Getting your Product into China with China Distributors

The China lawyers at my law firm are big fans in using China distributors to market and sell products in China. Our thinking on this goes as follows:

1. We have seen too many Western companies spend too much time and money trying to sell their products into China.

2. We have seen too many Western companies fail in selling their products into China.

3. China is a difficult country. Most of the marketing clichés about it are true. It is not one market. You can succeed in Shanghai and never succeed anywhere else. You can succeed in one province and never succeed anywhere else. China is big and China is diverse. And for many products, its distribution and retail or wholesale networks are a mess. Add in the cultural and language unfamiliarity that accompanies all of this for most Western companies and. . . . well you get the point.

4. From a legal perspective, China distribution agreements are relatively easy in the sense that we can draft a distribution agreement that works for China and for our own clients. As can be seen in the following posts, we have for years been extolling the ease of “doing” China distribution contracts and of setting up a sound legal foundation for a successful China distributorship:

But. . . .

Getting the right distributor and then establishing the right distribution relationship is not so easy.

I was reminded of that today when a food client of mine sent me an email with a link to The More Things Change in China – Hershey’s Chocolate Edition, which seeks to dissect what is going wrong for Hershey’s in China, as evidenced by its most recent earnings report showing sales are “suffering” in China:

Was this just another case of China’s souring economy dragging down another venerable American company? Or was there something else at play here – something more subtle. In search of an answer, I emailed a gentlemen whose judgment on foreign investments in China I trust, and who asked that – for the purposes of this blog – he be referred to as “Cocoa.” He took a look at Hershey’s attempt at an explanation, and used it to form his own. So, with Cocoa’s permission, I reprint Cocoa’s sound explanation for why Hershey’s is tanking in China.

“I think Hershey’s problems in China – and as judged by China – have nothing to do with Hershey’s chocolates taste which is acceptable, design and packaging which is okay, price which is reasonable and all in all an acceptable value (I pointedly dismiss all other products but the chocolates no matter in what form; peanut butter cups probably make the average Chinese gag). Rather, the company bought a pig in a poke, to wit Shanghai Golden Monkey which Hershey now understands has an “unstable distributor network” (call that distributors disloyal to the brand who can’t be won over to push sales without hefty rebates coming into their pockets) and so the “retail customer reach is not as broad as we (Hershey) believed it to be” (meaning the customer base is much, much smaller than was presented to Hershey) and so the consequence that sales in 2015 are US$90 million less than the US$200 million they expected – well, that’s 45% below projections which to anyone in industry is a sure-fire pink slip to all involved. In short, Hershey’s problems in China have nothing to do with chocolates but everything to do with newbies coming to China and being sold a bill of goods. Yep, it’s that simple.”

I have nothing to add to this except to say that, a) I agree, and b) it’s remarkable that after three decades, well-heeled, established companies continue to allow their enthusiasm to run past their common sense when seeking growth in China.

I have no idea why Hershey’s sales in China are hurting, but both I and the other China lawyers at my firm have most definitely seen our own clients have their China sales stymied due to their China distributor. But on the flip side, we have also seen our clients’ China sales soar due to their distributor in China.

So now that you understand the issue, how can you as a Western company choose the right China distributor and then make your arrangement with that distributor work? Two answers, neither of which I realize are going to be terribly satisfying. One, engage in extensive due diligence when choosing your China distributor. That does NOT mean automatically choosing Chinese Company A simply because Chinese Company A called you. That means first understanding your industry and your market in China and then choosing a reputable distributor best equipped to service your industry and your market. Two, think long and hard about what you want your distributor to do in China, about what you want your distribution relationship to look like in China, and about all the things you need to do to protect yourself in China.

And then have a contract drafted that advances all these things.