With China getting more expensive and difficult for foreign companies, and with many foreign companies choosing to leave China rather than risk getting caught for operating there illegally, my law firm’s China lawyers have been seeing an uptick in companies looking to sell their products into China without having a company in China. Some of these companies are looking at joint ventures, which have their own peculiar complications. Most are looking at either selling their products into China from their home country or via distribution relationships. See Distributing Your Product in China: The Legal Basics. Still others are looking to go the reseller or the licensing route.
For reasons still unknown to us, we have lately been seeing an increase in foreign companies (mostly North American) looking to sell their products into China via sales agency relationships.
Sales agency is usually defined roughly as a “contractual arrangement under which an agent acquires the right to negotiate the sale of a principal’s goods or services, usually in exchange for a commission or fee computed as a percentage of sales generated.” This relationship may be — but need not be — an exclusive one. Under a sales agency relationship the sales proceeds go from the buyer of the product or services directly to the company that makes the product or provides the services. In other words, the money would need to leave China and go to the foreign company and the foreign company then, in turn, kicks back some of that money as a commission to its sales agent or the buyer segregates out a separate payment to the China seller. Even with all of China’s tightening of capital flows and the increased difficulties in getting money out of China, it is still rare for the sale of a product worth less than say $250,000 million to have any such issues.
Sales agency relationships are usually less complicated than distribution relationships because so much more of the expenses are assumed to rest with the principal and not pushed off on the sales agent. With the increase in companies seeking such relationships, we developed the following initial questions to get to the heart of the matter and to allow our lawyers to figure out the basics of where we need to go in drafting a China-centric sales agency contract for our clients. I list out these questions below as they should prove a good starting point to those who may be looking at getting their product (or even their services) into China via a sales agency deal.
1. Please provide the name, address, and all other contact information you have on the Chinese company that will be the seller of your product.
2. Who buys the product? Wholesalers? Retailers? End users? Online sellers (Taobao, Tmall, JD.com, Amazon)? All or some of the above?
3. What will be the terms of the sales agreement between the purchasers of the product and the seller? In particular, how will you deal with warranty and after sales service for the items sold? Will the sales agent be involved in this process?
4. How will the sales agent commission be calculated? When and how will the commission be paid? When the customer is identified? When the sale closes? Payment to the sales agent from the buyer as part of the sales price payment? Payment from you a certain number of days after the sale? Payment every month, aggregating all sales from that month? Every quarter? Payment to the sales agent’s bank account in China? Payment in RMB? Payment in some other currency to an off-shore bank account?
5. What is the territory of each sales agent? Will that territory be exclusive? Will sales agents be permitted to sell into other territories? Normally, “territory” is a geographic region, like Shandong Province or Shanghai. However, territory can also be based on the type of ultimate customer: retailers, wholesalers, online sellers, private citizens. Territory can also be based on the specific products the agent is authorized to represent. Conflicts on territory are common in China, so it is important that our contract be clear on this issue.
6. For each specific sales agent, what will be the term of their agency agreement? Note that many agents will insist that IF they meet a certain sales target, the term of their agreement will be automatically extended. In some agency agreements, the penalty for not meeting the sales target is not termination of the agreement, but rather the termination of exclusive rights.
7. How will you arrange for contact with the customers? Will the sales agent handle all communication with the customer or will the sales agent “turn over” the customer to your team at a certain point in the process?
8. How will you handle the cost of promoting the product? In particular, will you provide any support to the sales agent? That is, will you provide a annual marketing support payment? Will you provide written or online marketing materials? Will you provide training and support?
9. What rights will the sales agent have to use your company name, your brand name, and your logo?
10. How will you determine the specific products a sales agent is authorized to represent? Will it be your entire line of products, or will certain agents be restricted to certain products?
11. How will you determine the sales price of your products? Will the sales agents work from a catalogue provided by you, or will you have a specific price list for each agent for their specific products.
12. Will your company be making any direct sales to Chinese customers, or will you make your sales exclusively through your sales agents?
What are you seeing out there?