China is the biggest untapped market for international franchisers: more than 100 urban centres with a population of more than 1m, inhabited by an emerging affluent middle class of 100m to 200m people, who typically view foreign franchise brands as providing reliable quality and as a feature of their aspirational urban lifestyle.
Add to this low market penetration for international franchisers in most sectors, reported franchising growth of more than 40 per cent a year in recent years, a lack of domestic franchising expertise, and Chinese entrepreneurs who like the security of a well-known brand with a tried-and-tested operating system, and it is no wonder franchisers are salivating.
The spanner in the works has been the legal regime. Until recently the law governing franchising in China was onerous and restrictive, preventing all but the most dogged and resource-rich franchisers from entering the market.
This changed in May with the enactment by the State Council of the new Chinese franchise regulation and the Ministry of Commerce’s issuance of implementation guidelines. With the new laws, China will no longer be just for the pioneers and will finally open its frontier for proper settlers.
The change has largely been driven by the Chinese government’s commitment to its World Trade Organisation obligations and lobbying efforts by international organisations such as the International Franchising Association, which have succeeded in convincing officials of the benefits of relaxing restrictions on franchising for the economy, for small businessmen who are the potential franchisees and for the consumer.
Top sectors include hotels, fast-food restaurants, convenience stores, car maintenance, home decoration, real estate, training, beauty and fitness, laundry, costume retail and book distribution.
There are several key changes in the regulations: foreign franchisers wishing to sell franchises into China were required to have an equity investment in two outlets for one year in China before being allowed to sell franchises. Since May 1, the two outlets no longer need to be in mainland China.
Though the Chinese government has historically been concerned about protecting franchisees from fraud, they are now prepared to relax this control, relying more on the general law to protect franchisees. International franchisers will benefit greatly from this provision, which is intended to be in line with franchise practice around the world.
Second, franchisers selling franchises in China without complying with the threshold requirements before May 1 will be exempt from those requirements if they register before May 1 2008. This amnesty provision is intended by the Chinese government to maintain stability in the market.
Third, intending franchisers will be able simply to register with the Ministry of Commerce instead of seeking government approval. Previously, this was a time-consuming process in which the applicant was at the mercy of government decision makers.
The only dark cloud in the otherwise sunny skies is the wide discretion given to the government agencies responsible for administering the new law. However, this is not expected to be a big problem. Significantly, a government official was quoted on the China Chain Store and Franchising website as saying that the new regulations are intended to “[minimise] restrictions and effects on the operation of enterprises”.
The regulations should make the Chinese market much easier to access for foreign franchisers. This will be of particular help to small and medium-sized companies that lack the resources to deal with the current requirements.
The author is a partner in the Beijing office of international law firm DLA Piper.