Avoiding The "Deemed Export" Dilemma in China

Recently, US franchise companies have run into problems hiring foreign Chinese nationals for their overseas supply and distribution facilities. It seems the "deemed export" licensing regulations have morphed into "deemed reexport" licenses according to industry representatives. Traditionally, the BIS regulation applied to the transfer of controlled technology to foreign nationals from controlled countries residing in the US. Apparently, US companies are now being advised to get export licenses for foreign nationals from controlled countries outside the US borders as well.

This new policy will soon have a chilling effect on US franchisors' hiring practices both in the US and in their overseas facilities. Many highly skilled foreign nationals from controlled countries will not be able to compete for positions in US international franchise companies, which could cause a dilution in service quality if those jobs go unfilled.

As the BIS sorts through the stacks and piles of deemed export applications the process can takes months to process the information and that is only the first filter for an export program. Then comes the implementation of "silos" for the employee from restricted data outside the license. US franchise companies don't need anymore "toll booths" on their way to global fast track.

Does New Chinese Franchise Law Have Feng Shui?

Earlier this month, May 1st to be exact, the long awaited Chinese Franchise Disclosure Guidelines ("Guidelines") went into effect. The Guidelines have brought some clarity to the Regulations as they attempt to add specific details to specific enforcement issues, but there are still traps for the unwary, it appears for foreign franchisors.

Specifically, Article 4 of the Guidelines requires a franchisor to deliver a written disclosure document to a prospective franchisee at least 30 days before the execution of the franchise contract. Nothing is said about the all important "first meeting"; rather, it is the number of days that seems to have the most relevance vis a vis the time of delivery.

Additionally, the new Guidelines are silent as to whether we are talking about business or calendar days. Remember, Mandarin Chinese working days and calendar days are depicted differently. Calendar days are typically shortened to "days", whereas working days cannot be shortened, according to my Chinese colleagues.

I will post more on the potential pitfalls of the most recently enacted Guidelines in the next few days, but for now it appears that we are getting more Qi than water.

Olympic Size Export Risks for Franchisors in 2008

As the US athletes prepare for the 2008 Olympics in China, so should US franchisors. Challenges for both competitors could be substantial. US Department of Commerce and Defense Department officials have announced their intent to tighten controls vis a vis exports to China. Of 1,000 applications for dual use permits for China in the last four years only 700 have been approved under EAR regulations, according to BIS officials.

In addition, according to the DTSA, only a few licenses have been approved by the State Department for items exported to China subject to ITAR. Any US item for export to China controlled by ITAR must receive a presidential waiver before a license can be approved. Check the various US government websites for specific sanctions currently in force against the Chinese government or its various entities.

With a record 35 venues in place for the 2008 Beijing Olympics, the Games could be a gold medal opportunity for both US athletes and franchisors, but to succeed one must prepare early.

China Goes for Gold

With the Chinese government buying a $3 Billion (8%) stake in Blackstone Group, could McDonalds or Starbucks be their next target? It seems as obvious as a Yao Ming dunk. China has traditionally invested in conservative US T bonds, but no longer. Rumor has it that China wants more out of its growing foreign reserves and will even establish a foreign investment agency to enthusiastically chase higher yields in the coming months. As the US dollar continues to decline on world markets, China seems to be poised to begin a US shopping spree. US franchise systems may be the on the list. As the 2008 Olympics get nearer, China may have enough hard ware to make the final medal round.