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

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

A major difference between successful distribution in China and other countries is that an exporter may need to consider working with multiple distributors to achieve his export sales targets. This implies a cautious initial approach that does not commit them too unconditionally or punitively to any single partner. Unfortunately, there are still a number of cases of painful terminations of distribution agreements.

Indeed, the size of the country and the regional differences suggest that China may not be a single market but an aggregate of regional sub-markets. Apart from the Chinese context and its cultural differences, which are sometimes difficult to grasp, regional habits or preferences sometimes play a role. A good example is food consumption habits. Consider setting up storage and distribution logistics adapted to a country or continent. Depending on the situation, it may make sense to choose one or more distributors who are well established in the target regions. Or, for example, to divide the responsibilities of resellers according to their privileged access to certain distribution channels.

There are also China-specific considerations that need to be taken into account when searching for and selecting distribution partners. For example

• The protection of intellectual property rights (trademarks, .com.cn and .cn domain names, etc.)
• Import approvals from the China customs
• Market entry approvals with the co-liability of a formally appointed distributor
• The product certification required to comply with Chinese standards
• And the possible breach of written conditions in the event of a 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:

• Their experience and knowledge of the local market
• Their ability to actively and continuously target their compatriots, potential customers
• Access to a selective or specialised panel of professional customers (B2B trade)
• The size of its distribution network and sales force (in the case of B2C trade)
• The ability to carry out promotional activities, advertising, marketing campaigns, trade fairs
• The implementation, monitoring and control of a coherent pricing policy
• The establishment and coordination of a network of resellers or retailers
• Manage a good after-sales service, returns or replacements of products
• Be able to produce regular reports on market trends and sales forecasts.

For products that require technical skills for installation, repair or regular maintenance, it is necessary to ensure that the distributor has the necessary resources. Check what internal or external resources they have access to. Or, if you prefer, the need to be directly involved in these critical reputation and sustainability issues.

3. Finding and selecting 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. However, finding a good distributor, i.e. 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, introductions by mutual acquaintances or professional networks, presentations by chambers of commerce that forward business enquiries.

The Covid-19 pandemic in 2020 and 2021 has had a significant impact on the ability to travel and attend international trade shows. However, we see that many US and European companies are still keen to find sources of growth in China and Asia.

4. How dependent are you on one or more distributors?

Who needs whom? An international manufacturer exporting to many countries may consider that a distributor in China is lucky to have access to its recognised brand. This is typically the case for consumer goods (B2C) with a certain level of awareness.

From another perspective, a distributor may feel that they are THE 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, such as:

• Technical equipment in the public sector: power plants, research or R&D centres in the hydroelectric, nuclear industries, etc.

• Industrial equipment in B2B professional sectors: test equipment for specific applications in the automotive sector, electronic cards integrating components covered by an international patent or containing specific proprietary software.
  
• Products whose sensitivity requires distribution networks that are closely monitored by the Chinese authorities. This is the case for food, medicines and their ingredients, pharmaceuticals, vaccines for humans or animals, etc.

• Products for which the possibility of exporting to China depends heavily on tenders or project bids. These tenders are sometimes restricted to companies that have been pre-qualified or approved to respond to sensitive civil or even military requests.
  
  
• Tenders in China are not necessarily open to international bidding. For example, tenders may be restricted to imported products that already have a local distributor in China. Considerations such as professional qualifications, responsibility for distribution in the market or ability to invoice locally in Chinese currency (CNY or RMB).

5. What is your distribution strategy for the Chinese market?

It is common for a potential distributor to ask for marketing exclusivity for your products. Is it a motivating argument to impose your monthly or annual sales targets on them? It is possible, but nothing is certain. Some resellers may only need to be able to quote your company name or product brand in order to achieve other objectives. For example, to gain the confidence of other targets by suggesting a capital of trust or professional specialisation that your image or reputation gives them. 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 wholesalers who want to be independent of their supplier, who is an authorised distributor of a brand. It is possible to consider working with a local distributor, but it will still be necessary to assess its current strengths and weaknesses. In particular, assess its ability to develop and communicate a clear distribution strategy.

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

6. The case of online sales and e-commerce in China

For consumer products, a presence on Chinese platforms has become essential. It is even necessary to organise and regularly monitor this presence. Overall, there are two possible distribution models: classic online sales (stock of products in China) and cross-border sales (stock of products coming from abroad or unpaid in a Chinese free trade zone)

Since 2012, the authorities have allowed the practice of cross-border online trading, also known as "cross-border" e-commerce. Authorised platforms guarantee buyers the origin and authenticity of imported products. The two most important to date are the Chinese platforms Tmall Global (subsidiary of Alibaba) and Kaola. Cross-border transactions are subject to specific regulations, both from a customs point of view (possible preferential tariffs and taxes) and from a logistics point of view (shipment from abroad or from a bonded warehouse in China).

The platforms are very demanding about the conditions of cooperation and even select their customers. They require high security deposits, but also regular participation in paid promotions and marketing campaigns. For a certain number of exporters, this option may seem like a blessing at first sight. Others, however, have found the platform's requirements to be unacceptable or less acceptable because of the model's significant impact on margins. Exporters (i.e. those not based in China) say that cross-border sales force them to adopt a distribution policy that is simply out of control. The most experienced observers also note that customer data is under the full control of these e-commerce sites. Chinese online sales platforms are not only intermediaries that facilitate commercial transactions, they are also resellers of customer data (data brokers).

Strategically, for a long-term vision, it is wise to organise and monitor the e-commerce presence in China through a trusted partner or a subsidiary in China. This is the choice made by the majority of international brands, particularly those selling products regulated by the health authorities (NMPA for cosmetics and beauty products, and CFDA for food).

More recently, other companies have opted to leave point-of-sale distribution (shops, corners) to distributors and instead wish to regain control or actively participate in online distribution in China. By controlling a local stock of products that are approved, cleared and under control according to Chinese standards.

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

7. Do you prefer to find 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. Historically, the ability to import or export to China was vested in state-owned enterprises called Corporations. They had exclusive import and export rights. Until the early 2000s, for example, only one Corporation per province was allowed to import oilseeds, grains, wines and spirits. The first private reseller networks to market foreign alcoholic beverages therefore had to enter into a consignment and import-on-account agreement with a corporation.

Gradually, and since China's accession to the WTO in December 2001, Chinese private enterprises or foreign-invested enterprises can have import-export rights for a category of products defined in their exploitation licence (business licence). ). This is another aspect that should be checked, along with the holding of any other relevant registrations, certificates or special permits that may still be in force.

To date, a Chinese company with import-export rights must also obtain an International Trade Operator Certificate in addition to its main business licence. Finally, a registration must be made with the local Chinese customs office. This registration is not valid at all points of entry into China. It is primarily done at the customs office of the place of incorporation. It can be extended to other Chinese ports with additional procedures.

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

So for a Chinese distributor, being an importer or not does not mean the same responsibilities. Nor the same skills. A Chinese agent who is doing well in his domestic market is not necessarily familiar with the formalities involved in importing into China.

This is why a distributor may prefer to use the services of an importer rather than becoming an importer himself:

• His company's licences do not allow it. He does not want to (or cannot) change them.
  
  
• The capital or guarantee requirements do not encourage him to apply for these import rights.
  
  
• The need to recruit qualified personnel in international trade does not seem relevant to him.
  
  
• The import of sensitive or regulated products imposes other requirements that the company does not meet. Staff to be trained by the Hygiene Bureau (China FDA), dedicated storage area, etc.
  
  
• The product categories for which it may already have import/export rights do not include those of your products.
  
  
• The company or its shareholders may be subject to administrative restrictions.
  
  
• The distributor has a further interest in separating the import and distribution functions vis-à-vis its foreign suppliers.
  
  
  

Whether a distributor uses the services of an importing intermediary is not necessarily in doubt, but should be investigated and verified. Either way, it does mean that the contractual arrangements you need to put in place as a European exporter become a little more complex. At the very least, the importer must be named as the consignee of the goods (deposit) on the transport documents. Exchange control in China requires that he is the only person legally authorised to pay the price of your goods. The purchase, entry and exit of foreign currency is not free in China.

Also consider these issues when discussing with your prospective agent whether your products will require maintenance, repair or any other form of after-sales service that involves possible re-shipment outside of China.

Finally, in addition to the legal aspects of drafting an appropriate distribution agreement, it is necessary to define the Incoterms (International Commercial Terms) in order to determine the obligations and liabilities of the parties. The Incoterms used in the US differ significantly from the ICC 2020 Incoterms used internationally, so make sure that the commercial terms you refer to are well understood by your Chinese counterparts.

8. Example of 15 questions to ask a Chinese distributor

For any distributor search project, asking a few basic questions will allow you to make an initial selection. It's an easy way to eliminate a significant number of operators that simply aren't right for you. Here are 15 examples of such questions:

1. How long have they been in business selling a particular product category?
2. How many years of experience do they have in the industry?
3. What is their turnover over a given period?
4. What other product families do they sell (link to 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 handle the import formalities themselves or do they use an intermediary importer?
9. What are their main products?
10. What type of staff are in their offices?
11. How are customer relations, maintenance, after-sales service and complaints handled?
12. In which market segments are they most established and advanced?
13. What is their shareholder structure - are they privately owned, Crown Corporations?
14. Do they have any holdings or interests in other distribution networks?
15. Have they been the subject of management irregularities sanctioned by the Chinese authorities?
    
    

9. The risks of not choosing your Chinese agent well

The ability of distributors or resellers to sue if they feel aggrieved or deceived is a serious matter that should be taken seriously. In addition to the uncertain outcome of a possible lengthy legal dispute, other consequences may also arise:

• Damage to the reputation of your brand (denunciation or organised complaint campaigns)
  
  
• The inability to close one or more e-commerce accounts opened on a Chinese digital platform
  
  
• Difficulties in transferring control of an online sales site (taobao, tmall, jd.com, etc.)
  
  
• The emergence or resurgence of parallel import or smuggling networks.
  

The hassle and cost of resuming distribution or changing Chinese agents can be daunting. Not only financially, but also in terms of your company's image and reputation.

In recent years, the Chinese authorities have become increasingly demanding on compliance issues. A recent example is China's traceability requirements for the production, storage, transport and distribution of imported products considered sensitive (particularly food, medical devices and cosmetics). These regulations also reflect the enforcement of China's social credit system, which also applies to companies. Therefore, the reputation and history of a distributor and its agents should be carefully checked during the selection process and before making a final decision. What companies are involved? who are the managers and shareholders? what is their professional and administrative reputation?

10. Evaluate the reliability of a distributor and check their creditworthiness

Your search in China is almost complete. You've identified one or more potential distributors, eliminated those that don't meet your criteria and shortlisted the most relevant ones for final selection. Are you ready to enter into a partnership? Ready to sign a distribution agreement for one or more years? Not quite yet.

Where possible, a financial solvency analysis is carried out to assess the financial health of a partner company in China. Still in 2025, only listed companies will be required to publish financial information, limiting access to financial statements for other private companies. The solvency (credit) report analyses the ability of companies to meet their financial obligations. It involves using financial ratios, balance sheets and credit ratings to assess the risks associated with transactions and partnerships.

In the absence of public financial data, additional indicators are useful to assess the reliability and conditions of cooperation with a Chinese distributor: verification of its licences, verification of its ownership structure, status of registered and paid-up capital, administrative and commercial reputation, detection of links with other companies or with influential people.

The last step before working with a distributor is to check its networks. You'll want to make sure that the distributor is able to meet your normal business requirements. For example, ensuring product traceability, storage and delivery in the best possible conditions. For the distribution of industrial equipment products, the partner must be able to provide a good after-sales service and technical support (installation, maintenance, upgrades). This aspect is often underestimated by foreign brands due to a lack of resources and control relays.

In cases where technical support is essential to long-term success and reputation, some foreign companies may wish to take on this function themselves. For example, by setting up a local representative office in China to provide technical support in China. Others choose to fly technicians or engineers to China on a regular basis. They train a distributor or end-user, install equipment, calibrate or upgrade a customer's equipment.

11. Our services for your China prospection