Exhilarating change, 10 years later, as China eyes pragmatic tomorrow
Illustration by Jonathan Hankin
Author’s note: Ten years ago, I went to China on behalf of the International Franchise Association to seek to persuade the government to liberalize its rigid franchise regulations. My colleague Tao Xu and I were fortunate enough to be successful in that mission. Recently there was an event marking that anniversary, and Tao was there to file this report.
On May 1, 2007, China’s franchise regulation went into effect with much fanfare. From China’s perspective, it was a promise made and a promise kept, by firmly establishing the legal framework for foreign franchisors’ activities within China.
It was just at the beginning of China’s shift from a manufacturing economy to a service economy—an economy that today boasts the world’s No. 2 gross domestic product, with a middle class of a staggering size (over 100 million and still growing).
The rule-making process itself was, by Chinese standards, remarkably open: Drafts were circulated; public comments were solicited; and outside input was welcomed. Private lawyers were even invited to help the drafting of the implementation rules, a practice that is no longer in vogue with the new crop of Chinese officials in charge today.
As Philip Zeidman and I observed in this space 10 years ago from Beijing, after working with the Chinese officials on the regulation for months, franchising in China has “taken one more long step toward a more pragmatic tomorrow.” That column’s title? “A new beginning for franchising in China.”
Ten years later, sitting in a gleaming meeting room in Beijing’s National Convention Center, it was somewhat surreal to find the theme of the 2017 China Franchise Convention blasted on the screen: “Innovating a New Beginning.”
What has changed?
So, has nothing changed in the last 10 years?
Without question, in 10 years, much has changed. China has grown into one of the largest franchise markets. While the average size of the franchise systems is still lagging, the total number of franchise systems is among the highest in the world (approximately 5,000, comparable to the number of franchisors in the U.S.) and, perhaps more importantly, every year there are more than 500 new franchise systems entering China.
China has also made long strides in the development of a legal and regulatory framework for franchising. Almost 3,400 franchisors have now registered their franchise offerings with the Ministry of Commerce’s online filing system, which underwent a significant upgrade just a few weeks ago.
And, not surprisingly, that has yielded a fair amount of dispute. One study a few years ago put the number of franchise-related litigation at slightly below 5 percent of the business-related civil litigation filed in Beijing..
Both the Supreme People’s Court and the High People’s Courts at many provinces (the highest appellate court for most business-related litigation) have issued decisions or opinions on various important issues in franchise-related disputes. The two most influential High People’s Courts (Beijing and Shanghai) each issued a set of guidelines for their lower courts on the interpretation and enforcement of the franchise regulation.
The Ministry of Commerce has given informal advisory opinions on a host of issues, mostly taking a pragmatic stance in an attempt to foster the development of franchising in China. For example, it has allowed hotel companies to use its managed properties to satisfy the “two stores one year” requirement.
It has delegated most of the franchise registration responsibility to the local authorities, except for the registration of foreign franchisors. It has proven to be receptive, at least at times, to concerns and suggestions expressed by the franchise companies and industry representatives. It has even broken its long-standing policy of not issuing written advisory opinions—well, sort of—by posting some FAQs on its website.
But, has that “pragmatic tomorrow” really arrived? And, more importantly, where does China’s franchise regulatory regime go from here?
During the one-day summit meeting, and the three-day exhibition, it became apparent that China’s franchise industry is grappling with the same questions. You hear much discussion on market specialization—a belief that for an economy of this size, a brand can only be successful if it specializes in a niche market and differentiates itself.
Duck necks and WeChat
You also hear insistence (or wishful thinking?) on the sustainability of brick-and-mortar stores. And who else could better embody these sentiments than the luncheon speaker—the founder of Juewei Duck Neck, a chain of 7,000 snack shops that specializes in, well, duck necks. Meanwhile, the sober reality is that China is a society that essentially lives on WeChat (900 million daily active users, more than Facebook and Twitter combined) and Taobao (Amazon on steroids).
As for the regulation of franchising, the officials seem to recognize the information disclosure requirements are a vital tool in protecting franchisees, and the current industry practice leaves many aspects much to be desired. So they have expressed interest in adding more details and guidance to the disclosure requirements.
But at the same time, the registration requirement, and the officials’ inconsistent approach to many aspects of that process, have stirred up many complaints and they come from all corners—franchisors, their advisers, industry associations and more. There are some signs that the officials are exploring ways to streamline and simplify the process. We will be watching that—and not just from afar.
For us, it has been an exhilarating 10 years in observing, and with our clients, participating in the development of China’s franchising activities. And we look forward to bringing to you, our readers, more updates from China in the next 10 years.
Philip Zeidman is a senior partner in the Washington, D.C., office of DLA Piper. Reach him at firstname.lastname@example.org. Tao Xu is a partner at DLA Piper in Reston, Virginia. Reach him at 703.773.4181; email@example.com.