CHINA: THE MOTHER OF ALL FRANCHISE MARKETS

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."