China will unveil a new regulation on commercial franchises to boost the development of the country's new business model.

Guo Geping, chairman of the China Chain Store and Franchise Association (CCFA), said the first commercial franchise regulation will be publicized in the next five months in order to fit into the rapid expansion of the franchise sector in China.

The former Ministry of Internal Trade issued its management rules on commercial franchise operations in November 1997, which was an industrial rule without legal effects.

The new regulation is aimed at ensuring franchise store runners carry out their commitment to franchise brand owners and should ensure the quality of the stores, Guo said.

Franchise store runners will be protected by the new regulation in the case of franchise brand companies going bankrupt, Guo added.

The regulation will also help attract more overseas franchise brands to China, Guo said, noting that some foreign brand owners are hesitant about coming to China because of a lack of legal protection here.

Men Xiaowei, vice-director of the Market Bureau under the State Economic and Trade Commission, which is responsible for drafting the regulation, said the draft has been completed and will soon be submitted for review by the State Council.

"It is expected to be implemented before the end of this year after winning approval from the State Council."

The completed draft is split into eight sections with 45 items.

The proposed regulations will involve the rights and obligations of parties engaging in franchised operations, a basic framework for franchised business contracts, transparency of information, advertising and punishment for lawbreakers, Men said.

Compared with other business modes, franchises need more comprehensive laws and regulations as a guarantee for its development.

"Because the franchise does not expand by tangible assets such as capital and equipment, but the use of permission of trademarks, patents and special running modes," he said.

Compared with the current industrial rule on franchise operations, he disclosed that new regulations will closely address information availability, advertising issues and punishment rules.

It is necessary to stipulate precious and timely information disclosed by franchisers, which is key to franchising relationship and protecting interests of franchisees, Men said.

There were no clear definitions on this regard in the former industrial rule.

Meanwhile, advertisements which mislead investors and coax them into franchises will be prevented by the new regulation.

The regulation will also offer detailed definitions on franchise fee collection and special stipulations for the catering industry.

Because of the lack of strong and effective regulations, copyright issues, the disclosure of commercial secrets and other problems have cropped up in line with the rapid growth in franchised businesses.

Although not big in scale, the franchise sector has witnessed a rocketing growth in China as a new business mode introduced less than a decade ago.

Its sales growth hit 40 percent on average in the past three years, far more than the 10 percent annual growth of national consumer goods.

According to statistics from CCFA, franchisers in China totaled 1,000 last year, rising 40 percent from that of 2000.

More than 50 industries have applied for franchise operations, including traditional sectors of catering, retailing and individual services, as well as some newly developed fields of education, commercial service, family service and automotive care.

In terms of the number of franchisers, the catering industry leads by 35 percent, while retailing accounts for 30 percent, life services such as laundry 10 percent, and auto sales, care and leasing 3 percent.

Nearly half of the top 100 restaurant companies are utilizing franchise business models, and their business earnings significantly surpass those of independently operated companies, according to a survey by the China General Chamber of Commerce.

Malan Noodles Company is the largest domestic franchiser with 361 outlets.

Franchise also has been a major way of expansion in retail chain stores.

In the top 100 chain stores listed by the State Economic and Trade Commission last year, 61 enterprises are franchisers.

Their 5,400 franchised outlets achieved a sales revenue of 27 billion yuan (US$3.26 billion) last year.

The franchisers saw faster growth than those applying for direct operations in outlet numbers and sales revenue.

With comparatively low costs and low risks associated with franchising an established brand name, the future looks bright for the sector, said Li Xihua, professor of the Commercial Economic Research Institution.

It is estimated that franchising generates about 50 billion yuan (US$6.04 billion) each year, only 2 percent of all retail sales in China.

The world average is more than 40 percent, he said.

China's good economic environment is creating more franchisers, said Ren Xingzhou, market economist from the Development and Research Center with the State Council.

Increasing numbers of enterprises became qualified for being franchisers after they improved their brands, technology and management, he said.

On the other side, enterprises without a strong capacity to become franchisers and individuals are looking for good investment opportunities as money in their hands keep increasing as China's economy continues to grow, he added.

The huge potential of the franchise sector cannot be calculated purely by its benefits, many related industries can make money from it, which makes the market share bigger.

For example, law firms, consulting companies, real estate companies and financial institutions can all benefit from the prospering industry.

However, there are some practical reasons besides a lack of regulations that have hindered the fast development of franchising in China.

(China Daily July 8, 2002)