China Business, Legal News

Selling to China: Is Your Distributor Your Friend?

China lawyers for contracts

I am writing this on a plane back from Poland, where I spent a few days as a guest professor, lecturing at the University of Warsaw (and loving every minute of it).

My first day consisted of me speaking for 1.5 hours on How to Protect Your IP from China. I have given this talk many times, mostly because it is my favorite, by far. I like it not just because protecting your IP from China is so critical, but because in discussing how to do this I get to weave in a ton of great stories on what it’s like to do business in China.

For my second day I was initially tasked with talking about China contracts for foreigners for 1.5 hours and how China’s law/business differs from the West for another 1.5 hours. I initially thought the first speech would be too boring and I was initially scared to death of the second one. How can I come up with 1.5 hours on how China differs without just feeding the audience a boring list of things. I should note that having to come up with a new speech ranks in terms of pain points with having to confess that the Seattle Seahawks are not very good this year.

In preparing for my speeches, I decided to start with how China differs and to my surprise, once I got started I could not stop, to the point that I requested of my handlers that I just talk about contract law within this soon to be 3 hour speech and that is what I did. Turns out I could speak for three days on just this one topic and I now just need to come up with an hour long version and add it to my repertoire.

I started my speech (don’t worry, I am not going to discuss all 87 PowerPoint Slides and this post will get to its point very soon and yes there is one) with the following slide:

My following nine slides were various warnings about China, the second of which was the following:

China distribution contracts
I then used this slide as the initial jumping off point to explain and give examples of how Chinese companies so often view their business relationships differently than Western companies. I also talked about how Western companies need to be careful not to assume their expectations of that relationship line up with the expectation of their China partner. I used the following two slides (which are a direct quote from my friend and China negotiation expert, Andrew Hupert:

China distribution agreement

China distributor contract

I assume you are by now wondering when I am going to link all of the above to China distribution relationships, or at least you should be since the title of this post is “Selling to China: Is Your Distributor Your Friend? Well here goes.

It is because on my flight back from Poland I read a really good Forbes Magazine article, Selling To China: Is Your Distributor Your Friend? The article is by Frank Lavin, CEO of Export Now, a US-based company that helps “brands succeed in China’s digital space and it addresses the “disconnect” between Western companies and their Chinese distribution partners. That article spurred this post. Lavin starts the article with the following example of that disconnect:

A global sports equipment company recently became frustrated by its sales in China. The company was experiencing strong growth from the tennis rackets it manufactures, but its badminton sales were a disappointment. Why the contrasting fortunes? Because the brand’s Chinese distribution partner was refusing to stock the company’s badminton equipment.

“Don’t blame me,” protested the distributor. “Badminton isn’t popular in China.” The distributor thought that if he stocked the inventory, it wouldn’t sell to the pro shops across the country.

This is not how the relationships between manufacturers and distributors are supposed to work. In the traditional model, the distributor takes on the responsibility of marketing the products and growing the business. It’s the distributor who establishes partnerships with wholesalers and retailers, keeping them supplied with the latest lines, stocking their inventory, and in return can receive a margin upwards of 50%.

Lavin then notes how in the West a distributor’s relationship with its brand owner is more “win-win,” with both companies working together to build the brand. This though is not usually the case in China because Chinese companies tend to focus more on short term profits:

In China, however, these conditions rarely apply. The brand is often new to the market, doesn’t command high revenue (yet), and the distributor might be handling anywhere between 40 and 200 different brands. Why should they care about yours, particularly if other brands are growing faster?

You might find yourself in a frustrating chicken-and-egg relationship. The distributor does not want to promote your product if it is not a winner, but the only way to make it a winner is to broaden its distribution.

My absolute favorite PowerPoint slide is the following one and I put it in nearly all of the speeches I give and it was in both of my Warsaw speeches:

This slide sums up how Chinese companies typically view their deals and their contracts and how it is the job of the Western company and its China lawyers to structure the deals and draft the contracts to deal with this.

For distribution contracts, this means being clear about what your distributor is required to do and the penalties to which it will be subject if it doesn’t. In particular, it means being able to sell through additional channels if your Chinese distributor is not working zealously working enough for you. Or as Lavin puts it from the business perspective:

Is your distributor your friend? Sure. Sort of. But the best approach in China might be to cultivate the distributor relationship for your high-volume items, and rely on e-commerce for the the full product slate, new product launches and customer engagement activities. Distributors are more likely to support you when they see that you have an e-commerce strategy. The best way of cultivating a friendship with that distributor is cultivating a friendship with e-commerce as well.

For more on China distribution relationships and contracts check out the following:

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