Doing Business in China by Morgen Witzel & Witzel Morgen & Xi Chao

Author:Morgen Witzel & Witzel, Morgen & Xi, Chao [Ambler, Tim & Witzel, Morgen & Xi, Chao]
Language: eng
Format: epub
Publisher: Taylor and Francis

Agencies and licensing

The reader will be familiar with agency (importing) and licensing (local production by the third-party licensee) arrangements which operate in China much like anywhere else. These classic ways to enter a new market minimise the demands on the exporter and use the existing resources and capabilities of the importer or agent or distributor or licensee. For this section, we will take all these terms as equivalent. The differences are more technical than real, apart from licensing which involves the transfer of much more intellectual property.

If/when the licence expires or the arrangement terminates in some other way, the firm will have acquired an on-site competitor who can make the product cheaper (certainly) and better (possibly) than it can. There have also been quite a few cases of identical factories being opened just down the road and, coincidentally of course, producing identical goods.

Franchising, a form of licensing but with less basic brand risk, is also growing in popularity. It has the additional advantage of not requiring JV retail licences. KFC, Starbucks, Pizza Hut, the Hong Kong clothing retailers Bossini, Giordano, G2000, and 7–11 are commonly cited examples. For retailers and service industries, franchising offers less financial exposure similar to those above, but the control problems and the consequent impact on brand identity (always a problem for franchisors) need to be estimated. Observers also warn that franchising regulations in China change frequently and are not applied universally across the country. Some franchisors have had significant intellectual property issues with franchisees and this will continue. Building a relationship based on trust between franchisor and franchisee is again absolutely essential.

China being as big as it is, the need to develop relationships and the future strategic extension of the agency or licensing arrangement into China, all suggest some form of local representation. A full-scale representative office is expensive but some sharing may be possible. For example, the British building materials sector established a joint office representing 30 companies in Shanghai on 28 April 1999. Having no local office and changing the firm’s representative who comes visiting every few months is such a bad idea that it would be better not to start. If the Chinese importer insists on buying the goods, then bank the cash by all means, but do not consider market entry. Maybe you should worry about him becoming a competitor, though.

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