There was no March newsletter. I took a well deserved vacation and attended the IFE in Washington, D.C. This issue brings focus upon franchising in China. Subjects include key changes to China franchise regulations which are beneficial to foreign franchisors, U.S. franchise concepts that work well in China and the importance of preparation for entering the worlds largest market.

The Measures for the Regulation of Commercial Franchises in China will take effect May 1, 2007. After two years of discussions and lobbying by various members of the international franchise community, important changes were made to the initial regulations devised by the Chinese Ministry of Finance and Commerce in 2005.

The "2 -1 Provision" is Deleted.

The requirement that a foreign franchisor must operate a minimum of 2 pilot locations in China for a minimum of 1 year before being allowed to franchise has been deleted. This was seen as a significant obstacle to many small and medium sized foreign franchisors due to the significant costs involved in operating pilot locations.

The Joint and Several Liability Provision is Deleted

The original regulations stated that the franchisor is jointly and severally liable for their suppliers services and products. This was an onerous provision which left franchisors totally exposed. The new regulations do not include this provision.

Franchise Approval Process Eliminated

The previous regulations required a franchisor to seek and obtain approval from the Provisional Government before being able to offer franchises. The new regulations requires only that notification be given to the governmental authority in order to be registered.

Recent changes to franchise regulations in China, which will take effect May 1st ,exclude a number of provisions which were considered onerous. These recent changes to franchise regulations in China will make the franchise waters in China far easier to navigate.

" To know the road ahead, ask those coming back." Chinese Proverb

China is the worlds most populous country and the second - largest franchising market after the United States. Its diversified and rapidly growing middle class provide franchisors significant opportunities. For those franchisors looking to enter China the following are some important tips to follow:

1.The Best Franchise Concepts

Franchise concepts that work best include food concepts with a contemporary menu and simple concept. Woman and children's products are also attractive. Franchises that consist of a process and are labor based can be easily duplicated and do not have great appeal. Examples would be automotive and home repair services and similar franchise concepts. Education and training service franchise concepts will continue to grow in demand as the Chinese economy experiences rapid growth. Because of the sheer size of the market in China a niche franchise concept, which may only appeal to a small percent of the Chines population, could have a potential market in the millions.

2.Register Your Trademarks First

It's very important that you register your trademarks in China. As a signatory to the Madrid Protocol, you can file an individual trademark application in China or a Madrid Protocol application to protect your trademark. A Madrid Protocol application may make sense when you are filing in a number of countries at the same time and you have a corresponding U.S. application. A downside of the Madrid Protocol is that you need to keep the U.S. Registration in force for 5 years or else the Madrid Protocol Application will be lost. An application filed directly in China can be the way to go if you want to broaden the type of goods that the mark covers or if there is no U.S. application. The cost to register a trademark in China can range from $1500-$4,000 and generally takes about 2 years. For additional information regarding China trademark registrations contact Tom O'Rourke of Bodner & O'Rourke at 631-249-7500 or e- mail torourke@bodnerorourke.com 

3. Make a Visit to China

As is the case with entering any foreign market, its important that a representative of the franchisor visit the country. The visit should be made before a transaction is completed. By making a visit to China it will be easier to have an understanding of the country, its cities, people and market conditions.

4. Choose the Right Licensee or Joint Venture Partner

Having a licensee or partner with guanxi ( personal connections) and experience in the same industry as the franchise can facilitate a successful relationship. In todays Internet age its not unusual for franchisors to be contacted by prospects from other countries, including China. Its important that a franchisor in its haste to do a transaction properly qualifies and investigates all prospects.

If you have any questions regarding the subject of franchising or licensing in China feel free to contact FranchiseKnowHow.

" Do not remove a fly from your friend's forehead with a hatchet." Chinese Proverb

KFC started its China operations in 1987 in Beijing, three years before McDonalds. Today there are over 2,600 KFC restaurants in its China Division which is based in Shanghai. The China Division includes Mainland China, Thailand and Taiwan. There are over 1,700 locations on the Chinese mainland. In perspective McDonalds trails KFC with 770 restaurants on the mainland.

In 2006 the KFC China Division had operating profits of more than $290 million. This represents over 50% of the profits earned by Yum Restaurants International, which operates 12,000 outlets outside of the U.S. excluding the Yum China Division. When KFC started its China operation, Yum, which is the parent company, set up its own supply and distribution system. KFC has tailored its menu to suit local tastes. KFC opened its first franchise outlet in 1993, however the majority of its locations are still company opened.

KFC expects it China Division to continue its dynamic growth. It currently opens a new restaurant every 22 hours. CEO David C. Novak has an objective for KFC to have as many locations in China as the United States.

" Believe one who has proved it. Believe an expert." Kathleen Norris

A number of years ago when exporting franchise concepts to Asia, with few exceptions every prospect I dealt with asked if we were interested in doing a joint venture. This relationship was desirable to the foreign firm since it established a business and financial bond which they perceived to be far stronger than the franchisor -licensee relationship. These prospects believed that a joint venture relationship provided the best way for the two entities to enter a new market by combining their resources Not unlike the vast majority of U.S. franchisors my response was that we preferred the licensee arrangement. In retrospect, I've found that a JV relationship can offer significant benefits, particularly in a country like China.

A joint venture in China is a company formed by a foreign investor, such as a franchisor and a Chinese company. The foreign partner owns more than 25% of the shares. The JV is not a merger between two companies but rather a new entity owned by both parties. A JV can be an Equity JV whereby the profits and losses are shared by the partners based upon percent of shares owned or a Contractual JV where the foreign and Chinese owners have the ability to distribute profits and losses according to specific contractual terms.

There are several benefits to the JV relationship, especially in China:

1. Both parties have a true vested interest in the success of the joint venture firm
2. Each JV partner can focus on their individual strengths in operating the company
3. The foreign or U.S. partner has added control and oversight by virtue of being part of the JV
4. The foreign JV partner can have a member of their management team serve as a part of the JV team, working alongside their Chinese partners
5. An exit strategy in the JV agreement can serve as an incentive for the Chinese JV partner.

Entering into a Joint Venture agreement with a Chinese entity can be an effective way to enter China. Moreover, the JV agreement can be structured in such a way that the franchisor entering China can use its intellectual know-how, branding and operational intelligence to acquire equity in the new JV. The end game can have as a primary goal the Chinese partner acquiring the equity from the franchisor and franchising the concept to others.

" A goal without a plan is just a wish." Antoine de Saint

Franchisors with an interest in bringing their concept to China should contact us. FranchiseKnowHow has a number of highly qualified prospects in China who are looking to establish US franchises in their market in China. If you're not quite ready to enter China at this time but have a future interest in China contact FKH for the right advice. We'll show you how to prepare to enter the worlds largest market.

"Do not fear going forward slowly; fear only to stand still." Chinese Proverb

I had the opportunity to speak once again at the IFE in Washington, D.C. on March 31st. For the past three years my topic has dealt with the subject of franchisees meeting the franchisor at their corporate headquarters, or more often defined as Discovery Day.

Personally and professionally I find it a rewarding experience since I have the chance to provide advice to prospective franchisees. My non-scientific survey indicates to me that in spite of the information available to prospective franchisees on the Internet, in trade magazines and from other sources, a number of prospective franchisees continue to place significant trust in the information and judgment of franchisor staff when they deal with a franchisor. This trust factor requires all franchisors to be forthright and honest when dealing with prospective franchisees.

Bottom line: If a candidate doesn't have sufficient capital and/or the aptitude to operate the franchise don't do the deal!

" A person who trusts no one can't be trusted." Jerome Blattner

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