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Understanding the Chinese Market
March 23, 2005
Recently I attended a business conference hosted by
the Chinese – American Institute at Bryant University in Smithfield, Rhode
Island. The conference included a number of Chinese companies interested
in expanding trade with the US. The conference included several speakers
who have had significant business dealings in China. Although the
companies had a manufacturing and technology base the conference provided
me an opportunity to acquire additional insight into Chinese business
dealings. A good deal of this information has implications for those of us
in the franchise industry.
Shawn He, organizer of China Biz offers these
comments:
“Chinese consumers prefer American brands over Japan
and Europe. The American image and lifestyle has great appeal to the
Chinese citizen. Despite this fact, last year Japan sold twice as much to
China as the US. The opportunity for American companies to sell to China
is significant.
"The auto industry in China is huge and growing yet
services such as auto financing and insurance is almost non-existent.”
Michael J. Meagher, Chairman of the International
Law Group of Burns & Levinson who lived in China for 8 years had some
advice for dealing with Chinese business owners especially when doing
joint ventures.
“Be sure to do a term sheet or memorandum of
understanding before any JV agreement. (This would apply to master license
or franchise JV’s).
"Be sure that the Chinese partner or licensee is
incentivized in the agreement to cooperate. This kind of approach can help
to avoid misunderstandings and litigation. In response to my question Mr.
Meagher has seen an increase in Chinese acquisitions and investment in US
companies. (Of course this led to envision small but attractive US
franchisors being acquired by a Chinese entity, which aid expansion in the
US and serve as a portal to franchise in China.)
Savio S. Chan, President &CEO US-China Partners:
“Outsourcing to China can provide cost savings and
an entrée into the Chinese market. Opportunities include training and
language to provide for outsourcing IT and business services.
"Currently the Chinese middle class consists of 50
million people earning $20,000 per year US. There are 100 million earning
$11,000 US. Projections call for 450 million middle class Chinese by the
year 2015.”
As you can see China has millions of people who seek
US goods and services. It is said that whatever China can’t make they will
buy.
Franchise Regulations Update
The latest franchise regulations released by The
Ministry of Commerce contain changes to the Interim Measures, which were
drafted to comply with WTO requirements. Some of these changes apply to
foreign franchisors and not domestic. Those foreign franchisors that were
operating in China prior to the latest regulations being drafted fall
under the previous requirements.
Disclosure on the part of the franchisor is more
stringent and there is a requirement that new foreign franchisors must
operate 2 pilot locations for 1 year before they can franchise. It remains
to be seen whether these provisions will remain in the final regulations,
which are to be adopted later this year.
In any case, foreign franchisors will need the
resources and/or contractual relationship with its Chinese licensee or JV
partner in order to operate the pilot locations.
In terms of sub franchising or master license
agreements there are still some questions that remain to be answered in
the most recent franchise measures.
Having competent franchise counsel in China is the
best way to navigate these uncharted waters.
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