Doing Business in China: Opportunities and Challenges

Just read The Pros and Cons of Franchising in China on franchising in China, but with applicability for anyone looking at doing a consumer business of just about any kind in China.

The article starts by listing the following opportunities foreign franchises face in China:

Edwards sets out the following opportunities:

  • China’s consumer class is expanding fast.
  • Western brands are highly regarded.
  • Western franchises bring new and modern business systems.
  • Second- and third-tier cities are open to franchising.

It then lists the following challenges for doing business in China — my comments are in italics:

  • “Intellectual property protection is uneven. Weak intellectual property enforcement and an inadequate legal framework are key reasons early foreign brands opened as company-owned stores or JVs, instead of franchises, in China. Many US brands have seen local companies take their name and logo and open fake, unapproved outlets. For example, after a local coffee store chain violated Starbucks’s trademark by nearly duplicating its name and logo, Starbucks took the company to court and won the dispute in 2006.”  Intellectual property protection in China is uneven, but it is uneven no matter how you go into China and going in as a franchise is not necessarily worse than going in some other way. Edwards says foreign brands opened in China as company-owned stores or joint ventures so as to protect their intellectual property, but that isn’t correct about joint ventures. Foreign brands typically went into China as joint ventures either because the laws at that time required they go into China as joint ventures or because they believed they needed the assistance of a Chinese partner and forming a joint venture was how to secure that. Generally, forming a joint venture is one of the worst ways to protect IP because it so often involves a foreign company turning over its IP to the joint venture and so when the Chinese company takes over the joint venture the foreign company loses its IP. Going into China does put IP at risk, but not going into China also puts IP at risk and beyond that it risks no profits in China. The key to protecting your IP in China is much more about protecting your IP in China than it is about the structure you use to go into China.  
  • Local managers lack strong management skills. Agreed, though getting better.  
  • “Finding and evaluating licensee candidates is tough. The most important part of franchising a brand is finding, evaluating, and signing a qualified company as the local, regional, or country franchisee. Due diligence resources to fully check on a local company are improving, but it is still difficult to find companies with the management skills, business track record, and capital to acquire and properly develop a US franchise business. To help find appropriate licensees, companies can check with various organizations, such as US Commercial Service offices in China, legal firms with US ties, consulting firms, or American Chamber of Commerce offices.”  Completely agree. Do your due diligence on your putative Chinese partner before you ink the contract.  
  • “China has many markets.  The sheer size of China, and its diversity of business and food culture, makes franchise development difficult. Companies that function well in one region seldom function as well elsewhere in China. Accordingly, franchisors rarely grant companies a country franchise for China.” This reminds me of advice our China lawyers always give regarding China distribution agreements: giving one distributer an exclusive for China does not usually make sense because it is the rare Chinese company truly strong throughout China.  
  • The regulatory environment is evolving.  Unclear and changing regulations have created uncertainty for foreign franchisers that wanted to enter China in the past. I Sort of agree. Our China attorneys have had fewer problems with the clarity of China’s franchise regulations than with the fact that they are not terribly franchise-friendly.
  • “Franchises must adapt their products to new markets.  Some franchises face difficulties in China when they do not adapt—or are slow to adapt—to the needs and tastes of Chinese consumers.”  Agreed. 

What do you think?

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