Many foreign companies are none the wiser about what they’re really agreeing to when making one party their exclusive nationwide distributor.
Though of course you have your exceptions, it’s usually a bad idea to work with only one distributor. Many distributors claim nationwide coverage, but this is often not the case. And even if they do offer nationwide coverage, it’s usually not nearly as effective as working with regional distributors.
Transferring all power to one party can also be a risky step and there are many examples of this going wrong. Using a network of distributors is not only more effective for sales, but also offsets risks.
China is too big to work with only one distributor
China is such a big country that it shouldn’t be looked at as one unified market, but rather as a combination of multiple (sometimes unique) markets. For one party to effectively cover all regions is difficult, and rare.
Instead, it’s common practise and advisable to appoint regional distributors that are well grounded and well connected in their home regions.
The majority of nationwide distributors simply do not perform as well outside of their home regions. Hence why working directly with regional distributors is often the best way to go. The alternative is to have your nationwide distributor manage his (and thus your) distribution partners throughout the country.
The question therefore is: do you want your distributor to select your distribution partners and control them? Or do you want to select your own distributors and manage them yourself?
Of course it is convenient to have a partner manage your distributor network. It’s often also a recipe for poor performance. Distributors usually sell multiple brands and do not have the time or the inclination to focus all their energy on selling your products.
Though you often see this work fine in the beginning, many times sales start to decrease rapidly as the years pass by. The reasons vary, but many times it’s because your distributor found a product that sells easier, better and/or offers a better margin. And if you put all your money on this one distributor, you run the risk of losing your business in China when the relationship sours.
Don’t put all your eggs in one basket
Besides negatively impacting your sales in China, appointing just one distributor can have more serious implications. Working with only one partner often times transfers too much power out of your hands. When you have a minimal presence in China, or not at all, this can be used against you.
I recently made contact with a medical device company who had come to China some years ago, but were still dealing with the hangover from a bad decision.
When the company entered the market they had chosen to appoint one exclusive distributor. They also trusted this distributor with registering their intellectual property and products with the Chinese authorities. Unfortunately after a few years their relationship soured. When it came to renewing their product registration they found out their distributor had not registered their products properly in the first place. Consequently, they had to completely renew the registration before they could start selling again, which took well over a year.
Control your IPR and brand
Working with just one distributor can leave your company more exposed to theft of intellectual property. It’s not very common, but a distributor who is contracted as your only partner in China can have a much easier time making your product redundant. For example, a distributor may copy your product and branding in their own independent, and cheaper imitation product.
This is not to say that in some circumstances, partnering with one exclusive distributor is not a good option. However, if this is the case ensure to protect yourself with good local contracts. Regardless of the number of distributors you do choose to use, contracts written up by a local law office should provide a safeguard against many common issues.
Distributors offer a good way to get your product into the Chinese market. However, don’t rush into relationships that you’ll later regret. Make sure you spend some time on finding and selecting (vetting) the right distribution partners before entering into an agreement.
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