China has accumulated over 2000 franchises, which is today the biggest number. Considering its huge territory, enormous market, diversified culture, it has become a promised land for franchising. No one should hesitate to start on an adventure of franchising in the Middle Kingdom, of course, if you the rule of the game.

An exponential growth

Franchising appeared in China in the 1990s. It has been developing in an extraordinary way ever since. According to the Chinese Federation of Franchising, there were just 1000 franchises in China in 2000. This number doubled in 10 years. Besides, this channel of sales is very popular and the audience is very happy about it. Thus, the first 30 grands developed under franchising schemes in China generate a revenue of about 6.18 billion euros, that is more than the global revenue obtained in 2001 by all of the franchises in the world.

A market structure which facilitates retailing

According to the statistics of the Chinese Federation of Franchising, which comprises first 346 brands, retailing is the leading channel of franchising in China. It represents 43.4% of franchised brands against 29.5% of services and 27.2% of restoration business. Moreover, the medium size of businesses is very modest. 78% among them obtained an annual revenue of about 5000 euros.

An average model of development taking into account the limits of the Chinese economic model

For a very long time, deploying one's business in China was a real financial disaster for foreign investors. Indeed, initially, it was possible to open up a representation office in China, that is it was possible to advertise one's business but not to make a profit. Sales were realized from the legal headquarters in Hong Kong which proved to be very insufficient. So different forms of partnerships have been launched, every time it was something new. Contracts signed under such circumstances were very complex. Facing those difficulties, franchising developed as a means of very simple market penetration and, luckily, was accepted very well.

Development which meets the requirements of the Chinese Government

China has been growing for 25 years at a pace of 10% a year. The Chinese Government wants this growth to be more coherent and less dependent on the foreign market. It is therefore trying to encourage the interior consumption. Franchising reflects macroeconomic preoccupations of the Chinese Government and so it is well accepted by Chinese consumers.

A development to be consolidated

Still, no one should be lullabied by illusions facing such an extraordinary expansion of this new concept in China. Actually, apart from a real success which accompanies many franchising schemes, there have been too ambitious projects and premature lame ducks. The Chinese Federation of Franchising shows restraint as far as maturity of this market is concerned. One should be very suspicious about too rapid start-ups, very little coherent and not well planned, which usually lead to a big number of failures.

A regulated sector

The Chinese law-makers regulate franchises by virtue of a law of the 31st of January, 2007, which entered into power on the 1st of May, 2007.  The Commercial Measures of 2004 and Franchising Measures of 1997 were either amended or abridged. This law defines a franchising operation as a brand license associated with a transfer of know-how.

Constraints for a franchisee

A franchisee using part of the transfered know-how has to give to his/her franchiser a part of revenue and to apply the brand know-how strictly. The law-makers actually provide the franchiser with means of control and sanction. Moreover, contract cannot exceed a duration of three years. This disposition creates a potential risk for a franchisee as it does not guarantee that he/she will be able to compensate for investments. However, it is possible to eliminate this disposition by virtue of a contract itself.

Constraints for a franchiser

In order to do franchising in China, the franchiser has to use the know-how which is to be franchised for at least a year in two shops either in China or abroad, otherwise the franchiser will be fined. The franchiser also has to register as a franchiser and to submit to the Administration a copy of the specific instructions manual. Thus, the franchiser runs the risk of his/her know-how being made public. In order to prevent this from happening, the franchiser has to amend the instructions manual before submitting it. Finally, the franchiser has to provide all the necessary information, include a traditional legal notice and take the responsibility. The franchisee may cancel a contract unilaterally at the beginning of its execution during the testing period, however its duration has not yet been specified. The franchiser is actually in a very fragile situation at the very beginning of a contract execution.

Sources of uncertainty

The first uncertainty refers to the imperative or non-imperative nature of the Chinese law on franchises. There are other important concerns: know-how and its properties have not been defined, obligations of the franchiser are not clear, the issue of exclusive usage was not settled, but also obligations regarding the commercial secret, no affiliation and no competition clauses remain very vague.

Conclusion: franchisers should not hesitate to develop franchising schemes in China, of course, if they know the rules of the game
Despite some uncertainties and concerns, the way a franchising scheme is to be organized is regulated as far as specific activities are concerned, but also providing information and clauses included in a contract itself. If the proprietors of foreign brands learn well the acts governing this segment of the Chinese market, they can see very good opportunities develop in front of them in China once they decide to invest in the country via franchising.