FRANCHISE: Product licensing from licensee’s perspective

Wambugu Wa Gichohi

Product licensing involves obtaining rights to manufacture and sell one or more of someone else’s brands for a specified period within a defined market in consideration for volume-based royalties or a lumpsum.

Two reasons make it viable for a manufacturer to seek product licences. First, rapid technological changes dictate short product lifespans. To survive, a manufacturer has to continually add new products to replace declining products. Second, product portfolio diversification driven by the need to utilise excess production and marketing capacity, even-out seasonality of some products or simply add to the bottom line with a proven product. Lack of internal skills, time or money to develop own products drives manufacturers towards obtaining product licences.

Product licensing avails many advantages to the licensee. First, it costs less than buying an entire company or a division of a competitor. It is particularly attractive since you pay royalties over the license period. Secondly, you do not invest in own R&D which is normally expensive. Thirdly, you minimise your costs and risks in cases where the product doesn’t succeed in your market area-you simply give up the license and move on. Fourthly, you quickly break into your assigned market with the new product based on experience gained in another market. Lastly, you tap into the capacities and know-how of the product’s developer, who may be many times over larger than you are and with development capacities you may never afford.

There are disadvantages. First, you may lose capacity to develop your own technology internally, given the ease of using licenses. Secondly, the license may force you to accept restrictions on the product’s marketing, thereby stifling your innovation and possibly your ability to make better returns. Thirdly, a new technology may soon make the licensed opportunity obsolete. Finally, MLAs are more long-term, sometimes with minimum annual royalty and exit requirements, making it difficult to exit at minimum expense.

Typical MLAs cover several elements of the relationship. First, the IP granted- patent, trade secret, trademark, copyright, industrial design etc. Second, the rights granted in relation to the IP mentioned above-how to use it. Third, the designated market and exclusivity applicable, fourth the term of licence, fifth the minimum and ongoing royalty required, sixth the licensor’s obligations-training, support etc. Seventh are the licensee obligations covering finance, secrecy, costs, marketing etc. Eighth, are guarantees (normally licensors don’t guarantee results of using the rights granted) and any warranties required from the licensee. Finally, the rights of either party to and upon termination of the license.

In perspective, motor vehicle producers use MLAs to access different components needed to assemble a motor vehicle. Whatever car you drive, it has very few (if any) components made by the car manufacturer. Most parts are sourced from licensed manufacturers, with the car manufacturer’s logo stamped on them, which are then assembled to the end-product you ride in. To entice licensees to invest heavily to support the vehicle brand, MLAs allow them to produce slightly higher volumes and sell in the after-market without the manufacturer’s logo, normally at cheaper prices than the vehicle manufacturer-branded component. So, next time you want to buy the same genuine brake pads for your car at 40 per cent lower than the dealer price, just find out who was originally licensed by the vehicle maker to supply the branded pads to the assembly plant!

Using the same principles, there’s no need to reinvent the wheel as we drive our East African industrialisation agenda. Licensing by bigger manufacturers to local smaller manufacturers will achieve faster industrialisation.

The writer is a franchise consultant helping indigenous East African brands to franchise, multinational franchise brands to settle in East Africa and governments to create a franchise-friendly business environment.