OPENING A FRANCHISE IN CHINA? BRING MONEY _ AND PATIENCE

OPENING A FRANCHISE IN CHINA? BRING MONEY _ AND PATIENCE

A Big Mac in China is fairly inexpensive - nine yuan, which is $1.10, or about half what it costs in the United States.

Foreign franchise investment in China, however, is not a cheap or quick proposition.A start-up operation must earn several government approvals, seek out the right Chinese partner and try to find a way to repatriate earnings out of a country that operates under tight foreign-currency regulations.

"I remain optimistic about China in the medium to the long term," said Philip Zeidman, general counsel to the International Franchise Association in Washington. "But I don't think anyone should assume they will get their money out quickly."

A report from Beijing by the U.S. Commerce Department's Foreign Commercial Service listed six major problems facing the would-be franchiser: foreign- currency restrictions, local licensing approvals, intellectual-property violations, high tariff barriers, poor infrastructure and scarce supply of high-quality materials.

That report was issued before November, when the Beijing municipal government ordered McDonald's to immediately vacate what was its largest outlet in the world. The fast-food restaurant was just down the road from Tiananmen Square at the intersection of Wangfujing Street and Changan Avenue, Beijing's busiest shopping area. The city said McDonald's had to move to make way for an office and shopping complex.

While U.S. lawyers were mulling over applicable land-use rights in the restaurant's 20-year lease that could be and were revoked at will, McDonald's executives decided not to assert the company's property rights over the Wangfujing premises. Instead, they opted to expand to other outlets.

Their strategy seems to have paid off. Since December, the company has added 11 restaurants to the several dozen it has in China.

And McDonald's officials are confident that they will meet the company's target of establishing 600 restaurants in China in the next 10 years. By

comparison, McDonald's plans to open 400 restaurants in the United States every year and 1,000 more worldwide.

For smaller companies, however, the McDonald's eviction is not so easy to dismiss.

"If this happens to McDonald's, what will happen to me?" asked a U.S. executive with retail interests in China.

Despite such hurdles, the lure of a market of 1.2 billion consumers seems irresistible.

McDonald's, Kentucky Fried Chicken, Pizza Hut and other market leaders have set up their operations first in the Shenzen Special Economic Zone over the past decade, and a dozen new arrivals have opened their flagship outlets in China in the past 12 months.

The newcomers include TCBY; Roma Corp., which operates the Tony Roma's ribs restaurants; and Alphagraphics, a copy and speed-printing operation.

Franchising opportunities in China are beginning "to diversify from fast- food services to other consumer-type businesses and spreading to smaller companies as well," Mr. Zeidman said.

A large Texas-based home-remodeling service is exploring the possibility of opening its first shop in China later this year. One-hour photo franchises have sprung up in major urban centers in the coastal region - a testament to Chinese parents' obsession with taking pictures of the only child the government permits most families to have, according to the Commerce report.

Most foreign franchisers have sought to set up directly in China through wholly owned enterprises or equity joint ventures, rather than by granting licenses to Chinese franchisees.

"We are not franchising right now," a McDonald's spokesman said.

Fast-food restaurants and other retailers have avoided direct franchising to domestic owner-operators because Chinese firms typically lack the hard currency to pay franchise or royalty fees.

Moreover, a franchise requires foreign-product licensing in China, which treats the transaction as a technology transfer. Such transfers must meet stricter regulations and are subject to additional approval by the Commission of Foreign Economic Relations and Trade.

Foreign companies are advised to move as quickly as possible to register their trademarks in China because of the country's weak enforcement of intellectual-property rights.

"Much of the talk and writing in China is about the enforceability of intellectual-property rights for videotapes or CDs, but much less about trademarks," Mr. Zeidman said.

For example, before Dunkin' Donuts set up shop in China, it had to spend considerable time and legal costs to assert its claim to the name, since there was already another "Dunkin' Donuts" in existence in China. The real Dunkin' Donuts had to prove that it is a well-known international brand and that it held the global rights to its own name.