I am writing this article from my room in the Beijing Hotel which
overlooks the vast expanse of Tiananmen Square and a host of insipid
office buildings that surround the government district; all that
lies within this vista is in the service of the People's Republic
of China (PRC). The morning sky is a dove gray, Chairman Mao's favorite
color as replicated in his official uniform. Mao's likeness gazes
south across the square from the huge portrait over the massive
gate to the ceremonial center of China and the ancient, historically
preserved Forbidden City. They call this place "the former
center of the world." Perhaps someday China may once again
lay claim to such an illustrious title.
With a population of 1.3 billion people, China is the mother of
all markets. In modern China, everything is gobbled up, consumed
in huge quantities 24 hours a day. World markets wobble under the
upward spiral of material costs and the price squeeze bulldozed
by this economic powerhouse.
Today, complex issues intertwine to deter development of world
business in China. Politics, economics, social development and ideology,
coupled with bureaucratic interference, distrust of foreigners,
and lack of legal protections, have slowed the march to capitalism.
These obstacles create great tribulations for international enterprises
operating in China. Franchising has been investing in China for
years. Yet, only a few global franchise brands are flourishing as
they relentlessly learn to absorb elements of Chinese culture.
A crucial problem for franchising is that for years the Chinese
Ministry of Commerce has been unceremoniously dragging its feet
on passage of a Franchise Trade Regulation. With no primary enforceable
rule in place, franchisors are reluctant to take the risks of franchising
in China and of being forced to become partners in joint ventures
with their Chinese franchisee investors. Such uncertainty is clearly
not the milieu in which franchisors normally covet to do business.
The Great Wall of China is not just the ubiquitous ribbon stretching
for thousands of miles as seen from outer space. No, the modern
Great Wall is the one created by the Chinese bureaucracy restricting
free trade. To a great extent, like it or not, China is changing
the way the world does business.
The fact is foreign franchising in China is a very gray area, and
without government concentration and deliberation at the highest
levels, it will remain static. This inertia helps
no one. Protecting intellectual property under current law is almost
impossible; Chinese pirates take advantage of every opportunity
to counterfeit and distribute seemingly anything made by man, including
franchise systems. Last year, China had the most software forgery
in the world with more than 90 percent counterfeited, bootlegged,
and sold for use across the country at pennies on the dollar. Software
manufacturers lost billions in fees, and the potent truth is that
China will add almost 90 million new Internet users in the next
three years. In recent years, theft of American technology in China
accounted for well over $300 billion in losses of intellectual property
for U.S. firms.
Ironically, Asians know and appreciate the value of another person's
knowledge. Yet they bootleg that knowledge, like global buccaneers
habitually producing products, and using technology without respect
for obligatory fees. Over the years, China has tended to treat technology
theft as a civil rather than a criminal matter. Without new, enforceable
regulations in place, this thievery will likely continue.
Trademarks, copyrights, and patents are the quintessential, world
wide recognized means of defining business and its attendant rights.
Without these guarantees and protections, franchising takes on the
risks of a game of chance. Understandably, foreign franchisors are
concerned that their knowledge, expertise, and system operating
procedures can and will be illegally exploited in China. A solution
that will add needed legal protection and defendable safeguards
is on the horizon.
Because of China's accession into the World Trade Organization
(WTO), the country is required to embrace franchising by 2005 with
definitive laws and regulations that can be enforced in a courtroom.
(The next WTO meeting is in Hong Kong in Dec. 2004) The Chinese
government is at last learning that franchising can be a boon to
its people, for it is an excellent mode to solve the enormous job
problem and the country's scattered private capital dilemma. China's
capital markets are woefully underdeveloped, and franchising would
allow the assembly of capital from a wide base through franchisee
investment. Economic sources report that the Chinese unemployment
rate is at or above 23 percent, a state secret. This estimated percentage
translates into a boggling 169 million people. Such a number is
equal to the entire U. S. labor force.
The Yuan, or Renminbi, is not the only currency in China. In the
PRC, one must have currency within the government and bureaucracy.
If a business person or organization is not connected, hard wired
into the government agencies, little commerce will take place regardless
of capability, aspiration, force, or enterprise aptitude.
You will also need a business guide, and interpreter that are on
your side, not the Chinese. This is an individual that understands
business culture, subtle gesticulations, what is enforceable and
what is not in the country, as well as speak the language and know
where they are going day and night. They will know the assemblage
of people to do business with, and even more significantly, those
through which you should not conduct commerce and trade. In other
words, they have strict allegiance to you and your business development
within the PRC.
Franchisors have great faith in the legitimacy of the printed word
to guide them through the long-term legal relationships with franchisees.
A severe disparity exists within the Chinese business culture on
this essential aspect of franchising. Within this culture, the written
word is not considered the final authority of meaning. To the Chinese,
words and contracts are merely the beginnings of understanding,
not sacrosanct agreements. For most global entrepreneurs, this attitude
represents harsh culture shock. A Chinese business negotiation strategy
is intentional lack of transparency disclosures and a precipitous
perseverance to hold final negotiations on their own turf.
Further hindering the growth of franchising is the almost total
lack of training in the PRC. The increasing numbers of qualified
potential Chinese franchisees with robust resources for funding
and a motivation to become entrepreneurs hold out promise to correct
this inadequacy. However, even with such a vast market potential
and a national economic growth rate of 10 percent annually, things
are not shifting as smoothly as franchisors wish. The Chinese are
learning, however, that when investment is linked to continuous
training within a well tested operating system, franchising can
swiftly move the inexperienced franchisee into the successful commercial
market based economy. Fortunately, the Chinese government is coming
to this positive conclusion, although rather sluggishly.
China's rapid business economic growth corresponds proactively
with franchising, as many cultures of the world collide in this
immense melting pot of consumerism. It is said that one could be
blind and still hit a buyer's market in China today. Standardized
management and efficient inter-cultural understanding through franchising
will help guide the way.
Economists and business analysts predict that we will soon see
franchise growth and development flourish in China. Although today
the line to enter the country is comparatively short, that will
change rapidly, I forecast, when the draft regulation on commercial
franchising is promulgated in China.
Couple that action with the 2008 Olympics in China, and you have
a definite need for infrastructure to be set in place. The Chinese
government, hearing the defining tick of the clock, will surely
act upon its awareness of the perfected ability of franchising to
help assemble the mammoth partnerships on which this worldwide pinnacle
of showcases will take place.
While our franchising initiatives meetings were taking place in
Beijing, Donald Evans, the U.S. Secretary of Commerce, and Elaine
Chao, the Secretary of Labor, were also on a week long visit to
China. Emphasizing the importance of moving toward market-based
reforms and a free flow of capital and currency, Evans urged the
Chinese government to break down trade barriers. Evans, moreover,
cited the obvious quandary China has with defending intellectual
property theft in the PRC.
Franchisors have always been pioneers moving into new untamed markets
with products and services. Many will see the possibilities in China
and accept the challenge. After all, it will be tough to pass up
the largest market place the world has ever known.
As I approach my 27th year in the business of franchising, I have
never witnessed possibilities of this magnitude for the community
of franchising. I have a conviction of confidence that China will
be a magnificent place for franchising to flourish in the near future.
The mysteries of the Orient have summoned mankind for centuries,
and franchising has a destiny to achieve. Franchisors must demand
that the Chinese government fulfill its responsibility as a world
leadership nation and member of the WTO. This very thought evokes
a Chinese proverb, "Parents who are afraid to put their foot
down usually have children who step on their toes."
Reprinted with approval from Franchise International Magazine,
London, October 2004.