This is actually a newsletter we are sending to one of the law organizations LLX is a member of, GALA.  But I figured it would be ok to make it public, too.

Since this article was published in Hot Branding News last September, there have not been significant changes in China’s franchise laws as the Chinese authorities have still not issued the implementing regulations for the Franchise Measures that were released effective February 1, 2005.  As various provisions of the Measures are very unclear and uncertain in effect, it is very difficult for franchisors to accurately determine how to comply with the provision s of the Measures.  For example, the law states that a company needs to own/operate two stores in operation in China for one year before the company can qualify to conduct franchising activities.  But the Measures are silent on what constitutes ownership/operation and how to apply for franchising qualification.  Hopefully the implementation of regulations will be issued later this year to clear up many of the uncertainties brought on by the Measures. 

            The real franchise news in recent months involves changes in strategy and the entry of new players.  Sacks Inc. will become one of the first American department stores to franchise in China.  The new luxury store will be built in the famous Bund district of Shanghai.  Sacks Inc. has signed with Roosevelt China Investments Corp., allowing RCIC to own and operate the franchise in China.  Sacks is hoping to answer a booming Chinese demand for luxury products—a market that is purportedly growing at 60% a year. 

KFC, operated by Yum! Brand Inc., which already has over 1,700 outlets in China, has changed its franchise requirements in order to get a foot in the door of second and third-tier Chinese cities.  The initial fee of 8 million Yuan for franchisees has been lowered to at least 2 million Yuan for these less developed cities.  KFC is adapting to the lower amounts of capital in cities away from the special economic zones in an effort to meet the needs of interested investors in those areas.

However, the new law affecting China’s advertising sector is more straightforward.  Starting this January, foreign advertising companies have been able to directly enter China’s market without a Chinese partner.  This means the barriers for advertising companies entering China have been reduced to a bare minimum.  It also allows foreign firms to enter China without having to give up creative control to a local partner.  For those advertising companies that have not entered China yet, it is very good news—especially for smaller, specialized groups without the resources or desire to buy into a Chinese advertising company.  Still, teaming up with a Chinese company can bring immediate contacts and market presence.  But joint ventures are thankfully an option now, not a requirement. (link: China Meets WTO Demands)

An interesting pieces of advertising news involve Microsoft’s new ad campaign, “Why Take the Risk?”  With President Hu’s recent visit to Microsoft’s headquarters in Washington State before meeting George Bush in Washington D.C., it is apparent that the Chinese are interested in improving their poor image in intellectual property defense.  Just prior to Hu’s visit with Bill Gates, China outlawed the sale of “naked” PC’s.  In other words, Chinese computer manufacturers must sell PC’s with an operating system on them in order to discourage the purchase of pirated software—which is what the sale of naked PC’s encouraged.  In the wake of this law, China’s largest PC manufacturer, Lenovo, along with China’s third largest, Tsinghua Tongfang, have both signed massive deals with Microsoft, agreeing to pre-install Windows on their machines.  This means that Microsoft can make a huge alteration in its business model for China.  In previous conversations with Microsoft employees, I learned that the software giant did not focus on marketing software in China because piracy is too prevalent.  Instead, they advertised services like setting up and maintaining servers.  Now the sale of legitimate software is suddenly a big source of revenue and Microsoft is moving to back it up with their new “Why Take the Risk?” ad campaign.  They are putting up outdoor advertisements and Internet banners with snakes in the cd-drive and ants in the hardware.  If you want to take a look, check out their Chinese site. 

If change is a constant in the rest of the world, it is the breath of life in China.  A shift in laws has Microsoft quickly peeling out a new marketing strategy and Yum! Brand Inc. is taking the initiative by changing its own rules to reach a broader market.  Though the laws aren’t perfect, they are constantly being adjusted and that usually means China is opening up to meet its WTO agreements.