Publications

28 Nov 2011

Do your expansion plans include a look at Indonesia and Vietnam?

FranCast

Philip F. Zeidman

The upcoming International Franchise Association/Franchise Times/US Commercial Service Trade Mission to Indonesia and Vietnam serves as a useful reminder that those two countries figure prominently in the international expansion plans of many franchisors.  It’s thus an appropriate moment to take a fresh look at what’s happening in those markets.

Indonesia

It is difficult to recall how unappetizing Indonesia seemed only a few years ago.  After 9/11, the country with the largest Muslim population of any nation seemed a distinctly unappealing market for an American franchisor.  And, indeed, there have been bombings in Jakarta and Bali, riots and attacks on the outlets of some of the best known American franchise names.  Add to that the financial crisis of the late 1990s and the more recent shocks, recurring political instability and the country’s almost uncanny magnetism for natural disasters – volcanoes, earthquakes, tsunamis – and the natural question has to be:  Why Indonesia?

As it turns out, there are ample reasons:  The world’s fourth most populous country, and the largest in southeast Asia, Indonesia is growing, and rapidly; GDP growth was up 6.1 percent last year, and 2011 looks even better.  Perhaps as important, the demographics are what many franchisors seek:  more than half the population under the age of 34, a rapidly growing middle class and increasing urbanization.

But the ambiguity and uncertainty of the Indonesian regulation of franchising has long acted as a barrier to franchisors seeking to enter the market… or, at the very least, as a source of great frustration.

Indonesia has had a series of laws and regulations that regulate franchising, the most recent update being in 2007; it is principally a registration/disclosure law which, in theory, should present few concerns to US companies accustomed to the statutory pattern here.  Like some other franchise statutes, the law also requires specific clauses to be included in the agreement – and goes further, by requiring that certain types of assistance be provided.  But the history of the law and its revision, and the unsettled state of its interpretation and its enforcement, has led to some consternation.

Among the issues which have arisen: a requirement for franchise agreements to be governed by Indonesian law. The requirement includes "other matters needed to be known to the franchisee," which introduces a troubling degree of subjectivity. (And the Ministry of Trade may at the time of registration "suggest" additional information…and the potential penalties for non-compliance could be severe). Is the updating of disclosure required? No, but it is "advisable." May English be the governing language? Yes, but "that could change."

Finally, other provisions raise numerous issues.  The notorious "clean break" requirement essentially permits a terminated franchisee to maintain a stranglehold over the appointment of a replacement, although theoretically for only a six-month period.  There may be restrictions on the proximity of one franchisee to another, and there are required preferences for the use of domestic goods, and priorities for “small and medium scale enterprises.”

If all of this sounds annoying and intrusive, it is.  We have been able to negotiate our clients’ way through this morass, or devise alternatives, but no one should be under any illusion as to the ease of the process.

Vietnam

For those whose memories are forever sifted through the upheaval of the 1960s and 1970s, the very notion of Vietnam as a commercially appealing market requires some serious rearrangement of thinking.  And the realization that the 85 million people – especially those outside Hanoi and Ho Chi Minh City – contain many whose incomes make purchases of Western goods and services unrealistic simply gives added impetus to those who would view Vietnam as off the radar screen.

That could be a mistake.  Rising incomes; an emerging middle class; an economy growing at nearly 8 percent in recent years, with the retail sector well above that; a young population (two-thirds under 30); a stable political environment; a growing demand, at least in large cities, for Western and high-end products and services beyond what can be provided locally; and a slow and bureaucratic process for approval of other retail licenses, creating a relative opening for franchises: all that doesn’t sound much like the popular conception of Vietnam.

Unlike most franchise disclosure laws, which largely follow the US model, the 2005 Vietnam law sought consciously to follow the Australian approach.  This distinction will not make a great deal of difference to entering franchisors, but there are some points which they should keep in mind (not all of which are fully settled):

• The Vietnamese business community – not unlike those in some other socialist and post-socialist societies – appears to believe that the disclosure law was essential to establish the country in the mainstream of franchising.
• There is a greater role for government (again as might be expected) than we are accustomed to seeing elsewhere.
• The franchise system must have been operating for at least a year, but that can have been in any country, and either franchised or company owned.
• Some of the terminology used may not truly have a directly equivalent vocabulary in English.
• The choice of governing law and of the language (and of the governing language in the event of a dispute) remains a matter of some confusion.
• The admonition to treat franchisees “fairly” remains inadequately defined.
• There are a number of provisions which the parties may waive or alter.
• Any “important change to the franchise system” must be disclosed to existing as well as prospective franchisees.

None of this need be alarming to an entering franchisor, although it does require some adjustment of mindset.  But that may be a small price to pay for participating in one of the newest – and hottest – franchise markets.

For more information about expanding your franchise operations into Indonesia and Vietnam, please contact:

Philip F. Zeidman