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Is China still the Wild West?


By Yizan He

(Original article was published in World Trademark Review.The copyright of this article belongs to the author Yizan He.Please indicate the source if authorized)

To many western rights holders, China remains a mysterious market; but there is more going on than licensing associations and the media would sugges

Although for many economists, the debate as to when China will overtake the United States and become the world’s largest economy looks set to continue, there is no doubting the market’s significance for global brands and rights holders.
As a result of higher disposable incomes, Chinese consumers have begun trading up from mass brands to premium brands and have increased their spending on services thanks to their willingness to pay extra for a better experience. In many product and service categories, the growth of premium segments has outpaced that of mass segments. This is good news for western rights holders, which are generally regarded as premium alternatives.


Lack of media coverage

Fuelled by a relentless appetite for western intellectual property, licensing has been growing rapidly in China ever since the early 2000s. However, to many – including experienced licensing executives – China remains a mysterious Wild West.
One of the key reasons for this is inadequate media coverage by licensing trade associations and trade magazines in the United States and Europe. Most large Chinese licensors remain unknown in the trade, despite the fact that hundreds of millions of dollars’ worth of licensed merchandise is sold in China annually. An experienced Chinese licensing professional would likely agree that the list of the world’s top 150 licensors would have to be rewritten if proper account were taken of Chinese rights holders. Likewise, large Chinese licensees rarely if ever feature in trade coverage. Notable absences include Suning Group – a massive appliance retail operator which has licensed many top brands (including Whirlpool, Electrolux and Pioneer) and transacts hundreds of millions of dollars in retail sales of licensed electronics and home appliances annually.
This lack of knowledge contributes to apprehension and fear among western rights holders, potentially losing them a significant number of business opportunities.
Fortunately, this will likely be resolved over time as trade media gradually increases coverage of China and more Chinese licensors and licensees attend licensing shows in Las Vegas and London.


Rise of licensing models unique to China

Another key reason why China may not spring to western executives’ minds is that the approach to licensing is so different there. Chinese businesses have a more flexible and sometimes more ingenious approach to licensing, which has resulted in several models unique to the country. Over the years, various models have emerged and flourished in the market, such as the license-to-own model which WTR covered in its December/January 2011 issue (“Adapting to new environments – trademark licensing in Asia”, WTR 28) and which is used by many licensors and licensees – a notable example being the Beverley Hill Polo Club (BHPC) licensing programme in China.
With nearly 600 mono-brand stores in major cities across the country, BHPC is considered one of the most successful licensing programmes in China. Its original brand owner, BHPC International, was founded in Beverly Hills, a town of celebrities and wealth. In June 2002 Japanese company Young Sangyo acquired trademark rights in the brand for multiple Asian countries, including China and Japan. It subsequently licensed the BHPC mark to Shengmei Fashion of Guangzhou (Shengmei Fashion is part of Huaxing Group – a Chinese conglomerate with business interests spanning fashion, property and mineral water). As the BHPC brand grew in China, the likelihood of losing the licence under the traditional licensing model became all too obvious to the Huaxing Group. In 2012, Young Sangyo and Huaxing Group set up a joint venture to which the China trademark rights were assigned – with the latter being given the option to acquire the BHPC trademark rights in China (by acquiring full interests in the joint venture) for a specific amount of cash and equity. At the time of writing, Huaxing Group is preparing its initial public offering for China’s main board. Given that it has full ownership of its main trading label – BHPC – Huaxing Group’s valuation will be much greater in the eyes of investors than if it were a mere BHPC licensee. This is a win-win situation for all stakeholders.
License-to-own and other equity-backed licensing models may still be difficult for western licensing executives to grasp. However, China is a buyer’s market, with hundreds if not thousands of western brands trying to make inroads into the country. Most large Chinese companies have been adamant about their preference for either a license-to-own model or outright trademark acquisition.
Western rights holders which are unwilling to accommodate this growing trend are likely to face tough challenges in China and may have to work with smaller Chinese companies or regional players rather than national players.
Of course, the majority of western rights holders would never consider giving away their IP rights in China to licensees under any circumstances. Brands with ongoing global operations will stick with traditional licensing models, for understandable reasons. However, for brands that are less well known in China, an inevitable challenge remains: established Chinese companies have a strong preference for outright acquisition of brands and may insist on a license-to-own model.


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Logo slapping is prevalent among the many Chinese licensees of various European football clubs, including apparel licensees and travel-gear licensees

Picture: Eugene Onischenko/Shutterstock.com


Understanding Chinese licensees

To identify the best Chinese licensee partners and present a compelling value proposition to them, rights holders first need to understand how Chinese businesses think.
Unlike their western counterparts, many Chinese companies operate with short-term mindsets – understandable given the size and pace of the market. Their biggest fear is usually that a competitor could approach the rights holder with higher forecast royalties and walk away with the licence – often along with the dealer or franchisee networks – which could be fatal to any business.
Given this, it becomes easier to understand why Chinese companies are anxious about rights holders terminating licences sooner and are keen to recoup their royalties as soon as possible. Influenced by the market reality and short-term mindset, few are willing to wholeheartedly invest in long-term merchandise planning or product designs for brands that they are not sure they will manage to keep.
The results are lose-lose for all.
For example, logo slapping is a common practice among the many Chinese licensees of various European football clubs, including apparel licensees and travel-gear licensees. Little effort is given to merchandise design, retail stores or marketing. Licensed merchandise is generally cookie cutter and frequently sold on flash sale sites such as VIPSHOP.com with an artificially inflated retail price and a huge perceived discount – up to 90% is not unheard of. A comparison between such licensed merchandise with BHPC licensed merchandise is revealing and highlights the quality of BHPC’s licensing operation in China.


Choosing the right partner

There are many good licensees in the market; but how does one identify a good licensee partner? While there is no easy answer to this, generally speaking, companies with certain characteristics are probably a better bet.
First, companies should have western-educated Chinese entrepreneurs among their founders and top management team. The immersion of this target group in the western education and business environment world has helped them to develop a better understanding of the heritage and DNA of western intellectual property, along with a higher degree of respect for IP rights and more consistency in maintaining transparent business practices.
Second, companies should have established retail operations. Unlike the majority of retailers in Europe and the United States, retailers in China use a concession model – meaning that the set-up and daily operation of retail stores are handled by vendors. Chinese companies with their roots in original equipment manufacturing or trading business usually lack retail infrastructure and know-how. This is equally true of large Hong Kong-based trading companies, which have limited retail networks in China. Chinese companies tend to have a far better understanding of local markets and are therefore more likely to succeed.
Last but not least, direct-to-retail licensing is taking off in China, with online retailers in particular becoming good candidates for western rights holders. According to iResearch, a prominent market research firm in China, a massive amount of retail spending has now been redirected to e-commerce. About 11% of China’s total retail spending occurred via e-commerce in 2015 and this figure is expected to rise to 20.8% by 2018. While rights holders cannot afford to ignore this trend, they should resist the temptation to jump onto the direct-to-retail licensing bandwagon in China unless they have the proper team on the ground and the necessary tools to monitor operations there.
In the previous example, some may wonder why European football clubs are not protecting the value of their brands by more closely monitoring their licensees in China. This could be due to the limited tools available to them. Without knowledge of what is really happening in China, little can be done. For rights holders that do not invest in monitoring their licensing operations in China, it is like driving blindfolded.


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Companies whose founders and top management teams include western-educated Chinese entrepreneurs tend to have a better understanding of the heritage and DNA of western intellectual property
Picture: vitstudio/Shutterstock.com


Available tools for overseeing licensing programmes

Having a trustworthy team on the ground to oversee a licensing programme in China should not be underestimated. Simply relying on Chinese licensees’ quarterly reports is risky, given that the costs of mitigating non-compliance can be so high. For rights holders based 8,000-plus miles away from China, and for which maintaining a local team is not viable, employing IP surveillance tools can be an essential and cost-effective solution.
Unfortunately, failure to monitor licensing programmes occurs with both small rights holders and global companies. The risks posed by unauthorised use of one’s intellectual property are tangible and the presence of poor-quality or fake licensed merchandise cannot be eliminated easily due to the complexity and breadth of the market. For example, large amounts of Pepsi-branded underwear are still sold in China today after its ex-licensee was terminated years ago in 2011 The damage to Pepsi’s brand (and licensing revenue) is inevitable and likely to continue for years to come.
Tools are available to allow rights holders to track online infringements and counterfeits, and even to monitor online marketing and social media platforms. For example, IP Rights Security Eagle Eye is powered by a sophisticated data-mining engine and allows rights holders to monitor multiple mainstream e-commerce platforms in China, including TMall, Taobao and JD.com, in real time. It can even provide them with a full list of retailers selling licensed merchandise and a suspect list with an estimation of their transaction volume.
Equipped with in-depth intelligence, western rights holders can then make informed decisions and take decisive action, including taking down online stores and shutting offline stores with support from local police, Customs and government agencies.
As China undergoes structural reform, its government is encouraging local companies to invest more in high value-added areas including advanced technologies, better product designs, original content and stronger branding. As Chinese companies own more and more intellectual property of their own, there will be a gradual improvement in terms of overall respect for intellectual property, which will likely benefit both Chinese companies and western rights holders alike. Despite current challenges, China is one step closer to becoming one of the largest markets for IP licensing in the world.


Yizan He is founder and CEO at Alfilo
yzh@alfilo.com


The original article was published in The World Trademark Review which is a London-based trade magazine on Dec. 2016

(Original article was published in World Trademark Review.The copyright of this article belongs to the author Yizan He.Please indicate the source if authorized)