Business Life: Franchising - Cure All or Flash-in-the-Pan?

cctv.com 09-11-2003 09:55

The Asia Franchise Association's forum that closed last weekend in Beijing has really kindled Chinese interest in the franchising business. Franchising is an effective way of keeping start-up costs down. It also provides a safety margin for people just starting up in business. It is already widely used in China's food catering and retail sectors, and now it is also making its appearance in commerce and individual service areas. But is it a useful way to go in any business context? In today's Business Life we'll see whether franchising is a cure all, or just a flash in the pan idea for these new businesses.

Mr. Kou is in the real estate business. He provides sales and home rental services. Mr. Kou and his partner came to the Beijing headquarters of Century 21, a Boston-based real estate supplier, for advice on franchising issues.

Kou Hailong, Customer said, "We have been running business in this area (housing sales and rentals) for two years. We have proved quite popular with the locals. So far, we have opened four stores. But as we look to open more stores, we have started running into problems - like management."

Mr. Kou is only one of six million Chinese people running small and medium size enterprises who often encounter problems when they decide to expand. This is when they turn to experienced overseas companies like Century 21 for advice on franchising. Century 21 is a Fortune 500 company pioneer in real estate. It has successfully franchised 6,600 real estate offices around the world and is now introducing its franchising business model into China.

"We have very strict requirements of our franchisees, especially our regional franchisers. First of all, they should have a very sound financial base and run a good business in their area. It's even better if they have many years' experience in real estate. Their financial business integrity is also considered." Said Bingley Liew, Business Manager of Century 21 China Real Estate.

As the president of Century 21 China, Bill Hunter introduced the franchising system three years ago. Although the system has been a success overseas, Mr. Hunter says the company is adopting a different philosophy here. He notes that China covers a vast area and that different regions have different ways of doing business. So Century 21 will put in a two-level strategy. They will license regional master franchisers in key cities who will then help manage the scattered franchisees in their general area.

"They know the market better than we ever could. And also most importantly for the franchise to succeed, you need to be localized to each one of those individual market places because they are there, and they are the leaders in the local markets. They know how to do that, so that really has been the key to our dramatic growth that get strong regional partners and we teach them how to be franchisers." Said Bill Hunt, President of Century 21 China Real Estate.

Century 21 now has 200 franchisees in 13 regions in China. However, it was not the first foreign company to bring the franchising concept to China. It was introduced in the late 1990s.

Hogen Sun, GM of Modern English, said, "We learned this is very good idea. We can do a show very quick, we can do more school and then every school can join more income for us. But later, we realize each school spent a lot of money to be well. So the best way we can do is to use a modern system like franchising system."

So they took action on this. In only two years, Modern English licensed 31 schools nation wide with over 120 thousand English students. After witnessing the rapid and healthy development of Modern English, Miss. Huo joined their franchise network. She has now come to her own conclusions about the franchising model after operating the English training center in the Asia Game Village for several months.

Lihong Huo, Manager of Asia Game Village Center, Modern English, said, "To be a franchisee of a famous brand is much better than starting a new business on your own. Franchising can help lower the costs. The head office can also provide us with high-level support that we wouldn't have as a sole operator. However, just to be licensed doesn't guarantee success. You must work hard and operate smart. You most definitely need to take a personal interest in the business."

Franchising is a Western concept, so the locals understand that it is not just a matter of blindly copying it. They must adapt and tweak the model to meet China's unique demands.

Many different companies have seen the great advantages of franchising in lowering costs and more effectively utilizing capital - and the model is being taken up by many different business sectors. But franchising is in its infancy here in China, and companies that move too fast can run into problems.

"The development in China has been too fast. We could describe it as moving 'by leaps and bounds'. This has resulted in some unfortunate consequences, usually caused by lack of management skills. The companies hurry to expand the franchise network using borrowed money and human resources." said Peele Wang, President of Cloud Seed Consultant

Local businesses have already realized the importance of experience and good management strategies. Let's look at the collaboration agreement between Modern English and Lenovo, one of the most famous IT pioneers in China. With Lenovo's support, Modern English hopes to improve and expand their services through the Internet.

Xia Xueguang, Manager of Sunny Information Technology Service, Lenovo, said, "We regard this is a effective and profitable model. By franchising, Modern English can effectively help English learners all over the country to study the language at very little cost. It can help quickly popularize English learning around China. This is something Lenovo has always anticipated. "

The establishment and maintenance of a good brand name is essential for a franchise. But success depends finally on a sophisticated business environment. And in this respect Chinese authorities are inclined to lack understanding of the concept.

Bill Hunt, President of Century 21 China Real Estate, said, "Maybe the biggest challenge or confusion is the interpretation of franchise laws that has been put into the system from the central government, and other interpreted from the local government. So that's just communication process. In some cases, the local government were misunderstanding the franchise was a business model and not a business itself, they found the fact franchise need a different license in which to run the business."

As a world famous franchise brand, Century 21 also has headaches with Intellectual Property Right protection in the brash new market environment in China.

David Yu, Vice President of Century 21 China Real Estate, said, "We faced a lot of problem of brand protection. For example, they have much more small offices named as Century 22, even Century 23. Or they can buy our trade name with other famous local brand together. So I think that's an unfair competition means. According to Chinese law, so we give them two tries, join us or be sued."

Problems also occur with co-operation between franchisers and franchisees. Having fully investigated China's franchise environment, these consultants urge more legal controls for the franchise business here.

Overseas franchisers need to understand the legalities in China. They must also make a careful choice of partners. But the biggest issue for overseas franchisers is to adapt to the local customers' needs.

Guo Geping, Chairman of China Chain & Franchise Association, said, "The Asian market, especially China's market, differs greatly from the European and American markets. If overseas franchisers only copy in China what they have done there, then it's possible it won't work. They should validate their model in the Chinese market and make appropriate adjustments. Then they will have a foundation for success."

China is in the process of improving the laws and regulations that relate to franchising, and a new franchise law should be passed by the end of this year. Meanwhile, many more investors in China are starting their own businesses by franchising. The overseas experience shows that franchising is an effective way to expand business. But it must be remembered that only those who can adjust the model to meet Chinese needs will come out ahead.

Editor:Zhang Wenjie  Source:CCTV.com