Tongjitang Chinese Medicines: Fighting Off Counterfeiters

| About: Tongjitang Chinese (TCM)
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A reader recently asked for one or two negatives aspects of Tongjitang Chinese Medicines (NYSE:TCM). In response I have posted a few risks associated with investing in this stock. For most part, they are either uncertainties in the Chinese pharma industry or minor issues common to small caps. But I do want to single out the brand protection issue and discuss it a little more here.

Although not as famous as Tongrentang (which dates back to 1669 and is probably the best-known “senior” medical brand in China), Tongjitang is still a well respected brand in China. The brand dates back to 1888 when once-governor of Yungui (Yunnan and Guizhou provinces) Mr. Tang Jiong and his friend invested 2000-liang (2025 ounces) of silver to open Tongjitang Drugstore.

Gradually Tongjitang became renowned for its highly proficient physicians, quality drugs, genuine ingredients, fair pricing, and business ethics. The reputation even spread overseas.

Like many other senior brands, in the past half-century or so Tongjitang has gone through chaotic times. But the brand managed to survive and was reinvigorated following the buyout by Mr. Wang Xiaochun’s Guizhou Xianling. TCM’s heavy advertising and marketing spending in recent years has helped to strengthen the brand.

Naturally, the brand is also plagued by infringement and plagiarizers. In the Chinese market, not only are there counterfeit XLGB medicines, there are also related and unrelated medicines sold on plagiarized Tongjitang brand. In the past, the company has worked with several provinces to crack down counterfeit XLGB products with some success. But by briefly browsing the customer questions section of Guizhou Tongjitang Pharmaceutical’s (TCM’s major operating company) web site, there still appears to be some customer concerns regarding counterfeit XLGB products. Furthermore, in the service complaints as well as the customer questions sections there were two or three reports of skin-related medicines sold on counterfeit Tongjitang brand.

Several enterprises have also competed to take a share of the Tongjitang brand. I have knowledge of three companies (other than TCM) that use the word “Tongjitang” in their company names. They are Shanghai Tongjitang, Hubei Tongjitang, and Sanjin Pharma’s Tongjitang subsidiary. All these companies seem to have been endorsed by their respective local governments. Their Tongjitang brands have all been claimed to date back to the 1888-founded Guiyang Tongjitang. Yet none of them has provided a convincing story of how it is related to Guizhou Tongjitang.

The most striking example would be Shanghai Tongjitang. It owns the domain and was founded only in August 2002. Without explaining how it is related to the genuine brand, it mysteriously boasts about Tongjitang’s more than century-old history on its web site. Now you have seen the enterprise version of a five-year-old kid bragging about having five or six generations of descendants. Unless it is a subsidiary of Guizhou Tongjitang (which I do not believe so), this is brand infringement at its most blatant extreme. Shanghai Tongjitang claimed it was GMP certified in March 2005.

TCM management is aware of the existence of Hubei Tongjitang and Sanjin’s Tongjitang subsidiary (but I do not know if it is aware of Shanghai Tongjitang). Due to China’s inadequate regulatory and legal system, TCM will be fighting an uphill battle with these infringers. The company thinks it might need to live with these companies in the end. A thorny issue is that Tongjitang is not actually legalized as a well-known trademark in China. But I believe it would be a big mistake for the company to leave at that.

After all, Tongjitang was recognized as a “National Senior Brand” in 1994 by the then Ministry of Domestic Trade. And partly based on this recognition, the company won a lawsuit in July on a domain-name infringement case in Changsha City, Hunan Province, according to a Guizhou Daily report. Another key point mentioned in the report was the company’s history of winning legal battles related to its Tongjitang brand. (This is a proof that the company has not really sat still when it comes to brand protection. Good news for shareholders.)

In my humble opinion, the company should have dedicated personnel working just to protect its brand. The top priority for this team should be to earn a legalized “well-known trademark,” using as basis its 1994 “National Senior Brand” recognition, its “Guizhou Province Well-Known Brand” recognition, and the history of legal judgments in favor of the company. Depending on the outcome of this legal battle, the company should confront the infringing businesses mentioned above and resort to legal means when necessary. Understandably, due to the various local stakes involved and China’s inadequate legal system, this legal battle is most likely a much tougher one than the domain-name case where the defendant was only an individual.

Meanwhile the company should immediately work to differentiate its Tongjitang brand from the plagiarized brands (if it has not started doing so yet). It should clearly state that Guizhou Tongjitang is the only genuine Tongjitang brand, in its various advertisements, marketing campaigns, seminars and other consumer education initiatives. Those plagiarized Tongjitang brands should also be clearly named and stated to be unrelated to the genuine “National Senior Brand.”

In the event the company cannot legalize Tongjitang as a national "well-known trademark", it should think about the possibility of acquiring these infringers. Collectively (with the infringers) they should work together to guarantee the quality of their products and use a single “Tongjitang” brand. In an alliance, they would be powerful enough to secure a legal “well-known trademark” in China, thus preventing newcomers from stealing the brand again. If this is not feasible or does not work out, the only solution would be to strengthen the brand differentiation effort described above. And that is why brand differentiation is important from the very beginning.

Successful brand protection will contribute to TCM’s long-term success, in a big way. And management’s skill, commitment, wisdom and creativity will be put to test in its brand-protection endeavor.

Disclosure: The author owns TCM as of this writing. This post represents only the author's personal view which can be biased or incorrect. It should not be interpreted as a recommendation to buy or sell TCM stock.