CHINA FRANCHISE NEWS
Vol. 2 , No.5 - February 28, 2001
Special Edition:
A proposed revision of the "Trial Regulation on Commercial Franchise Business" (the "Commercial Franchise Regulation") has been taken under consideration by the State Economic and Trade Commission (SETC).
Lehman, Lee & Xu, as the legal advisor of China National Chain-store & Franchise Association (CCFA), has been invited to comment on the proposal. Should you have any comments regarding the current Commercial Franchise Regulation, please contact us at franchise@chinalaw.cc
To see the electronic version of the Commercial Franchise Regulation please visit our web site www.chinalaw.cc
TOPICS THIS ISSUE:
- Is it True - China Forces Restructuring on Carrefour?
- Avon sees China sales more than doubling by 2003
- A JV set up by Fuji and Lucky Film
- Equal Taxation for Domestic and Foreign-Invested Enterprises
- McDonald's JV in Guangdong Changes Name
- Guangzhou to give FIEs National Treatment
Is it True - China Forces Restructuring on Carrefour?
Financial Times reported on Feb. 8, 2001 that Carrefour, the French company that has become the most successful foreign retailer in China, has broken China central government regulations on foreign-invested retailing enterprises and faces protracted negotiations with authorities to "restructure" its businesses on the mainland. It is reported that Carrefour's main transgression was failure to secure the approval of the central government authority, the State Economic and Trade Commission (SETC), to open any of the stores it operates - relying instead on the goodwill of local authorities. The report quoted one SETC official, "we have given an order that Carrefour correct their business. We are now deliberating on how they will have to restructure. It could take two months before we decide what they will have to do." It is possible that Carrefour's ambitious expansion plans in China this year - it intends to open 10 more stores - will be derailed by the restructuring.
China opened the retail sector to foreigners on a trial basis in 1992, with open locations limited to 6 cities and 5 special economic zones, including Beijing, Tianjin, Shanghai, and Shenzhen. SETC and the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) co-published the "Experimental Measures on Commercial Enterprises with Foreign Investment" (the "Commercial Measures") on June 25, 1999, which expanded the open areas to capital cities of provinces, capital cities of autonomous regions, municipalities directly under the central government, cities separately listed in the plan, and special economic zones. The foreign investor's contribution to the joint retailing enterprise could reach 51% or more upon special approval of the State Council. A joint commercial enterprise is currently not allowed to franchise chain stores but can directly invest in and operate chain stores.
However, some foreign commercial businesses operate in the "gray area" - locally approved parallel operations. Some of them set up joint chain stores with local governments without the approval of the central government, or set up joint commercial consulting companies to invest in outlets, or even establish solely foreign-owned retailing enterprises. It is reported that there exist more than 300 commercial JVs in the Chinese market with only about 21 legally approved by SETC & MOFTEC.
Insiders disclose that Carrefour entered China by setting up a joint commercial management company. However, management JVs, according to Chinese laws and regulations, are not allowed to invest in business. Therefore, the Chinese party to the Carrefour JV registered a commercial subsidiary running chain stores, which then was managed and operated by the Carrefour JV.
It was not clear what the Carrefour restructuring would involve but industry experts said some sort of punishment was probable. During Beijing's last crackdown on the retail sector in 1998 and 1999, more than 35 outlets were closed and several foreign groups had to sell stakes to Chinese partners.
The move to restructure Carrefour, which has 27 stores and 16,000 employees in China, comes as a warning to other foreign retailers that Beijing intends to enforce central government regulations more actively before its accession to the World Trade Organization, expected sometime this year.
(Source: Sina News 02/20/01)
Editor: After publication of the above report, SETC Public Relations Department said that they would clarify with relevant authorities to confirm the truth of the report. Carrefour China also said they had not received any notification regarding the restructuring. The 4 outlets of Carrefour in Beijing still run normally. We will follow up this issue during the next few weeks.
Avon sees China sales more than doubling by 2003
The world's biggest direct seller of beauty products, Avon Products Inc., expects its China sales to more than double by 2003, as it intends to license 1,000 new franchised Beauty Boutiques in major Chinese cities this year.
New York-based Avon has a strong foundation in direct sales in the workplace, but suffered a huge setback in the Chinese market when Beijing banned direct selling in April 1998.
After the ban, Avon was among the first direct-selling companies to be relicensed by the Chinese government as a wholesale-retail operation, Avon spokesman Brian Martin said.
Following three years of losses in the country, Avon reported for the first time that its operations in China were profitable in 2000. This was based on a 44 percent increase in last year's sales in China, to $71 million.
"We've been adapting to the realities of how we need to do business there since the ban," Martin said.
"We are in China for the long term and are rapidly building brand awareness among Chinese women," said Andrea Jung, Avon Chief Executive Officer.
Over the long-term, Avon said it intends to resume direct-selling in China through independent sales representatives, assuming Beijing's restrictions are lifted. Avon said that such an easing is expected within the next several years.
"China's impending entry into the World Trade Organization will facilitate resumption of direct selling within some reasonable period of time, maybe two or three years out," Martin said.
(Source: Reuters News 02/20/01)
A JV set up by Fuji and Lucky Film
In early 2001, no one is sure where to put the blame, but everyone is certain a price war is on over camera film. In Shanghai, the average price of a roll of Fuji film has plunged by about 6 RMB (US$0.72) to only RMB 13 (US$1.57). Accordingly, China Lucky Film Co., Fuji's Chinese competitor, lowered the price of its film by 20 percent. Just when Fuji Photo Equipment Co. and China Lucky Film Co. were denying the price war, explosive news was disclosed - Fuji will invest in Lucky Film. Fuji will contribute cash, technology, and management skill to China Lucky Film Co. for 49% of the JV, while Lucky Film will hold 51% of the JV.
A senior official of Lucky Film disclosed that both sides had begun cooperation in principle. He denied the possibility that the brand "Lucky" would disappear because "the purpose of cooperation is to propel Lucky Film into the international market by using the mature technology and management experience and the international distribution network of Fuji. And Fuji will not own the controlling stake of the JV." Therefore, "the Lucky brand will be held by Lucky not Fuji." The official even mentioned that Lucky Film had negotiated with Hewlett Packard about co-investment of ink-jet materials, and that Lucky Group will move its headquarters from Hebei province to Beijing around March or April this year, all of which is evidence that Lucky seeks a breakthrough in the highly competitive light-sensitive industry.
Eastman Kodak Co., the world's largest manufacturer, hass 42% of the global market share and 53% of the domestic market share after kicking out Fuji Film from the No.1 position in the Chinese photo-processing business. In 2000, Kodak established more than 1000 outlets, and conducted the month-long "Kodak start-up alliance" program to help small film-processing businesses. By the end of last year, Kodak's color film market share was up to 50%, with Fuji and Lucky respectively 30% and 20%. However, Lucky's 20% market share is based on its color film prices, which are 20% lower than Kodak's. Lucky's cooperation with Fuji presages a price war against Kodak.
(Source: Huaxi News 02/25/01)
Equal Taxation for Domestic and Foreign-Invested Enterprises
China will begin to levy the urban maintenance and construction tax on all foreign-invested enterprises ("FIE"s) from this year, revealed an official of the State Administration of Taxation.
The urban maintenance and construction tax has been only levied on domestic enterprises; FIEs have been exempt, according to the PRC Provisional Regulations on the Urban Maintenance and Construction Tax (1985). However, as China's accession to WTO approaches, the country is working toward uniform tax treatment for domestic and FIEs.
The current urban maintenance and construction tax that domestic enterprises pay varies by area. In general, the rate is 7 percent in medium and large cities and 5 percent in small and medium towns. If the enterprises are located in rural areas or economic development zones, the tax rate could be as low as 1 percent.
Currently, FIEs are also exempt from the following taxes: vehicle and vessel use tax, vehicle and vessel license plate tax, housing property tax, and city and town land use tax, etc. These taxes, which have been levied on only domestic enterprises, will soon be levied on FIEs as well.
FIEs also currently enjoy the preferential policy of "two-year exemption and three-year reduction" for income tax, which attracts the attention of many FIEs. For the time being, there is no timetable for the abolition of this policy. However, there is general agreement among the business community that under the condition of "national treatment", the abolition of this policy is just a matter of time.
(Source: China Information News 02/16/01)
McDonald's JV in Guangdong Changes Name
Beijing Sanyuan Foodstuff Co., Ltd. recently bought the Chinese shares of Guangxin-McDonald's JV previously owned by Guangdong International Trust and Investment Co. (GITIC) and changed the JV's name to Guangdong Sanyuan-McDonald's Foodstuff Co., Ltd.
Beijing Sanyuan acquired 50% of the equity of Guangxin-McDonald's for US$9,900,000.GITIC totally withdrew from Guangxin-McDonald's, which released GITIC's debts valued at RMB50,000,000, disclosed an official of GITIC's liquidating committee.
Beijing Sanyuan has been in the dairy industry for 45 years and has annual operating revenues around RMB1.5 billion (US$181 m). As McDonald's No. 1 partner in China, after the completion of the acquisition, Beijing Sanyuan will have co-invested with McDonald's in more than 100 outlets, almost 30% of McDonald's domestic market share. It is reported that Guangdong Sanyuan-McDonald's will expand its business scope and increase McDonald's Guangdong outlets from currently 40 to 100 or more.
(Source: Xinhua News 02/24/01)
Guangzhou to give FIEs National Treatment
Guangzhou will unveil new regulations on registering enterprises this year that will suggest "gradually giving foreign-funded enterprises national treatment."
The new measures were announced Feb. 9 at the Guangzhou Working Meeting on Management of Enterprise Registration.
With certain exceptions, foreign-funded enterprises should no longer be required to undergo examination and procure permits from other departments before registration;
With approval, foreign companies that have established or invested in more than five enterprises may be registered the same way as domestic enterprise groups.
Foreign-funded enterprises that have been profitable for the last three consecutive years may be registered as companies limited by shares and apply for listing with their original Chinese and overseas investors acting as promoters;
When Chinese-foreign equity joint ventures or Chinese-foreign contractual joint ventures, as shareholders or promoters, use their own assets or profits to set up a new company with a domestic enterprise or purchase partial equity in a domestic enterprise, the new company should be registered as a domestic enterprise;
When foreign investors exchange high-tech research for shares of an enterprise, the enterprise will get permission for registration if the Municipal Science and Technology Commission confirms that the value of such technology is below 35 percent of the registered capital (special approvals could allow more than 35 percent);
Guangzhou-based foreign-funded enterprises will be encouraged to invest in central and western China. Productive enterprises with more than 50 percent of their registered capital already secured and nonproductive enterprises with more than 70 percent of their registered capital already secured are encouraged to set up branches in the country's central and western regions.
(Source: Yangcheng Evening News 02/10/01)
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