30 Oct 2014
Asia’s Licensing Hub Reaches Out to China’s Booming Market
Hong Kong is ideally placed to capitalise on the Chinese mainland’s fast growing licensing market, despite the many challenges it presents.
- Chart: Licensing activities, demestic versus overseas, by location (%)
- Chart: Licensing activities on the Chinese mainland, by company origin (%)
- Chart: Entry modes for international licensing companies (n=28)
- Chart: Locations where international licensing companies conduct mainland business (n=26)
- Chart: Retionales for entry modes of international licensing companies (n=28)
- Chart: Mainland licensors using agents to develop licensing business (n=26)
- Chart: Types of properties handled by licensors and agents on the mainland (n=27)
- Chart: challenges facing licensors or agents operating on the mainland (n=80)
- Table: Problem on operating in the mainland’s licensing market (%)
- Chart: Respondents engaged in licensing business with Hong Kong companies
China’s consumer market has witnessed spectacular economic growth in recent years . This has attracted international brands and retailers and created a flourishing business for international licensors and licensing agents. Over the past three years, the country’s per capita income has risen by half, reaching about US$6,800 in 2013. The growing affluence and purchasing power of Chinese consumers has driven licensed merchandise sales. The country’s licensed merchandise market was worth about US$5.5 billion in 2013, accounting for some 29% of the entire Asian market. Also, for the first time, it surpassed half of Japan’s sales (54%), even though China’s per capita income is barely one-fifth that of Japan’s.
While China’s licensing market is dynamic, it is also fraught with challenges for those overseas licensing companies looking to cash in on this surge of consumer spending. HKTDC Research recently conducted a survey aimed at shedding light on this burgeoning market for interested overseas licensing companies, including those from Hong Kong . This article looks at the Chinese mainland market from the perspective of the licensors and licensing agents.
Licensing business on the mainland
Among the survey’s respondents – which included licensors, licensing agents and licensees from around Asia – the Chinese respondents were predominantly focussed on their domestic market. Just 11% said they were engaged in both domestic and overseas licensing business. This stands in stark contrast to their Japanese counterparts, of whom 70% were involved in both domestic and overseas activity. Similarly, Hong Kong licensing companies are fairly externally-oriented, with 58% engaged in both domestic and overseas licensing.
Understandably, the saturation of Japan’s licensing market – which has shrunk in recent years, despite being the biggest market in Asia – is a driving force for outward-looking Japanese licensors (Licensing Opportunities in Asia: An In-depth Look). Japan and South Korea’s licensors and licensing agents comprised the entirety of international licensing companies covered in the survey. Some 30% are now engaged in licensing business on the mainland.
Confined by a relatively small domestic market, Hong Kong licensing companies are keen to develop cross border business. As such - and since the international financial meltdown of 2008 - they have set out to capitalise on the economic paradigm shift of the mainland, which has seen it move from being export-led to being consumption-driven. Close to half of the Hong Kong-based respondents are engaged in the mainland licensing business .
International licensing companies advance
Among the international licensing companies engaged in mainland business, 50% used local agents. This is a lot more than using non-local agents (22%) or opening their own mainland offices (22%). The term “local agents” refers primarily to mainland licensing agents, yet also covers overseas licensing agents with localised operations on the mainland (including those from Hong Kong). In this context, only 22% of international licensors work through licensing agents based outside the mainland (including Hong Kong).
As for the locations of international licensing companies’ offices or appointed agents on the mainland, Shanghai hosts more than half of the international licensing companies and/or their agents (54%), followed by Beijing (15%). Interestingly, some licensing companies prefer to conduct their mainland business directly from Japan and South Korea, but none do so via offices in Southeast Asia or outside Asia.
The top three rationales cited by international licensing companies for their preferred means of entering the mainland market are: “Have a strong network of licensees" (50%), "have expert knowledge of marketing for doing business in the area" (39.3%), and "have deep understanding of licensing business customs in the area" (32.1%). International licensing companies, most of whom are licensors, prefer to operate in places close to their prospective or existing licensees. Alternatively, they rely on licensing agents that have an outstanding track record of developing new business in the mainland’s target markets.
Mainland licensing companies’ domestic focus
As previously mentioned, just 11% of the 55 mainland-based respondents engaged in both domestic and overseas licensing business. They are all focussed on the mainland market, whether licensors, agents or licensees. Among the mainland licensors, 73% use agents. The survey revealed that these licensing agents are mostly based in Shanghai (59%), followed by Guangzhou (29%) and Beijing (12%). Business relationships between the licensors and the appointed agents are generally cordial, with more than 90% of licensors reporting they are satisfied or very satisfied.
Development of mainland licensing market
Until the mid-2000s, the mainland licensing market was principally driven by properties from the US and Japan, including Walt Disney, Warner Bros and Doraemon characters. However, in a bid to boost the home-grown cartoon, comics and television and movie animation industry, the Chinese government has adopted measures viewed as restrictive by foreign companies.
For example, a prime-time television ban imposed in September 2006 means mainland television stations cannot broadcast foreign-made animated films or television series from 5pm-8pm everyday . Advertisements or trailers for foreign-made animated works have also been banned from being screened during prime time. Needless to say, animation and character properties rely heavily on media exposure and promotion, especially television broadcasts.
The policy has, in fact, stimulated the emergence of home-grown mainland animation characters, such as 2009’s Pleasant Goat and Big Big Wolf, which was a big success. In tandem with the launches of more home-grown characters, awareness of the Chinese licensing business has spread across the country.
As for the types of licensing properties handled by licensors/licensing agents conducting business on the mainland, up to 89% are in the character and entertainment category, with fashion and lifestyle second (33%), followed by brands and trademarks (22%), and sports (15%). All licensors/licensing agents reported stronger growth for their properties on the mainland in 2013 than in 2012, including celebrities, arts, audio and music.
Issues confronting licensors and licensing agents
Although the mainland licensing market has expanded rapidly, many issues and concerns remain. Licensors and licensing agents working on the mainland were asked to name their top three concerns. These were revealed as: "insufficient understanding of the licensing market conditions" (56%), "copyright infringement" (38%), and "insufficient information on licensees" (39%). Contrasting with the survey findings from 2010, “insufficient understanding of the licensing market conditions" replaced "copyright infringement" as the number one problem in 2013.
As the mainland licensing market evolves, attention to operational issues is also changing. In 2010, the major issues facing companies conducting licensing business were pirated and knock-off products relating to character and entertainment properties belonging to global licensors. With market growth and the rapid emergence of home-grown licensors and licensing agents, there is now more demand for licensing business expertise and business partner networks. This is intended to raise the sophistication level of the industry. There is, however, still a wide knowledge gap between domestic and overseas licensing companies, according to a number of interviewees.
For Chinese licensing companies, home-grown characters have improved, but still many licensees do not have sufficient knowledge of the licensing business and fee negotiations. Few are capable of making high-quality licensed products, given the lack of planning and design. As such, they may find it difficult to differentiate their products from imitation or pirated products. They thereby fail to tap into the increased demand for high-quality licensed products from well off consumers. On the flipside, licensors and licensing agents also face the problem of creating touch points between consumers and their expanding array of new characters.
Excluding licensors and licensing agents based on the mainland, "copyright infringement" (57%) returns to the top of the list, followed by "insufficient understanding of the licensing market conditions" (34%), "strict restrictions on television broadcasting" and "market structure is complicated and unusual" (32%). Obviously, the proportion of mainland respondents viewing copyright infringement as a problem has declined, while there is greater emphasis on "insufficient understanding of the licensing market conditions" (100%), "insufficient information on licensees" (57%), and "companies lack knowledge and information about licensing business" (30%).
Making inroads into China’s market
The emergence of Chinese properties over the past few years notwithstanding, the mainland market is characterised by a chaotic co-existence of both high- and low-quality licensed products. Also, there is a failure to communicate effectively with consumers given the lack of marketing power and poor differentiation between genuine and pirated products. Ostensibly, animation broadcast restrictions applying to foreign character properties, though boosting development of home-growth characters, hinder the introduction of successful overseas characters. This is due to the weakening of those communication channels used for building rapport with consumers.
In a bid to overcome marketing impediments due to broadcast restrictions, licensors and licensing agents increasingly use the Internet to communicate. They also vie for more e-commerce opportunities, partly because physical stores are expanding relatively slowly. Additionally, live events can be a good way of connecting with prospective customers, with many enhanced by a growing use of social networking services (SNS).
For licensors and licensing agents, local or otherwise, the Shanghai Licensing and Sourcing Expo (SHLS) can assist in jump starting licensing opportunities on the mainland. Similarly, the Hong Kong International Licensing Show (HKILS) – the largest of its kind in Asia – features hundreds of overseas and mainland exhibitors. These range from licensors, licensing agents and brand owners, to other service providers and professionals in digital entertainment, design and marketing. HKILS, along with the concurrent Asian Licensing Conference (ALC) and related product trade fairs, can strengthen business ties and help unlock opportunities for all kinds of licensing companies.
As noted in the preceding article, Capitalising on Licensing Opportunities in Asia via Hong Kong, the vast majority of survey respondents recognise the value of Hong Kong when it comes to developing their licensing business. They hold positive views of the many functions  Hong Kong provides, something that sets the city apart as the gateway to Asia’s licensing market. The survey showed that more than 80% clearly identified the value of developing their licensing business on the mainland through Hong Kong. Additionally, twice as many Chinese licensees compared to Chinese licensors/licensing agents are engaged in business with Hong Kong. This testifies to their eagerness when seeking out overseas properties and licensing expertise through Hong Kong.
 Chinese GDP grew at 9-10% annually before easing to 7.7% in 2012, while such growth momentum was maintained in 2013. 2014 is expected to see further easing to about 7.5%, which is still exceptionally high compared to the rest of the world.
 In the first half of 2014, HKTDC Research completed a survey exercise on the licensing markets in Asia, including 50 in depth interviews and 169 questionnaires. These involved licensors, licensing agents and licensees in Japan, South Korea, Hong Kong, the Chinese mainland, Taiwan, India and four selected Southeast Asian countries - Malaysia, the Philippines, Indonesia and Thailand. As not all survey questions were completed by all 169 respondents, caution should be exercised in interpreting the percentage of responses pertaining to particular questions. This is due to the corresponding sample sizes, which may vary with the question.
 For the purpose of conducting the questionnaire on a geographical basis, those licensing companies originating from overseas (including Hong Kong) whilst operating on the mainland were counted towards mainland licensing companies (that is, they comprised the subsidiaries of overseas licensors and licensing agents). In this connection, among the 55 mainland respondents covered in this part of the questionnaire, 27 were mainland licensors and agents (primarily indigenous mainland licensors). The remaining 28 were mainland licensees. On the whole, 16% of these 55 mainland respondents are engaged in business with licensing companies based in Hong Kong.
 Prior to 2006, TV stations on the mainland were free to schedule their cartoon broadcasting, so long as domestic animations accounted for no less than 60% of all cartoons aired on any TV channel.
 Hong Kong boasts a very positive licensing environment, with strong protection of intellectual property rights and efficient conduct of licensing business. This, along with the presence of high-quality licensing firms and strong ties with the mainland, Southeast Asian and global licensors, underpins its status as a licensing hub in Asia.