7 Oct 2014
Hong Kong and the Mainland "Going Out" Together (4): Co-operating with Foreign Partners through Licensing Arrangements
“As well as acquiring foreign brands and technologies through direct acquisition, mainland companies may consider using licensing arrangements to achieve the similar result as part of their ‘going out’ strategy. This is a win-win solution as it can reduce their initial investment and risk, while enabling them to establish a more long-lasting co-operation relationship with their foreign partners.” This was the advice that Anita Leung, chairman of the Hong Kong Sub-Chapter of the Licensing Executive Society of China, gave when HKTDC interviewed her with regard to overseas investment of Chinese companies.
Advantages of licensing agreements
In the wake of the rapid growth of outbound investment in recent years, mainland companies are “going out” not only to set up marketing networks and to buy raw materials and key parts, but also to form partnerships with foreign brands and undertake technological co-operation with overseas firms. In fact, many mainland companies are hoping to “bring in” famous international brands to access China’s thriving consumer market. Some companies also hope to secure advanced R&D, production and environmental protection technologies as a means of upgrading their overall technological and production capabilities.
Leung said: “Mainland companies must bear huge acquisition costs in the initial stages of investment when it comes to directly acquiring foreign brands or technology. This is even though they may not be sure whether the brands they are buying can actually produce the anticipated sales results or whether the technology is really what they require. This may increase the risk of the entire investment project.”
“On the other hand, not all famous brands or foreign companies that possess advanced technologies are willing to sell their intellectual property rights outright to other companies. This in effect limits the choices of mainland companies in terms of their ‘going out’ strategy.”
“As an alternative, mainland companies can first conclude licensing contracts with foreign companies. As a ‘licensor’, the foreign party grants a licence or permission to the mainland party to use its brand, technology and other intellectual property rights. As the mainland company is not buying the property rights outright, the initial licensing fee it pays may be substantially lower than it would pay for a direct acquisition. After that, it will have to pay annual royalties to the licensor.”
“The contracting parties may negotiate the specific terms and conditions of the contract according to their respective circumstances. The mainland party may also discuss with the other party the risks that may arise from the use of the brands and technologies concerned in order to work out mutually agreed licensing arrangements.”
Specific provisions add flexibility to co-operation
Assessing the benefits of licensing arrangements, Leung said: “Both sides may include specific provisions in the licensing contract, including an undertaking that, after an agreed number of years, the mainland company (licensee or franchisee) may choose to ‘buy out’ the property rights. Alternatively, both sides may re-negotiate a different form of co-operation, such as setting up a joint-venture company to continue the co-operation. This is a more flexible arrangement and will give both sides greater leeway in the course of their co-operation.”
“As well as being applicable to the licensing of brands, trademarks, technologies and patents, this arrangement may also be used when it comes to the licensing of copyrighted works, designs of animations/characters and clothing, as well as cultural and artistic works. As such, it offers another alternative for those mainland companies looking to co-operate with foreign partners aside from mergers and acquisitions.”
Intermediaries provide win-win solutions
Many mainland companies are not familiar with the law and business culture of foreign countries. Likewise, foreign companies owing a brand and/or proprietary technology may not understand the background and customs of Chinese companies. A lack of trust may thus become an issue. Co-operation between companies through licensing arrangements requires legal services and proper arrangements that both sides can trust. A platform for effectively implementing the co-operation agreement is also required. In light of this, a third party is required to help both parties iron out problems in the event of disputes.
In Leung’s opinion, Hong Kong enjoys a good reputation for its sound legal system, protection of intellectual property rights and adherence to international commercial practices. It can provide excellent legal and other professional services to mainland and foreign companies. In fact, many foreign companies have established subsidiary companies in Hong Kong for the specific purpose of holding and handling their specific intellectual property rights.
With such vehicles, foreign companies can conclude contracts with mainland clients in Hong Kong in order to obtain better legal protection, arbitration, mediation and other professional services. Hong Kong, with its extensive business networks on the mainland and throughout the world, has always been an effective channel for those mainland companies venturing into the international markets in search of partnerships for brand and technological co-operation. Hong Kong’s ideal business environment can also help mainland companies “go out” and conclude partnership agreements through licensing and other arrangements.
Remark: For more information about China’s “going out”, please refer to the research article Jiangsu/YRD: Hong Kong Service Opportunities Amid China's "Going Out" Initiative and the research report China's "Going Out" Initiative: Jiangsu/YRD Demand for Professional Services of the HKTDC Research
 Anita Leung is a partner in the solicitors’ firm Jones Day.