The Changing Nature of Distribution in China

Monday, July 3, 2006 6:01

For many multinationals looking to sell their products, one of the most difficult tasks is creating successful distribution strategies and channels. Realizing and understanding that China is not a single market but in fact is many markets is the first and most important step in this process and the second step is finding the right distributor for each market

Historically, many multinationals employed mixed strategies that included the use of distributors and direct sales teams, whereby the power and usefulness of the direct sales teams would grow as market knowledge improved. Distributors were used as the primary entry channel, but gradually were fazed out of larger markets as direct sales channels were established.

Historically, the roles and responsibilities of the distributor were:
1) Assist the manufacturer enter the Chinese market or expand into new markets
2) Identify and develop opportunities for new product development
3) Provide cash and inventory management
4) Provide a clear legal separation between the manufacturing entity and end users

Benefits of distributors:
1) Market knowledge and connections to end users, industry leaders, and government officials
2) Ability to create and manage small accounts en mass
3) Willingness to hold large inventory stocks
4) Distributors would provide certain cash flows to manufacturer

Problems with distributors include:
1) Scale of operations and geographic reach were limited often within particular cities or provinces
2) Product portfolios that contain competitive products
3) Lack of product knowledge and potential applications for the development of future products
4) IP protection was not a primary concern

Recent Situation:
While the benefits of distributors are many, the role of the distributor is changing and will continue to change

1) Successful multinationals are moving away from distributors in primary market by establishing their in-house direct sales teams
2) Increasing demands of end user for higher service quality
3) Creation of national distributors thorough M&A< 4) Government regulations on distribution

Potentially the most significant catalyst of the changing role of distributors is the internationalization of China and the ease of access many multinational executives believe there is to entering China and establishing operations. Unlike 10 – 15 years ago, many foreign executives (for right or wrong) now feel personally comfortable flying to China and conducting sales calls. As many of their customers from home markets are now in China.  Thus the need to cold call or develop new relationships can be postponed as initial trips focus on building local relationships with existing customers.

For companies who have been successfully operating through distributors and are now stable enough from which to expand in China, opening a small sales office (with tech support) where large accounts can occur is often the next step. As this continues, the role of the distributor, and thus their power, will decline as the responsibility of managing larger accounts is taken from distributors and moved to internal sales and support teams.

Depending on the level of sophistication and value-added services provided, distributor roles in second tier cities may remain unaffected for some time.  for many manufacturers, there is yet to be any critical mass in these cities.

Another significant catalyst for change will be the consolidation of regional distributors to create China-wide distribution networks. Only recently occurring, and still only on a regional basis, these new entities will be in the best position to attract and manage the business of new market entrants from abroad.

Depending on the industry, centralized buying will help to speed up the entire process as domestic and international buyers begin to demand better service and product range from distributors.

Finally as recently seen in the medical equipment industry, government intervention will also change the nature and profitability of the distribution process. With distributors often in the middle of the majority of corrupt practices, the central government has begun to take necessary steps to protect consumers. Recently, this has lead to the government implementing a new margin regime in the distribution of healthcare products. Through these regulations, the government could drastically alter (see previous post on implications of new regulations) the way medical consumables are distributed in China.

Future role of distributors:
In the future, the role of distributors in China will continue to be an important one, especially for new entrants by:

1) Offer a window to the market through which new entrants can learn about and build a distribution network in China
2) Reducing initial inventory and carrying costs for new entrants
3) Risk Mitigation of product failure as well as lessoning the risks associated with doing business

For new entrants to the China market, distributors will continue to play an invaluable role.  Distributors can offer immediate access to markets that could take years to access otherwise, they mitigate the risks of business and provide secured cash flow. 

For experienced groups, the role of distributors will be relocated to markets outside of Shanghai, Beijing, and Guangzhou to areas that have yet to develop markets large enough to support in-house teams. 

The fact is that managed properly, distributors provide valuable services that companies should not be afraid to take advantage of.  The key is to manage the relationship properly to ensure that best practices are being kept, that your product is a good fit into their existing portfolios, and that they are receiving the support they need to push your product down the chain.

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4 Responses to “The Changing Nature of Distribution in China”

  1. All Roads Lead To China » Employing distribution or direct operations does not abrogate your need to understand local markets says:

    August 1st, 2006 at 9:53 am

    […] Having managed foreign service and distribution operations in Asia and Europe, Rich’s status report in The Changing Nature of Distribution in China rings true. My concern is that too many readers will not grasp its operational meaning that, at root core, distribution is an exchange of footprint for control, and that whether the choice is direct or distribution, the principal must have a working knowledge – all the way back to its headquarters and development center – of the local market and its supply and distribution chain. […]

  2. All Roads Lead To China » Forbes Review of Logistics Players in China says:

    October 3rd, 2006 at 2:00 am

    […] There are companies like APL and Maersk that will continue to focus on outbound traffic consolidation and companies that will focus only on inbound freight forwarding. however for DHL, UPS, FedEx, and TNT, the game is much more complicated. Creating a China-wide network (owned and outsourced) that will service global contracts and capture new ones is the brass ring that they are all reaching for. For more information, I encourage readers to view our reports on the logistics industry (Long Haul Logistics,Changing Nature of Distribution, and Logistics Overview ) and our map detailing China’s Domestic Transportation Network In addition, 3pl Wire and Asia Logistics Wrap are great blogs, and the China Supply Chain Management Council also offers very good information online Full disclosure: I was a former member of Emery Worldwide and UPS and I continue to work with providers in China and advise manufacturers in this area. […]

  3. All Roads Lead To China » Networking in China: How Relationships are Changing says:

    October 14th, 2006 at 11:56 am

    […] Relationships with Distributors: Relationships with distributors for companies entering China are critically important to the long term success of future operations, and some of these changes we highlighted in the post The Changing Nature of Distribution in China. […]

  4. All Roads Lead To China » Networking in China: Part III Building a Network says:

    January 28th, 2007 at 8:13 pm

    […] As highlighted in the Changing Nature of Distribution in China, the role of distributors is a very important one, and the relationships must be managed very carefully as the power of distributors in many markets is still very strong. […]