1.0 General Facts About Malaysia and the Investment Climate مل ي س ا ي Malaysia Flag Emblem Motto: Bersekutu Bertambah Mutu (English: Unity Is Strength) Anthem: "Negaraku" Capital Kuala Lumpur: 2°30′N 112°30′E Largest city: Kuala Lumpur Official language: Malay Government: Federal constitutional monarchy - Paramount Ruler Tuanku Syed Sirajuddin Jamalullail - Prime Minister Abdullah Ahmad Badawi Independence: - From the UK (Malaya only) August 31, 1957 - Federation (with Sabah, Sarawak and Singapore) September 16, 1963 Area: - Total: 329,847 km² (67th) 127,355 sq mi - Water (%): 0.3 Population: - 2006 est. 26,857,600 (45th) - 2000 census 23,953,136 - Density 77/km² (115th) 199/sq mi GDP (PPP) 2005 estimate - Total $290.7 billion (33rd) - Per capita $11,201 (61st) HDI (2003) 0.796 (61st) – medium Currency: Ringgit (RM) (MYR) Time zone: MST (UTC+8) - Summer (DST) Not observed (UTC+8) Internet TLD .my Calling code +60 **Putrajaya is the primary seat of government The Malay Peninsula and indeed Southeast Asia has been a center for trade for centuries. Various items such as porcelain and spice were actively traded even before Malacca and Singapore rose to prominence. In the 17th century, large deposits of tin were found in several Malay states. Later, as the British started to take over as administrators of Malaya, rubber and palm oil trees were introduced for commercial purposes. Over time, Malaya ds a n m l b e ca m e th e w o rl ’ l rg e st p ro d u ce r o f ti , ru b b e r, a n d p a l o i. T h e se th re e commodities along with other raw materials firmly set Malaysia’ e co n o m i s c tempo well into the mid-20th century. During the 1970s, Malaysia followed the footsteps of the original four Asian Tigers and committed itself to transition from reliance on mining and agriculture s s sta n e to manufacturing. With Japan’ a n d th e W e st' a ssi n ce , h e a vy i d u stri s flourished and in a matter of years, Malaysian exports became the country's primary growth engine. Malaysia consistently achieved more than 7% GDP growth along with low inflation in the 1980s and the 1990s. Current GDP per capita grew 31% in the Sixties and an amazing 358% in the Seventies but this proved unsustainable and growth scaled back sharply to 36% in the Eighties rising again to 59% in the Nineties led primarily by export-oriented industries. Macro-economic trend This is a chart of trend of gross domestic product of Malaysia at market prices estimated by the International Monetary Fund with figures in millions of Malaysian Ringgit. Economy of Malaysia Currency: 1 Ringgit = 100 sen Fiscal year: Calendar year Trade organizations: APEC, ASEAN, WTO Statistics GDP ranking: 33rd GDP: $290bn (2005) GDP growth: 7.4% (2004) GDP per capita: $11,160 (2005) GDP by sector: Agriculture (7.3%), industry (33.5%), services (59.1%) (2004) Inflation: 3.5% (2005) Pop below poverty line: 8% (1998) Labour force: 10.26m (2004) Labour force by occupation: Manufacturing 27%, agriculture, forestry, and fisheries 16%, local trade and tourism 17%, services 15%, government 10%, construction 9% (1999) Unemployment: 3.8% (2005) Main industries: Peninsular Malaysia - rubber and palm oil processing and manufacturing, light manufacturing industry, electronics, tin mining and smelting, logging and processing timber Sabah - logging, petroleum production Sarawak - agriculture processing, petroleum production and refining, logging Trading Partners Exports: $140bn (2005) Main partners: United States 19.6%, Singapore 15.7%, Japan 10.7%, China 6.5%, Hong Kong 6.5%, Thailand 4.4% (2003) Imports: $110bn (2005) Main Partners: Japan 17.3%, United States 15.5%, Singapore 11.9%, China 8.8%, South Korea 5.5%, Taiwan 5%, Germany 4.7%, Thailand 4.6% (2003) Public finances Public debt: $104bn (45.5% of GDP) Revenues: $22.95bn (2004) Expenses: $27.75bn (2004) For purchasing power parity comparisons, the US Dollar is exchanged at 1.70 Ringgit only. From 1988 to 1997, the economy experienced a period of broad diversification and sustained rapid growth averaging 9% annually. By 1999, nominal per capita GDP had reached $3,238. New foreign and domestic investment played a significant role in the transformation of Malaysia's economy. Manufacturing grew from 13.9% of GDP in 1970 to 30% in 1999, while agriculture and mining which together had accounted for 42.7% of GDP in 1970, dropped to 9.3% and 7.3%, respectively, in 1999. Manufacturing accounted for 30% of GDP (1999). Major products include electronic components -- Malaysia is one of the world's largest exporters of semiconductor devices -- electrical goods and appliances. During the same period, the government tried to eradicate poverty with a controversial race-conscious positive discrimination program called New Economic Policy (NEP). First established in 1971 after race riot known as the May 13 Incident occurred, it sought to eradicate poverty and end the identification of economic function with ethnicity. In particular, it was designed to enhance the economic standing of ethnic Malays and other indigenous peoples (collectively known as bumiputras in Malay. The NEP ostensibly ended in 1991; however the policies persist in the form of other programmes such as the National Developmnent Policy. The policies are enforced overtly through race- based quotas for low-cost housing units, university placement, business equity ownership, etc. Rapid growth was achieved partly through privatisation of inefficient state owned enterprises, thus subjecting them to commercial pressures and forcing them to better utilise their resources. Mostly deals were done behind closed doors and put through rather quickly. In one example Khazanah Nasional alienated shares in DRB Hicom to Mega Consolidated. This led to such deals being labelled mega projects. Foreign funds were attracted to invest making the local money market and bourse liquid. This created opportunity for local businesses to raise capital on the KLSE, and carry out infrastructure development in areas like telecommunications, highways and power generation to meet bottlenecks caused by rapid industrialization. An intense labor shortage created employment for millions of foreign workers. Subsequent events show that more than 50% were illegal. The influx of foreign investment led to the KLSE Composite index trading above 1,300 in 1994 and the Ringgit trading above 2.5 in 1997. At various times the KLSE was the most active exchange in the world, with trading volume exceeding even the NYSE. Some of the more visible projects from that period are Putrajaya, a new international airport (Kuala Lumpur International Airport), a hydroelectric dam (Bakun dam), the Petronas Towers and the Multimedia Super Corridor. Proposals that were eventually cancelled include the 95km Sumatra-Malaysia bridge (would have been world's longest), the Mega International Sea and Air port on reclaimed land in Kedah (would have been worlds biggest) and the KL n ty d d a l d s rst ty l L i e a r C i (w o u l h a ve b e e n w o rl s l rg e st m a l. A n d w o rl ’ fi ci b u it o ve r a river) Concerns were raised during the time about the sustainability of the rapid growth and the ballooning current account. The mainstream opinion prevalent at that time was that the deficit was temporary and would reverse once imported equipment started producing for export. In spite of that, measures were taken to moderate growth especially when it threatened to overheat into the double digits. The main target was asset prices, and restrictions were further tightened on foreign ownership of local assets. Exposure of local banks to real estate loans were also capped at 20%. As was widely expected, the current account deficit did narrow steadily, year to year, from 9% to 5% of GDP. Malaysia has the largest operational stock of industrial robots in the Muslim world. Asian financial crisis and subsequent recovery Further information: Asian financial crisis The year 1997 saw the drastic changes in local scenarios. Foreign direct investment fell at an alarming rate and Ringgit depreciated substantially from MYR 2.50 per USD to much levels lower (up to MYR 4.80 per USD at its bottom) s as capital flowed out. The Kuala Lumpur Stock Exchange’ co mposite index fell from approximately 1300 to nearly merely 400 points in a few short weeks. In response, the Malaysian government imposed capital controls and pegged the Malaysian Ringgit at 3.80 to a US dollar while refusing economic aid from International Monetary Fund (IMF) which came with austere lending conditions. By refusing aid and thus the conditions attached thereof from the IMF, Malaysia was not affected to the same degree in the Asian Financial Crisis as Indonesia, Thailand and the Philippines. Regardless, the GDP suffered a sharp 7.5% contraction in 1998. It however rebounded to grow by 5.6% in 1999. The Government of Malaysia predicted 5.8% real GDP growth in the year 2000, but most analysts predicted growth will exceed 8% for the year. In order to rejuvenate the economy, massive government spending was made and Malaysia continuously recorded budget deficits in the years that followed. Economic recovery has been led by strong growth in exports, particularly of electronics and electrical products, to the United States, Malaysia's principal trade and investment partner. Inflationary pressures remained benign, and, as a result, Bank Negara Malaysia, the central bank, had been able to follow a low interest rate policy. Later, the country enjoyed faster economic recovery compared to its neighbors though in many ways, the level of pre-1997 affluence has yet to be achieved. The fixed exchange rate regime was abandoned in July 2005 in favor of managed floating system within an hour of China's announcing of the same move. In the same week, Ringgit strengthened a percent against various major currencies and was expected to appreciate further. As of December 2005, there has been no further appreciation of the ringgit. In spite of the large positive current account surplus, foreign reserves have started to fall at a rapid rate. Official statistics released in March 2006, confirmed capital flight of more than USD 10 billion. Trade Malaysia is an important trading partner for the United States. In 1999, two-way bilateral trade between the U.S. and Malaysia totaled U.S. $30.5 billion, with U.S. exports to Malaysia totaling U.S.$9.1 billion and U.S. imports from Malaysia increasing to U.S.$21.4 billion. Malaysia was the United States' 12th-largest trading partner and its 17th-largest export market. During the first half of 2000, U.S. exports totaled U.S.$5 billion, while U.S. imports from Malaysia reached U.S.$11.6 billion. The Malaysian Government encourages Foreign Direct Investment (FDI). According to Malaysian statistics, in 1999, the U.S. ranked first among all countries in approved FDI in Malaysia's manufacturing sector with approved new manufacturing investments totaling RM5.2 billion (US$1.37 billion). Principal U.S. investment approved by the Malaysian Investment Development Authority (MIDA) was concentrated in the chemicals, electronics, and electrical sectors. The cumulative value of U.S. private investment in Malaysia exceeded $10 billion, 60% of which is in the oil and gas and petrochemical sectors with the rest in manufacturing, especially semiconductors and other electronic products. 2.0 Franchising in Malaysia As untimely as in the 1940s, Malaysia has observed franchise concepts making inroads into the retail vertical. Mainly, it covers 4 areas of retail activities as shown below: 1) Retail outlets for shoes planned by Bata shoes dealership; 2) Petrol station dealership – sales of petroleum products; 3) Soft drinks production for local bottlers; and 4) Automobile dealership – distribution of passenger cars. a as si n s l n M a l ysi ’ fra n ch i n g i d u stry i stil a t i fa n cy sta g e b u t its participation performance has been increasing steadily. One of the pioneers who started franchise business in Malaysia is believed to be Singer Sewing Machines. However, this novel concept of business expansion and distribution is only obvious when fast food restaurants e.g. Kentucky Fried Chicken (KFC), A&W, ds r o n a a n y a n d M cD o n a l ’ b e g a n th e i o p e ra ti n s i M a l ysi i th e 1 9 7 0 s a n d e a rl 1980s1. Becoming master franchisees or franchisees to foreign franchises proved to be the fastest way to enter the franchise industry as they offer well-known brands, tested business models with strong growth opportunities. Most of the local players who are active in the foreign franchising sector are large multinational companies such as KFC Holdings Bhd, Berjaya Group, KUB Holdings Bhd, Eden Group and TT Resources Bhd and several wealthy individual investors. Usually, these conglomerates use franchising as a strategy for regional expansion and therefore, hold master franchisee rights to a number of other countries in the region. At present, foreign franchisees take up 40% of all franchising and US franchising alone dominates 70% of this figure. In 2003, franchising represented 4% of retail outlets in Malaysia and 5% of total retail sales. Fast food dominated the franchising sector, with sales exceeding RM1.3 billion yearly2. The total retail sales in 2003 marked RM56.6 billion. 1 US and Foreign Commercial Services and U.S. Department of State, 2004 2 Innovation Associates Analysis; US & Foreign Commercial Services and US Dept of State 2004; Malaysian Economic Report The Ministry of Entrepreneur Development has identified various industries that have the potential to be franchised and best suited franchise concepts. They are as listed below: Food industry – developing local dishes into fast food business Laundry business – catering for the needs of customers in urban areas Building maintenance – such as general cleaning and janitorial services Construction industry – for the supply of building materials The Retail Sector By Value of Sales (Amount are quoted in current prices) TOTAL RETAIL Clothing, textile, linen, towels, SALES IN 2003: blankets and footwear RM56.6 BILLION 4.70% Petrol, diesel, lubricants and 11.90% others Household and personal goods 49% Food, drinks and tobacco 24.90% Industrial, agricultural, business equipment and materials 4.50% Motor trading and motor 5.00% accessories stores Source: Innovation Associates Analysis; US & Foreign Commercial Services and US Dept of State 2004; Malaysian Economic Report Total Registered Franchisor and Master Franchisees from Different Sectors of the Economy as at 31st March 2005 Furniture and Landscaping 7% 2% 3% IT & Telecommunication 4% 8% Health Care Centres & Products Supermarket / Minimarket 31% 12% Education Centres & Kindergarten Clothes & Apparels Services & Maintenances 14% Food 19% Others Source: RoF, Ministry of Entrepreneur and Cooperative Development, 31 March 2005 Wholesale & Retail Trade Companies Shareholdings (at par value) 5.30% Nominee Companies 13.80% Bumiputera 44.20% Foreigners Other Malaysians Malaysian Indian 34.30% 1.70% Malaysian Chinese 0.70% Source: Innovation Associates Analysis Monitoring the growth of franchise business through franchise unites gives a good indication of how successful are the franchisors in growing the business s and the Malaysia’ franchising growth. However, the success of Franchise Development Programme (FDP) in grooming Bumiputera entrepreneurs is a challenge that needs to be critically deliberated and studied. It may be that the entry cost to operate as a franchisee is higher than the entry cost for a typical retail self-own business. The characteristics of each retail model make them suitable for differing situations and needs. Therefore, when a single store decides to expand, or a new start-up, is planned, business owners must evaluate their needs and objectives and identify the optimal retail model for their business. Investment and revenue structure is one of the key considerations in selecting the retail model for a business to adopt. A company that has a successful product does not wish to invest in the infrastructure to distribute or deliver the product to a potentially widely dispersed customer base may opt to adopt a dealership model or a franchising model, where as a company that is willing to take on the financial commitment of expanding may do so through chain stores. Joint ventures or subsidiaries may be a compromise for companies wishing to maintain equity in their business while still drawing on external funding. Retail sales in developed markets are more concentrated in the non-food sector where as emerging countries such as China and India with their huge population are concentrated on the food sector. Malaysia has been experiencing an increasing growth in its non-food sector since 1999. Comparison of retail markets in Asia China India Malaysia Saudi Arabia Retail Ranked first in Expanding at 7.3% of Retail sales Industry Asia market a rate of 7% population is are Fragmented p.a. employed in proportion of industry and Retail sales the retail consumer low ROE as a market expenditure Retail sales as proportion of Retail sales in is high, a proportion of consumer proportion of hovering in consumer spending is consumer the 50% spending is high reaching expenditure is range high reaching 50% 29.2% Trend is 85% Growth in Retail sales by towards non- Food retail food retail is food was 27% food sector is high and 73% non- products and growing Forecasted food in 2003 growth rate growth is Number of is 16.5% p.a. 8.3% in 2008 food and non- food retailers are 10,839 and 35,121 respectively in 2003 Retail sales forecasted to reach RM67.4 billion in 2008 Drivers Emergence of Foreign Increasing High middle class investment income proportion of families Affluent Consumer young people Entry to WTO middle class confidence High level of Increasing disposable population income growth Construction Technology and property Foreign boom investment Foreign investment Evolution Wholesalers Shopkeepers Dominated by Supermarkets Traditional Supermarkets small Hypermarkets markets Hypermarkets traditional Food chains Supermarkets Departmental convenience & Landmark Hypermarkets stores neighborhood malls Shopping malls stores Shopping city Supermarkets, departmental stores Hypermarkets are entering the market at a fast pace Comparison of retail markets in Asia Japan Australia Malaysia South Korea Retail Retail sales as Retail sales 7.3% of Retail sales Industry a proportion of as a population is as a consumer proportion of employed in proportion of expenditure is consumer the retail consumer 46% expenditure is market expenditure Non-food retail 39% Retail sales in is 39% dominates the Retail trends proportion of Non-food total retail sales is growing in consumer retail is at at 70% the non-food expenditure is 61% of total retail sector 29.2% retail sales Retail sales by food was 27% and 73% non- food in 2003 Number of food and non- fod retailers are 10,839 and 35,121 respectively in 2003 Retail sales forecasted to reach RM67.4 billion in 2008 Drivers Demographic Demographic Increasing Demographic trends trends income trends Technology Low interest Consumer Technology rates confidence Low unemployme nt Retail spending Technology Evolution Traditional Traditional Dominated by Traditional retail markets retail markets small retail markets Convenience Non- traditional Non- stores traditional convenience traditional Vending retail markets and retail markets machines neighborhood Non-traditional stores retail markets Supermarkets, departmental stores Hypermarkets are entering the market at a fast pace y se vi o m n ste s In 1 9 9 1 , th e re w a s a n e w l se t u p F ra n ch i D i si n o f P ri e M i i r’ Department identified 6 types of business models – before the enactment of the Franchise Act – that have adopted franchising concept as part of their marketing and distribution system. The business models are summarized as below: Purest Form Similarity to Franchise System Least Similar Franchisor/ Business Product Dealership Trademark/ Promoter Master Format Distribution Franchise Brand Name Franchisee acts Franchisee Franchise/ Franchise/ Franchisee License as promoter to Franchisor v Local Licensing requires to Franchisee franchisor. (international Authorized Franchisee market licensed to Stocks are company) Franchise obtains so s fra n ch i r’ make solely supplied gives license Holders license to products and so s fra n ch i r’ to franchisor. to master Master produce and services in a products and Franchisor franchisee to franchisee distribute specific maybe involves in produce and acts as products geographical various. providing market its match-maker according to area. E.g. Walt resources: products. giving so s fra n ch i r’ E.g. EON, Disney capital, raw, E.g. Burger licenses formula and Petrol Kiosk cartoon material and King received methods. character management from E.g. Coca- E.g. PERNAS franchisor to cola EDAR (G-Mart appoint local stores) franchisees. E.g. s’ M cD o n a l s, Pizza Hut, 7- Eleven Source: Franchise System: A Strategy towards Creating Bumiputera Commercial and Industrial Community. July 1991, page 5-8. Prepared by se vi o m n ste s o a F ra n ch i D i si n , P ri e M i i r’ D e p a rtm e n t; In n o va ti n A sso ci te s Analysis. However, after the enactment of the Act, not all of the alluded business models se se n ve are recognized as fra n ch i s. “F ra n ch i ” h a s si ce b e e n g i n a sta tu to ry definition under the Act. According to the Innovation Associates Analysis, under Section 4 of the Act, it n se th m i d e fi e s “fra n ch i ” a s a co n tra ct o r a n a g re e m e n t, e i e r e xp re sse d o r i p le d , whether oral or written, between 2 or more persons of which3: 1. The franchisor grants to the franchisee the right to operate a business according to the franchise system and term determined by the franchisor; 2. The franchisor grants to the franchisee the right to use a mark, trade secret, confidential information or intellectual property owned by the franchisor, and 3 Franchise Act 1998 (Malaysia), Section 4 includes a situation where the franchisor (either a registered user or is licensed by another person to use any intellectual property) grants the right (that he possesses from another person) to the franchisee to use the intellectual property; 3. The franchisor possesses the right to administer continuous control during se se s n o n th e fra n ch i te rm o ve r th e fra n ch i e ’ b u si e ss o p e ra ti n s i a cco rd a n ce with the franchise system; 4. The franchisor has the responsibility to provide assistance to the franchisee to operate hi business including such assistance as the provision or supply of materials and services, training, marketing and business or technical assistance; 5. In return of the grant of rights, the franchisee may be required to pay a fee or other form of consideration; and 6. The franchisee operates the business separately from the franchisor, and the relationship of the franchisee with the franchisor shall not at anytime be regarded as a partnership of the franchisee with the franchisor shall not at anytime be regarded as a partnership, service contract or agency. The condition of franchising in Malaysia reached a certain level of significance with the enactment of the Franchise Act 1998. Then, the setting up of a franchise o t m n ste s ce a th d e ve l p m e n t u n i u n d e r th e P ri e M i i r’ o ffi ta ke s p l ce . W i th e n e w legislation came the Registrar of Franchise and the formation of industry level organizations such as the Malaysian Franchise Association. In fact, franchise activities and business opportunities in Malaysia have been highly encouraged by the Government of Malaysia. According to the Ninth Malaysian Plan, increased emphasis is given to the promotion of the franchise industry, as it presented viable opportunities for entrepreneurs to participate in structured and well-established business with relatively lower risks and a greater probability of success. The brand name, standard operational procedures, systematic training and support from the franchisors were among the critical factors that contributed to widespread franchised business especially in the food, cosmetics and consumer goods segments. While the franchise industry nurtured many new and existing businesses for homegrown products and services, there remained vast untapped opportunities. During the Ninth Malaysian Plan period, it was found that the number of franchisors increased from 90 in 2000 to 204 in 20054. In the Ninth Malaysian Plan, in order to enhance coordination in the management of franchise development as well as increase participation, the Government of Malaysia has assigned the Perbadanan Nasional Berhad (PNS) – M a l ysi ’ a as National Body – to give the mandate in June 2004 to be the sole agency implementing the Franchise Development Programme (FDP). Some of the activities implemented under the FDP include product development, franchise investment and financing schemes, education and training, promotion and marketing as well as research and development to develop homegrown franchise systems. 4 Ninth Malaysian Plan 2006 - 2010 Legal Malaysia Franchise Act 1998 The enforcement of the Malaysia Franchise Act 1998 is aimed at creating a systematic registration system to oversee a well-managed and healthy growth of the Franchise business in Malaysia. The existence of the Franchise Act has evoked different reactions from both local and foreigner supporters of the franchise industry for the implementation and enforcement of the Act. However, judging by the background of the industry in Malaysia, the existence and enforcement of the law is something that is highly essential based on the following: The Act, in its force is hoped that future franchisors, master franchisees or franchisees have guidance on basic matters that must be analyzed and addressed before getting involved into the business. The Act can prevent or deter attempts at fraud, deception and discrimination in the offer of franchise business sales and prevent the distribution of disclosure documents that contain confusing and inaccurate information or that exclude important information to the future franchisees. The Act encourages good business practices such as the responsibility to be cautious and fiduciary, besides protecting the system and the so g fra n ch i rs’ co p yri h t fro m b e ing duplicated. The Act will assist the Government of Malaysia to supervise and monitor the growth of the industry through the implementation of the Franchise Development Programme. Other related laws 1. Contract Act 1950 2. Trademark Act 1976 3. Copyright Act 1987 4. Patent Act 1983 5. Other regulations – Company Act 1965, Sales of Goods Act 1957, The National Land Code/Law 1965 and Crime Act 6. Common Law Franchise Agreement This document draws together the whole transaction and should accurately reflect the promises made, whilst ensuring that there are sufficient controls to protect the integrity of the system. It is an insurance policy for both parties if things go wrong. Features include: The establishment and identification of the franchisors proprietary interest. This deals with the franchisor's business system and know how, his trade marks, trading names and copyright material. The nature and extent of the rights granted to the franchisee. This deals the the operation of the franchise, the right to use copyright material, trade marks, etc. The period of agreement. This deals with the franchisees legal position in the tied supply of products for a period of time, normally five years. Most agreements allow for the franchisee to exercise their right to renew after this period of time. The initial and continuing obligations of the franchisees. This deals with the financial burden of setting-up in compliance with the franchisor's requirements, undertaking to comply with operating, accounting and administrative systems to ensure essential information is available to both parties. The operational controls imposed upon the franchisee. This ensures that operational standards are properly controlled - failure to maintain standards in one unit can harm the whole network. Sale of the business. If a franchisor is highly selective when considering applications for new franchises, there is every reason for him to be equally selective about those who want to join by buying a business from an established franchisee. Death of the franchisee. In order to give the franchisee peace of min, provision should be made to demonstrate that the franchisor will provide assistance to enable the business to be preserved as an asset to be realised. Arbitration. This deals with the appointing of a private arbitrator. This will prove advantageous to both parties when things go wrong. Termination and its consequences. Invariably, there will be express provision for the termination of the agreement in the event of a default by the franchisee. Franchise Associations 1. The Malaysian Franchise Association The Malaysia Franchise Association (MFA) was founded on 18 January 1994, by 44 founding members. Most are franchisors, master franchisees, franchisees and supporting institutions included the FDP organized by the m e o n o t m n ste s i p l m e n ta ti n a n d C o o rd i a ti n U n i o f th e P ri e M i i r’ D e p a rtm e n t at that time. The official launch of MFA took place simultaneously with the launch of the FDP and the International Franchise Conference and Exhibition, co- organized by the Coordination and Implementation Unit, MFA, and the International Franchise Association (IFA). MFA was then registered under the Association Act 1966 on 30 August 1994. The objectives for the formation of MFA are: n e n rn To unite the members’ i vi w o f p ro te cti g th e i i te re st To cultivate and protect the image of franchising and encourage ethical business practice T o su p p o rt th e g o ve rn m e n t’ e ffo rts i e n co u ra g i g th e s n n p s B u m i u te ra ’ direct and active involvement in franchising Meanwhile the main functions of MFA are: To set and enforce a code of professional business ethics amongst members To set as a registry of information pertaining to franchise business operating or intending to operate within the country To coordinate and offer training programs, seminars and exhibitions specially oriented to franchising matter To undertake promotional activities to promote franchising as a successful marketing business concept To provide input and liaise with government departments and/or agencies on matters concerning franchising and its application To serve a forum for exchange of experience and expertise amongst members To establish and maintain affiliations with counterpart organizations globally To develop and maintain affiliations with local industry trade organizations representing distributors, retailers and service industry generally To sponsor franchise trade and investment missions to other countries To host international franchise trade and investment missions ad assist foreign players of the industry in familiarizing with the potentials of franchise business in Malaysia MFA cooperates with Kota Francais Sdn Bhd and the Malaysian Resources Corporation Bhd to develop and promote the concept of se C i “F ra n ch i se C i i a b u si e ss d e v elopment centre ty”. F ra n ch i ty s n concept, including shopping centre, that groups most franchise businesses in one location and under one roof. The first Franchise City was opened in Shah Alam in mid 1999. As a self-regulatory body, MFA also acts as a mediator to resolve conflicts among members, besides offering a special programme for the franchise selection process to make the franchisor-franchisee marriage easier. MFA is also one of the founding member of the World Franchise Council (WFC), the highest franchise body that affiliate franchise associations in 33 countries in the world – South Africa, United States of America, Argentina, Australia, Austria, Holland, Belgium, Brazil, United Kingdom, Canada, Czechoslovakia, Denmark, Equador, Philippines, Finland, Greece, Hong Kong, Hungary, Italy, Japan, Germany, Malaysia, Mexico, New Zealand, France, Poland, Portugal, Spain, Singapore, Sweden, Switzerland, and Yugoslavia and a federation, that is the European Franchise Federation (EFF). Apart from the above, MFA has taken the lead to initiate the formulation of the Asia-Pacific Franchise Confederation (APFC), in which the pro-tem members are the franchise associations from Australia, Philippines, Hong Kong, Indonesia, Malaysia and New-Zealand. At its inaugural meeting on 24 September 1998 in Kuala Lumpur it was the consensus to appoint MFA as the first secretariat. 2. The World Franchise Council The World Franchise Council (WFC) was founded in 1994, a result of a si n o d e ci o n m a d e i th e N a ti n a l F ra n ch i a o se A sso ci ti n s’ E xe cu tives meeting held on 14 February 1994, simultaneously with the IFA Convention in Las Vegas, US. The WFC was established based on: To recognize and determine related matters with regard to the information, experiences and know-how of the franchise business for sharing internationally and to provide the necessary mechanism to realize the purpose. To act as a franchise information resource centre internationally and to represent the consensus of opinions of the affiliated franchise organizations to other international bodies including the United Nations and the International Chamber of Commerce. WFC membership is open to franchise associations from all over the d s a a o e y o ty ts w o rl . It’ l w s a n d re g u l ti n s cl a rl sta te th a t th e m a j ri o f i members are companies that run franchise businesses. Only one franchise association can be accepted as a WFC member from a country. (However the exception is Hong Kong) 3. The International Franchise Association The IFA was founded in 1960 in the US. The IFA now has about 700 members among franchisors (representing 70% of all franchisor companies in the US) and more than 29,000 franchisees and suppliers. a g A t th e l u n ch o f th e IF A 1 9 9 8 “M e m b e r-Get-A-M e m b e r” ca m p a i n o n 8 March 1998 in Las Vegas, then IFA Chairman, Jeffrey T. Williams, targeted 1,000 franchisor memberships for 2000. 3.0 Reasons to venture into Malaysia Support from the Government of Malaysia During the Ninth Malaysian Plan period, franchise development programmes will be further strengthened to provide for more effective franchisor-franchisee matching, product development and training. To enable more entrepreneurs to participate, increased emphasis will be given to identifying and promoting franchises that require a relatively lower capital base. PNS will devise new approaches to promote local franchise product development. Moreover, existing financing schemes will also be reviewed and procedures simplified to improve access to funding. In addition, co-operatives will be encouraged to leverage on their extensive networks and large membership base to develop franchises. An integrated database on franchising will be established to provide for better planning, monitoring and collaboration among domestic and foreign franchise entrepreneurs. The more successful homegrown franchisors will be encouraged to expand overseas and seize opportunities presented by regional and multilateral arrangements such as the ASEAN Free Trade Areas (AFTA) and Free Trade Agreements (FTAs)5. The Government of Malaysia has allocated RM600mil for Franchisepreneur Development Programme and Franchise Investment and Financing Scheme by PNS, said Entrepreneur and Cooperatives Development Minister Datuk Mohamed Khaled Nordin. PNS had restructured its organisation by establishing a Franchise Division and mobilised PNS Francais Sdn Bhd as a PNS investment company in franchise business field. According to Mohamed Khaled, the programme was aimed to open more opportunities and space to develop franchise entrepreneurs apart from providing for investment and financing facilities. n se “P N S i tro d u ce d th e n e w te rm `F ra n ch i p re n e u r’ to re p re se n t fra n ch isors, franchisees including franchisee areas, unit and multi-units. d fi n se o “A m o n g p ro g ra m m e s i e n ti e d i th e F ra n ch i P ro g ra m m e s a re E d u ca ti n a n d Training Programme, Local and Overseas Promotions, Franchise Right of Purchase, Product Development, Database, Franchisor Credential Programme se n vi d e a n d F ra n ch i e M a tch i g A cti ty,” sa i M o h a m e d K h a l d . 5 Ninth Malaysian Plan 2006 - 2010 Franchise business is promoted in Malaysia By Ronnie Lim, Managing Director of Deloitte KassimChan Tax Services Sdn Bhd Being a food haven, Malaysia offers many opportunities for franchising food products. Further, production of goods such as batik and rattan products may also be franchised. Franchising is a method of doing business by which a franchisee is granted the right to offer, sell or distribute goods or services under a marketing plan or system prescribed by a franchisor. This includes: A manufacturing franchise – manufacture and sale under licence of proprietary products; A product franchise – distributorship agreements; and Business format franchising – an arrangement allowing a person (the franchisee) to carry on a business under the trade name and using methods developed by another (the franchisor). The Franchise Agreement In a typical agreement, the franchisor provides the trademarks, know-how and training, grants various rights, and supplies a number of goods and services to the franchisee in return for payment. The franchise agreement may provide to the franchisee the right to operate a franchise for a period (often five or 10 years); initial services such as advice on site selection and lease negotiation, training, recruitment and assistance with management; shop fittings, tools and any equipment necessary for the business; ongoing services, such as marketing, advertising and updating of the franchise; and stock-in-trade. The types of franchise fees payable under franchising agreements vary depending on the structure of the franchise and the rights granted to the franchisee. so s ti F ra n ch i r’ T a x P o si o n In most instances, income from the exploitation of a business idea and the provision of services derived by a franchisor will be subject to corporate tax. To the extent that the initial payment is attributable to goods and services provided by the franchisor, it will undoubtedly be a trading receipt. However, a substantial element of the consideration will usually represent the cost of entry to the franchise system, including consideration for the grant of the franchise or license. se s ti F ra n ch i e ’ T a x P o si o n The initial large lump sum franchise fee is usually regarded as a capital payment and not deductible for tax purposes. Recurring franchise payments such as royalty and service support fee are tax deductible. Presently, there are specific orders issued by the Finance Ministry that provide for double deduction of expenses incurred on Malaysian brand-name goods. A manufacturing company that incurs cost of acquisition of proprietary rights is given a tax deduction of the cost of acquisition of the rights over a period of five years. 4.0 Brands Operating in Malaysia and Its Success Stories SINMA - Making Every Business Venture Grow... http://www.franchiseek.com/Malaysia/Sinma_Fashion_Jewellery_0905.htm SINMA has been adorning beautiful fashion jewellery on satisfied consumers for almost two decades. Still, SINMA a do not intend to stop there. With a time- proven business model, we have grown into a highly successful retail chain. However, SINMA believe that the opportunity for SINMA to grow is not something they should keep to themselves. It is also something they want to build and share with the rest of the world. SINMA have already set everything in motion for SINMA's global future. "Making every girl pretty" is the motivating factor behind everything they do at SINMA. Because they understand the desire of girls of all ages, including little girls, teenagers, working executives and mature women, they are able to provide products and services to fulfill their every whim. This is the same dedication SINMA will put behind our efforts into our business partners by making every business venture grow globally. SINMA's simple, smart formula for success evolved from years of going against all odds. Founder Mr. Lee Hwa Cheng has built the SINMA's business model from the ground up since 1986. Today, it is an enviable business that has survived three major recessions and become Malaysia's biggest fashion jewellery retail chain. Chicken Rice Shop in regional franchising plan http://www.franchiseek.com/Malaysia/Chicken_Rice_Shop_0905.htm The Chicken Rice Shop expects to start franchising its business regionally within the next two years. Indonesia will be the first destination for the restaurant group, followed by Australia, Singapore and other Asian countries. Indonesia was chosen due to its high population, adding that the company would be banking on its halal tagline to attract the Muslim market there. As for expansion within Malaysia, the company was planning to open eight more outlets throughout Peninsular Malaysia in the next six months. To date, there are a total of 24 outlets in the peninsula. The first Chicken Rice Shop was opened in June 2000 at USJ, Subang Jaya. On the investment for each of its restaurant it was between RM300,000 and RM500,000 per outlet, depending on the size. On sales, the company's 24 outlets registered an average sales of RM30mil per annum and this was expected to increase with the additional outlets. Malaysian Marrybrown Fried Chicken Goes International http://www.franchiseek.com/Malaysia/news0704_MaryLand_Chicken.htm The husband and wife team of Lawrence Liew and Nancy Chan are the new names to watch in the international fast food franchising fraternity. Their rapidly growing Marrybrown Fried Chicken system is the first Malaysian fast food company to go international via the franchising system. Liew is the executive chairman and chief executive officer while Chan is the managing director, and both of them holdsimilar capacities in Marrybrown International Fast Food. The latter is responsible for the setting up of Marrybrown Fried Chicken outlets outside Malaysia through appointed master franchisees in the respective countries. The Johor, Malaysia-based Company, founded in 1981, now has over 100 company-owned and franchised fast food restaurants in Malaysia, China, Singapore, Brunei, India and the United Arab Emirates (UAE). There are 95 company-owned and franchised outlets throughout the peninsula. Overseas, it has 16 franchises in China, seven in southern India, two in Brunei, three in the UAE and one in Singapore. The company had also been negotiating with several parties interested in becoming master franchisees in Afghanistan, Australia, Cambodia, Iran, Indonesia, Laos, Myanmar, Russia, South Africa, Thailand and Vietnam. The company has laid a five-year program starting from this year to open franchised outlets in these places. Sealing the contract for the master franchisee was not just a matter of getting money from the licensee but also included help finding the right location, recruiting frontline staff, logistics, lining up the menu and investigating the existing players in the market. Wwhenever they were on business trips overseas they would patronize as many fast food joints as they could, in order to see what other players were offering to their customers in terms of pricing and serving portions, and tailor their own offerings accordingly. Marinating ingredients for chicken and fish as well as sauces for all the outlets are manufactured in Malaysia to standardize the taste of Marrybrown fried chicken everywhere. However, the company is quite flexible when it comes to introducing other menu items popular with locals of the respective countries -thus an outlet in Dubai may have different offerings than one in China. The UAE outlets served chicken satay as the dish was similar to kebab. They also serve loose rice in Arab countries, rather than the sticky rice popular in Southeast Asia. The company's first Middle East outlet was set up in late January this year at Diera, Dubai, whiles the second and third are in Jebel Ali and Sahara Mall. The balance 100 outlets would be in other Middle Eastern countries, with the majority in Jeddah, Medina and Mecca in Saudi Arabia, as these are the largest markets. Over two million Muslims visiting Mecca and Medina for their haj and almost one million performing umrah outside the haj months, the company could not ignore the potential. The Middle East region would see about 120 Marrybrown restaurants within the next five years, of which 20 outlets would be in the Gulf countries of Abu Dhabi, Oman, Kuwait and Bahrain. Secret Recipe http://www.secretrecipe.com.my/secretrecipe/catalog/exchange/topc4314.html Secret Recipe, a lifestyle café chain has become a household name following its debut in Malaysia since 1997. Secret Recipe has successfully established its brand name in Malaysia, Singapore, Indonesia and Thailand by virtue of its fine quality cakes, fusion food and distinctive service. The company has registered an impressive double digit growth for the past 5 years. In a short period of seven years, Secret Recipe has experienced a rapid growth of over 100 cafes throughout the region. Secret Recipe continuously strive to surpass our own commitments and to be recognized as a leader in our industry. As a testimony of our commitment to excellence, Secret Recipe has earned numerous accolades; some of the more prominent ones are: ti M o st C o m p e ti ve C o m p a n y A w a rd 2 0 0 3 ” a a M a l ysi B o o k o f R e co rd 2 0 0 3 ” Superbrand of Malaysia 2003-4 ” l S M I B ra n d B u id e r o f T h e Y e a r A w a rd 2 0 0 4 ” l E xce le n t F o o d A w a rd 2 0 0 4 ” l P ro d u ct E xce le n ce A w a rd 2 0 0 5 ” Most Promising Franchisor of The Year Award 2005-6 ” a a a M a l ysi B e st H a l l R e sta u ra n t o f T h e Y e a r 2 0 0 5 ” In the year 2006, Secret Recipe plans to make its presence in India, China and West Asia.