Export and sell in China? how to choose a distributor?

1. What kind of distributor to look for to sell in China?

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A major difference between successful distribution in China and other countries is that, to meet their export sales goals, an exporter may need to consider working with multiple distributors. This implies a cautious first approach that doesn't bind them unconditionally or penalizingly to one single partner. Unfortunately, there are still many cases of painful termination of distribution contracts.

Indeed, the country's large size and regional differences suggest that China may not be a unified market but an aggregate of regional submarkets. Apart from the Chinese context and its cultural differences, regional habits or preferences sometimes matter too. For example, food consumption habits can vary greatly. Consider setting up storage and distribution logistics adapted to a country-continent. Depending on the situation, it may be relevant to choose one or more distributors well-established in selected regions. Alternatively, split the responsibilities of resellers according to their privileged access to certain distribution channels.

There are also China-specific considerations to keep in mind when searching and choosing distribution partners. For example:

• The protection of intellectual property rights (brands, .com.cn and .cn domain names, etc.)
• The import authorizations that are filed by the China customs office
• The market-entry authorizations with the co-liability of a distributor formally appointed
• The product certification required to comply with Chinese standards
• And a possible non-compliance with the written terms in the event of breach of a distribution contract.

2. What added value should you look for in a Chinese distributor?

First of all, we can think of criteria such as:

• Their experience and knowledge of the local market
• Their ability to prospect potential clients actively and continuously
• Access to a selective or specialized panel if the clients are professionals (B2B commerce)
• The extent of their distribution network and sales force (if B2C commerce)
• Ability to conduct promotional actions, advertising, marketing campaigns, trade shows
• Implementation, monitoring, and control of a coherent pricing policy
• Setting up and coordinating a network of resellers or retailers
• Managing a good after-sales service, return, or replacement of products
• Know-how to carry out regular reporting on market trends and sales forecasts

For products that require technical skills for installation, repair, or maintenance, it is necessary to ensure the resources provided by the distributor. Check what internal or external resources they can access. Or, if preferred, get directly involved in these critical matters of reputation and sustainability.

3. Find and select trustworthy distributors

Many real, fake, or outdated databases list the names of Chinese companies that could be potential distributors. Apparently, nothing too difficult to go through. Still, finding a good distributor, that is to say, choosing a reliable and loyal partner, is much more difficult.

There are other classic ways to find a Chinese distributor. Meetings at business fairs in China or abroad, introductions by acquaintances or professional networks, presentations by Chambers of Commerce relay business requests.

The Covid-19 pandemic had a major impact on the possibility of traveling and attending international fairs. However, many US and European companies are still eager to find sources of growth in China and Asia.

 

4. What is your relationship of dependence on one or more distributors?

Who needs whom? An international manufacturer exporting to many countries may consider a distributor in China lucky to have access to their recognized brand. This is typically the case for consumer goods (B2C) with some notoriety.

From another perspective, a distributor may feel they are the right partner to give you the best possible access to the Chinese market. This is the case for certain niche markets in B2B distribution, for example:

• Technical equipment in Public Industries: power plants, research centers, or R&D centers in hydroelectric, nuclear industries, etc.
• Industrial equipment in B2B professional sectors: test equipment for specific applications for the automotive sector, electronic cards that integrate patented components or include proprietary software.
• Products whose sensitivity requires near-monopolistic distribution networks or strong scrutiny from Chinese administrations, such as food, drugs, pharmaceuticals, and vaccines.
• Products for which exporting to China depends greatly on calls for tenders or project bids, sometimes open only to pre-qualified or approved companies.

 

5. What distribution strategy for the Chinese market?

It is common for a potential distributor to ask for marketing exclusivity for your products. Does that make it a motivating argument to impose your sales targets on them? It is possible but uncertain. Some resellers may only need to cite your company name or product brand to accomplish other goals, such as gaining the trust of other targets by suggesting a professional specialization that your reputation gives them.

Some distributors with distribution references lack direct access to an international brand. They are local wholesalers who wish to be less dependent on their authorized distributor. Co-operation with a local reseller is possible, but it's necessary to assess their current strengths and weaknesses and their ability to develop a readable distribution strategy.

Depending on product lines or customer location, here are some classic models used for distributing international brands in China:

• One distributor per large region: South China, Center-East China, North China
• One national distributor responsible for a specific product range
• A distributor granted exclusive import rights in China, feeding an authorized distribution network
• An exclusive importer running a network of sub-distributors or retailers split by specialization or location
• A wholly foreign-owned subsidiary (WFOE) that imports products, controls stock, and manages a network of regional distributors
• A China representative office assisting an importer or distributor with technical support, training, or marketing
• A joint venture with a Chinese partner, mostly for regulatory considerations, like large international retail chains

 

6. The case of online sales and e-commerce in China

For consumer products, presence on Chinese platforms has become essential. Organizing this presence and regular checks are necessary. Two distribution models exist: classic online sales with stock in China and cross-border sales with stock from abroad or within a Chinese free trade zone.

Since 2014, the authorities have allowed cross-border e-commerce. Platforms like Tmall Global and Kaola assure buyers of the origin and authenticity of imported products. Specific regulations govern these transactions, from customs (possibly preferential duties and taxes) to logistics (shipments from abroad or a bonded warehouse in China).

These platforms are very demanding. They require large security deposits and regular participation in paid promotions. For some exporters, this option appears attractive but others find it less acceptable due to the significant impact on margins. Cross-border sales force some exporters to follow a distribution policy beyond their control. Customer data is also under the full control of these e-commerce platforms.

Strategically, it is prudent to organize and monitor e-commerce presence in China through a trusted partner company or a subsidiary. This is the choice made by many international brands, especially those selling products regulated by health authorities (cosmetics, foodstuffs).

Recently, some companies have chosen to leave physical store distribution to distributors, while taking control of or participating actively in online distribution in China. They manage a local stock of approved products, cleared and under control.

Consulting digital marketing companies specializing in these subjects will be invaluable for evaluating the technical aspects and budgeting for an online presence in China (websites, digital content, mini Wechat programs, SEO in Chinese, etc).

 

7. Favor the search for an importer or a distributor?

In China, the roles of importer and distributor do not have the same tenor as in the West. The Chinese market has long been restrictive and monopolistic. Historically, only state corporations, known as Corporations, were authorized to import and export to China. Until the early 2000s, only one Corporation per province was authorized to import products such as oilseed, grain, wine, and spirits. Early private resellers had to find an agreement with a Corporation.

Gradually, and since China's accession to the WTO in 2001, private Chinese companies or foreign-invested companies can have import-export rights defined in their Exploitation License (business license). Ensuring holding these rights along with the necessary registrations, certificates, or special permits remains essential.

Today, a company with import-export rights must also obtain an International Trade Operator Certificate separate from its main license and register with the responsible Chinese customs office. This registration is initially made at the customs office of the municipality of registration and can be extended to other ports with additional procedures.

The above illustrates the procedural Chinese administrative logic which favors approval over declaration, common in many western countries. Since 2014, the Chinese social credit system also applies to all companies registered in the territory.

For a Chinese distributor, being an importer implies different responsibilities and skills. A competent domestic agent may not be familiar with customs formalities. A distributor may prefer using an importer's services for various reasons:

• Their company licenses do not permit it or they do not wish to modify them
• The capital or guarantee requirements discourage them from seeking these import rights
• Recruiting qualified international trade personnel is not relevant to them
• The import of sensitive or regulated products imposes preconditions they do not meet (e.g., staff training by China FDA, dedicated storage area)
• Their current import-export rights categories do not include your products
• Administrative limitations may restrict them
• They have an interest in separating import and distribution functions for foreign suppliers

Whether a distributor uses an importer's services should be examined and verified. This implies that the contracting must be slightly more complex. At a minimum, the recipient of the goods on transport documents must be the importer. Chinese exchange control requires that only the importer is legally authorized to pay for the merchandise. Purchase, entry, and exit of foreign currency are not free in China.

Consider these aspects when discussing with your future representative if your products require maintenance, repair, or after-sales service involving possible reshipment outside China.

Beyond the legal aspects of drafting a suitable distribution contract, you must define the Incoterms precisely to determine the parties' obligations and responsibilities. Ensure that your Chinese interlocutors understand the international trade terms well, whether using UCC Incoterms in the USA or ICC Incoterms in Europe.

 

8. Example of 15 questions to ask a Chinese distributor

For each distribution partner search project, asking a few basic questions allows for an initial selection. It's a simple way to set aside many operators that aren't right for you. Here are 15 examples of such questions:

1. How long have they been in business selling a given product category?
2. How many years of experience do they have in this industry?
3. What is their turnover over a given period?
4. What other product families do they distribute (link with the sale of related products)?
5. What other international or Chinese brands do they represent? Are they complementary?
6. Which companies are under their direct control and where are their offices?
7. Do they have all the correct licenses or special permits required?
8. Do they do the import formalities themselves or use an intermediary importer?
9. What products represent their main market?
10. What category of staff is present in their offices?
11. How are customer relations, maintenance, after-sales service, complaints handled?
12. In which market segments are they the most established and advanced?
13. What is their shareholder structure? Are they private, or did they belong to crown corporations?
14. Do they have any holdings or interests in other distribution networks?
15. Were they subject to management irregularities sanctioned by the Chinese authorities?

Of course, some targets will tend to say, far from verifiable reality, what they think you want to hear or read. Cross-checking and verifying their assertions is necessary as part of a methodical and organized scrutiny.

 

9. The risks of not having chosen well your Chinese representative

The nuisance capacity of distributors or resellers who feel offended or cheated is a serious matter. Apart from the uncertain outcome of a possible long litigation, other consequences may arise:

• Damage to your brand’s reputation (denouncement or organized complaint campaigns)
• The impossibility of closing one or more eCommerce accounts opened on a Chinese platform
• Difficulties in transferring control of an online sales website (Taobao, Tmall, JD.com, etc.)
• The emergence or resurgence of parallel importation or smuggling networks

 

The pain and costs of resuming distribution or changing Chinese agents can be daunting. Financially costly and damaging to the image and reputation of your company.

Recently, Chinese authorities have been increasingly demanding on compliance matters. A recent example concerns the Chinese requirements for the traceability of production, storage, transport, and distribution of imported products regarded as sensitive (food and cosmetics). These provisions also echo the enforcement of the Chinese Social Credit system. Carefully verify the reputation and history of a distributor and their representatives during the selection process. Which companies are involved? Who are the managers and shareholders? What is their professional and administrative reputation?

 

10. Evaluate the potential of a distributor and check their reliability

Once you have identified potential distributors, are you ready to start a partnership and sign a distribution contract? Maybe not.

The last step before collaborating is to check their legal entity, reputation, and networks. Ensure the selected distributor can meet your basic requirements, such as ensuring product traceability, storage, and transport. For machinery tools, ensure they can provide good after-sales service and follow-up for installation, maintenance, and training. Often, these verifications are undervalued due to lack of resources.

If outstanding technical support