M&A, Talking Point

Just the tonic

How a herbal tea brand ended up in one of China’s worst legal battles


Relaunched and reinvigorated? Jiaduobao faces a $436 million damages suit from Guangzhou Pharmaceutical

During the Summer Davos Forum in Tianjin last week more than 300 foreign delegates were invited to a special ‘Guangzhou Night’. To accompany the traditional Cantonese cuisine, the beverage of choice was the herbal tea Wanglaoji, provided by its owner, Guangzhou Pharmaceutical.

The state-owned enterprise was a sponsor of the meeting and described it as the perfect stage to “tell the world the story of China’s time-honoured brand”. Wanglaoji also announced that it plans to team up with China Goubuli, a state-owned steam bun chain based in Tianjin, to sell its tea at its outlets. (China Goubuli is opening restaurants abroad and in 2014 it was on the verge of acquiring American coffee chain Dunkin Donuts, see WiC222.)

But as one new partnership was being formed, there was a less welcome reminder that one of Wanglaoji’s earlier deals continues to fester.

In fact, just when it looked like Wanglaoji had put its protracted legal wrangling with archrival Jiaduobao behind it (see WiC103), a new chapter has opened in one of China’s worst corporate feuds. In a fresh filing in a provincial court in Guangzhou last week, Wanglaoji said it is seeking Rmb2.9 billion ($436 million) in damages from its former business partner. That is the largest ever claim in a Chinese intellectual property case. The new lawsuit looks like it could drag on for years, and it forms the latest front in China’s increasingly hostile trademark wars, which have recently embroiled foreign firms like New Balance.

A brief recap of Wanglaoji’s story

Created in 1828, the Chinese herbal beverage has a history older than Coca-Cola.

But like the American soda, which started as a cocaine tonic to replace morphine, Wanglaoji can also trace medicinal roots. According to company legend, an overworked imperial envoy fell ill during Lin Zexu’s campaign to ban opium in Guangdong in the 1830s. He recovered after taking a herbal drink from a Guangzhou doctor called Wang Zebang. Lin sent Wang a giant gourd-shaped copper pot in gratitude, carved with three large golden Chinese characters that read ‘Wang Lao Ji’ (Lao means ‘old’ in Chinese and Ji was Wang’s nickname as a child).

Wang chose this auspicious designation as the trademark for his herbal medicine, which became a popular street drink in southern China. According to Phoenix TV, when one of Wang’s offspring expanded the business to Hong Kong in 1896, Wanglaoji was the first Chinese trademark to be registered in the British colony. At the turn of the century the herbal drink was even on sale – as a luxury product – in parts of the United States.

However, as Mao Zedong consolidated power in the 1950s, private firms in China found their once flourishing businesses nationalised. Wanglaoji did not escape the process and was merged with eight other Chinese medicine providers in Guangzhou and became part of the newly formed Yangcheng Tonic Factory. The switch from family ownership to state control was disastrous, but Wanglaoji survived. The brand was basically left idle until 1992, when Yangcheng Tonic began producing the herbal drink and selling it again in Guangdong.

And Jiaduobao?

By the early 1990s Yangcheng Tonic was struggling and lacked the cash and the expertise to grow Wanglaoji’s business.

Step forward Chan Hong-to, a food trader in Hong Kong. The Guangdong-born entrepreneur recognised the untapped potential of Wanglaoji as consumerism burgeoned in post-reform China. He had already acted as the distributor for Wong Kin-yee (or Wang Jianyi in Mandarin), the great-great granddaughter of Wang Zebang, who was running a Wanglaoji business in Hong Kong.

According to China Business Journal, Chan talked Yangcheng Tonic into a deal in 1995 and he set up Guangdong Jiaduobao Drink (JDB), a wholly-owned unit of his Hong Kong-based Hong To Group.

JDB bought the rights to the Wanglaoji brand name for five years paying Rmb300,000. It also invested $20 million in a production plant in Guangdong.

Described by China Business Journal as a “marketing genius”, Chan replaced Wanglaoji’s medicinal-looking green cartons with shiny red cans with a golden logo. Indeed, Chan made the herbal tea into more of a Coca-Cola lookalike as he started marketing Wanglaoji as a soft drink rather than a Chinese medicine.

Sales of the tea took off, from close to zero in 1995 to Rmb100 million in 2000. Helped by the SARS outbreak, sales then quadrupled from Rmb150 million in 2002 to Rmb600 million in 2003. Meanwhile Yangcheng Tonic had been swallowed up by Guangzhou Pharmaceutical in 1997. The local government-controlled firm continued to produce a version of Wanglaoji in its older green packaging, but its lacklustre sales persuaded the local pharma giant that it was not getting a fair cut on the original deal, despite the fact that JDB had been investing heavily in developing the Wanglaoji brand across mainland China.

Why the bad blood?

Three years after it had taken control of Yangcheng Tonic, Guangzhou Pharmaceutical signed a new 10-year contract with JDB. The licencing fee for use of the Wanglaoji trademark was increased to Rmb4.5 million a year and set to further rise by 5% annually to 2010, according to Caixin Weekly.

But the magazine reports that Guangzhou Pharmaceutical soon began to complain about the way that JDB was displaying its own name alongside the Wanglaoji brand. “JDB was highlighting Jiaduobao’s name while weakening the public impression of the brand holder Guangzhou Pharmaceutical. That reflects their intention to steal the brand,” an official at the firm told Caixin Weekly. Even still, JDB managed to extend its licencing deal for another decade to 2020, paying annual royalties of about Rmb5 million.

That turned out to be the result of some dodgy dealings, however. In 2004 – the year that JDB began to expand beyond Guangdong – Guangzhou Pharmaceutical’s general manager Li Yimin was arrested on corruption charges. The next year he was convicted of receiving bribes, including HK$3 million ($385,000) from Chan at JDB. In October 2005 Chan was also arrested in Guangdong, although the Hong Kong businessman was released on bail a month later and fled the country (more on this later).

By 2005 annual sales of Wanglaoji had surged to Rmb2.5 billion. With so much at stake the Guangzhou government allowed JDB to maintain its business under Chan’s control, based on the questionable contract signed with Li. But Chan sought a more permanent resolution. After Guangzhou Pharmaceutical refused his proposal to raise royalty payments to Rmb50 million a year, he came up with something more attractive.

According to 21CN Business Herald, Wong Kin-yee’s family firm owned more than 40 of Wanglaoji trademarks registered overseas. The Hong Kong firm also boasts the most legitimate claim to ownership of Wang Zebang’s original recipe for the herbal drink. So Chan brought Guangzhou Pharmaceutical and Wong together to form a joint venture that invested in Guangzhou Pharmaceutical’s green-carton Wanglaoji business, but that would eventually own the red-can version too (when JDB’s lease expired), plus Wong’s overseas trademarks.

These somewhat complicated arrangements would dilute Guangzhou Pharmaceutical’s ownership of its herbal tea business in mainland China but in return would mean that it enjoyed new exposure to the overseas market under a “super national brand”, 21CN reported.

So why the legal tussle?

The joint venture didn’t work out. One reason was that JDB’s separate red-can business grew too fast. According to Caixin Weekly, it surpassed Rmb15 billion in revenues in 2008 and overtook Coca-Cola as the bestselling canned drink in the country. Guangzhou Pharmaceutical declared that Wanglaoji was China’s number one brand in 2010 and deemed it worth Rmb108 billion. The SOE also claimed that JDB’s licence was invalid and demanded that the Hong Kong firm stop using the trademark. JDB responded by changing its product’s name to Jiaduobao but kept the iconic red-can design, as well as the most popular advertising slogans.

That unleashed what has become the bitterest legal tussle in Chinese corporate history, comprising numerous lawsuits, fought across various courts. Essentially, Guangzhou Pharmaceutical has argued that the contract signed with Li Yimin was the result of corruption and thus unenforcable. JDB has countered that the red-can design and advertising slogans for the tea were created by Chan and his marketing team, and that Wanglaoji wouldn’t be as successful as it is without JDB’s investment.

Who is getting the best of the case, though? China Business Journal has calculated that JDB had lost 19 out of 20 lawsuits by the end of 2015. Many of the legal proceedings continue (awaiting final appeal) but the most crucial decisions have gone against JDB. It has lost the rights to use Wanglaoji’s name, the iconic red-can packaging, a popular advertising slogan about the medicinal function of the tea and, last but not least, the recipe itself. Now it faces the future prospect of paying Rmb2.9 billion in damages to Guangzhou Pharmaceutical in the latest suit.

Is a truce possible?

Last month JDB seemed to have conceded defeat and looked ready to move on with a standalone identity for its Jiaduobao brand. In May it announced plans to cooperate with Angry Birds, the massively popular app franchise, and to promote its herbal tea in gold-colour packaging rather than the famed red (see WiC327).

In an unexpected development Chan also made a rare public appearance last month. Arguably China’s richest fugitive (Hurun estimates that he is worth Rmb16 billion), he showed up at a signing ceremony between JDB and Beijing Enterprises in Hong Kong. (Prosecutors in Guangzhou say Chan is still on their wanted list, and presumably he would be detained if he crosses the border into the mainland from Hong Kong.)

At the ceremony Chan said JDB will provide financial backing for Beijing Enterprises’ football team, which is vying for promotion to the Chinese Super League. The two firms will also cooperate in the beverage industry with a goal of realising “the Chinese dream of creating a great national brand”.

The move looks like a defensive one in view of Guangzhou Pharmaceutical’s sustained legal assault. By bringing in a powerful firm under the Beijing municipal government, JDB is showing that it has strong state backing outside Guangdong province, says Sohu Finance. “Beijing Enterprises may even invest in JDB in the future, forming a relationship similar to COFCO and Mengniu [a large milk producer],” it suggests.

In the meantime Guangzhou Pharmaceutical’s relentless pursuit of the case, as well as its latest claim for damages, seems to have won it few fans, especially as JDB now seems prepared to drop the Wanglaoji brand and strike out on its own.

“The internal feuds between Wanglaoji and JDB have not only wasted company resources and the court’s time. They have severely affected the global expansion of Chinese herbal tea culture too,” China Business Journal reprimanded. The newspaper added that the archrivals should learn from the healthier competition between Coca-Cola and Pepsi, which has propelled both firms to leadership positions in the soft drinks market. “Small success is down to yourself but truly big success is down to your opponent,” it proposes. “If the market is big enough for both Coca-Cola and Pepsi, it is big enough for both Wanglaoji and Jiaduobao.”

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