Li Ning launches its sports wear for the Olympic Games in Beijing, June 6. (File photo/Xinhua)
China's sporting goods giant Li Ning is betting on Chinese professional basketball with a record capital investment to revive the business.
Li Ning, the medal-winning gymnast who founded the company, signed a memorandum with the Chinese Basketball Association (CBA), the top pro basketball league in China, in June for a five-year sponsorship. He reaffirmed on July 6 that Li Ning will be a chief sponsor.
The China Entrepreneur magazine reported that the contract has still not been made public pending smaller details which require further negotiations. Sources said the deal has reached a collossal 2 billion Chinese yuan (US$314 million), or an average of 400 million yuan (US$63 million) each year, which would set a new record for sports sponsorship in China. Some commentators described the deal as the boldest ever sports marketing campaign in the nation.
It seems that Li Ning is making a daring gamble on the CBA because he does not have many other options at the moment. The company's sales revenue dropped by 5.6% to 8.929 billion yuan (US$1.3 billion) in 2011 as net profit tumbled 65.15% to 386 million yuan (US$61 million). Some corporate executives see another negative growth for 2012 in light of escalating competition, falling retail prices, rising inventories, and thinning profits.
Li Ning recently carried out a personnel reshuffle and brought TPG Capital, a private equity investment firm based in Texas and a strategic investment partner, into the management team.
The founder and chairman also took charge again as CEO and launched new marketing campaigns, including reviving the CBA partnership after an absence of seven years.
If the sponsorship figures from Li Ning as reported by the media are accurate, the amount will exceed by 20 times the 20 million yuan (US$3.14 million) paid by competitor Anta Sports Products each year under its 60 million yuan (US$9.4 million) contract they have held for the past 3 years.
Some analysts also pointed out that even Nike pays only one fourth of the Li Ning sponsorship to the Chinese Football Association for Chinese Super League (CSL) games, a contract with a much longer term of 10 years. Li Ning set sights on the CBA contract after other sporting goods giants, including Adidas, Nike and Anta Sports, pulled out from bidding because they thought the asking price of over 250 million yuan (US$39.3 million) had become too high.
Analysts and competitors are casting doubt on the high cost of the sponsorship. But Li Ning stressed that pro basketball and the market environment in China have undergone dramatic changes in recent years. The sport is now worth of commercial investment, he said. He revealed a plan of putting greater focus on basketball games.
More Chinese basketball fans watched CBA games than National Basketball Association games in the US for the first time in the past season, partly due to the long standoff between NBA players and team owners.
For the first half, in the past CBA season, Chinese watching the games aired by CCTV, a state-owned media corporation, already exceeded one billion people, not including the fans at local TV channels and on the internet.
Li Ning is fully aware of the importance of sports competitions and sponsorships to sport equipment and sportswear companies. Li Ning has taken advantage of one of the biggest of competitions, sponsoring four Olympic games in a row from 1992 to 2004 in spite of thin profits on estimated combined costs of around 500 million yuan (US$79 million). But Li Ning eventually emerged as the biggest domestic Chinese sporting goods supplier, now able to rival Adidas and Nike.
The CEO was first approached by the CBA in 2004, but he passed the chance to allow Anta Sports, a small footwear maker based in Jinjiang in southern Fujian province with annual sales of just 370 million yuan (US$58 million) to tie up with pro basketball.
Through its connection with the CBA, Anta Sports secured other important pacts like the one with the Chinese Olympic Committee, is has been posting an annual growth rate of more than 90%.
Anta Sports listed its shares on the Hong Kong stock market in 2011, with sales rising to 8.9 billion yuan (US$1.4 billion) in 2011. Although the revenue is about equal to Li Ning, the profit generated from Anta surpassed them by 3 times, for a total of 1.7 billion yuan (US$267 million).
During the same period, Li Ning seemed to have made the mistake of spreading its resources too thin by sponsoring sports like badminton, jogging, and women's fitness activities on the home market and sports events in European and Latin American nations, pointed out analysts.
Li Ning has also reached out to NBA giants but the deals turned out unexpectedly poor when the public found the shoes too big for their tastes. The name of Li Ning does not ring the bell for most of the younger Chinese consumers either.
Li Ning said "focus" will be a new and key strategy. Some sport business analysts agreed to Li Ning's plan of launching new sales campaign on the home market again by tying up with CBA.
They also cautioned that the success of the new push hinges on the two crucial elements: improved operations and marketing tactics of the company itself and the overall development of the pro basketball sports market in China.