The firm is just one of a number of major multinationals that have moved, or are about to exert greater independence in their China operations, taking advantage of the latest mainland market liberalization.

China freed up its distribution industry to foreign investment last month, in line with commitments it made on joining the World Trade Organization three years ago. Previously, only the biggest multinationals were allowed to take part, and even then only with local partners. The local-partner requirement has been dropped and the industry is now also open to smaller players.

Regulations have also broadened the scope of retail and wholesale activities that foreign investors can undertake, with previously off-limits sectors, including franchising, opening up.

Global express delivery firms are rubbing their hands at the thought of owning their own mainland distribution networks without having to have a domestic - usually state-owned - partner in tow.

But the benefits to foreigners of the recent changes aren't just about moving goods. Foreign companies are also looking forward to finally being able to establish their own relationships with Chinese customers without having to work through local intermediaries.

Foreign investors say most of the domestic companies that until last month had a virtual monopoly on delivery, logistics and after-sales services in China fell far short of international standards. International firms felt their own reputations were being tarnished in the process.

``In the mid-1990s, foreign-invested enterprises increasingly despaired over the inadequate state of transport infrastructure, which was made worse by monopolistic practices, a fragmented and chaotic distribution system and local protectionism,'' said Patrick Powers, director of China operations at the US-China Business Council in Beijing.

Contrary to industries like manufacturing, where increasing competition never ceases to squeeze profit margins, foreign firms are confident they can defeat their Chinese rivals on the distribution front. Multinationals, in particular, excel at logistics. The prospect of freer distribution has also emboldened a number of major foreign companies that had previously steered clear of China.

One is Britain's Tesco, the world's third largest retailer, which last year agreed to purchase for 140 million (HK$2.05 billion) a 50 percent stake in the Hymall chain of 25 hypermarkets owned by Taiwan food company Ting Hsin in the mainland.

One of the things Tesco brings to the marriage is ``world-class supply chain management,'' company spokesman Greg Sage said.

Japan's Honda has been making cars in China for nearly a decade, but only now has its Guangzhou Honda joint venture been able to set up franchises that offer customers parts supply in addition to vehicle sales and repairs and information - functions that were previously separate.

Honda says it will gain better control over its prices, service quality and marketing as a result. The company plans to nearly double annual production in China to 530,000 vehicles by next year.

The liberalization of ownership rules has also persuaded fast-food empire McDonald's, which now operates in China through a joint venture, to introduce franchising; by 2006, it expects to have eight or 10 mainland franchisees. ``Franchised stores will play a big role in the next five to eight years,'' vice-president of international franchising James Kramer said. Starting this year, the world's largest restaurant chain plans to add 100 outlets per year to the 600 it already owns in the mainland.

The elimination of many domestic intermediaries from the supply chain should allow foreign manufacturers to have more direct contact with customers and tailor products and services to their needs.

``From now on it will become possible for a company to actually use its own sales channels for the domestic market, to engage in various types of distribution-service businesses, including after-sales service, and to expand direct contact with customers,'' said Tatsuki Onda, a senior consultant with Nomura Research Institute's Asia business consulting department.

``So with respect to automobiles, machine tools and various precision devices, for example, it will become possible to quickly develop products suitable for China's market and to improve products according to the preferences of the Chinese people.''

Before the new regulations took effect, overseas firms had to jump many hurdles to participate in distribution-type services. These included severe geographical limitations, a ban on foreign control and restrictions on business scope. And only the larger multinationals could meet another of Beijing's entry criteria - annual sales of US$2 billion to US$2.5 billion.

Overseas companies often took creative approaches to get around the rules. The most popular way for importers to gain some control over their distribution was to operate a disguised customer service center in an area like Shanghai's Waigaoqiao Free Trade Zone.

Though they were legally consultancies, such operations were in fact used to service mainland clients.

Another, riskier approach was to bypass the central government altogether and set up shop with only the approval of local authorities.

France's Carrefour famously established a chain of supermarkets in this way, and was penalized as a result, after competitors like Wal-Mart cried foul.

Now, the only requirements for foreign retailers wanting to set up shop in China are a good reputation and a clean record.

Virtually all foreign investors in China believe they have plenty to offer the country in terms of know-how, but Onda of Nomura Research said they had to be prepared to learn as well as teach. ``Because there are a number of conditions unique to China, any attempts at market entry without fully understanding the situation will incur a large risk of failure,'' Onda said.

For example, China's distribution industry follows the unique practice of paying jin chang fei - participation fees - instead of straight commissions. ``Many people say this is complicated and totally incomprehensible,'' Onda said.

Such particularities mean it is probably neither practical, nor wise, for foreign investors to dispense with all of their mainland partnerships.

It was because of such concerns that Tesco opted for a part share in an existing business. ``We spent three years researching the retail market in China to ensure we found the right local partner,'' Sage said.

According to Tesco, its Taiwan-based partner, Ting Hsin, combines an intimate knowledge of mainland language and culture with familiarity with international retailing standards.

Onda said Hong Kong and Singapore companies could make the same claim. daniel.hilken@globalchina.com