My friend told me about the proposition because he knows I'm building a career helping businesses understand how to best approach initiating or improving their business in China. As he told me of this great idea that was already a proven, successful model in other free market economies around the world, he had a look of skepticism on his face. He said it was risky, and that China was different than the other countries his colleague mentioned.
I agreed. As he was telling me about the business model I could see one glaring flaw. Intellectual property rights in China don't function with the same level of legal support that they do in, say, France or Germany. Because the model was fairly simple and functioned as a way to bring people into businesses where they would spend money while participating in the colleague's organized association, it would be difficult to protect the idea as unique and copyrighted. What would prevent local entreprenuars from shamelessly copying the model, promoting it themselves at a lower price, and still making a great profit by delving deeper into the market than the original, western-owned business could have gone?
I didn't feel, and neither did my friend, that the colleague had a realistic understanding of the culture and buinsess environment in China. If his business proved successful in, say, Shanghai, it would only be a matter of months or even just weeks before a competitor popped up with a nearly identical, cheaper model that started stealing his business and cut off its expansion. Taking the issue to court would be difficult. Just look at Chery Automotive and GM as an example.
In 2000, Chery, a government-owned auto company from Wuhu, Anhui province, was in discussions to buy struggling Daewoo. The purchase was never made, but a year later Chery began producing the QQ, which looked like a carbon copy of the Daewoo Matiz, which was contracted for production by GM when it acquired part of Daewoo in 2003. In China, the GM Matiz was marketed as the Spark.
GM sued Chery in Chinese courts for copyright infringement. Chery claimed they designed the QQ independently, and the case was decided in favor of Chery even though GM showed that with no modifications, the QQ's doors could be transferred to the Spark with no modifications. Chery's QQ is much cheaper than GM's Spark, and is out selling the Spark by a large margin.
In addition to rip-offs and copyright infringement, there are specifics to Chinese copyright law that differ from US standards. For example, when McDonald's went into China, they copyrighted their logo for the restaurant industry and a few other food and food container related industries. They did not copyright their logo for the jewelry industry. So across the street from McDonald's on the famous and highly visible Wangfujing Street in Beijing, the Jewelry and Jade Garden popped up with its triple-arch logo. Whether they are copying McDonald's and diluting its brand recognition is irrelevent if McDonald's never registered its name and logo with China's jewelry industry.
China also has a vibrant knock-off fashion and pirated DVD industry. The government makes perfunctory displays of force in stopping the pirated DVD and rip-off fashion industries, but they don't make much of a dent. There is a reason for this. In some small towns, removed from the booming economies of Shanghai and Guangzhou, the DVD copying industry or faux Abercrombie rugby shirt industry might be the only production facility in the city. Without a legitimate business available, closing the DVD factory might thrust a large chunk of the population into poverty.
China wants a piece of whatever pie is available domestically. Its legal systems will look favorably on their own domestic businesses when challenged by the big or small international interests. It's important to get everything in writing and copyrighted long before entering the Chinese market. Once a company gets in and takes off, it should be prepared to defend its copyright in cities around the country. It should be ready to accept some dilution of its brand and some copying of its product by small knock-off operations and keep in mind when pursuing legal action may not be worth the expense.