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In China, why people who should know better keep getting it wrong


Philip Zeidman

Illustration by Jonathan Hankin

Many years ago I heard a “China scholar” recount a mantra he said was then circulating among his colleagues:

Travel to China for six days: write a book.

Travel to China for six months: write an article.

Live in China for six years: write nothing at all.

The story is probably apocryphal, but the point it makes is valid: The more time you spend delving into that country, the more you realize you don’t know.

The striking aspect of this bit of ancient self-mockery is that it’s still true. Despite the enormous growth of the country’s underpinnings and its significance in the world, together with the obviously magnetic pull of its market, it remains true that people who should know better keep getting it wrong—some of them businesspeople, some of them the self-styled experts.

The world's consumer

Franchising is a prime example. By now it is indisputable that China has moved from being the world’s factory to being the world’s consumer.

As Bloomberg recently admonished its readers, “Chinese Consumers Now Rule the World. Get Used to It.” And much of China’s rapidly rising purchasing power is going into discretionary spending.  

Thus, enter franchising, a vehicle for marketing which is rarely used for basic necessities, and which thrives when a marketplace is characterized, as China’s is, by rising household consumption; growth in retail sales (about 10 percent a year); shifts to trendy products, services and experiences; attraction to foreign brands; and increasing urbanization.

And so it is that in a country where franchising barely existed a few years ago, there are today perhaps 5,000 franchise companies there.

Given that impressive set of opportunities, one continues to be surprised at how some very smart people in the field do some very dumb things.

A good example is the protection of the franchisor’s name in the most effective way possible. Adopting a Chinese name and registering it as a trademark at the time of entering the Chinese market is very important, but very often neglected by western brands. China has a Chinese-speaking population of more than 1 billion, but most of them are not fluent in English. Adopting a Chinese trademark can remove the language barrier and improve brand recognition.  

A good example is the Chinese name of the sandwich shop Subway. Subway’s Chinese name (pronounced as “Sai Bai Wei”) is a transliteration of its English name. Its meaning is “to surpass hundreds of tastes,” not bad for a company trying to appeal to the tastes of a broad range of consumers.

If a brand does not adopt a Chinese mark, Chinese consumers generally will do so on their own, and the brand will lose control over the Chinese name used. China’s serious problem of trademark hijacking exacerbates the problem: Professional trademark hijackers may apply to register the most commonly used Chinese marks by Western brands, thus precluding a franchisor from using the Chinese marks by which its products are most commonly known.

Michael Jordan case

A recent illustration of the cost of ignoring this issue arose in connection with the Chinese name of the former NBA star Michael Jordan. In 1988, a Chinese sports clothing company registered the Chinese transliteration of his last name. By using that name as its trademark and trade name, the Chinese company achieved great success:  It now has more than 5,000 shops in China with annual sales revenue reaching nearly US $600 million.  

Nike, which offers the “Air Jordan” products, had been attempting to remove the Chinese company’s registration but all attempts failed. In 2012, Michael Jordan brought a lawsuit in his own name against the Chinese company based on infringement of his rights to his name. The Chinese courts ruled against him, but in 2016 the Supreme Court overturned those decisions and found that the registration and use of the Chinese transliteration of Jordan by the Chinese company infringed Michael Jordan’s rights to his name and violated the trademark law.

That battle lasted more than a decade, and consumed sums of money that surely could have been put to better use.

Another, and one of the more highly publicized incidents, arose in the context of the choice of the Chinese name for a company—in this case, the world’s best-known franchisor—McDonald’s. The company recently entered into a mega-transaction with a U.S.-based investor and one of China’s largest companies, selling most of the mainland and Hong Kong stores to the two conglomerates.

To avoid the buyer’s use of the McDonald’s name, the target company shifted from the long-used Chinese transliteration (“Mai Dang Lao”) to a name that translates in English as “Golden Arches.” But much of the uproar that ensued, abetted by observers who had clearly not done their homework, was based on the assumption that the names of the individual restaurants would change as well. That’s not true: It’s only the registered business name of the corporation (now a McDonald’s franchisee) that will change.

So it’s not only companies engaged in franchising itself that too often make missteps. It’s also those who hold themselves out as well-informed commentators.

A well-known news service recently distributed an article with the appropriately sober title, “Franchising in China: An excellent business opportunity but not one to take lightly.” But the author’s discussion of the “stringent requirements for potential franchisors” is marred by information that is flatly wrong.

There is no substitute for reaching out to as many sources of information as you can identify. Just beware of which ones are reliable.
Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or philip.zeidman@dlapiper.com. The author wishes to acknowledge the contribution of Crystal Cai of the law firm’s Hong Kong office.

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