China’s digital ad sector grows 12.1% despite economic headwinds

The news: Despite struggles in China’s broader economy, its digital advertising sector is projected to grow 12.1% to $143 billion this year, accounting for 85% of the country’s total media spending. This performance will push overall media expenditures up 10%, just ahead of the 9.5% expansion of the US.

However, 2024 likely marks the end of China's era of double-digit growth.

The advertising strength is impressive given the market economy’s overall slowdown. Persistent challenges in housing, weak consumer confidence, and mounting corporate debt have contributed. While government stimulus measures aim to hit the 5% growth target, they mask deeper structural issues that signal more sluggishness.

A tale of two models: Stark differences among China's tech giants show the economy’s problems and promise.

• Traditional ecommerce leaders are losing steam, with Alibaba and JD.com seeing ad revenue growth of just 5% and 2.7%, respectively. We expect Baidu, the sixth-largest ad player in the market, will increase ad revenues 1.5% this year after posting a 4% decline in Q3 after SMBs reduced their spend due to macroeconomic conditions.
• Meanwhile, platforms focused on entertainment, commerce, and services are thriving—Tencent, Meituan, Kuaishou, and PDD’s Pinduoduo unit are all posting ad revenue growth above 20%.

The reasons vary; Tencent benefits from surging long-form video consumption (albeit with slower growth ahead), while Meituan's dominance in food delivery drives its ad business.

PDD ascendant: Since its 2015 launch targeting lower-tier cities with budget items, PDD has undergone a dramatic evolution.

• The pandemic was a turning point, as the platform became a go-to destination for groceries and agricultural products during lockdowns. This shift helped PDD shed its early reputation and gain traction in China's wealthy urban centers.
• Its numbers tell the story. Pinduoduo is projected to generate $22.4 billion in ad revenues this year, capturing 15.7% of China's digital ad market—trailing only Alibaba and Douyin. In ecommerce channel advertising specifically, PDD now commands a 35% share, dwarfing JD.com's 11%.

PDD's international expansion through Temu highlights its ambitions beyond China. While the company has diversified from its early reliance on advertising revenues, its ad business continues to thrive from what management calls "higher user engagement and more compelling advertising product offerings."

Our take: The contrast between PDD's rise—despite a slower Q3 due to competitive pressures—and traditional ecommerce platforms' struggles points to a broader shift in Chinese consumer behavior. Pinduoduo has been able to outperform the field on account of its ultra-low prices, which is helping it attract more users.

Even as the broader economy faces headwinds, companies that can capture and maintain user engagement are finding ways to boost their advertising businesses. This suggests that while China's era of easy growth may be ending, opportunities remain for innovative players who can adapt to changing consumer preferences.

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