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Franchising in China (Part 1 of 4)

Doing Business In China

Franchising in China (Part 1 of 4)

Written by Angela Ly for Gaebler Ventures

This article discusses the attractiveness of setting up a franchised business in China.

Franchising has become a widely used business expansion strategy.

It utilizes a proven business concept and implements it in another location. In many developed countries, franchising has produced many success stories.

As the franchising sectors in the West have become mature, in particular the United States, franchisors look to markets in the Middle East and Asia. China in particular is commanding a great deal of attention for potential franchisors.

Successful franchising in China depends on whether the strategy that has proven successful in the business' home country will also work in China. A successful business model in one country may not necessarily be as successful in another country.

As are there bound to be political, social, and cultural differences, you cannot simply wholly transplant the business model from one place to another. It is necessary for prospective franchisors to consider their franchising approach in a detailed manner.

The challenge is to identify the areas that need to be changed to suit the Chinese market, such as product attributes and variety. The selection of locations to franchise businesses adds a further challenge.

China, with its population of 1.3 billion and growing middle class, is attracting plenty of businesses from around the world to consider franchising their brand names there. Global brands had, for many years, focused on the affluent customer segment.

However, the middle class segment's spending power has increased dramatically, opening up doors of opportunity for both local and foreign brands to establish their presence across the country and tap into the local markets, in particular the three largest cities in China - Beijing, Shanghai and Guangzhou.

The middle class consists of mainly professionals who have an increasing demand for global quality products and are willing to spend. Evidence of the stronger purchasing power of Chinese consumers can be seen in their higher disposable income and consumer confidence index.

Economic factors such as China's accession to the WTO in 2001, and its rapid growth rate since then, further fuelled the interest of franchisors. Its entry into the WTO resulted in lower tariffs and trade restrictions, making foreign companies more competitive in the Chinese market.

Recent updates in franchise and contract laws have also increased the attractiveness of China as a target location for opening several franchises. The Ministry of Commerce introduced updated laws, known as the '2007 Franchise Regulations'. The updated Regulations provided more specific and detailed operational conditions of foreign franchisors, and removed many restrictions for these foreign franchisors in China.

Franchising was not legal in China until 1997. During the 1990's, franchising was a new concept to most people in China. Since then, it has developed to a business model that has become more widely known.

Angela is currently an MBA student at Nanyang Technological University in Singapore. Ms. Ly is looking to specialise in Finance, and has an interest in exploring topics in entrepreneurship and strategies for small businesses.