Debt-ridden Chinese football plays a risky game

04 August 2017 Consultancy.uk

As the English football season prepares to kick off with the Community Shield clash between Arsenal and Chelsea at Wembley, Chinese footballing executives will be viewing the match enviously. Despite periods of intense investment, the Chinese Super League’s sponsorship and television revenues do not appear to be growing rapidly enough, with new debt regulations from the Chinese FA suggesting the region’s footballing governance bodies are apprehensive of a bursting bubble.

Aside from the money-spinning Asian tours of Europe’s elite clubs during their pre-season, the majority of British coverage of Chinese football over recent years has been directed on the ever-growing transfer and wage bill of the nation’s clubs, which may well see a new regulatory framework compromise Chinese clubs’ purchasing power in the future. According to Big Four consultancy KPMG, investment in China’s sports industry is due to reach RMB 3 trillion ($446 billion) by 2020. In line with the analysis provided by the consulting firm, in order to avoid a dramatic bubble-burst, clubs must not only to attract and develop talent but also to create a modern, commercially-oriented football economy.

Despite improving attendance figures in the short-term, seeing grounds filled with fan-numbers comparable to those of Spanish La Liga, the limitation of publicly-owned, non-football-specific venues and lower ticket prices, mean that CSL clubs’ match-day revenues are considerably lower than those of their Western peers. Meanwhile, attendances are, in many cases, more volatile and dependent of on-pitch success than in Europe, where long-suffering supporter bases have been built over many decades for even the least successful clubs.

Liaoning Hongyun for example averaged over 20,000 fans at their home games in 2016, while in the 2017 season which has seen the team hover above the relegation zone, the average attendance is below 12,000. In that case, while improving domestic consumer spending is expected to grow by $1.8 billion by 2021 in the nation, further boosting this, the Chinese Super League (CSL) will still need to attract major sponsorship and television deals by appealing beyond China is essential in order to be sustainable.

For Chinese clubs, then, although the overall focus is still on financial outlay in the transfer market and investment in grassroots, the development of modern organisational structures and the optimisation of business operations is essential for long-term development. In an extremely competitive and increasingly regulated landscape, KPMG’s Football Benchmark finds those excelling off the pitch will undoubtedly be in a better position to succeed on the field.

CSL Attendances

To some extent, the CSL has experienced collective success in this manner, with the league’s growing stature, which has been amplified by high-profile arrivals from the English Premier League and Europe, being confirmed by Ping An Insurance’s renewal as league sponsor. The five-year new deal (2018-2022), worth RMB 1 billion, makes the company the CSL’s longest-running sponsor.

Sponsorship still represents the main revenue source for individual CSL clubs – however the league collectively sees little benefit from this, as assets including naming rights and shirt designs usually reside with the clubs ownership. As a result, names are often modified following ownership changes, as was the case of Chinese e-commerce giant Alibaba’s 2014 investment in the CSL’s most successful club Guangzhou Evergrande, which saw Taobao (Alibaba-owned online retail company) added to the club name.

TV trouble

In terms of television revenue meanwhile, the league has yet to really find its niche. Back in 2015, the Chinese Football Association (CFA) agreed with China Media Capital (CMC) for the sale of the league’s broadcasting rights. While this was not only a significant revenue increase on the previous agreement with China Central Television (reportedly RMB 80m), the relationship between the league and the media conglomerate has become strained recently.

CMC agreed to pay RMB 8 billion (above EUR 1 billion) over the 2016-2020 cycle, RMB 1 billion for each of the first two seasons of the agreement and RMB 2 billion in each of the following three, however the broadcast giants reportedly delayed their latest payment and formally requested the CFA to re-negotiate the contract. As pressures for rapid development are balanced delicately against the fear of unsustainability and collapse, newly imposed regulations aimed at controlling the investment in player signings have been blamed for diminishing the media value of the product, demonstrating the tightrope Chinese football presently walks.

CSL TV revenue

Over the last two seasons, the CSL has attracted numerous marquee signings, including the likes of Hulk, Alex Teixeira, Jackson Martinez, Ramires, Gervinho, Graziano Pelle, Oscar, John Obi Mikel and Paulinho. While this has quantifiably increased foreign and domestic interest in China’s premier division, the Chinese Super League’s transformation into a lucrative global consumable is a long way from complete, and at present rates sponsorship and television rights, while yielding higher revenues, are in danger of not covering these expenses. Even with the massive television deals tabled in England, British clubs have recently been noted for being increasingly under financial pressure, and with that lower broadcasting and sponsorship return, a number of Chinese clubs are reportedly no different.

Shanghai Shenhua is an archetypal example of the risky game Chinese clubs are playing. Early CSL arrivals Nicolas Anelka and Didier Drogba both enjoyed turgid spells at Shanghai Shenhua – following the expulsion of the manager who brought the duo on board – before leaving quickly despite hefty pay-packets, while current Shenhua employee Carlos Tevez is reportedly suffering the same experience at the club, despite raking in £615,000 a week. With on-pitch success continue to elude the expensive Shanghai outfit meanwhile, Shenhua are just one of 13 clubs currently threatened with expulsion from the Super League of 16, due to outstanding debts regarding player transfers, salaries or bonuses – with the Chinese Football Association are presently warning this could see them denied entry into next year's competitions.

The CFA’s newly toughened stance was in turn provoked by a letter sent to the CFA by the Asian Football Confederation on July 11, which stated clubs had until Aug 31 to clear all outstanding payments or face exclusion from next year's Asian Champions League. While the domestic market might be large, the CFA are aware that, as per the English model, continental football is essential to expanding the profile of both Chinese clubs and the Super League itself – meaning an exclusion from the Champions League could severely dent their hopes of raking in English Premier League levels of television revenue for decades to come, along with large sponsorship opportunities that accompany that. Had Manchester United missed out on Champions League football for the coming 2017/18 season for example, the club stood to miss out on £21 million in sponsorship alone.

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