With the increasing size of the Chinese market coupled with rapidly expanding consumer spending, many companies have added the Chinese market to their list of strategic priorities. It often starts along the lines of “We should be selling into China”. But many companies tend to assume that their options are limited to setting up an operating company in China (WFOE), or entering a joint venture with a Chinese company. Unfortunately, both of these options often present significant challenges to a small to medium sized companies due to the required commitments of time, resources, and personnel, not to mention the significant upfront investment and associated risk.
Another increasingly common option however, is selling goods into China via Chinese distributors. The benefits quickly become apparent, enabling many companies to expand their sales in China, without requiring heavy upfront investment. Using this model, many Fortune 500 companies allow specialized Chinese distributors to leverage their existing distribution and marketing networks to sell their products. Yes, under this model, a cut of the final selling price will be allocated to the distributor, but this model is often a win-win for both parties involved, and the percentage allocated to a distributor can be extremely attractive when weighed relative to the cost of setting up and operating company in China to handle the full marketing, sales, and distribution process. As many companies have found out the hard way, this is an enormous undertaking, especially in a country such as China with vast language, cultural, and regional differences.
Many managers also point out that no one knows the different regional markets of China and how to reach them better than successful local Chinese distributors.
It is generally accepted from a legal perspective, that distributor relationships are much more straightforward (and less risky) than a joint venture, and far less time consuming and costly than opening an operating company in China.
It should be noted that it is still very important to find the right fit for your distributors to build a healthy and successful long-term business relationship. Although this is not always simple or easy, some firms do exist, like ours, with linguistic and cultural fluency in China, that can assist you to find, establish a relationship, vet, and manage your Chinese distribution channels.
Overall, there are many benefits that can be attained through leveraging Chinese distributors to sell your products into China. At Nexus Pacific, we have seen this model to be increasingly employed by foreign companies of all sizes and nationalities selling into China as part of a “China-lite” trend, where companies seek to limit downside risk from operations in China, while still achieving high sales volume and market penetration. Is this type of model right for your company?
If you have any questions or comments, please feel free to contact us!