China ruling on tea packaging row will worry foreign firms

China ruling on tea packaging row will worry foreign firms

China’s top court ruled on Wednesday that JDB (China) Drink Company and Guangzhou Baiyunshan Pharmaceutical Holdings (00874.HK) can continue to use similar packaging for their herbal tea beverage products.

Both companies “had made contributions to promoting the packaging and related products,” the court said as it gave its verdict allowing the two firms to sell their products under similar-looking cans.

The ruling puts an end to a long legal battle between the two Chinese firms, but it could send a chilling message to foreign brands that rely on mainland distributors to promote their products.

Wong Lo Kat tea, which originated during the Qing Dynasty period, was created by a doctor named Wong Chat Bong. It is made from herbs and is believed to be able to good for the body.

After China opened up its economy in the 1970s, “Wong Lo Kat” trademark became the property of state-owned Guangzhou Yangcheng Pharmaceutical, whose parent is the predecessor of Guangzhou Baiyunshan Pharmaceutical Holdings.

In 1995, Hong Kong businessman Chan Hung-to saw the potential of the brand and acquired exclusive licensing rights to sell Wong Lo Kat on the mainland until 2010, through his company JDB. The contract was later extended twice until 2020.

Applying his business acumen to the operation, Chan marketed the herbal tea as a healthy, mass-market soft drink. He also changed the packaging into eye-catching red aluminum cans.

Wong Lo Kat became a big success, and replaced Coca-Cola as the top seller of canned beverages on the mainland. The annual sales of the herbal drink reached 4 million tons by 2007.

Chan has managed to transform Wong Lo Kat into a household name in China.

Unfortunately, as the business became far too successful, Guangzhou Yangcheng wanted to take it back.

The company applied to the China International Economic and Trade Arbitration Commission to terminate JDB’s right to use the Wong Lo Kat trademark, using the argument that Chan had bribed its former manager with HK$3 million to extend the licensing contracts.

JDB stopped producing and selling canned herbal tea under the Wong Lo Kat brand. Yet the recipe of the herbal tea itself is not patented, but only the trademark.

Soon, Chan continued the business by renaming his products as Jiaduobao in 2011.

Chan changed the brand name but kept the red can design and again employed his superb marketing skills to build up the brand, which now reportedly matches Wong Lo Kat in terms of sales volume.

Following the court decision this week, JDB said in a statement that it firmly supports the final ruling and that it will strengthen efforts to advance the herbal tea industry as well as promote China’s herbal tea culture worldwide.

Guangzhou Pharmaceutical said it “respects the ruling of the court”.

Well, what else can it say, given that the ruling was final and there isn’t much it can do now.

The Guangzhou Pharmaceutical worries aside, looking at the matter from a broad perspective, the court may have set a bad example that could worry foreign companies selling products in China.

To tap the China market, it’s a common practice that foreign brands would enlist the help of local partners to develop to promote the products and develop the business.

However, if a local agency can legally offer a similar product using a similar packaging once the products become successful, they could turn into a powerful rival to the original brand owner.

This article appeared in the Hong Kong Economic Journal on Aug 17

Translation by Julie Zhu

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