Brand Crisis behind the Dispute of GOME

2011/04/14,By Aimee Wang, China IP,[Trademark]

GOME is China’s No. 1 electrical appliance retailer. A dispute arose between the major shareholder Huang Guangyu and the chairman of the board Chen Xiao recently, which brought about a sequence of problems to the company and attracted wide attention from the public.
Dur ing the evening of September 28, 2010, at the Hong Kong Regal Hotel, the results of the GOME Extraordinary General Meeting of shareholders were revealed. Chen Xiao (present chairman of the board of GOME) won support and maintained his current position. While one of the key proposals brought forward by Huang Guangyu (the major shareholder of GOME) “cancel the authorization of the Board of Directors” was approved, which means that any issuing of additional new stocks would be decided by the General Meeting of Shareholders in the future. To some extent, Chen Xiao was victorious; meanwhile, Huang Guangyu successfully consolidated his position as a major shareholder and greatly lowered the risk of his shares becoming diluted. Another prominent party who played a crucial role in the process was the American Private Investment Company— Bain Capital, whose choice was the decisive factor in the duel between Chen and Huang. As the subtle relationship between Chen, Huang and Bain charged on, the future of this battle seems more inconceivable. On September 29, the opening price of GOME stock was HKD 2.4, falling 3.61% compared to the HKD 2.49 of the last trading day. The stock price of GOME continuously dropped to HKD 2.31 on October 8, 2010. In a sense, the “9•28” vote was not the end of this battle. The parties’ subsequent actions have continued since September 28. On September 29, negotiations were held between Huang’s representative Du Juan (Huang’s wife, the core figure of Huang’s party) and Bain’s Directing Manager Zhu Jia in Beijing. A consensus among the public was for settlement through negotiation. Those key issues may be settled on the conference table such as the resignation of Chen Xiao, the structure of the Board of Directors, as well as the management of the nonlisted companies. The GOME dispute is a lesson for all Chinese entrepreneurs. The Chinese corporate governance, the healthy development of a listed company, the correct allocation of the professional manager, the debate between legal and moral are problems to be taken seriously. While beyond the complicated share control dispute, the reporter focuses on a special question behind the GOME dispute.
A misreading by the media—the “GOME” trademark problems emerged
Prior to the “9•28” vote, the source of “GOME” trademarks attracted media; attention and speculation over Huang’s withdrawal of his “GOME” trademarks have been widely commented on. It has been reported that the trademark right is one of the most valuable assets in Huang’s hands, which will help him to win this battle. Reports also indicate that Huang will probably withdraw his authorization of the “GOME” trademark right from the listed company by 2014, and manage his own non-listed company under the “GOME” trademarks. Thus, the listed company will have to utilize its other brands such as “YongLe” or “DaZhong” for further development after it loses the “GOME” trademarks. Recently, a representative from Huang’ party responded to this question publicly: “the major shareholder had never taken the trademark right as a priority, and had not raised any opposition against the trademarks until now. According to laws and regulations, the duration of a registered trademark is 10 years, which explains the year 2014. The original applicant of the trademark enjoys prior registration rights, thus, as long as the additional terms are not violated, the listed company can continue
to use the trademark. In this way, the withdrawal of trademarks is completely a misreading by the public.” Simultaneously, as to the challenge of a breakaway of the non-listed shops put forward by the brand’s
initiator Huang Guangyu, representative from Chen Xiao’s party also responded that the use of “GOME” trademarks will not be affected in any aspect even if the nonlisted shops break away from listed shops. Although it seems a misreading by the media, the serious problem that a listed company cannot control its own trademark right are clearly presented to the public. Even though the problem of trademark is not considered as the center of this dispute, it will certainly be an inevitable problem in the process. The reason why a listed company does
not own its own trademark right can be tracked back to 2004 when the company was first listed.
Exploration of the ownership of trademark right
Article 4 of the “2010 annual midterm report of GOME” attracted the reporter’s attention. “The annotation incomes, other incomes and revenues” stipulates that “the non-listed GOME groups include Beijing Peng Run Investment Co., Ltd., Beijing GOME Electrical Appliance Co., Ltd., GOME Electrical Appliance Retail Co., Ltd. and other companies using the ‘GOME’ trademarks and trade in the field of Electrical Appliance and consumption electronic products in other cities in China where this group does not carry out its business.” When logging on the website of the China trademark office, the reporter found that the series of “GOME”
trademarks such as “GOME in Chinese,” “GOME in Chinese and GOME,” “GOME electrical appliance in Chinese” are all under the name of “Beijing GOME electrical appliance Co., Ltd.,” which is the personal asset of Huang Guangyu as listed in the above mentioned mid-term report. Accordingly, there is no doubt that the “GOME” trademark right is owned by Huang Guangyu. Huang’s representative also confirmed to the media: “the owner of the trademark right is not the listed company, and there are additional terms for the listed company’s use of the trademarks: the trademarks can only be used in mainland China and Hong Kong, and cannot provide the use of the marks to its franchised outlets. Additionally, the listed company’s shares in the listed shops cannot be lower than 50%.” The representative further expressed that the trademark will not be taken as the next card. The listed company owns the right to use the trademarks permanently and freely. There will be an automatic extension in 2014, but it is only automatic and Huang Guangyu should sign the trademark license contract without any additional conditions. Although not the next card, the trademark right is a trump card in Huang’s hands available at any time.
Crisis on the breakaway of listed shops and non-listed shops
There were 135 GOME electrical appliance shops in 37 Chinese cities throughout the country in the year 2004 when GOME was initially listed. Huang, the initiator of GOME, included 96 shops in 22 Chinese cities into the listed company and preserved the other 39 shops in 15 cities and added them into the non-listed company. The explanation for the non-listed entities was the limitation on business operations. During these years, the listed company ran the nonlisted shops in the form of trusteeship and the non-listed shops earned profits for the listed company in the form of management fees. Six years later, the number of listed shops has reached 740 and non-listed shops 372. The two parts are distinctive from each other in day to day operations—listed shops function in 22 cities including Beijing, Tianjin, Chongqing, Shenzhen, Guangzhou and Wuhan, while non-listed shops in Shanghai, Zhejiang, Henan, Heibei and most cities in northeast China. A non-disclosed party from Gome s t a t e d , “An ‘Ag r e emen t o f No Competition’ was signed. It was agreed that the two parts do not conduct business in the same city. Concurrently, there was also a limitation to this ‘Agreement on No Competition,’ that is, it is only valid when Huang’s shares go beyond 30%. Otherwise, it will become invalid.”
Until now, the focus of the GOME dispute has also transferred to the breakaway of listed shops and nonlisted shops. The distinction between the two parts which has existed for six years has seemingly been the cause of today’s confusion.
Brand crisis behind the breakaway
According to persons concerned, the Board of Directors with Chen Xiao as the representative sent Huang “A Letter To Beijing GOME Electrical Appliance Co., Ltd”, claiming that “Our company agrees with the requirements raised by your honorable company and at the same time make the following notifications
to your honorable company: Our company decides to end the gross supply agreement, the gross purchase agreement, purchase service agreement for 2010 as well as operation agreement for 2010 on the date of October 31, 2010. Your honorable company operates the nonlisted shops on your own as of the date of November 1, 2010.” The agreements mentioned above refer to the trusteeship agreement between listed and non-listed company. That is to say, if no consensus is reached on the problems of non-listed shops, GOME will face the problem of a break. How many GOMEs will there be in the future? Will Chen Xiao continue to be the chairman of the Board? The focus of this dispute has pointed to these questions. It is easy to see that GOME will be confronted will a serious brand crisis once the separation occurs. In fact, people are now concerned more with the development of this dispute rather than the quality of the GOME’s service and products. It is obvious as to the depth the impact will be on GOME once the listed and non-listed shops split. What will happen if the secession really takes place? How can the public tell this “GOME” from that “GOME”? Li Xingguo, chief consultant from the China Brand Culture Committee, commented “will there be GOME in the future? Who will be responsible for my aftersale service? Consumers generally make favorable choices. Doubt is the largest challenge for a brand.” Chen Yunfeng, prior general manager of GOME sales center, also expressed his concern “Once there is problem in the brand, it will take a long time for a new brand to be established. People are used to buying electrical appliances from GOME, so it takes time and effort for a new brand to be recognized and at the same time, the company has to undertake the risk.” In addition, based on the “Agreement on No Competition” between the listed company and Beijing GOME, business of the listed company will be restricted from entering regions like Shanghai, Henan, Hebei. Furthermore, since there is no limitation for the expansion of the other brands owned by listed company like “Yong Le” and “Da Zhong” in the abovementioned regions, a listed company can compete with non-listed companies in the name of those brands. The confusion can be easily imagined. The largest winner is the competitor SUNING. If we define the tacit balance between GOME and SUNING on the basis of competition in the electrical appliance market, the brand crisis of GOME will definitely break this balance. In this fierce competitive market, SUNING will have the opportunity to play catch up and exceed GOME in a relatively short period of time. According to the Mid-term Report 2010 from SUNING, due to a good market environment and management, the revenue in first half of the year has reached 1.97billion Yuan, with a growth of 56% compared to the same period  ast year. The statistic reveals a 2.05 times revenue increase compared to the revenue indicated in GOME’s Mid-term Report.
This is not the intention of shareholders
“No matter who wins in this battle, what we are concerned most with is that the company runs well,” Commented Investors at the Extraordinary General Meeting of shareholders held on September 28. A person concerned stated that ending the trusteeship agreement is not the intention of Huang. “The

letter was aimed to change some of the investor’s minds and win additional support. Since the goal was not reached, the key to solving the problem is to go back to the conference desk and find some proper solutions.” A report from Merrill on September 28 said, “If the two parties can ease the dispute through negotiation, GOME will avoid from being divided into two companies and more resources can be concentrated to the well management of business. Compromises are needed for a peaceful resolution, but it is better than a result with two losers both paying heavy expenses.” Forbes and Interbrand have jointly published the “list of 50 best Chinese Brand Value 2010” in Beijing. GOME was listed with its outstanding achievement and brand impact. According to the latest evaluation from “Rui Fu Chinese List of the World Most Valuable Brands”, GOME ranked number five with a brand value of 52.612 billion Yuan. Holding first place as the Chinese electrical appliance chain-store franchiser, GOME will be heavily hit by any incident. This is not the intention of shareholders.

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