Guide To Excellent Franchising In China

Posted on October 28, 2010
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First, for detailed information about franchising: Franchise Disclosure Document.

With China’s opening of its market and recent succession into the WTO, it has undergone fast development in the past decades. Due partially to such development and in combination with its large 1.3 billion population (330 million in its center-class alone as compared to America’s total population of 300 million), it represents the world’s largest but ‘untapped’ client market. For a lot of franchisers searching for to market reliability related to brand recognition and systematic organizational constructions to the oftentimes chaotic and fragmented client sector (notably the food and personal service industries), China will probably be each the most important but most difficult alternative in the twenty first century.

Fortunately for each shoppers and people in the franchising business, 2007 arguably brought about the largest liberalization of this sector because the “Opening Up” reforms of 1979. That being said, nevertheless, foreign franchisers have, in the past, seen their share of successes and failures, many of whom have ‘caught it out’ throughout China’s market modifications to become a client family title, reminiscent of McDonald’s, KFC and Pizza Hut.
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I. Development of the franchise market in China

In 1997, China’s Ministry of Inner Trade promulgated the Administration of Industrial Franchise Procedures (Trial Implementation and hereinafter “Franchise Procedures”) representing the primary set of laws directed at particularly addressing points pertaining to the franchise sector. The Franchise Procedures introduced types of franchises: i) direct franchising and ii) sub-franchising. The Franchise Procedures supplied for the essential construction of present franchising legal guidelines, which requires the disclosure of fabric info to prospective franchisees and consists of the following: fundamental information about the franchiser; operational results of the franchiser; financial results of its franchise outlets; charges and payment obligations; and, terms and situations for goods and services supplied to franchisees. The Franchise Procedures also established the quasi-governmental China Chain Retailer and Franchise Affiliation (“CCFA”). (Note that the Franchise Procedures have been interpreted as not being relevant to cross-border franchise operations.)

In 2004, as part of China’s accession into the World Trade Group (WTO) and dedication to the rules therein, the Ministry of Commerce issued the Measures for the Administration of Franchise Operations (“Franchise Measures”) effective February 1st, 2005. The Franchise Measures have been promulgated shortly after the Measures on the Administration of Overseas Investment in the Industrial Sector, which liberalized foreign investment in the retail and wholesale distribution industry. Unlike the Franchise Procedures, the Franchise Measures not only permit foreign investment in the franchising sector but also comprise a whole chapter drafted exclusively for this purpose.

Very similar to the Franchise Procedures, the Franchise Measures centered largely on franchiser disclosure, but also included the “-plus-one” requirement, which mandated franchisers to function company-owned stores in China previous to commencing franchising activities. Obviously, this has prevented many start-up franchisers from immediately commencing operations in China and was a disincentive for market entry. Moreover, the promulgation of the Franchise Measures and the requirement that each one franchising operations be performed only by PRC entities has effectively eliminated the alternative measures being utilized by foreign franchisers for a few years, including licensing arrangements and international franchising agreements.

There have, nevertheless, been current modifications to the franchising framework with the promulgation of quite a few new legal guidelines in 2007 which will probably be additional discussed below.

II. Current Legal Framework and Franchising Constructions in China

In May of 2007, MOFCOM replaced the Franchise Measures (2005) with the Rules on the Administration of Industrial Franchises (“Franchise Rules”). The Franchise Rules, along with the MOFCOM-issued Administrative Measures for the Data Disclosure of Industrial Franchises (“Data Disclosure Measures”) and the Administrative Measures for Archival Filing of Industrial Franchises (“Archival Filing Measures”) presently govern franchising constructions in China and set out the following necessities:

1. Definition and Applicability Scope of Industrial Franchises

Article 2 of the Franchise Rules states that the laws are relevant to all investors engaged in business franchise operations in China

“Industrial Franchise” is outlined in the Franchise Rules as “enterprise activities whereby a franchiser, by execution of agreements, permits a franchisee to use operational sources, reminiscent of a trademark, emblem, patent, know-how and others which are owned by the franchisor [refers to authorized (not natural) persons], and the franchisee conducts enterprise beneath the unified enterprise mannequin in accordance with the provisions of the contract and pays franchise charges to the franchiser.

2. Qualifications and the Two-Plus-One Rule

Franchisers should own a nicely-developed enterprise mannequin, and be able to offering continued operational management, technical help, enterprise coaching and other services to the franchisee. Moreover, franchisers should own no less than company-owned stores for a interval of no less than one 12 months . Noticeably missing is the phrase “in China”, which permits for brand new foreign entrants to instantly commence franchising activities in China.

3. Filing Necessities

Within fifteen days of executing the primary franchise settlement, the franchiser should file with MOFCOM , particularly i) if the franchising activities happen inside a single province, autonomous region or municipality beneath the central authorities (Beijing, Shanghai, and other main cities), then with the MOFCOM of that province, autonomous region or municipality beneath the central authorities; or ii) if franchising activities happen in a couple of province, autonomous region or municipality, then on the nationwide level MOFCOM.

Thereafter, the related MOFCOM could have ten days to properly file all accomplished filings , and publish them on its website. However, it’s vital to notice that the franchiser should, inside 30 days of any change probably impacting the filing, apply for an alteration of its filings.
Read more about: Franchise Disclosure Document

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