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China Distributor Relationships: Why Don’t They Get No Respect?

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Yesterday’s post China Distributor Agreements: A Relatively Easy Way To Sell Your Products Into China, was on how companies can sell their products into China via a China-based distributor. On Linkedin, in response to that post, Shanghai businessperson, Bill Cosgrove wrote the following:

Dan,

You make a compelling case for distributors. Why do you think the distribution route isn’t getting respect? Fear of loss of control? Just early in the process of this channel?

I responded to that with this:

Bill, Great question! Such a great question, in fact, that I am going to answer it on our blog (www.chinalwblog.com), where I can give it the treatment it deserves, rather than here. Watch for it on Thursday (or maybe Friday).

My friend, and China supply chain expert, Michael Zakkour, then wrote the following:

Dan, there are a LOT of downsides to distribution and distribution only deals in China. Marketing, brand positioning, being locked into bad deals. I have a number of clients who were nearly ruined in China because of distribution only deals and we are restructuring their presence.

First off, let me be perfectly clear here. I am not saying, nor would I ever say that a distribution arrangement works for every situation. I would not even go so far as to say that it works for most situations. All I am saying is that we have seen it work many times when undertaken in the right situation and too many companies fail even to consider it. On the flip side, as Michael would no doubt attest, too many American companies go into distribution relationships without sufficiently considering them and without erecting sufficient protections.

Michael’s answer does go a long way in explaining why China distribution deals are not more common, but there is more to it than what Michael is saying. Michael is absolutely right in saying that there are a lot of downsides to China distribution deals and he only lists a few of them. I am not going to underplay the risks of a China distribution arrangement. Not at all. What I will say instead though is that there will always be risks with any business avenue taken on China and that for many companies, a distribution model is the least risky of all.

For what sort of companies does a China distribution arrangement make sense? Most clearly, the company that either cannot afford or is unwilling to pay what it would take to go into China on its own. The risks Micheal lays out above will all be there for these companies, but a good distributor coupled with a good distribution contract can go a long way towards reducing (not eliminating) those risks. And it is not as though those same risks would not also be present were the American company to go into China alone. Yes, your China distributor can ruin you by bad marketing and bad brand positioning, but I also have seen American companies ruin themselves with those same things. As for Michael’s concern about getting locked into bad distribution deals, I personally have seen countless American companies for whom that has been true, but if I might brag just a bit here, none of them have been clients of my firm.

Without a doubt, the worst deals that my firm’s China lawyers see are exclusive distribution deals with a Chinese distributor that fails to contain a termination provision that allows the American company to end the relationship if the Chinese side is not making sufficient sales or in any way tarnishing the American company’s brand or reputation.

I actually think the most interesting question is a subset of Bill’s question as to why distribution deals get so little respect from American companies going into China and my theories on that follow.

First, I think that too often American companies’ eyes exceed the size of their stomach. In other words, they too often believe that they are capable of selling their products themselves within China when in fact they are not. If you are not capable of selling your products yourself in China, you should be considering other alternatives, of which a distribution deal is just one.

Second, I think that many American companies do not realize that there are good distributors in China. There are bad ones too and it largely depends on the industry. By way of examples, we have worked with many companies in the pharmaceutical, software, and publishing industries that have achieved great results with Chinese distributors, including in many instances where these companies would almost certainly have failed in China without their distributors.

When it comes to business and when it comes to China, there is rarely a one size fits all solution. Using China distributors as a way to sell your product into China should not be ignored.

What are your thoughts?

The post China Distributor Relationships: Why Don’t They Get No Respect? appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.


Source: http://www.chinalawblog.com/2015/02/china-distributor-relationships-why-dont-they-get-no-respect.html


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