There are several ways to start distributing your products in China. The most common method is to directly work with Chinese distributors to handle all your sales. Though there are some downsides to this approach. You can also develop your own local presence in the form of a Wholly Foreign Owned Enterprise (WFOE) or get involved in a Joint Venture (JV). Recently an alternative entry method has become more popular and particularly with SMEs: incubator or (distribution) support platforms that guide you into the market.
5 + 1 Modes To Choose From
Before assessing which entry mode fits your strategy and goals best, I would advise you to first learn more about the regulations regarding foreign direct investment in your industry. Some industries are prohibited to foreign investors, although these are few.
Each industry within China is classified either as encouraged, permitted, restricted or prohibited. This, in turn, affects the options that are available to you. Learn more about the classification and rules and regulations of your industry by reading China’s Foreign Investment Guidance Catalogue.
Now let’s take a look at some of the most common entry modes and discuss their respective advantages and disadvantages.
|Distributor or Agent||Cost-efficient and relatively easy to setup.||Little control over brand; often disappointing results unless support is provided by parent company. Risk of IP infringement.|
|Representative Office||Low-cost, easy way to establish a presence in China.||High running costs and cannot engage in profit-making activities. Difficult to disband and therefore not suitable if you want to expand operations. Not a viable method for product distribution.|
|Joint Venture||Able to benefit from Chinese counterpart’s network and facilities; no steep learning curve; shared risks.||Less control; more receptive to IP infringements; high risk of failure due to culture, business and/or expectations mismatch.|
|Wholly Foreign Owned Company||100% control over operations; no third parties involved. Less risk of IPR infringements.||A long incubation period; difficult to disband; high initial costs; a steep learning curve.|
|Incubator / Support Platform||100% control over operations, low startup costs, access to local partner network, decreases risks and enables you to avoid common pitfalls.||Generally not suitable for very large MNCS, added value depends on incubators’ industry expertise and experience, quality varies.|
It is also interesting to consider new developments in China regarding economic and financial reforms. Designated areas such as the Shanghai Free Trade Zone (FTZ) are trial zones for new legislature which may be applied to the whole country if successful. The FTZ’s goal is to make it easier for foreign companies to establish a presence in China and for domestic companies to do business abroad. However, it might take several more years before foreign companies are able to fully enjoy the perks of FTZ’s.
Incubator platforms: an attractive alternative option
In recent years alternative, more cost-efficient methods to enter the market have opened up new opportunities for SME’s. Incubator platforms, or support platforms, provide a variety of services intended to help foreign companies get started in China. From receiving financial and legal advice to engaging in sales under the host company’s business license, these firms’ entrance into the Chinese market is facilitated and risk is minimized.
Many of the drawbacks of the previous approaches are avoided: commitment is not as rigid as in a JV, fewer resources are required to test the waters, and your intellectual property rights are safer. However, it is essential to choose an incubator platform that specializes in your industry and which can provide you with industry-specific advice, a reliable partner-network and the resources you need. For instance, here at Launch Factory 88 we only specialize in assisting industrial B2B firms sell and manufacture in China.
Which ever industry you are in, choose your platform wisely and make sure to perform due diligence before entering into a contract. And don’t forget: the most important question you should ask any incubator or support platform is “What first-hand experiences do you have in distributing and selling in China?”
Latest posts by Duco van Breemen (see all)
- INFOGRAPHIC: Chinese water pollution - 9th December 2015
- Exhibiting at a Chinese trade fair: 3 things to keep in mind - 16th September 2015
- Food and business scandals in China give rise to foreign brands - 26th June 2015