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Oct, 01 2005

Giant franchise marketplace

Country focus China: Given the vast potential of China as a consumer and industrial market, it is no surprise that a large number of foreign franchisors are either operating in China or giving serious consideration to doing so

UNTIL recently, China remained a closed country with a no entry sign prominently displayed to outside companies. Today, what is considered as the most significant development in the country’s economic progress is the initiation by Deng Xiaoping in 1978, to reform the Chinese economy. China is slowly stepping out from its self-imposed isolation with a purposeful intent. It is playing its economic card with felicity in its relations with other countries. China has acquired a solid manufacturing base and has been able to maintain a balance between domestic and foreign demands. And now with the opening up of the Chinese market, a giant opportunity has been presented to the international franchisors.

Franchising in China began in the late 1980s when Li-ning became the first company to apply for the franchise format. In 1993, another company, Quanjude, developed outlets through franchising after establishing the Quanjude Group. Donglaishun, Malan Noodle and Rongchang Washing soon followed . In 1999, franchising in China progressed to an overall construction period with renowned international franchisor expanding into the country. In 2002, the Chinese government lifted the restrictions on the entry of franchisors after its entry into the World Trade Organisation (WTO). Statistics show that there were already over 1,000 franchisors in China, covering 50 industries.

Foreign companies wanting to expand into China through franchising have an advantage over others as franchising allows these companies to break into the Chinese market with relatively less capital. However, franchising also presents foreign franchise operators with many potential problems. For example: There is a shortage of local management talent, Chinese laws on intellectual property rights are still weak, and, Laws governing franchises are inadequate. As a result, some of the well known international franchise companies are not operating as franchises but are considering expansion through joint-ventures and foreign-owned outlets.

Franchise development

Considering that franchising is an excellent format that can solve China''s enormous job problems, and the country''s scattered private capital dilemma, the Chinese government entered into WTO which led to a more transparent and standardised market economy. China''s capital markets are woefully underdeveloped and franchising would allow the assembly of capital from a wide base through franchise investment.The macro-environmental conditions in China appear quite favourable for international franchising. The political system is stable and increasingly welcomes the foreign investment. The legal system is evolving quickly, and providing the mechanisms necessary to encourage international franchise growth. China''s promising economic environment is encouraging more and more companies to adopt the franchising model. Food franchise businesses including KFC, McDonald''s, Pizza Hut, T.G.I. Friday''s, Subway, and Haagen Dazs, account for the majority of the brands. The non-food brands such as Century 21, Kodak, Athlete''s Foot and Kinko''s, have also entered the market and are now looking forward to expansion.

Franchisors in China

McDonald’s: As the most successful franchisor in the world, 70 per cent of McDonald''s outlets were opened all over the world through franchising, in China it

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