We started a China Law Blog Group on Linkedin with the goal of creating a spam-free source for China networking, information and discussion. We now have nearly 8,500 members and, more importantly, a number of lively discussions.

We have had some absolutely terrific discussions, both based on the numbers (a number of the discussions have received around 100 comments and some have gone over 200) and on their substance. Our discussions have ranged from practical (such as, how do I open a China bank account or what are the best practices for a China Joint Venture or what is the most important thing to do for doing business in China) to deep think (such as, what is the future of rule of law in China? or what are the differences in how Chinese companies and French companies are run).

What also boosts the group is its diversity of membership. We have a large contingent of members within China and without. Some members are China lawyers, but the overwhelming majority are not. We have senior personnel (both China attorneys and executives) from both large and small companies and a whole host of junior personnel as well. We have students and we have professors. This mix only contributes to the high level of discussions.

I am most proud of how (at least as far as I know) no spam item has yet lasted on the site for anything even approaching 24 hours.

If you want to learn more about China law or business, if you want to discuss China law or business, or if you want to network with others doing China law or business, I suggest you check out our China Law Blog Group on Linkedin and join up. The more people in our group, the better the discussions.

We will see you there. Click here and join us.

The title is stolen from the Warren Buffett line, “You can’t make a good deal with a bad guy, regardless of any piece of paper. And it is so true.

Our China lawyers are always telling our clients the following:

  • Legitimate Chinese companies do not want to get sued. In our experience, they are even more concerned about getting sued than are American companies. They do not want to get sued because getting sued is both expensive and damaging to their reputation.
  • Crooked Chinese companies do not mind getting sued, because they can always just shut down and they have little to no reputation to protect.
  • The above means that a good contract with a good company can be very valuable at making sure the Chinese company does what you want it to do.
  • A great contract with a crooked Chinese company has virtually no value at all, because the crooked Chinese company does not much care.
  • The above means that you must be careful about with whom you do business in China (or anywhere for that matter).  Do your due diligence before you contract.

There are three primary reasons for having a good contract with your Chinese counter-party.

1.  Clarity. The first is to achieve clarity. To make sure you and the Chinese company are on the same page. For example, if you ask your Chinese supplier if it can get you your product in 20 days, it will say “mei wenti,” or not a problem, pretty much every time. But if you put in your contract that the product must ship in 20 days AND for every day it is late, the Chinese company must pay you 5% of the value of the order, there is a great chance the Chinese company will get honest with you and tell you that 20 days is impossible. At that point, you and the Chinese company can figure out a more realistic time frame and then you know what to realistically expect going forward. Needless to say, we can give countless examples of this sort of thing, but this is yet another reason why our China attorneys advocate putting your contract in Chinese. Clarity before you start the relationship is critical.

2.  StrictureThe second benefit of having a well written Chinese language contract with your Chinese counter-party is that the Chinese company knows exactly what it must do to comply. And, in most cases, it might as well. Let’s use the 20 day example as the example here too. If your Chinese manufacturer makes widgets for 25 foreign companies and five of those foreign companies have very clear time deadlines with a very clear liquidated damages provision in their contracts, and the Chinese company starts falling behind on production, to which companies will the Chinese manufacturer give production priority? Of course it will put the five companies with a good contract at the front of the line. Why wouldn’t it?

3.  Enforceability. My firm has written hundreds and hundreds of China contracts and we have never once been called on to litigate any of them nor are we aware of any of them having been litigated. We attribute this to reasons #1 and #2 above, and this just reinforces our claim that good contracts help prevent problems. It also bears mentioning that the World Bank ranks China 19th among 189 countries at enforcing contracts.

What do you think?

Despite the increasing restrictions on using employee dispatch companies for hiring of “your” China employees, our China lawyers have seen very little by way of a slowdown in smaller companies choosing to go that route, especially if doing so will allow them to delay having to form a China WFOE that much longer.

The legal issues for foreign companies that use employee dispatch companies are not terribly complicated, with one exception.

The way the whole system works is that you as the foreign company sign a contract with the employee dispatch company for it to hire as its own employee an individual or individuals you would like doing work for your company. The better dispatch companies generally have pretty good contracts for this and so our role as attorneys for our foreign clients is mostly to point out the provisions at which our clients have some negotiating power.

The complication arises in the contract between the employee dispatch company and its/your employee and it is here where we see the most mistakes being made. The employee dispatch company drafts its employment contract with its/your employee to protect and benefit itself, without any real regard for you.  In most respects, your interests are fairly well lined up with the employee dispatch company and so for the most part it is a good thing that most of these companies draft good China employee contracts.

But when it comes to your intellectual property, you need to account for the fact that your employee dispatch company does not care at all. And when I say, “at all,” I mean at all. Your employee dispatch company does not care if its contract with its/your employee protects your IP and your employee dispatch company does not care if its contract fails to protect your IP.

For this reason, you have to care and you have to be the one to make sure that the employee contract reflects this. If you want to be sure that the employee does not end up owning your intellectual property, you need to make sure that the employee contract is clear on this. If you want to be sure that your employee signs a contract that reduces the likelihood of he or she running off with your trade secrets, you need to make sure that the employee contract has provisions for that.

Cause if you do not make sure that your China attorneys do this, nobody else will.

One of the tougher issues we as China lawyers face is what we call the Home Office/China Office tension. These situations are tough for us because we are so often put smack dab in the middle.

Let me explain.

On the one side you have the US home office, often replete with well trained in-house attorneys and accountants and businesspeople. On the other side you have the China office, often replete with foreign and Chinese employees who have been hired based on their knowledge about doing business in China and for their ability to figure out how to get things done in China. The US home office has very little knowledge about China and the China office has very little desire to follow every rule in China when doing so will lead to increased costs and/or decreased sales/profits.

That puts us in the uncomfortable position of being the buffer between the two offices, explaining to the US office why it must do xy and z in China and then having to fight off the China office who does not think xy and z are really necessary.

One of our China attorneys wrote me the following email regarding one of these situations and because it is so typical, I thought it would be good to share, with all identifiers stripped from it:

In case you have any doubts, Mr. Y. [the American who heads up the China office] will get along perfectly with ____________ [a China consultant whom we believe to be corrupt]. They see the world in the same way.

However, CleanCo [the made up name for our client] has told me that it wants to obtain venture funding from real people in the United States. You can imagine what a connection with ________ [corrupt China consultant] would do to that plan. Mr. Y runs the China office in the way that is typical of _______[the China city in which it is located]. In that sense, Mr. Y. is right that we don’t understand how China works.

However, he is wrong. We understand very well how China works because we know full well that the way China works is not going to be acceptable to any legitimate VC group.

This is the problem in CleanCo. Mr. Y says this is the way it is done in China and when he says that, he is absolutely correct. That is probably what the advisors to GSK said to them and look what happened there. The same will happen to CleanCo if it keeps relying on a guy like Mr. Y. to determine how it conducts business in China.

When I talked to _______ [at CleanCo’s US office], he said: I want a China operation that will pass muster according under Wall Street due diligence standards. This is what we are tying to give them. However, Mr. Y. does not understand that and he has no intention at all of delivering that. So, at this time, CleanCo needs to decide what kind of China operation it wants.

No matter what, CleanCo needs to realize that if you run a crooked ship in China, you can be run out of town in just one day. That is their risk and that risk is very real.

However, this is a classic case where their ENTIRE China operation rests on Mr. Y. So they cannot easily get rid of him. It is a very difficult situation. This is a serious matter and it requires careful consideration by CleanCo. Considering what anybody can read on the web in about one hour as to what is happening these days to American companies, it is quite incredible that we are even having this conversation. At any rate, I will say it again that the issue is how CleanCo intends to operate in China. As long as it works through Mr. Y, the straight way will never work and he seems incapable of understanding that the China in which he did business twenty years ago has changed drastically. More troubling, he may be right that the [key] product cannot be manufactured in China “the straight way”. It’s a big deal and it cannot be swept under the rug at this point.

I am quite sure that many of you are quite familiar with the above tensions and we would love to hear what you think.

A while back we brought on a fully qualified Chinese attorney as a paralegal in our law firm. This person was working on obtaining her paralegal certificate at a local university. I asked her why she was pursuing a paralegal certificate, rather than going for an LLM degree (an advanced law degree), as is commonly done by China licensed lawyers in the United States. Her response was that she knew many Chinese lawyers who had obtained an LLM degree in the United States and not a single one of them had been offered a lawyer job in the United States. I told her that I too was not aware of any foreign lawyer who had obtained a US lawyer job.

I then went on to tell her that our firm does not hire LLM graduates for three reasons. The first is that we have no idea how qualified they are for practicing law in the United States because the LLM programs vary so much in what they teach.  The second is that we have no idea how qualified they are for practicing law in the United States because it seems that just about everyone graduates from US LLM programs with a 3.8 G.P.A or higher, leading us to believe that LLM grading is neither rigorous nor meaningful. Third, and oftentimes most importantly, most US states (at least as far as we know) do not allow LLM graduates to sit for their bar exam.

Which is why our lawyer hires have US (or US equivalent) J.D. degrees.

And this is NOT to criticize LLM degrees. Rather, it is to highlight how much they have changed in the last twenty years, without really having changed at all. Twenty years ago, foreign lawyers came to US law schools for LLM degrees and then they returned to their home countries. Their reason for securing a US LLM degree was to improve their English language skills, increase their understanding of American culture, and make connections with American lawyers and potential clients. All of these reasons made (and still make) complete sense and for that reason, a number of the top international lawyers in Asian countries like China, Vietnam, and Korea, have US LLM degrees.

But maybe around ten years ago, there was a large influx of China attorneys seeking US LLMs with the idea of securing jobs in the United States. US law schools — who make small fortunes off each foreign LLM — generally do nothing to dissuade these students from coming. And so they keep coming with the hope of American lawyer jobs that seem pretty unattainable. What then happens to these LLM graduates from China? It is my understanding that many (Most?) return to China and some get non-legal jobs.

What are you seeing out there and what do you think?

 

This post is the second in a series of posts by Grace Yang, one of our China lawyers resident in Beijing. Grace has her B.A. from Beijing University and her J.D. (law degree) from the University of Washington. Grace is licensed to practice law in Washington and New York States and she will be sitting for the China bar exam this fall. The below post and the one that preceded it stem from a recent project/memo Grace did for one of our American clients doing business in China.

 

In my last post, Paying Your Non-Chinese Employees In Your China WFOE Part 1, I discussed how China requires WFOEs report the combined U.S.-China salary of their employees and pay the tax on that combined salary when appropriate. The applicable rule is the Circular of the State Administration of Taxation on Income Tax Paid by the Enterprises with Foreign Investment and Foreign Enterprises for Their Employees on Behalf of Their Enterprises Abroad (Guoshuifa [1999] No. 241) (“Circular No. 241”).

Circular No. 241 applies only when the Chinese entity and the foreign entity are “related.” That of course leads to the question of what “related” means in this context. Because the term is nowhere defined, it is unclear whether an indirect connection between the US entity and the Chinese entity would be considered “related” under Circular No. 241.

Is it therefore possible to get around the taxes by having “your” China employees work for a US company separate from your regular US company? We advise against that because Chinese law has already defined the term “related” companies quite broadly in other contexts, which convinces us that it will do so under this circumstance as well. Specifically, two entities are considered “related” if (1) there is direct or indirect ownership or control with respect to capital, business operations, purchases and sales, (2) there is direct or indirect ownership or control by a third party; or (3) there are other kinds of mutually beneficial connections. If the Chinese tax authorities apply this broad definition, they would likely conclude that the China WFOE and your US company are related enterprises and then find that Circular No. 241 requires the WFOE to report and pay taxes on your employees’ full salary if they work in China for more than 183 days in a calendar year.

What about using an employee dispatch service to try to get around the combined salary problem? Our China attorneys have discussed this with multiple China government officials and each time we have been explicitly told that dispatch agencies are not allowed to dispatch foreigners because a foreigner’s work certificate must specify the employer of the foreigner, and when using a dispatch agency no employer can be specified. Using a dispatch agency also risks the Chinese authorities concluding that you did so to evade taxes, which will then lead to their imposing any taxes owed, plus interest and penalties.

To repeat what I said in the last post, there is simply no way around the fact that if your employee resides in China for 183 or more days, both you and your employee must pay tax on that employee’s combined U.S./Chinese salary.

This post is by Grace Yang, one of our China lawyers resident in Beijing. Grace has her B.A. from Beijing University and her J.D. (law degree) from the University of Washington. Grace is licensed to practice law in Washington and New York States and she will be sitting for the China bar exam this fall. The below post stems from a recent project/memo Grace did for one of our American clients doing business in China.

 

We are often asked whether it is legal to pay a non-Chinese employee from both the China WFOE and from a company outside China (usually the US parent company).  The answer to that question is an easy yes, but the tax issues that arise from that are where things get difficult.

It is perfectly legal for an American company to pay its American employees from both China and the United States. However if your American employees are resident in China for more than 183 days in any calendar year, you must pay taxes in China on the combined U.S.-China salary of your employees. This obligation to report and pay taxes is stipulated in the Circular of the State Administration of Taxation on Income Tax Paid by the Enterprises with Foreign Investment and Foreign Enterprises for Their Employees on Behalf of Their Enterprises Abroad (Guoshuifa [1999] No. 241).

The Circular on Questions Concerning Tax Payments for Wage and Salary Income Gained by Individuals without Residence within the Territory of China (Guoshuifa [1994] No. 148), mandates that if your employee works in China for less than 183 days in a calendar year, he or she is obligated to pay taxes only on that portion of salary received from the China WFOE when he or she was in China.

But if your employee works in China for more than 183 days but less than 365 days and so long as your employee did not live in China for a full year prior to this year, your employee must pay China taxes on the salary paid by the China WFOE and on the salary paid by your US entity during the period he or she is in China. In other words, your employee must pay taxes on whatever salary was earned in China, no matter who pays it.

If your employee works in China for over one year, but less than five years, your employee must pay China income taxes on the salary received from the China WFOE as well as on the salary received from your US entity during the time your employee is in China.

Don’t let the above throw you off, it is actually quite simple: if your employee works in China for 183 or more days in any calendar year, both you and your employee must pay tax on the combined U.S.-Chinese salary. There is no way around this obligation. We advise our clients to take this seriously, because failure to comply with this rule can result in penalties for both the WFOE and for the employee.

The problem is that foreign companies have customarily ignored this rule and while Chinese tax authorities have recently become much more aggressive in enforcing it. The issue normally arises when the employee applies to renew his or her visa. If the employee has resided in China for more than 183 days, the local tax authority will request a copy of the employee’s US tax return. If the employee fails to provide the US return, that employee’s visa gets denied. If the employee does provide the U.S. tax return, the tax authorities assess the tax, along with interest and penalties.

Our China attorneys are aware of several cases where foreign employees were denied entry into China after 183 days of residence for failing to report their combined salaries. We also are aware of multiple cases where the Chinese tax authorities took very aggressive penalty actions against WFOEs for failing to report and pay taxes on the combined salary of their high level China company managers. The risk of noncompliance is therefore significant.

So what should your WFOE do? Report the combined salary and pay the full tax, or ensure your employee resides in China no more than 182 days in any calendar year. In part II (coming tomorrow), we explain why you really do have no choice in this.

When our China lawyers are asked to assist foreign companies in determining where to locate in China, the first thing we do is ask that they fill out a long questionnaire to better enable us to gauge what is and what is not important in their choice of China location.

We ask our clients to rank various items by level of importance to them, including a whole slew of quality of life issues like local education and healthcare. We will be adding a new one: concern about pollution.

Greenpeace China just released a summary of its 2013 survey [in Chinese only] of China air quality and to quote China Hush, “the results are clear: the air isn’t.”

The survey looked at 74 Chinese cities and of those 74, not a single one met the World Health Organization’s recommendations for 2.5 micrometers or less of particulate matter.

In reviewing the Greenpeace list, I note the following regarding China cities in which foreign companies commonly conduct business :

  • The six most polluted cities (Xingtai, Shijiazhuang, Baoding, Handan, Henghui, Tangshan) are all in Hebei province. The seventh worst city is Jinan (did I call this or what?). Xi’an is 9th worst, Tianjian is 11th worst, Beijing is 13th worst, Wuhan is 14th worst, Chengdu is 15th worst, Hefei is 17th worst, Changsha is 20th worst, Nanjing is 24th worst.
  • The following cities did fairly well: Qingdao came in at 47 out of the 74 cities, just ahead of Shanghai at 47, and Guangzhou and Dalian at 55 and 57, respectively.
  • The 10 least polluted cities included Xiamen, Fuzhou, Kunming and Shenzhen.

I would venture to say that nobody who does much business with China does not know at least one person who has left China because of its pollution, usually out of concern for their kids. Because two of our firm’s China attorneys reside in Qingdao (the others are in Beijing), we are also aware of a number of people/companies leaving cities like Beijing, Xi’an and Chengdu for relatively less polluted Qingdao.

I see this pollution list as important and I would venture to say that foreign companies will be using it as a factor in determining where to locate in China.

What do you think?

The other day we did a post on how to shut down a China WFOE, entitled, How To Shut Down Your China Operations. In that post, we mentioned the possibility of selling your China WFOE to an employee or employees or selling it to another foreign company looking to go into China.

We got the following comment/question to that post:

Is there really a market for existing WOFEs? We have been operating for five years now and we are certainly fully aware of how hard it is, but I do not intend to quit, but certainly there will come a time when we need to exit China. One option is sale, but I really doubt that is possible. Does anyone know of examples? Also partial sale to key staff, for a peppercorn perhaps, seems to be a good idea from a business point of view. Does anyone know if this is possible?

I responded to that comment with the following comment of my own:

Not much of a market at all. The problem is that to buy a WFOE requires that the buyer essentially want to do exactly what the seller has been approved to do. So for example, if I want to do a consulting business in Qingdao, I must buy a consulting business in Qingdao. And then I also have to make sure that the costs of my doing due diligence on the WFOE and the risks of buying into the liabilities and problems of the WFOE, do not outweigh the advantages of taking over a WFOE, as opposed to forming a new one.

I am going to expound on my comment a bit here.

It is possible to sell a WFOE and our China Lawyers have been involved with a couple such sales and they are not particularly difficult from a legal perspective, but they are very difficult to justify from a business perspective and, in fact, none of the deals on which we have worked have actually closed.

You can sell your WFOE to a Chinese company (and this would include to an employee) and then it converts to a domestic company. Again, this is not terribly difficult legally, but such sales are rare because usually the employee knows exactly why the WFOE is closing down and usually the employee can choose to essentially take over the WFOE after the foreign company has left, and do so “informally” and without any payment.

You can sell your WFOE to a foreign company looking to do business in China, but that too has all sorts of difficulties, many of which we detailed in a previous post, entitled, Buying And Selling China WFOE Shell Companies. Not In My Lifetime?

In that post, we talked of how our China attorneys are always getting emails and calls from someone asking us if any of our clients might be interested in buying a China WFOE and of how our usual answer is “no.”

The people trying to sell their WFOE usually tout it as being completely liability free and therefore ready to go much faster and at a much lower price than if someone were to have to form their own China WFOE. For what it takes to form a WFOE in China, check out the following:

If you read any of the above posts, you will no doubt conclude that forming a WFOE in China is a convoluted and time consuming process, and it is. Therefore, buying an off the shelf WFOE must be much easier, right?

Wrong.

To quote from our previous post on selling a WFOE:

The thing about off the shelf WFOEs is exactly that: they are off the shelf and not customized. And that is where all of the problems arise. Let’s take as an example a WFOE that someone tried to interest me in many months ago. That company was in the IT outsourcing business in a second tier city. So right there, its only real potential buyer is someone who is interested in doing IT outsourcing in that second tier city.  Because if the buyer of that WFOE is interested in doing anything other than IT outsourcing, it will need to petition the government to expand or change its business scope. Similarly, if the buyer is interested in doing IT outsourcing in some other city, it will need to petition the government to move its WFOE or it will need to set up a branch in that other city, and thereby have to maintain two offices. When you throw in the fact that anyone buying a WFOE will need to conduct due diligence on it to make sure that it truly does have no liabilities of any kind (including, tax, employee, environmental, tort, etc.) and you can quickly see why forming a WFOE is going to be safer and probably equally as fast and cheap. The biggest benefit in buying a shell WFOE would be speed, but it is going to be the rare instance where saving a few months will warrant the extra risk.

In the post, “How To Form a China WFOE. Scope Really Really Matters,” we discussed the importance of a WFOE having a proper scope:

BUT — and this is why I am writing this post now — if you under or overreach on the description of your business scope, you might find yourselves in big trouble.  We are getting an increasing number of calls from American companies in trouble with the Chinese government for doing things in their business that were not mentioned in the business scope section of their initial WFOE.

In some cases, the companies have admitted to us that they were never “really comfortable” with the business scope mentioned in their applications, but that the company they had used to form their WFOE had “pushed” them into it as it would “make things much easier.” In some cases, the scope of the business changed after the application was submitted and the company had failed to secure approval in advance for the change. And in some cases, the company probably would never have been approved at all had it been upfront and honest in its application. In nearly all instances, the companies had managed to secure local approval but were now in trouble with Beijing, which constantly is auditing these applications. In one instance, the local government went back and changed its mind, probably after conducting an audit of its own.

I cannot go into any more detail on these matters, but I can give this advice: applying for a WFOE in China involves a heck of a lot more than just filling out a form and getting approval. It does matter for what you get approved and you (or whomever you are using for your WFOE application) need to know China’s foreign investment catalog inside and out before applying. You then must tailor your application to meet both the requirements of the foreign investment catalog AND the reality of what you will be doing in China. A failure to comply on both fronts will lead to, at best, a rejection of your application and, at worst, being shut down months or years later.

The odds of a shell WFOE’s city and scope lining up perfectly with that of a potential WFOE buyer are low and we are not aware of any website that tries to match up WFOE sellers with potential WFOE buyers. We also are not aware of a single deal where someone has purchased a shell WFOE.

So yes, buying a WFOE is possible, but difficult. But we do find the idea of selling a WFOE to an employee appealing as it can make for a smooth transition all around. But the real question (again) is not the legalities, its the practicalities and the desires, and for that we will need to wait and see.

What are you seeing?

Just read a really good article in the China Business Review by William Edwards, a global franchise consultant, entitled, The Pros and Cons of Franchising in China. As its title implies, the article is on franchising in China, but the part I liked most has universal applicability for those looking at doing a consumer business of just about any kind in China.

That part sets out the opportunities foreign franchises face in China, and the challenges, and I below list out those in the article and then make brief comments in italics.  

Edwards sets out the following opportunities:

  • China’s consumer class is expanding fast. Agreed.
  • Western brands are highly regarded. Agreed.
  • Western franchises bring new and modern business systems. Agreed.
  • Second- and third-tier cities are open to franchising. Agreed.

Edwards sees the following challenges for franchises doing business in China:

  • “Intellectual property protection is uneven. Weak intellectual property enforcement and an inadequate legal framework are key reasons early foreign brands opened as company-owned stores or JVs, instead of franchises, in China. Many US brands have seen local companies take their name and logo and open fake, unapproved outlets. For example, after a local coffee store chain violated Starbucks’s trademark by nearly duplicating its name and logo, Starbucks took the company to court and won the dispute in 2006.” I both vehemently agree and disagree. Intellectual property protection in China is uneven, but it is uneven no matter how you go into China and going in as a franchise is not necessarily worse than going in some other way. Edwards says that foreign brands opened in China as company-owned stores or JVs so as to protect their intellectual property, but that isn’t correct about joint ventures. Foreign brands typically went into China as joint ventures either because the laws at that time required that they go into China as joint ventures or because they believed that they needed the assistance of a Chinese partner and that forming a joint venture was how to secure that. Generally, forming a joint venture is one of the worst ways to protect IP because it so often involves a foreign company turning over its IP to the joint venture and so when the Chinese company takes over the joint venture (a not uncommon occurrence) the foreign company loses its IP. I note also that Starbucks IP fight was not with a franchisee; it was with a completely unrelated company, which gets me to my next point. Going into China does put IP at risk, but not going into China also puts IP at risk and beyond that it risks no profits in China. The key to protecting your IP in China is much more about protecting your IP in China than it is about the structure you use to go into China.  
  • Local managers lack strong management skills. Agreed, though getting better.  
  • “Finding and evaluating licensee candidates is tough. The most important part of franchising a brand is finding, evaluating, and signing a qualified company as the local, regional, or country franchisee. Due diligence resources to fully check on a local company are improving, but it is still difficult to find companies with the management skills, business track record, and capital to acquire and properly develop a US franchise business. To help find appropriate licensees, companies can check with various organizations, such as US Commercial Service offices in China, legal firms with US ties, consulting firms, or American Chamber of Commerce offices.”  Completely agree. Do your due diligence on your putative Chinese partner before you ink the contract.  
  • “China has many markets.  The sheer size of China, and its diversity of business and food culture, makes franchise development difficult. Companies that function well in one region seldom function as well elsewhere in China. Accordingly, franchisors rarely grant companies a country franchise for China.” Completely agree. In fact, this reminds me of advice our China lawyers always give regarding China distribution agreements: giving one distributer an exclusive for China does not usually make sense because it is the rare Chinese company that is truly strong throughout China.  
  • The regulatory environment is evolving.  Unclear and changing regulations have created uncertainty for foreign franchisers that wanted to enter China in the past. Sort of agree. Our China attorneys have had less problems with the clarity of China’s franchise regulations than with the fact that they are not terribly franchise-friendly.
  • “Franchises must adapt their products to new markets.  Some franchises face difficulties in China when they do not adapt—or are slow to adapt—to the needs and tastes of Chinese consumers.”  Agreed. 

What do you think?