3 July 2007
Licensed To Thrill(HKTDC Enterprise, Vol 07,2007)
The Next Big Licensing Market
The phenomenal growth of the mainland consumer market is sparking an accompanying surge in licensing opportunities for suppliers and buyers alike
The Chinese mainland is the world's fastest-growing market for licensed goods, having expanded from US$600m in 2001 to more than US$1.1bn in 2005.
This 17% annual growth rate has already made China the second-largest licensing market in Asia outside Japan and represents more than 80% of the region's entire licensing sector.
And the momentum shows no sign of slowing, thanks to upcoming sporting events such as the 2008 Olympics in Beijing, the 2009 East Asian Games that will be staged in Hong Kong, the 2010 Asian Games in Guangzhou and the 2010 World Expo that will be hosted by Shanghai.
Mainland consumers therefore hold enormous potential for buyers and suppliers in a region that accounts for about 8.5% of the US$108bn global licensing market, according to a recent research report prepared by the Hong Kong Trade Development Council (TDC).
For example, while retail sales of licensed products on the Chinese mainland were roughly the same size as of that of Southeast Asia in 2001, they were estimated to be 60% bigger four years later.
However, distinct variations within both the Asian and China markets could mean the difference between profit and loss for buyers and suppliers, TDC director Raymond Yip advises.
"For example, while entertainment/ characters, trademarks/brands and sports categories hold close to 60% of the global licensing market, Asia's licensing market is dominated by traditional Western character properties such as Warner Bros and Japanese characters with trademark and brand properties a distant second," he notes.
Recently, though, Korea and the Chinese mainland have both come up with home-grown characters and are beginning to see initial success. "For example, Korea's Mashimaro and the Chinese mainland's QQ Penguin were both developed in the online environment," Yip observes.
Chinese licensors and licensing agents are also more focused than their overseas counterparts on trademarks/brands (56.5% versus 30.7% respectively), though they are less experienced than their overseas counterparts in terms of licensing entertainment/characters.
Sports properties look increasingly promising in the global and Asian licensing market, Yip notes, and China's hosting of the 2008 Olympic Games ensures it will be no exception to this trend.
"For example, the FIFA 2002 World Cup co-hosted by Japan and Korea created a market of about US$320m for related products in Japan alone," he says.
"Similarly, the 2006 World Cup led to the rapid growth of sports-related licensing in the US and the same developments are expected in China following the 2008 Olympic Games."
As sports properties are often sold in conjunction with real sports events, this may result in huge consumption of sports-based products on the mainland next year.
The Chinese mainland licensing market is also characterised by its low per-capita spending on licensed products compared with more developed regional markets such as Japan, Hong Kong and Singapore. "China's licensing market potential appears enormous at US$0.85 per capita spending, which is among the lowest in the Asian economies," Yip adds.
This market is overwhelmingly skewed to the coastal regions, especially cities where consumer spending power is strong, distribution channels are relatively more reliable and the exposure to foreign culture is higher.
"Licensed products are by their very nature premium products, so it is understandable that the lion's share of sales is concentrated in Beijing, Shanghai and Guangzhou," Yip believes.
In fact, many overseas licensing companies have chosen these cities to launch their endeavours following China's World Trade Organization accession in December 2001.
Many of these companies have established themselves in Shanghai, attracted by the size of the retail licensing market and ease of access to licensees in the Yangtze River Delta region.
"Beijing is also attractive to overseas licensing companies as it is the country's publishing and film production/media centre, while Hong Kong is seen as pivotal for the business given its traditional twin roles as a gateway and regional headquarters," Yip maintains.
"Some 51.2% of licensing companies with business in China have established bases in Hong Kong or Shanghai and 50% in Beijing, but many overseas licensing companies have more than one location with Hong Kong seen as instrumental in administering the southern China business."
He is not surprised to find foreign properties dominating China's licensing market, where entertainment/character properties are the most important category.
"Overseas characters, including US characters from Disney (Mickey Mouse and Donald Duck) and Japanese characters Hello Kitty and Doraemon are popular on the Chinese mainland," Yip notes.
However, he adds that the Chinese government is keen to promote its domestic animation industry and has quickened the censoring process of domestic animation production - moving to monthly censoring instead of semi-annually.
"More domestic animation programmes are being shown during prime time, which together with the increasing amount of animation programmes broadcast on the Chinese mainland, means domestic animation properties will increasingly play a part in expanding the mainland's rapidly growing licensing market," Yip believes.
Licensed products look certain to play a much larger role in the retail sales mix as they accounted for US$1.13bn or 0.13% of China's total retail sales of consumer products in 2005, indicating clearly that there is much room for improvement.
"Cross-country experiences of the Asian licensing market indicate that a rise in per capita GDP tends to bring about even higher growth in per capita sales of licensed products," Yip explains.
As a result, retail sales of licensed products in higher-income cities like Shanghai, Beijing and Guangzhou, where per capita GDP exceeded US$6,000 in 2006, look certain to continue their strong trends in upcoming years.
Entertainment/characters are expected to have the best potential over the next one to three years, followed by trademarks/brands, with overseas properties expected to dominate as overseas licensing companies make inroads into the mainland market.
"Cartoon-driven characters will remain a key driver of the mainstream licensing market on the Chinese mainland, indicating there is enormous potential in children's products, apparel, toys and games and stationery for further developing their licensing business," Yip says.
The popularity of many Western and Japanese characters raises the prospect of related publications as a licensed product category, with Japanese "manga" publications recently gathering momentum in China.
"Children's goods, toys, video games and gifts are licensed product categories also expected to have promising prospects in the next one to three years," Yip adds.
Much of this market development will be driven by the increasing adoption of new promotional media like the Internet and mobile phones, with the number of Internet users increasing almost five-fold from 2002-2006 to exceed 130 million at the end of last year.
"Rapid growth of the online games market, which is linked intimately with animated characters, has also had an equally great impact on the mainland's fledgling licensing business," Yip believes.
Little wonder, then, that a recent survey of licensors and licensing agents showed that around three-quarters of those polled expect their licensing business to be "good" or "very good" over the next one to three years - with Chinese licensing companies and licensees even more optimistic at 90% and 97% respectively.
Licensors and licensing agents with business in China indicated that over the next three years, entertainment/ characters-related properties would be most promising (76%), followed by trademarks (66%), while US and Japanese properties would remain popular mainstream items.
"Shanghai and Beijing were considered the best target markets over the next one to three years by 76.5% and 59.3% respectively of licensors and licensing agents polled," Yip says.
"However, 58% of Chinese licensing companies, many of whom are based in Hong Kong, would like to include Southern China in general and Guangzhou in particular in their overall mainland licensing strategies."
More than half of the overseas licensing companies noted that they had made their foray into the mainland market within the past two years or so, while close to half who had yet to do licensing business in China were planning their mainland entry.
"Both overseas and indigenous licensing companies noted that business on the mainland was fraught with many challenges, including IPR protection, a shortage of useful information on licensing market conditions generally and information on mainland licensees specifically," Yip concludes.
"Hong Kong, with its excellent location, well-established mainland links and rule of law clearly has a vital role to play in the orderly, ongoing development of China's licensing market."
HERE TO HELP
Many international licensors and licensing agents doing business in China have chosen to establish their regional headquarters in Hong Kong, which they see as an important Asian base.
A recent survey of established and emerging licensing companies indicates that this trend is expected to gain momentum over the next one to three years, says TDC executive director Raymond Yip.
"Overseas licensing companies see Hong Kong as the most preferred location for entry into or development of their mainland licensing business," he explains, noting that Hong Kong was favoured by 61.3% of respondents compared to 48.4% for either Beijing or Shanghai.
Specifically, many of these companies operate their licensing business in China through Hong Kong-based agents and draw on the latter's knowledge, including ready access to licensees and an ability to organise promotional marketing activities on the mainland.
"Another key reason for using agents is that they can effectively smooth communication with other parties, particularly licensees on the mainland," Yip explains. "In fact, 75% of overseas licensing companies would prefer to work through agents in Hong Kong rather than Shanghai, which attracted 35%."
However, establishing business units or subsidiaries in Hong Kong would allow these licensing companies to reap the benefits of using Hong Kong as a business platform and capitalising on Hong Kong's business advantages and proximity to the mainland. "Hong Kong's advantages as a gateway to the Chinese mainland market are well-recognised," Yip believes.
He says major industry events such as the Hong Kong Licensing Show 2007 held at the Hong Kong Convention and Exhibition from July 3-5 help expand the market in Hong Kong, the Chinese mainland and further afield.
"The debut Sports Pavilion at last year's Licensing Show helped the industry to seize new sports licensing opportunities in Asia in general and China in particular," Yip believes.
"Exhibitors were ready to partner with potential licensees to develop different sports-licensed products, such as garments, footwear, stationery, houseware, toys and much more."
A new Hong Kong Character Hall that showcased Hong Kong's design capabilities by highlighting home-grown characters from about 28 Hong Kong designers was another attraction at the fair's sixth edition.
"Apart from helping Hong Kong designs and brands expand into overseas markets, the Licensing Show is also an ideal platform for overseas players to expand their licensing business on the Chinese mainland," he maintains.
Consumers in China are growing increasingly brand-conscious, Yip explains, and manufacturers are looking for international licensing properties that will help their products move up the value chain.
"The budding licensing business in China has stimulated the demand for design, distribution and legal services from Hong Kong professionals, and this trend shows no sign of slowing down," he notes.
Hong Kong agents, however, don't only play crucial roles on behalf of overseas licensors and licensing agents, but also act on behalf of the increasing number of Chinese licensees.
"These licensees expect Hong Kong agents to help, among other things, acquire overseas properties that are extremely popular on the Chinese mainland," Yip observes.
Some 62.2% of the advancing licensors and licensing agents surveyed believed that licensing prospects with large-sized private enterprises on the Chinese mainland would be "good" to "very good" over the next one to three years, followed by foreign companies (52.4%) and Hong Kong companies (50%).
"Hong Kong will play an increasingly important role in the licensing business, not only on the Chinese mainland but also Asia as a whole," Yip predicts.