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Licensing in China – Challenges & Opportunities

By George Williams, Managing Director, LMCA Asia

(Originally Published in Total Brand Licensing)

To assess the rapid rise and acceptance of licensing as a thriving industry in China in recent years, one need look no further than the upcoming China Licensing Expo in Shanghai in October of 2016.  As recently as four short years ago, this same event was comprised of a mere 30 to 40 small booths with no participation by the likes of Disney, the major motion picture studios, or the major toy companies.  With LIMA leading the charge, this year’s offering will, again, rival the annual Licensing Show in Las Vegas with more than 6,000 booths covering more than 150,000 square meters at the Shanghai New International Expo Centre.  Stepped up enforcement of trademark laws along with the China’s surging brand awareness have combined with the speed and convenience of the internet and e-commerce shopping to make an investment in brands and character properties for China a wise investment indeed.

But, the more things change in China, the more things stay the same.  China’s retail and distribution infrastructure remains highly fragmented, and the overwhelming majority of retailers, online and offline, lack the product development and sourcing capabilities required to get licensed products on their shelves.  Meanwhile, most potential manufacturing licensees remain structured for export and lack the distribution capabilities required to get licensed products to domestic consumers.  Alongside these key disciplines, manufacturing and retailing, lie additional components that are required for success, but are in limited supply.  These include design, product development and, most important, brand management capabilities.  And herein lies the challenge inherent in China’s burgeoning licensing industry – the number of properties seeking access to China’s billion-plus consumers far outstrips the available resources required to develop the products and make them available for sale, by several orders of magnitude.

To put this into perspective, it is important to consider differences with more mature licensing markets such as the United States.  In the US, the owner of a character property such as Angry Birds contacts one of the 10 remaining major national retailers in the market to present a direct-to-retail licensing opportunity for one or more widgets deemed suitable for the property’s enthusiasts.  Said retailer will typically control several hundred, or more, points of sale and will be well versed in the conduct of product development and sourcing operations required to fill its shelves, both real and virtual, with the private-label products that it requires to maintain its profit margins in one of the world’s most hyper-competitive markets.  Upon the successful, though not always amicable, completion of negotiations, our property owner executes an agreement that turns the entire operation of the licensed category over to the retailer, and then awaits quarterly installments, sporadic approvals and invasive audits notwithstanding.  Sound familiar?  Well, you’re not in Kansas anymore.

With very, very few exceptions, DTR does not exist in China.  You can count the number of nationwide retailers with product development and sourcing operations on one hand.  Department stores carry no inventory.  They, as well as Alibaba’s T-Mall, simply lease out space to brands or the brands’ designated distributors, or retailers.  Meanwhile, back at the factory, Chinese-made products are, now, often some of the world’s best, but the designs are usually developed elsewhere and don’t ask about getting the products to the local consumer.  Brand management? Integrated marketing programs? O2O? CRM?  Hello?  Silence.

It’s all coming of course.  Foreign retailers are educating the market, and China’s focus on the domestic economy will only hasten the pace at which these various disciplines that make up the “licensing ecosystem” become more abundant and better integrated to serve our aforementioned property owner and those that follow.  The challenge lies in taking what China is giving you, today, and making it work as you seek to bring your property to market and position it for long term success in this important territory.

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