Click on the image for details This article was first published in Caijing Magazine (ID: i-caijing) Behind Red Bull's annual sales of over 20 billion yuan in China lies a tangled web of interests between the Xu family and Yan Bin. Over 22 years of partnership, they experienced trust, suspicion, confrontation, and estrangement. What lessons can the business world draw from this? By Ma Xuemei, Caijing Reporter / Edited by Mark "If you take away Red Bull, Yan Bin's wealth would basically be negative, so he's fighting desperately." In the Beijing office of Global Law Office, the lawyer representing the Thai Xu family, the founder of the global Red Bull brand, told Caijing reporters. The Thai Xu family ranked 145th on the 2017 Hurun Global Rich List with $9.3 billion, holding the Red Bull trademark and being the largest shareholder of China Red Bull. The Yan Bin the lawyer mentioned is the chairman of China Red Bull and Reignwood China. He ranked 107th on the 2017 Hurun Global Rich List with $11 billion, tied with Zhang Jindong, chairman of Suning Holdings Group, and He Xiangjian, founder of Midea Group. Yan Bin has been low-key for years, a typical invisible rich man. It wasn't until the Xu family launched a series of lawsuits over the Red Bull trademark that he came into media view. Currently, Yan Bin's wealth, mainly accumulated from Red Bull beverages, is fraught with problems. So far, the two sides have been involved in more than 20 lawsuits, including those reported in the media: the Xu family sued the Red Bull can supplier ORG Packaging Co., Ltd. (002701.SZ, which has been suspended), the three production plants of Red Bull beverages, and some sales companies; Yan Bin's side sued Xu Xiongxiong, the head of the Xu family and director of China Red Bull, and filed for trademark arbitration. Why did the two wealthy families turn from close partners to bitter enemies? Who does Red Bull belong to, and what uncertainties lie ahead? Mutual Admiration In 1975, Xu Shubiao, father of Xu Xiongxiong and a Thai-Chinese businessman, invented Red Bull beverage. At 52, Xu Shubiao came from a poor background. After finishing primary school, he worked odd jobs, and his fate at the bottom didn't change until he became a salesperson at an international pharmaceutical company. This job not only deepened his understanding of the pharmaceutical industry but also activated his business potential. In the 1960s, Xu Shubiao resigned to found T.C. Pharma ("Tian Si Medical"), initially dealing in pharmaceutical raw materials and original drugs. In the 1970s, he noticed that energy drinks from South Korea and Japan were popular in the market, sensing a promising business opportunity. He developed a tasteless energy drink, which became Red Bull. Later, due to legal restrictions preventing simultaneous operation of pharmaceutical and beverage businesses, he gave up the former, retaining only the company name T.C. Pharma. Xu Shubiao had long wanted to introduce Red Bull to the Chinese market. In 1993, the Xu family established Hainan Red Bull Beverage Co., Ltd. in their ancestral home of Hainan. However, since China had no energy drink category at the time, and the Xu family was unfamiliar with the Chinese market, a series of issues with government approval, market cultivation, and channel expansion made Red Bull's first steps in China difficult. In 1995, through a friend's introduction, 72-year-old Xu Shubiao met 41-year-old Yan Bin. Perhaps their similar experiences of rising from the bottom resonated, and Xu Shubiao quickly chose Yan Bin as his partner for the Chinese market. On November 2, 2016, Xu Xiongxiong, son of Xu Shubiao, revealed in an exclusive interview with Caijing in Beijing that Yan Bin fled from the mainland to Thailand in 1970 and later became a Thai citizen. In 1984, he founded Reignwood Group in Bangkok, dealing in tourism and commodity trade. When he met Xu Shubiao, Reignwood Thailand was still small. In the few interviews with Yan Bin, most mention his early days in Thailand surviving by selling blood. A reporter from a national weekly who interviewed him told Caijing that Yan Bin was willing to talk about his youthful experiences, but each time he told a slightly different story. On her personal impression of Yan Bin, she said: "Yan Bin has a very strong desire for self-expression, believing his market acumen is formidable, but everyone knows his real strength lies in connections and resources." Why did Yan Bin, from a poor background, excel in connections? Perhaps a glimpse can be found in his own account. When working in Bangkok's Chinatown, Yan Bin often used his hand as an ashtray for his boss. When discussing business with others, the boss would stub out a lit cigarette directly into his hand, and even if it blistered, he wouldn't make a sound. The boss lived in the attic, while Yan Bin and other workers slept downstairs. Every morning at 5, Yan Bin would listen for sounds from upstairs. "As soon as the boss coughed, I'd bring up the spittoon, within a minute." Thus, after a year, he was promoted to manager. Although he came to Thailand at 16, Yan Bin always kept an eye on the Chinese market. In 1989, he co-invested in two buildings in Bangkok with a subsidiary of a Chinese ministry. Later, he returned to China and made many investments. What Xu Shubiao valued was Yan Bin's understanding of the Chinese market and his ability to navigate relationships. Before formally entering the Chinese market, the two sides first established Red Bull Vitamin Beverage (Thailand) Co., Ltd. ("Thailand Red Bull") on March 27, 1995. Thailand Red Bull was a pure holding company with no other assets. The Xu family and Yan Bin held 68% and 32% respectively. On December 25, 1995, Red Bull Vitamin Beverage Co., Ltd. ("China Red Bull") was registered in Shenzhen with a registered capital of $4 million. The Xu family and Yan Bin held 54.24% and 45.76% respectively. Notably, the business scope in the industrial and commercial registration was "production and operation of various foods and beverages; 70% of products for export." This indicates that Red Bull's production and sales were not yet officially recognized by Chinese authorities. Things changed two years later. On September 30, 1998, China Red Bull was re-registered in Beijing, transforming from a wholly foreign-owned enterprise into one of Beijing's largest Sino-foreign joint beverage ventures, with registered capital increased to $56.02 million. As a "special purpose beverage," Red Bull could now be produced and sold legitimately. The Xu family's lawyer told Caijing that this "legitimacy" was mainly due to Li Ruoming, then general manager and party secretary of China National Food Industry Corporation. In this change, Li Ruoming joined the board as vice chairman, serving until October 2015. At this point, the joint venture expanded to four shareholders with the following stakes: Thailand Red Bull 88%, Huairou District Township Enterprise Corporation (a wholly state-owned enterprise under Huairou SASAC) 1%, Inter Biopharma Holdings Limited (a wholly-owned company of the Xu family) 7%, and Global Market Holdings Limited (a wholly-owned company of Yan Bin) 4%. After conversion, the Xu family and Yan Bin held 66.84% and 32.16% respectively. Perhaps satisfied with Yan Bin's rapid opening of the Chinese market and holding an absolute advantage in equity, Xu Shubiao gave Yan Bin full trust. Besides one seat on the board, he delegated all affairs of China Red Bull to Yan Bin. In 2012, Xu Shubiao passed away in Bangkok. Crossing the Rubicon Under Yan Bin's efforts, China Red Bull grew rapidly. According to Euromonitor, a leading FMCG data research firm, from 2014 to 2016, Red Bull's sales in China were RMB 16.903 billion, 20.115 billion, and 22.163 billion respectively; global sales were $10.781 billion, $12.088 billion, and $12.372 billion; converted at annual exchange rates, China Red Bull accounted for 25.52%, 26.72%, and 26.97% of global Red Bull sales. However, Xu Xiongxiong told Caijing that China Red Bull never held a board meeting in the 20 years before 2015, and as the largest shareholder, the Xu family has not received a single dividend to date. The head of Huairou Township Enterprise Corporation also said they only received RMB 600,000 in dividends in 2002-2003. Neither the Xu family nor Huairou knew the exact sales and profit margins of China Red Bull; these data were only in Yan Bin's hands and never disclosed. But CITIC Securities research reports indicated China Red Bull's operating margin was around 27% in 2015, with a 75% share of the energy drink market. The Xu family's lawyer met with Yan Bin multiple times. He told Caijing that Yan Bin was very assertive in meetings, often leaving after saying his piece, leaving a room of people staring at each other. Occasionally, he would communicate privately with Xu Xiongxiong, excluding others. He would scold his subordinates at will; once, he even threw documents in his deputy's face. The 47-year-old Xu Xiongxiong left an impression on Caijing reporters as a well-bred rich second generation—neatly dressed, elegant, and soft-spoken. Even when describing scenes that seemed to anger him, he never used aggressive language. The other party, Huairou Township Enterprise Corporation, holds only 1% of China Red Bull, but given its sales and profit margins, its shareholder equity over nearly 20 years should be substantial. However, unlike the Xu family, Huairou never actively pursued its shareholder rights. Yan Bin appears to have close ties with Huairou District. In the early days, Huairou provided low-priced land and about RMB 15 million in financial support. In return, China Red Bull provided jobs and remained a major taxpayer in the district. This may explain why Huairou has remained aloof throughout the affair. For the Xu family, the largest shareholder, why did they only start asserting their rights in the last two or three years, given that the joint venture had no board meetings or dividends for 20 years? Xu Xiongxiong's explanation to Caijing was that his father, Xu Shubiao, had always trusted Red Bull's global partners, including Yan Bin. Additionally, the Xu family believed that during China Red Bull's development phase, Yan Bin should be given more time and financial support, so they rarely discussed dividends initially. Later, when the topic came up, Yan Bin kept saying the company wasn't profitable and needed more investment. The 66.84% stake in China Red Bull was always a reassurance for the Xu family. After all, seeing Red Bull grow in the Chinese market was their most desired outcome. The Xu family provided production technology, product formulas, and technical experts, while Yan Bin handled production and sales. At the time, China's energy drink market was a blank slate. Yan Bin, through heavy advertising and extensive distribution, gave Red Bull an absolute first-mover advantage. "Drink Red Bull when thirsty; drink it even more when sleepy or tired" became a well-known slogan. Facts show that Yan Bin knew his value better than anyone and has been scheming to maximize his contributions. The three Red Bull production plants in China—Red Bull Vitamin Beverage (Hubei) Co., Ltd., Guangdong Red Bull Vitamin Beverage Co., Ltd., and Red Bull Vitamin Beverage (Jiangsu) Co., Ltd.—were registered in 2005, 2009, and 2012 respectively. Their current controlling shareholder is Reignwood Investment (China) Co., Ltd. ("Reignwood China"), a wholly-owned enterprise Yan Bin established in 2009. Regarding the issue that the Hubei plant was established four years before its controlling shareholder, the Xu family's lawyer explained that the Hubei plant was initially set up with the joint venture as the major shareholder. Later, Yan Bin, feeling the Xu family didn't pay much attention to legal documents and trusted him, quietly transferred the Hubei plant to his own system. When establishing the Guangdong and Jiangsu plants later, he placed them directly outside the China Red Bull system. Now, these three plants have far greater output than the Huairou plant still within the joint venture system. As for China Red Bull's sales system, it has always been in Yan Bin's hands. The Xu family's lawyer told Caijing that the joint venture initially had a sales system. Later, Yan Bin set up sales companies outside the joint venture while closing down the joint venture's subsidiaries, eventually transferring all Red Bull sales operations out of China Red Bull. Red Bull's sales system in China includes over 20 branch companies and over 10 subsidiaries, with regional sales companies extending down to prefecture-level or county-level cities. This is one of the key reasons Yan Bin believes the Xu family cannot do without him. "The joint venture has become a small processing base," lamented the Xu family's lawyer. The Xu family says the original agreement clearly stipulated that the joint venture was responsible for Red Bull's production and sales. That is, production plants should be established by the joint venture, and the sales network should be set up by the joint venture with branches in various regions. In response to these issues, Caijing reporters repeatedly contacted Yan Bin himself, China Red Bull, and Reignwood China for verification, but received no reply from any of them. On August 4, Caijing reporters called Yan Bin's mobile phone, but he hung up, saying "I don't know the situation," "I don't understand what you're saying," and "I'm not responsible for this." Xu Xiongxiong said that in the early years, they could get financial statements from Yan Bin, but they were done by local accounting firms, very rough and chaotic, hard to understand. Later, at their repeated request, Yan Bin switched to PricewaterhouseCoopers. After receiving qualified financial statements, the Xu family gradually became suspicious of Yan Bin. (Neither the Xu family nor Huairou knew the exact sales and profit margins of China Red Bull; these data were only in Yan Bin's hands and never disclosed. Photo: VCG) Failed Negotiations In December 2014, the Xu family commissioned Global Law Office to investigate the entire matter, gradually realizing the seriousness of China Red Bull's problems. The exclusive rights to the "Red Bull" series of registered trademarks were another reassurance for the Xu family. However, the investigation revealed that Yan Bin, through the joint venture and other companies he controlled, such as Beijing Langchen Beverage Co., Ltd., had registered hundreds of Red Bull trademarks and design patents. The Singapore meeting in December 2014 was the first formal confrontation between the Xu family and Yan Bin. At this meeting, the Xu family demanded that Yan Bin transfer all Red Bull trademarks and design patents registered by the joint venture and his controlled companies to T.C. Pharma. T.C. Pharma is a wholly-owned company of the Xu family and the registrant and holder of the "Red Bull" series of registered trademarks in China. As early as 1995, T.C. Pharma registered the "RedBull Red Bull" trademark in China, with international class 32, representing "beer, mineral water, soda, non-alcoholic beverages, fruit juices, preparations," which is a core trademark. To protect intellectual property, companies typically expand the scope of registration after registering core trademarks to form a protective shield. A core trademark can be understood as a trademark registered in the category where the product truly belongs. For example, to protect the "RedBull Red Bull" trademark, in addition to registering in international class 32 (representing beverages), it can also be registered in class 29 (representing food). China adopts the international trademark classification method, which includes 45 classes in total. Additionally, since trademarks contain multiple elements, such as the Red Bull trademark including the words "Red Bull," "Red Bull," and graphics of one or two bulls, and these elements can be used individually or in combination, multiple logo designs arise. Shortly after China Red Bull was established in 1998, Yan Bin began registering trademarks. The Xu family only learned of this at the end of 2014, discovering that Yan Bin had registered most other categories of Red Bull trademarks and design patents, except for the core class 32. If the Xu family sought legal recourse to reclaim these trademarks and design patents, it would be a protracted litigation war. However, the Singapore meeting surprisingly resolved this thorny issue. At this meeting, the two sides signed a memorandum of understanding, and Yan Bin agreed to transfer the Red Bull trademarks and design patents to T.C. Pharma, signing trademark and design patent transfer agreements. Currently, all Red Bull trademarks and packaging patents have been transferred to T.C. Pharma. The Xu family's lawyer told Caijing that to ensure no omissions, they had repeatedly checked, and now T.C. Pharma owns more than 200 Red Bull trademarks. Yan Bin's willingness to transfer all trademarks and design patents to T.C. Pharma should be related to the equity change in Thailand Red Bull in September 2015. At the September 2015 board meeting, the equity ratio of Thailand Red Bull was changed. The Xu family and Yan Bin's stakes in Thailand Red Bull changed from 68% and 32% to 51% and 49%. Since Thailand Red Bull holds 88% of China Red Bull, the gap between the Xu family and Yan Bin's stakes in China Red Bull narrowed significantly. After conversion, their stakes in China Red Bull became 51.88% and 47.12%. But the disputes did not end there. Besides dividends, trademarks, and transferring production and sales outside the joint venture system, the Xu family also discovered that Yan Bin had at one point used related-party transactions to transfer joint venture funds to his own companies. How many fields do Yan Bin's actually controlled enterprises cover? Reignwood China's official statement says "Yan Bin founded a multinational group spanning health beverages, commercial real estate, outdoor sports, general aviation, culture and arts, international trade, energy and chemicals, and many other fields." The Xu family's lawyer analyzed that Yan Bin's actually controlled enterprises have complex, intertwined shareholding relationships. The basic logic is that Reignwood BVI controls Reignwood Hong Kong, which controls Reignwood China, which controls most domestic companies. He further commented that Reignwood China's business diversification is superficial; its golf courses and five-star hotels are not profitable and are supported by Red Bull beverage income. For example, China Red Bull's 2004 financial statements included an expense of RMB 100 million paid to a Reignwood China golf course for "renting training base." Wu Yuhai, legal representative of Huairou Township Enterprise Corporation, once told the Xu family's lawyer a detail: although the three production plants and sales companies are outside the joint venture system, their executives have always received salaries and bonuses from the joint venture. Regarding asset transfers, Yan Bin's side also did not respond to Caijing's interview requests. Xu Xiongxiong recalled that in a private exchange with Yan Bin, Yan Bin bluntly stated that China Red Bull's success was due to his efforts, and since he had taken out bank loans in his personal name to run the company, he deserved these benefits. Apart from paying the initial registered capital, the Xu family indeed did not provide additional financial support to the joint venture. After establishment, the registered capital was increased twice, with the Xu family, Yan Bin, and Huairou all contributing from the joint venture's reserve funds, enterprise development funds, and capital reserves in proportion. The Xu family's explanation is that according to the 1998 financial statements they received, China Red Bull was already profitable, with good cash flow, so no additional capital was needed. In subsequent negotiations, Xu Xiongxiong asked Yan Bin to provide evidence of loans for the joint venture, offering to compensate, but Yan Bin promised to provide it and then went silent. Yan Bin repeatedly told Xu Xiongxiong: "Red Bull's taste is easy to imitate; I can easily create a new brand." This made the Xu family realize the seriousness of the problem, and the resolution of the trademark issue gave them the initiative to act. In Court According to a 2009 agreement, T.C. Pharma authorized China Red Bull to use the Red Bull trademark (limited to mainland China) until October 2016. That is, if the two sides did not renew, Red Bull beverages produced after October 2016 would be illegal. A source close to Yan Bin told Caijing that Yan Bin never thought renewal was a problem, always believing the Xu family couldn't do without him and wouldn't dare to challenge him. In August 2016, the Xu family filed trademark infringement lawsuits against the three plants in Hubei, Guangdong, and Jiangsu. In October 2016, Yan Bin learned of the lawsuits and responded by filing an arbitration application through the joint venture with the China International Economic and Trade Arbitration Commission, seeking to revoke the trademark and design patent transfer agreements signed in December 2014. The Xu family's lawyer told Caijing that the two sides have had one pre-trial meeting and exchanged evidence, with the earliest first-instance judgment expected by June 2018. In fact, among the three options—continuing cooperation with Yan Bin, starting anew, or finding a new partner—continuing cooperation was the Xu family's first choice. After all, a lose-lose outcome is the worst result. In 2015 and 2016, the Xu family proposed many cooperation plans, but the two sides remained far apart. For example, in Q4 2015, the Xu family hired Morgan Stanley to draft an acquisition plan for the three production plants and sales companies, but Yan Bin rejected it as undervaluing. As of November 2, 2016, when Xu Xiongxiong gave an exclusive interview to Caijing, he still said: "(Cooperation) is still open, but the way (of cooperation) absolutely cannot be like before." According to Euromonitor forecasts, China's energy drink market will maintain an annual growth rate of 9.8%, reaching $11 billion by 2021. If Red Bull maintains its 2016 market share, its annual sales would be around $5.5 billion by then. Facing such a big business, the Xu family and Yan Bin will surely go all out. The Xu family's lawyer told Caijing that as of August 3, 2017, the lawsuits between the two sides exceeded 20. Currently, all cases are still in the procedural stage, and the real confrontation has not yet begun. The Xu family's lawsuits mainly cover three aspects: first, trademark infringement and unfair competition lawsuits against the three production plants and sales companies, with T.C. Pharma as beneficiary; second, a derivative lawsuit against Yan Bin for breaching director duties and causing huge losses to the joint venture (i.e., China Red Bull), with the joint venture as beneficiary; third, a dividend lawsuit against the joint venture, with Inter Biopharma Holdings Limited as beneficiary. Additionally, in June 2017, T.C. Pharma filed an infringement lawsuit against ORG Packaging and its wholly-owned subsidiary Beijing ORG Packaging Containers Co., Ltd. Although ORG has been suspended since July 11, it is still producing normally and continues to supply empty cans for Red Bull. Since 1997, ORG has been the largest supplier of Red Bull cans. When ORG went public in 2012, there was a saying in the market that "investing in ORG is investing in Red Bull," and Yan Bin's actually controlled overseas company, Honghao Group Holdings Limited, was indeed one of ORG's shareholders until 2016. As for the lawsuits initiated by Yan Bin's side, details are unknown since they have never accepted interviews. However, according to public information, Yan Bin's wholly-owned company Global Market Holdings Limited filed a lawsuit against Xu Xiongxiong in November 2016. The main content of the lawsuit is that Xu Xiongxiong simultaneously serves as a director and executive of China Red Bull and Hainan Red Bull Beverage Co., Ltd., creating a competitive relationship. The case is still under trial. Discussing the future, the lawyer said the Xu family has three options: first, adopt the common model in the beverage industry, find a corporate partner, and operate as a joint venture; second, continue the previous model, licensing the brand to a partner; third, operate independently. From 2014 to 2016, Yan Bin's side launched beverages such as Vita Coco, Capri-Sun, Voss, and War Horse in the market, but these products have very small market scales and cannot be compared to Red Bull. The dramatic reversal from close partners to bitter enemies is not uncommon in the business world, because interests always make human nature more naked and desires more inflated. Clarifying responsibilities, rights, and interests at the start of cooperation, and putting cooperation on a transparent, rule-based track rather than merely based on interpersonal trust, may be the lesson for onlookers from the Red Bull dispute. Xu Chenhui also contributed to this article This article will be published in the August 21, 2017 issue of Caijing Magazine Editor: Su Yue yuesu@caijing.com.cn Click on the image for details The 3rd (CFIC) China FMCG + Internet Conference will be held in Chongqing in October 2017. At this conference, New Distribution has invited 1,000+ distributors, 500+ brand owners, 200+ B2B platform founders, and 100+ investment and financing institutions to participate. The theme of this conference: New Forces, New Ecosystem. 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