The Beijing Olympics and the World Expo have given Chinese manufacturers a taste of brand licensing. Annual retail sales of licensed merchandise worldwide have risen every year and today top US $200 billion. The figure for the U.S. alone is US $105 billion, representing 52 percent of the world market. Compare that with China, with a lowly one percent share, or US $2 billion.

China, “the world’s workshop,” is a seasoned producer of high-quality low-cost goods. But for international events like the football World Cup and established trademarks such as Disney there is little profit to be made in the manufacture of such licensed products, since the lion’s share goes to the brand owners based outside China. The situation is different for domestic events or brands over which China owns the intellectual property rights or patents: for instance, the Chinese Basketball Association generates RMB 400 to 500 billion annually in sales of clothes and shoes bearing its logo.

According to the annual report of the International Licensing Industry Merchandiser’s Association, one third of the Fortune 500 companies are involved in brand licensing, a sector that no transnational business can overlook in its development strategy.

In the opinion of Professor Chao Gangling of Shanghai University of Finance and Economics, for a long time Chinese factories have been either original equipment manufacturers (OEM) making products or components for a purchasing company that are subequently retailed under that company’s brand name, or they have struggled to build from scratch their own brands that they manage to squeeze into the low-end market. Either way, the Chinese factories face puny profit margins and dim growth prospects. On the other hand, licensing of widely recognized brands offers an alternative route, one that effectively draws world attention to Chinese creativity.

“Brand licensing is way different from OEM,” explains Professor Chao. “A licensed producer can get involved in marketing, whereas an OEM is confined to the factory and can earn nothing beyond the processing fee. The brand owner controls the sales channels.”

But Chao warns that the title of licensed producer is no magic formula. Licensed brands can certainly give goods an edge, but what matters most in market performance is product development and marketing competence. When teaming up with international brands, Chinese companies should take the opportunity to learn from their foreign partners in areas such as quality control, brand management and internal supervision, all precious assets for businesses with their sights on the global marketplace.