Bottom line: A spat between Hisense and Sharp over the former’s use of the latter’s brand name spotlights the dangers of relying on such licensing agreements for Chinese companies going abroad.
An entertaining battle is rippling through the headlines as we head into mid-week, pitting Taiwanese contract manufacturing titan Hon Hai (Taipei: 2317) against Chinese TV maker Hisense (Shanghai: 600060) in a battle for the Sharp (Tokyo: 6753) brand name. This is essentially the story of two giants with very little name recognition battling for a brand that, somewhat ironically, fell onto hard times as a company but still retains a relatively strong reputation.
Hon Hai is virtually unknown outside of industry circles, but is one of the world’s leading contract manufacturers that is most often cited as producer of iPhones for Apple (Nasdaq: AAPL). Likewise, Hisense is a relatively well-known TV maker in China, but is virtually unknown outside the country, creating obstacles for its global aspirations. Then there’s Sharp, the former Japanese electronics superstar that fell onto hard times was was taken over by Hon Hai last year.
The story goes like this: Sharp at some point sold North American naming rights for its TVs to Hisense, most likely when the former was struggling and looking to raise some cash. That was all fine and dandy until last year, when Hon Hai, which also uses the Foxconn name, took control of Sharp, in its own bid acquire a relatively famous brand amid its own drive to move into consumer products business.
Now Hisense is accusing Hon Hai of employing bullying tactics in a bid to get back those North American naming rights for Sharp. According to a new report, Sharp approached Hisense last October about relinquishing the name, only to get rebuffed by the Chinese company. (Chinese article) When Sharp stepped up its rhetoric and Hisense still refused to budge, the former finally took the unusual action of suing the latter in the US to get the name back.
This particular account is all coming from Hisense, which uses some colorful language in describing how ungrateful Sharp was, and how the Japanese company has become a bit of a snake. In the lawsuit filed last week, Sharp accuses Hisense of smearing the Sharp brand by attaching it to low-quality, low-priced TVs, and is even seeking damages of $100 million.
We would have to see the actual licensing agreement before we can really pass judgment on the merits of the case, though I do expect such agreements do contain general clauses about maintaining certain quality standards. We should also note that all the details of this tale are flowing from Hisense, which is clearly miffed at the situation.
Dangers of Licensing
But the bottom line does seem to come down to who owns the rights to this particular name, and this particular case also spotlights the dangers that Chinese companies face in pursuing such arrangements. Hisense certainly isn’t the only one to use this kind of approach to going global. Rival TV maker TCL (Shenzhen: 000100) has done something similar, licensing the Alcatel name for its cellphone business about a decade ago and more recently signing a similar deal with the struggling BlackBerry (Toronto: BB) brand. (previous post)
In both of those cases, the two brands that TCL used were dying and the owners were only too happy to license out the names for some extra cash. That was also true for Sharp, though clearly Hisense didn’t anticipate that Hon Hai would also be looking to revitalize the brand later on. Then again, the Hon Hai-Sharp deal was bubbling in the headlines for more than a year before a takeover actually closed, so Hisense couldn’t say it didn’t see it coming.
All of this brings us back to the wisdom of licensing names, versus the much longer but safer process of developing your own brand. I personally think the own-brand development is smarter, even though it may be slightly costlier and require more time. But Chinese companies are often quite impatient and pursue this kind of licensing arrangement, even though such deals are rarely successful over the longer term. And this latest case shows that even when they are successful, there’s always the chance things could change and an agreement might not get renewed when it expires.