition games across China. This plan would give fans the opportunity to see NBA players up close and on primetime TV. Local governments, especially in second-tier cities hungry for international entertainment events, would likely welcome the attention to their cities and could leverage such events to raise the profiles of local companies throughout China and abroad. It would also be an easy decision for any NBA players or MNCs looking to raise their profiles among China’s basketball fans to sign on.
Though Yao’s announcement may have been one of China’s biggest sports stories for 2011, the domestic sports industry is developing rapidly and filled with opportunity. The PRC government will continue to encourage companies that position the use of sports to improve the daily lives of Chinese people.
About The Author
Matt Beyer is an associate director at North Head, a Beijing-based strategic communications and public affairs consultancy, and he leads the team’s sports practice. He was the first foreigner in China to take the PRC General Sports Administration’s Sport Agency Certificate Examination and acted as Yi Jianlian’s personal interpreter during Yi’s rookie season in the NBA.
Source: Re-Thinking the Game Plan