C.i. Process China consulting

Export and sell in China? how to choose a distributor?

By C.i. Process Shanghai
 
[ Sell in China ]
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sell and distribute your products in China

Exporting to China from the USA or from Europe might look like a simple step to get first a market and consumer feedback, feel the expectations and the market potential. However, distributing your products with local partners in China will likely be different from what you are used to in other markets.

This article aims to provide some observations and key points to consider so to find and manage an importer or a distributor network in China.

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sell and export to China
 
  Publication updated on 23 November 2021      

1. What kind of distributor to look for to sell in China?


A major difference between successful distribution in China and other countries is that, in order to meet their export sales goals, an exporter may need to consider working with multiple distributors. This implies a cautious first approach which does not bind him in a too unconditional or penalizing way to one single partner. Unfortunately, there are still quite a number of cases of painful termination of distribution contracts.


Indeed, the country's large size and regional differences suggest that China may not be a unified market, but an aggregate of regional submarkets. Apart from the Chinese context and its cultural differences which are sometimes difficult to grasp, regional habits or preferences sometimes matter too. A good example is that of food consumption habits. Consider setting up a storage and distribution logistics adapted to a country-continent. Depending on the situation, it may be relevant to choose one or more distributors well established in selected regions. Or to split the responsibilities of resellers according to their privileged access to certain distribution channels for example.

There are also China-specific considerations to keep in mind when searching and choosing distribution partners. Let's quote for example:

  • The protection of intellectual property rights (brands, .com.cn and .cn domain names, etc.)
  • The import authorizations that are filed by the Chinese customs office
  • The market-entry authorizations with the co-liability of a distributor formally appointed
  • The product certification requirements for Chinese standards
  • And a possible non-compliance with the written terms in the event of breach of a distribution contract.


2. What added value should you look for in a Chinese distributor?

First of all, we can think of criteria such as:

  • his experience and knowledge of the local market
  • his ability to prospect his compatriots, potential clients, in an active and continuous manner
  • access to a selective or specialized panel, if professional clients (B2B commerce)
  • the extent of its distribution network and sales force (if B2C commerce)
  • ability to conduct promotional actions, advertising, marketing campaigns, trade shows
  • implementation, monitoring and control of a coherent pricing policy
  • set-up and coordinate a network of resellers or retailers
  • manage a good after-sales service, return or replacement of products
  • know how to carry out regular reporting on market trends and sales forecasts.

For products that require technical skills for installation, repair or regular maintenance, it is necessary to ensure the resources provided by the distributor. Check what internal or external resources he can access. Or, the need - if so your preference - to get directly involved in these critical matters of reputation and sustainability.


3. Find and select trustworthy distributors

There are many real, fake or outdated databases that list the names of Chinese companies that could be a potential distributor(s) in China. Apparently, nothing too difficult to go through. Still, finding a good distributor, that is to say choosing a reliable and loyal partner, is much more difficult.


There are other classic ways to find a Chinese distributor. Meetings at business fairs in China or abroad, intruduction by common acquaintances or professional networks, presentation by Chambers of Commerce who relay business requests.


The Covid-19 situation in 2020 and 2021 had a major impact on the possibilities of traveling and attending international fairs. However, we testify that many US and European companies are still eager to find sources of growth in China and Asia.

 

4. What is your relationship of dependence on one or more distributors?

Who needs whom? An international manufacturer who exports to many countries may consider a distributor in China is lucky enough to have access to his recognized brand. This is typically the case for consumer goods (B2C) with a certain notoriety.

From another perspective, a distributor may as well feel he is THE right partner to give you the best possible access to the Chinese market. Access to consumers or users who are as valuable as they are sometimes inaccessible. This is the case for certain niche markets in B2B distribution and for example the case for:

  • Technical equipment in Public Industries: power plants, research centers or R&D centers in hydroelectric, nuclear industries, etc.
  • Industrial equipment in B2B professional sectors: test equipment for specific applications for the automotive sector, electronic cards that integrate components carrying an international patent or include dedicated proprietary software.
  • Products which sensitivity requires distribution networks that are almost monopolistic or under strong scrutiny from the Chinese administrations. This is the case for food, drugs and their components, pharmaceuticals, vaccines for humans or animals, etc.
  • Products for which the possibility of exporting to China depends greatly on calls for tenders or projects bids. These calls for tenders are sometimes addressed solely to the attention of companies pre-qualified or approved to respond to sensitive civil or even military requests.

  • Tenders in China are not necessarily open internationally. Thus, we have the case of requests where only imported products that already have a local distributor in China will be eligible. Considerations of professional qualification, responsibility for placing on the market, or ability to invoice locally in Chinese currency (CNY or RMB).

 

5. What distribution strategy for the Chinese market?

It is common for a potential distributor to ask for marketing exclusivity for your products. Does that make it a motivating argument to impose your monthly or annual sales targets on him? It is possible but nothing is less certain. Some resellers may only need to be able to cite your company name or product brand in order to accomplish other goals. For example, acquire the confidence of other targets by suggesting a trust capital or professional specialization that your image or reputation gives him. In other, more rare cases, it is a matter of arousing the interest of targets to be redeemed in the short term.

We also observe that some distributors with distribution references do not have direct access to an international brand. They are local wholesale resellers who wish to free themselves from dependence on their supplier who is the authorized distributor of a brand. It is possible to envisage cooperation with a local reseller, but it will still be necessary to assess its current strengths and weaknesses. Above all, measure how it has the capacity to develop and share a readable distribution strategy.

Depending on the breadth of product lines or the location of potential customers, here are some classic models used for the distribution in China of international brands:

  • 1 distributor per "large region" South China, Center-East China and North China

  • 1 national distributor in China by product family

  • 1 distributor who has exclusive import rights in China and who feeds its own distribution network. This network consists of its own companies and subsidiaries on the Chinese territory.

  • 1 exclusive importer partner who runs a network of sub-distributors distributed according to specialization or location criteria

  • A wholly foreign owned subsidiary (WFOE) that imports products, controls stock and manages a network of regional distributors. Many international brands initially chose to entrust the Chinese distribution of their products to Hong Kong or Chinese distributors in order to test the sales potential or the maturity of the market. Then, secondly to set up a direct sales office capable of taking over or supplementing the distributor's offer

  • A China Representative Office of the foreign brand which, without purpose to directly generate sales in China, assists an importer or distributor for technical support, training or marketing

  • A subsidiary in the form of a joint venture with a Chinese partner. This is, first of all for regulatory consideration, for example the situation that meet large international retail chains and hypermarkets

 

6. The case of online sales and eCommerce in China

For consumer products, presence on Chinese platforms has become essential. The organization of this presence and regular checks will even be necessary. Overall, there are 2 possible distribution models: classic online sales (stocks of products in China) and cross-border sales (stocks of products coming from abroad or unpaid in a Chinese free zone)

Since 2012, the authorities have allowed the practice of cross-border online commerce, also called "cross-border" e-commerce. Authorized platforms guarantee the origin and authenticity of imported products to buyers. The two most important to date are the Chinese platforms Tmall Global (subsidiary of Alibaba) and Kaola. Specific regulations govern cross-border transactions, both from a customs point of view (possibly preferential duties and taxes) and from a logistics point of view (shipments from abroad or shipment from a bonded warehouse in China).

The platforms are very demanding on the conditions of collaboration and even choose their customers. They require large security deposits, but also regular participation in paid promotions and marketing campaigns. For a certain number of exporters, this option may at first sight be perceived as a boon. Others testify from experience that the platform requirements are not or more acceptable because the model greatly affects the margins. Exporters (therefore not established in China) testify that cross-border sales force them to undergo a distribution policy that is simply out of control. The most seasoned observers also note that customer data is under the full control of these e-commerce sites. Chinese online sales platforms are not only intermediaries facilitating commercial transactions, they are also resellers of customer data (data brokers).

Strategically, for a long-term vision, it is prudent to organize and monitor the e-commerce presence in China from a partner company that you trust or from a subsidiary in China. This is the choice made by a majority of international brands which notably sell products regulated by the hygiene authorities (cosmetics and beauty products, foodstuffs)

More recently, other companies have chosen to leave distribution in points of sale (shops, corners) to distributors and instead wish to take back control or take an active part in online distribution in China. By locally controlling a stock of products approved according to Chinese standards, cleared and under control.

The opinion of digital marketing companies specializing in these subjects will be invaluable to you in evaluating the technical aspects and the costs to budget for the online presence in China (websites and other digital content, mini Wechat programs, SEO in Chinese, etc).

 

7. Favor the search for an importer or a distributor?

In China, the role of importer and distributor does not have the same tenor as in the West. The Chinese market has long been restrictive and even monopolistic. The ability to import or export to China was historically vested in state corporations called Corporations. They held exclusive Import Export Rights. Until the early 2000s, for example, only one Corporation per province was authorized to import oilseed, grain, wine and spirits products. The first private networks of resellers who engaged in the marketing of foreign alcoholic beverages therefore had to find a consignment and import-on-account agreement with a corporation.

Gradually, and since China's accession to the WTO in December 2001, Chinese private companies or foreign invested companies can have import-export rights for a category of products defined in their Exploitation License (business license). ). This is also an aspect that should be checked, along with the holding of other related registrations, certificates or special permits still in force.

To this day, a company in China that has import export rights must also obtain an International Trade Operator Certificate separate from its main license. Finally, a registration must be made, also separate, with the responsible Chinese customs office. This registration is not valid at all points of entry into China. It is first made at the customs office of the municipality of registration. It can be extended to other Chinese ports, subject to additional procedures.

The above illustrates what continues to this day of a Chinese administrative logic that remains procedural. It reveals that it is a logic of approval that prevails over a logic of declaration, more common to what we know in most western countries. Finally, since 2014, the Chinese social credit (and its system of rewards and punishments) also applies to all Chinese and foreign companies registered in the territory.

For a Chinese distributor, being an importer or not therefore does not imply the same responsibilities. Not the same skills either. A competent Chinese agent who performs well in his domestic market is not necessarily familiar with the customs formalities that involve the release of products for consumption.

Why a distributor might prefer to use the services of an importer than to be an importer himself:

  • The licenses of his company do not allow it. He does not wish (or cannot) modify them

  • The capital or guarantee requirements do not encourage him to ask for these import rights

  • The need to recruit qualified personnel in international trade does not seem relevant to him

  • The importation of many sensitive or regulated products imposes other preconditions that it does not meet. Staff to be trained by the Office of Hygiene (FDA), dedicated storage area, etc.

  • The product categories for which it may already have import-export rights itself do not include those of your products

  • The company or its shareholders may be subject to administrative limitations

  • The distributor has another interest in separating the import and distribution functions vis-à-vis its foreign suppliers


Whether a distributor uses the services of an importing intermediary company is not necessarily in doubt, but it should be examined and verified. Either way, this implies that the contractualization that must be provided for you, as a European exporter, becomes slightly more complex. At a minimum, the recipient of the goods (deposit) to be mentioned on the transport documents must be the importer. The exchange control in China requires that it is the only one legally authorized to pay the price of your merchandise. The purchase, entry and exit of foreign currency is not free in China.

Also think about these aspects when discussing with your future representative if your products require maintenance, repair or other form of after-sales service that involves a possible re-shipment outside of China.

Beyond the legal aspects of drafting a suitable distribution contract, it will finally be necessary to define the Incoterms precisely in order to determine the obligations and responsibilities of the parties. The UCC incoterms used in the USA being notably different from the ICC 2020 incoterms used in Europe, make sure the international trade terms you refer to are well understood by your Chinese interlocutors.

 

8. Example of 15 questions to ask a Chinese distributor

For each distribution partner search project, asking a few basic questions allows you to make an initial selection. It's a simple way to set aside a significant number of operators that just aren't right for you. Here are 15 examples of such questions:

  1. How long have they been in business selling a given product category?
  2. How many years of experience do they have in this industry?
  3. What is their turnover over a given period?
  4. What other product families do they distribute (link with the sale of related products)?
  5. What other international or Chinese brands do they represent? Are they complementary?
  6. Which companies are under their direct control and where are their offices?
  7. Do they have all the correct licenses or special permits required?
  8. Do they do the import formalities themselves or do they use an intermediary importer?
  9. What products represent their main market?
  10. What category of staff is present in their offices?
  11. How are customer relations, maintenance, after-sales service, complaints handled?
  12. In which market segments are they the most established and advanced?
  13. What is their shareholder structure? so private, did they belong to crown corporations?
  14. Do they have any holdings or interests in other distribution networks?
  15. Were they subject to management irregularities sanctioned by the Chinese authorities?

Of course, some targets will tend to say, far from verifiable reality, what they think you want to hear or read. Crossing and verifying their assertions will be necessary as part of a methodical and organized scrutiny.

9. The risks of not having chosen well your Chinese representative

The nuisance capacity of distributors or resellers who feel offended or cheated is a serious matter to pay attention to. Apart from the uncertain outcome of a possible long litigation at the Courts, other consequences may jointly arise:

  • Damage to the reputation of your brand (denouncement or organized complaint campaigns)

  • The impossibility to close one or more eCommerce accounts opened on a Chinese digital platform

  • Difficulties in transferring control of an online sales website (taobao, tmall, jd.com, etc.)

  • The emergence or resurgence of parallel importation or smuggling networks.

 

The pain and costs of resuming distribution or changing Chinese agents can be daunting. Financially costy but also costy for the image and reputation of your company.

In recent years, the Chinese authorities have been increasingly demanding on compliance matters. A 2021 example concerns the Chinese requirements for the traceability of production, storage, transport and distribution of imported products regarded as sensitive (in particular food and cosmetics). These provisions also echo the enforcement of the Chinese Social Credit system that also applies to businesses. By extension, the reputation and history of a distributor and their representatives should be carefully verified during the selection process and before your final choice. Which companies are involved? who are the managers and shareholders? what is their professional and administrative reputation?

 

10. Evaluate the potential of a distributor and check his reliability

Now you have identified one or more potential distributors, are you ready to start a partnership? Ready to sign a distribution contract for one or more years? Maybe not.

The last step before going in a collaboration with a distributor is to perform checkings on its actual legal entity, reputation and networks. You want to make sure a selected distributor may meet your basic requirements. For example, that he is able to ensure product traceability, storage and transport in the best conditions. For machinery tools products, he must have the capacity to ensure a good after-sales service and follow-up for installation, maintenance, training. Quite often, the verification of these aspects is undervalued by foreigners, due to a lack of resources.

In case the key point before purchasing is an outstanding technical support is essential for a long term set-up, foreign enterprises wish to handle this function by themselves. By directly setting up a technical support subsidiary in China for example. Others choose to regularly fly technicians or engineers to China. They train a distributor about the installation of a machine, programming or calibration at a customer's premises. The Covid-19 context and associated travel restrictions in force since early 2020 have indeed made these trips difficult or impossible.

 

11. Our services for your China prospection

  • Identify, select and pre-qualify future agents, distributors or importers

  • Assistance in negotiation, drafting agreements or mediation service in the event of disputes

  • Organization of your prospecting and accompanied meeting

  • Audit and assessment of existing distribution networks in China

    • Network of regional or provincial distributors
    • Network of local resellers or retailers.


 
 
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