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Wong Lo Kat V.S JDB: China Style Cola Wars

The government and a private company are battling in the market – and in court – over the country's favorite soft drink.

Eighteen years ago, a Hong Kong businessman named Chan Hung-to took a sip of an herbal tea produced by a government factory in Guangzhou and tasted the future – a beverage that he imagined could be the Coca-Cola of China.

The sweet, cold drink called Wanglaoji herbal tea is an acquired taste, a blend of seven medicinal herbs and flowers, including honeysuckle, mint and chrysanthemum.

Chan succeeded in making it China's favorite drink. After licensing the tea's name and recipe, he took it out of its dowdy green package, put it in an iconic red can with a bold golden logo and spent millions of yuan on massive marketing campaigns. By 2009, it was outselling even Coke in the country.

Now, Chan and his erstwhile government partners are locked in a series of bitter trademark battles. While the court hearing for the latest lawsuit is waiting to be held, the real story of Wanglaoji may be that winning in the marketplace is more important than winning in court.

But whether Chan can maintain market share if he loses the rights to use the bright red can design is a question worth billions of yuan.

Feng Zhimin, a senior executive at Chan's firm, says they are almost ready to throw in the towel on legal action. "If we lose this case again, there is no justice. We will give up," he says.

Rapid Growth

Wanglaoji herbal tea was invented in 1837 by a Guangdong doctor named Wong Chatbong. Wong took traditional Chinese herbs believed to reduce inflammation and brewed them into a concoction that eventually sold throughout southern China. In Cantonese, the drink is known as Wong Lo Kat.

In 1956, the government took over all of Wong's assets related to the herb drink as part of a drive to nationalize private firms. The brand was idle until 1992, when the Yangcheng Tonic Factory, owned by the Guangdong government, began to produce the drink and sell it in a green package labeled with traditional calligraphy.

Then, the Guangdong government, seeking outside know-how, invited Chan to invest in the product. In 1995, Chan set up a company called Guangdong Jiaduobao Drink & Food Co. (JDB) as a wholly owned subsidiary of his Hong Kong Hung To Group.

JDB licensed the Wanglaoji name, agreeing to pay about 300,000 yuan a year for five years for the right to produce and market the drink. JDB invested US$ 20 million in a production facility in Guangdong and replaced the medicinal-looking green carton with a shiny red can.

While the licensing fee seems meager today, a former Yangcheng employee says: "The price was reasonable. At that time nobody could be sure it would be profitable."

Yangcheng was taken over by government-owned Guangzhou Pharmaceutical Group in 1997, which began to think that it wasn't getting its fair share as it watched Wanglaoji's sales grow.

Annual sales of Wanglaoji topped 100 million yuan by 2000. In 2003, Chan started marketing the beverage as a soft drink rather than as medicinal tea. And in the next year, Wanglaoji started to expand its market beyond Guangdong.

In 2008, sales of Wanglaoji exploded thanks to visibility and goodwill gained by a large charitable gesture. JDB donated 100 million yuan to victims of the Sichuan quake, and press coverage of the gift gave Wanglaoji nationwide exposure.

The company's sales surged to 15 billion yuan in 2008 and 17 billion in 2010, said Wan Yuegui, the product's marketing manager. The brand accounts for nearly 7 percent of soft drink sales in China.

The market value of the brand name itself was 108 billion yuan in 2010, said Guangzhou Pharmaceutical.

Brand Building

Chan launched Wanglaoji in an era when branding was still relatively undeveloped in China, hawking the drink with images of youth, health and urban hipness. Its red and gold logo was as common on television ads and YouTube as in restaurants and grocery stores.

JDB hired a marketing firm that positioned the product as a soft drink that had semi-medicinal virtues countering the effects of spicy, greasy food. The herbs in Wanglaoji are traditionally touted as good for soothing inflammation and having a cooling effect.

While the red-can version of Wanglaoji took off, Guanghzhou Pharmaceutical continued to manufacture and market a version of the drink in the old green package. But Guangzhou Pharmaceutical was not sharing in the explosive national growth of the red-can variety.

By the mid-2000's, Guangzhou Pharmaceutical began to complain about the way JDB was displaying the JDB name alongside the Wanglaoji brand.

"[JDB] was highlighting the JDB name while weakening the public impression of the brand holder Guangzhou Pharmaceutical, which reflects their intention to steal the brand," said Ni Yidong, Guangzhou Pharmaceutical's deputy general manager.

Discontent and Bribery

While the Wanglaoji flew of the shelves, the companies behind the brand were increasingly fighting for control and licensing fees.

Nevertheless, JDB still secured another 10-year contract with Guangzhou Pharmaceutical in 2000, which required JDB to pay a modest licensing fee of 4.5 million yuan for the first year, rising 5 percent to 7 percent through 2010. The amount of royalties was still a flat fee not linked to sales.

In 2002 and 2003, the two companies again signed two supplementary contracts to enable JDB to use the Wanglaoji trademark for another ten years to 2020, with annual royalties ranging between 5 million yuan and 5.4 million yuan.

But in 2004, Li Yimin, general manager of Guangzhou Pharmaceutical, was put under investigation for corruption by the Communist Party's disciplinary agency. The next year Li was convicted of receiving bribes, including HK$ 3 million from Chan between 2001 and 2003, prosecutors said.

In October 2005, Chan was arrested in Guangdong, and prosecutors say he confessed to the bribery. He said Li struck a harder bargain during JDB's 2000 negotiation to extend the contract, and the bribery helped him to secure the contract.

Later that month, he was released on bail and fled the country.

Even after his arrest and flight, Chan continued to try to build ties with the government firm through offers of both increasing licensing fees and direct investment. A source close to JDB said Chan offered to raise his annual licensing fees to 50 million yuan, but the offer was rejected by Guangzhou Pharmaceutical.

Chan also provided capital infusions to the government-owned business, say sources close to JDB. In 2005, a firm held by five Hong Kong businessmen, Hong Kong Tongxing Pharmaceutical Co., poured 170 million yuan into the Guangzhou Pharmaceutical subsidiary that was marketing the herbal tea in green packaging. A source close to the situation said all the stakeholders of Hong Kong Tongxing are close to Chan.

"After using Guangzhou Pharmaceutical's trademark for so many years, Chan hoped to build a more sustainable partnership with deeper cooperation," said Pan Jianhui, secretary of the board of Guangzhou Pharmaceutical. "And capital cooperation is obviously the best way."

With Tongxing's investment, Guangzhou Pharmaceutical expanded its sales network and sales of its version of the drink reached 2 billion yuan in 2012.

Trademark Lawsuits

However, Chan's infusion of cash did not result in more peaceful relations. Since 2011, the two companies have been embroiled in a series of lawsuits. In August 2010, Guangzhou Pharmaceutical appointed a new general manager, Li Chuyuan, who was determined to regain some of the value that had been sold so cheaply.

Li demanded that JDB stop using the Wanglaoji trademark and announced that Guangzhou Pharmaceutical would be the sole marketer of the brand.

The following year, Guangzhou Pharmaceutical applied to the China International Economic and Trade Arbitration Commission to terminate JDB's use of Wanglaoji trademark. It argued that the contracts signed by Li Yimin were influenced by bribes and therefore invalid.

In May 2012, the commission ruled against JDB. It said that Li had illegally negotiated deals unfavorable to the state asset which should not stand. It ruled that JDB could no longer use the name Wanglaoji.

When Guangzhou Pharmaceutical succeeded in taking back the Wanglaoji name in court, JDB kept the design of the red can and simply changed the name to JDB.

Later in July 2012, in simultaneous lawsuits, Guangzhou Pharmaceutical and JDB challenged each others' ownership of the iconic red can brand. JDB argues that the red can was designed by Chan, that he applied for a patent in 1997, and that it has been used by JDB for 17 years. Guangzhou Pharmaceutical contends that it licensed JDB to use the trademark through past contracts.

Guangzhou Pharmaceutical filed its suit in Guangzhou, while JDB filed in Beijing. A Beijing-based patent lawyer said it appears each plaintiff chose the court where they thought they would prevail. But the two cases were merged in December by the Supreme People's Court, which assigned it to Guangdong Province Higher People's Court, which some industry insiders said could favor Guangzhou Pharmaceutical. The court hearing was scheduled on April 22 this year, but later postponed.

Wang Yong, a law professor at China University of Political Science and Law, said that the key question was whether the red packaging was included in the description of the trademark use in the contract signed in 2000.

Based on a copy of the 2000 contract viewed by Caixin, no such description was included.

In November 2012, Guangzhou Pharmaceutical again sued JDB on its right to advertise its past connection with the brand name. Guangzhou Pharmaceutical in January this year obtained a court order to prevent JDB from using the phrase "Wanglaoji has changed its name to JDB."

Market Competition

Outside the courtroom, the two firms continue to fight it out in the marketplace. Guangzhou Pharmaceutical rolled out its own red-can version of Wanglaoji in August, 2012. It has recruited 6,000 salespeople and plans to expand to 10,000 in 2013, to match JDB's army of salespeople, according to Pan Jianhui, secretary of Guangzhou Pharmaceutical's board.

JDB spent more than 1 billion yuan on advertising in 2012, market information shows.

The rivalry has also led to violence in a couple of cases, including a fistfight among salesmen and a minor stabbing of a Guangzhou Pharmaceutical employee, reportedly by a JDB employee.

Just as intense, but less violent, was the competition on television. Jiaduobao sponsors the popular talent competition called Voice of China and Wanglaoji sponsors popular a game show on a state broadcaster.

Guangzhou Pharmaceutical may also be calling on its friends in government. After JDB lost its trademark case last year, it found that ad space in bus stations in Guangzhou was suddenly unavailable.

"A related [government] department told us not to do advertising for JDB," said a staff member at Guangzhou White Horse Advertising Co.

But while the Guangzhou government may control the bus stops, JDB has a grip on private suppliers of raw materials. Guangzhou Pharmaceutical's Ni says that between June and August 2012, his firm had to pay double what JDB pays for raw materials for the tea because most suppliers had signed contracts with JDB for exclusive supplies.

The high costs of expanding its sales force and obtaining raw materials may be squeezing Guangzhou Pharmaceutical's profits. The company reported its Wanglaoji subsidiary's net revenues were 31 million yuan for 2012. Li, the Guangzhou Pharmaceutical general manager, said this year that Guangzhou's Pharmaceutical's 2012 revenue is more than 6 billion yuan from herbal tea products. However, market analysts said they believed the figure was inflated.

Li says Guangzhou Pharmaceutical has set aside 2 billion yuan for marketing in 2013, nearly half of the company's total revenue for last year.

Meanwhile, JDB's sales have seen continued growth, based on its mature distribution network and stable sales team. Figures from the National Statistics Bureau released in December show JDB accounted for 73 percent of the herbal tea market in China for the year.

As the rival companies await news on which will gain custody of the iconic red can brand, the beneficiaries of their competition may be retailers.

A supermarket owner in Guangzhou said that one of his shops signed an exclusive sales agreement with JDB and the other signed with Guangzhou Pharmaceutical. As a result, he got price cuts from both companies.

"They fight with each other and we earn money," the supermarket owner said. "That's ok with me."