On the second day of the Beijing International Audio Exhibition, Ge Lü Shi Company sold out all 500 pairs of their speakers at a wholesale price of 3,400 yuan each, distributed across more than 20 major cities in China. Multiple media outlets predicted that Ge Lü Shi's aggressive pricing would ignite a price war in the audio market, leading to a cautious consumer market. Lesheng Company's reputation suffered a severe blow, with online articles and posts from audiophiles lamenting that they had been duped and accusing Lesheng of excessive profiteering. This caused a near halt in Lesheng's entire sales system.
Price, an ancient economic lever, exerted its inherent effect. Lesheng Company quickly responded, with its board deciding to sue Ge Lü Shi Company under the "Anti-Unfair Competition Law of the People's Republic of China."
On the afternoon of June 3, 1997, in the meeting room on the 9th floor of Shenzhen's Babylon Building, Lesheng Audio Manufacturing Co., Ltd., the chairman's secretary, Fang Huifen, had polished the oval conference table anew. At each seat, there was a bottle of mineral water, an ashtray, and three documents relevant to the meeting: the meeting agenda, the direct economic losses to Lesheng caused by the Ge Lü Shi incident, and a comprehensive cost evaluation report on the minimum cost of Ge Lü Shi speakers.
At 2:30 PM, the 18 middle and senior management attendees from Lesheng Company arrived on time. This was one of the rare occasions when managers from the six direct subsidiaries were summoned to Shenzhen headquarters. Special invitee, litigation agent Lawyer Jiang Hanchen, was also present.
Chairman Lin Yufeng was the first to speak, saying, "Everyone knows the situation. Someone has poked the tiger, and they didn't pay for it. The board unanimously decided to sue Ge Lü Shi Company, authorizing Zhao Qing to represent the plaintiff and entrusting Lawyer Jiang Hanchen from Minghua Law Firm as our litigation agent. We've invited Lawyer Jiang to this meeting to better understand our situation and intentions. The evidence collection is nearly complete, and before filing the lawsuit, we need to discuss and unify our views."
General Manager Zhao Qing scanned the room and said, "The essence of the Ge Lü Shi incident is selling the value of two speakers for the price of one. This action misleads the market, implying Lesheng flagship speakers are overpriced. This will cause consumer dissatisfaction and aversion, undermining trust in the Lesheng brand, and could potentially eliminate our flagship from the market, collapsing our entire sales system. Our brand is everything; if it falls, it triggers a domino effect."
Lin Yufeng said, "This is not alarmism, it's fact. Let's hear from Lawyer Jiang on the legal aspects of the lawsuit. Feel free to discuss directly with him."
Lawyer Jiang habitually adjusted his glasses and said, "Based on the evidence, Ge Lü Shi Company violated two provisions of the Anti-Unfair Competition Law: selling below cost to undercut competitors and falsifying product origin. Ge Lü Shi's under-cost sales of speakers using Lesheng flagship kits aim to undercut Lesheng. The intent is clear. According to Article 20 of the Anti-Unfair Competition Law, Lesheng is entitled to public apologies and damages. The legal relationship is straightforward, with the key being solid evidence, ensuring a strong case."
The production manager showed a stack of evidence, saying, "We dismantled the Ge Lü Shi speakers and, based on craftsmanship and materials, it's evident that 3,400 yuan is below cost. Guangdong, the main production hub for speakers, sets the standard for cost-effectiveness. We evaluated the speakers with nine manufacturers, twelve experts, industry associations, and testing departments, obtaining 23 cost assessments, all exceeding 3,400 yuan, averaging between 4,200 to 4,500 yuan. Therefore, it's clear their cost exceeds the sale price."
The finance manager, scrutinizing the comprehensive cost evaluation report, pondered every data point:
Lesheng flagship kits: 1,100 × 2 = 2,200 yuanPure copper 24K gold-plated binding posts: 45 yuan each × 8 × 2 = 720 yuanInternal speaker wires: 12 yuan/m × 0.5m × 16 × 2 = 192 yuanSpeaker panels: 120 yuanUser manuals: 20 yuanHigh-grade sound-absorbing cotton: 5 yuan × 2 = 10 yuanHigh-grade damping boards: 40 yuan × 2 = 80 yuanAluminum dual-hole tweeter panels: 35 yuan × 2 = 70 yuanCopper brand labels: 3 yuan × 2 = 6 yuanCopper parameter labels: 5 yuan × 2 = 10 yuanFinished packaging: 18 yuan
The finance manager raised his hand to speak, "I worry we might have overestimated Ge Lü Shi's costs due to psychological bias. For instance, we estimated their binding posts at 45 yuan each, while our 13 yuan posts are already high-end. The main cost focus is on the cabinet craftsmanship, which is the most variable and opaque. With our debt ratio over 75%, I urge caution to ensure absolute certainty of victory."
The Wuhan branch manager asked, "How does this relate to the debt ratio?"
The finance manager explained, "If we lose, we'll be in trouble. A low debt ratio minimizes risk for creditors. If we lose our ability to operate, a 75% debt ratio could mean insolvency, as assets would be devalued, inviting creditors to demand repayment, leaving us vulnerable."
The production manager countered, "We used conservative estimates for Ge Lü Shi's costs. Their binding posts, five times the weight of ours, are likely worth 60 yuan. Craftsmanship costs are the focus, with a 25mm panel versus a 36mm laminated panel with advanced finishes and reinforcements. The costs are substantial."
The Nanjing branch manager asked, "How can Ge Lü Shi continue without our kits? Aren't they blocking their own path?"
The production manager replied, "They can use other suppliers. They've tarnished our flagship's image and established a superior value image for their speakers."
Beijing branch manager Yu Zhiwei expressed concern, "I agree with the cost assessments but feel the falsified origin claim is weak and might seem like slander. The 6 million yuan compensation might appear extortionate, potentially damaging our image."
Lawyer Jiang reassured with a smile, "Falsified origin is prohibited and strengthens our evidence chain, influencing the judge's mindset."
The marketing manager highlighted the economic loss report, "Lesheng's six direct subsidiaries and thirty-six agents report 2,170 pairs in stock, with 331 in production and 100 unfinished. We need to halve prices to compete, losing 1,950 yuan per pair, totaling 5 million yuan in losses. Adding rent, wages, operational inefficiencies, and reputational damage, 6 million yuan is reasonable."
Lawyer Jiang added, "Legally, we must claim maximum damages to influence Ge Lü Shi. They face bankruptcy, even if they win. High stakes pressure them, benefiting our legal position."
The HR manager questioned, "Why did Ge Lü Shi act this way without prior conflict? Was it strategic or cash-flow driven? What's their ultimate goal?"
Lawyer Jiang speculated, "They might seek notoriety through litigation, but the stakes are too high. We must ensure our case is unassailable."
The HR manager disagreed, "We face over 200 employees' livelihoods and a legacy built over decades. Victory is essential."
The meeting proceeded seriously, with all participants contributing opinions and discussing key issues.
Lin Yufeng stood and concluded, "Ge Lü Shi's actions force us into a do-or-die situation. Lesheng has no shield, only a spear. The best defense is a strong offense. I direct the litigation team to:
Aim to bankrupt Ge Lü Shi, refusing mediation.Emphasize the demanding design and craftsmanship of their speakers to justify costs and prepare for post-victory market positioning.Allocate funds to create media buzz, leveraging this for Lesheng's brand enhancement.
Zhao Qing stated, "This is a life-or-death battle. We must ensure victory, sending a clear message that Lesheng is untouchable."