A Golden Goose Tarnished: The Unraveling of China’s Brand Licensing Empire
The brand licensing model, once heralded as a capital-light path to explosive growth for Chinese consumer companies, is facing a severe reckoning. What was celebrated as a brilliant strategy for monetizing brand equity has, in many cases, devolved into a race to the bottom, sacrificing long-term trust for short-term royalty fees. The recent scandal involving a product falsely marketed under the prestigious Tongrentang (同仁堂) banner—a “krill oil” supplement found to contain zero krill oil—is not an isolated incident. It is a symptomatic flare-up of a systemic disease plaguing sectors from pharmaceuticals to apparel. This pervasive brand licensing crisis is now visibly corroding financial performance, hammering market valuations, and forcing a painful strategic rethink for companies that built empires on little more than a logo.
The allure was undeniable. For brand owners, licensing offered fat, high-margin revenue with minimal operational headache. For manufacturers, attaching a well-known label provided instant market access and consumer credibility. However, the foundational bargain—quality control in exchange for brand prestige—has been repeatedly broken. The consequences are no longer confined to consumer complaints; they are starkly reflected in quarterly earnings reports and plunging share prices, signaling a profound shift in market sentiment where brand dilution has tangible financial costs.
Key Takeaways for Investors and Executives
- The rampant misuse of licensed brands, exemplified by the Tongrentang krill oil scandal, is causing severe reputational damage and financial underperformance for brand owners, who struggle to control downstream quality.
- Companies like Kwaifu Pharmaceutical (葵花药业) demonstrate how opaque licensing relationships and misleading marketing of licensed products can lead to regulatory censure and directly contribute to staggering quarterly losses.
- Nanjiren (南极人), once the A-share market’s “Label King” with a valuation near ¥60 billion, now trades at a fraction of its peak, proving that an unchecked licensing model is unsustainable in today’s quality-conscious market.
- Investors must scrutinize companies reliant on licensing revenue for evidence of robust oversight, investment in core products, and a credible strategy to rebuild brand integrity beyond merely selling a name.
The Tongrentang Tangle: Prestige Diluted in a Sea of Labels
The revelation that a supplement boldly labeled “Beijing Tongrentang 99% High-Purity Antarctic Krill Oil” contained not a trace of krill oil sent shockwaves through China’s consumer health market. The product, tested by the Shanghai Consumer Council, was a masterclass in deceptive branding. The packaging prominently featured the revered “北京同仁堂” (Beijing Tongrentang) name, though the actual registered trademark was “朕皇” (Zhenhuang). The producer, Beijing Tongrentang (Sichuan) Health Pharmaceutical Co., Ltd., had allowed—or according to its defense, failed to prevent—its corporate name to be manipulated into a consumer-facing brand identifier.
This incident peeled back the curtain on a chaotic ecosystem where the Tongrentang name, a byword for centuries-old herbal tradition, has been fragmented and commercialized beyond recognition. The crisis stems from a historical split, resulting in three distinct entities: Beijing Tongrentang, Tianjin Tongrentang, and Nanjing Tongrentang. While Beijing Tongrentang is the original and most prestigious, it has limited control over the others’ operations.
Three Tongrentangs and a Universe of Licensees
Most of the proliferation of “Tongrentang” products on e-commerce platforms stems from aggressive licensing by Nanjing Tongrentang and its affiliates. For instance, a company called Green Gold Home, with only a 3% stake in a Nanjing Tongrentang-associated entity, operates as a “master distributor,” authorizing the production of everything from American ginseng slices to foot bath sachets under the同仁堂 label. The barrier to entry is low, the royalties are attractive, and the regulatory fines for substandard products, while frequent, are often viewed as a mere cost of business.
For the flagship Beijing Tongrentang, this reality is a nightmare. It has repeatedly issued statements clarifying it does not authorize such widespread use of its brand, but to little avail. The brand’s value is being systematically diluted in a market crowded with confusing and often inferior products. The financial impact is clear: for the first three quarters of the recent reporting period, Beijing Tongrentang’s revenue fell 3.7% year-on-year, while net profit plummeted nearly 13%. The brand licensing model, when executed by unrelated parties, acts as a direct drag on the core brand’s equity and profitability.
Kwaifu Pharma: When Licensed Products Trigger Regulatory and Financial Collapse
The case of Kwaifu Pharmaceutical (葵花药业) illustrates a more integrated but equally damaging brand licensing dilemma. Famous for its “Little Sunflower” (小葵花) children’s medicine brand, Kwaifu has extended its reach into the lucrative health supplement market largely through licensed production. However, this expansion has been marred by controversial marketing and serious corporate governance lapses.
In October, Kwaifu and its top executives, including Chairman Guan Yuxiu (关玉秀) and General Manager Guan Yi (关一), were issued a formal warning by the Heilongjiang Bureau of the China Securities Regulatory Commission (CSRC). The violation? A 32.38 million yuan procurement deal with an affiliated company, Haivy Biological, which was not disclosed as a related-party transaction as required. Haivy Biological is a key contract manufacturer for Kwaifu’s line of “Little Sunflower” branded supplements.
Misleading Marketing and the Erosion of Trust
The problems extend beyond governance. Licensed Kwaifu products have been at the center of misleading marketing storms. In live-streaming sales, promoters for “Little Sunflower” branded calcium supplements have used placards hinting that the product could aid height growth for people up to age 26, using opaque language like “improving image” and “becoming more outstanding” to skirt advertising regulations. This blatantly plays on parental anxiety with claims that defy basic biology.
Other licensed products, such as a “Gamma-Aminobutyric Acid Vitamin” supplement, have been promoted as suitable for young children despite packaging that clearly states it is a “sports nutrition (endurance) food” not intended for infants. This pattern of aggressive, ambiguous marketing for licensed goods is creating a deep rift with consumers. One parent quoted in source material expressed fury after realizing a purchased supplement was not designed for children: “Spending money is a small matter, but this kind of marketing is irresponsible to children.”
The financial repercussions have been brutal. Kwaifu’s Q3 report showed a staggering quarterly loss of 115 million yuan, a year-on-year decline of 214.27%. For the first nine months of the year, revenue crashed 43.24% to 1.68 billion yuan, and the company slid into a net loss. The brand licensing strategy, intended to drive growth, has instead become a primary vector for reputational harm and financial distress.
Nanjiren: The Rise and Fall of the A-Share “Label King”
No company epitomizes the pure-play brand licensing model—and its precipitous fall—better than Nanjiren, later renamed Nanji E-commerce (南极电商). In 2008, it sold off its manufacturing plants to focus solely on brand authorization. Riding the e-commerce boom, its business of selling “clothing tags” to manufacturers flourished. By 2017, its brand licensing gross margin reached an incredible 96.46%, surpassing that of Moutai (茅台) and earning it the moniker “the Label King” of the A-share market.
At its peak in 2020, Nanji E-commerce boasted a net profit of 1.19 billion yuan and a market capitalization approaching 60 billion yuan. Its network included thousands of suppliers and authorized stores across 45 product categories, truly creating a universe where “everything can be Nanjiren.” However, this breakneck expansion came at the cost of quality control. From 2018 onward, Nanjiren products frequently appeared on blacklists issued by market regulators across China for issues ranging from substandard children’s clothing to faulty travel suitcases.
A Failed Pivot and a Founder in Distress
Facing mounting consumer backlash and a collapsing stock price, founder Zhang Yuxiang (张玉祥) attempted a pivot. He expressed regret, stating the business no longer made him “proud,” as even he and his acquaintances did not prefer to wear the products. The company announced a shift from open licensing to an invitation-only model and pledged to restart its in-house product lines, aiming for a hybrid strategy.
The results, however, reveal a company stuck in transition. The 2025 interim report showed that while revenue came mainly from a new advertising services business, the only segment delivering substantial profit was the old brand licensing arm, with a 93.8% gross margin. The performance of the new self-operated retail products was conspicuously absent from detailed reporting. Meanwhile, quality control issues persist; as recently as November 2025, a Nanjiren-licensed garment was flagged as substandard by Suzhou market regulators.
The founder’s own financial woes mirror the company’s struggles. Zhang Yuxiang has seen nearly half of his equity pledged, and he was recently subjected to a court-ordered “consumption restriction” (限高令), limiting high-end personal spending due to debt-related cases. From a peak near 60 billion yuan, Nanji E-commerce’s market cap has withered to around 8.4 billion yuan—a devastating 85% collapse. The brand licensing model, in its purest form, has proven to be a dead end.
Market Reckoning: Why the Licensing Model is Now a Liability
The simultaneous crises at Tongrentang, Kwaifu, and Nanjiren are not coincidental. They mark a maturation of the Chinese consumer market and a shift in regulatory and investment sentiment. The brand licensing model is facing a perfect storm of converging negative forces that are transforming it from an asset to a liability on corporate balance sheets.
Firstly, consumers are vastly more informed and skeptical. They read ingredient lists, research corporate structures online, and share negative experiences instantly across social media. A single scandal, like the “zero-content krill oil,” can cause permanent brand damage, with consumers walking away for good. The modern market offers limitless alternatives, and trust, once broken, is exceedingly difficult to repair.
Secondly, regulators are taking a harder line. The CSRC’s action against Kwaifu for undisclosed related-party transactions shows that the financial governance of licensing networks is under scrutiny. Simultaneously, State Administration for Market Regulation (SAMR) agencies are increasingly naming and shaming branded products that fail quality checks, holding the brand owner accountable for the sins of its licensees.
The Investment Community’s Flight from “Light Asset” Risk
For institutional investors, the calculus has changed. The “light asset” story that once justified premium valuations is now seen as a story of diluted control, hidden liability, and eroding moats. The dramatic de-rating of Nanji E-commerce is the clearest signal. Investors are penalizing companies that cannot demonstrate direct oversight over their product quality and supply chain. They are rewarding transparency, vertical integration, and genuine investment in R&D and core product innovation over financial engineering centered on logo licensing.
The financial underperformance of these companies is a direct result of this lost trust. When consumers reject licensed products, sales fall. When sales fall and marketing costs rise to combat negative sentiment, profits evaporate. The brand licensing model’s high margins are meaningless if the top line is in freefall.
Rebuilding Trust: The Path Forward for Chinese Brands
The era of easy money from unchecked brand licensing is over. For companies entangled in this model, the path forward requires painful but necessary strategic choices. The first, and most critical, step is a radical overhaul of quality control and compliance systems for licensed products. This means auditing manufacturers rigorously, implementing unannounced inspections, and establishing clear, enforceable contracts with severe penalties for violations. It must become more expensive for a licensee to cut corners than to maintain quality.
Secondly, companies must re-invest in their core proprietary products and technologies. The brand must stand for something tangible again. For Tongrentang, this means leveraging its herbal expertise in flagship products it directly controls. For a company like Kwaifu, it means refocusing on its proven strengths in pediatric medicines rather than chasing supplement fads through third parties. A strong, innovative core business acts as a reputational anchor and a more sustainable growth driver than licensing ever could be.
A Call for Discernment: Guidance for Stakeholders
For investors analyzing Chinese consumer stocks, a deep dive into licensing revenue is now essential. Scrutinize the percentage of income derived from royalties, the disclosure around licensee relationships, and the history of product quality incidents. A heavy reliance on licensing should be seen as a risk factor, not a strength, unless accompanied by demonstrable, transparent oversight mechanisms.
For consumers, vigilance is key. Look beyond the prominent logo on the packaging. Check the fine print for the actual manufacturer, search for product quality reports from market regulators, and be skeptical of exaggerated health claims, especially for licensed products in the supplement space. Your purchasing power is the ultimate regulator.
The market has delivered its verdict on the reckless brand licensing model. It is a strategy that consumes the very brand equity it seeks to monetize. Companies that fail to learn this lesson, that continue to prioritize short-term royalty streams over long-term brand integrity, will see their fortunes continue to decline. The future belongs to brands that understand their name is not just a label to be sold, but a promise to be kept—a promise that forms the unshakable foundation of true market value and consumer loyalty.