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Getting Your Product Into China Via Distributorship. A Legal Piece Of Cake.

Posted in China Business, Legal News

I often get calls from companies that want to get their product into China or increase sales there. Many times, they are under the false impression that they have two choices: go it alone or form a joint venture with a Chinese company. Entering into a distributorship relationship with a Chinese company (or companies) is another option. From a strictly legal perspective, distribution relationships between foreign and Chinese companies are actually fairly straightforward and are far easier and generally less risky than joint venture deals and typically far less costly and time consuming than going it alone.  

From a business perspective, taking most products into China (be they industrial or consumer), marketing it, selling it, and then delivering it, is a massive task for any foreign company. I hate to trot out a cliche, but China is a big and diverse country and it should be viewed as many markets, not just one. Yet with China’s wealth rapidly increasing, it is the rare company that is not at least desirous of adding China to its list of markets. China is becoming a consumer/buyer nation. 

We have written a number of times about some of the issues foreign companies face in getting their products sold in China, including in the following posts:  

Distribution contracts with Chinese companies can have much in common with US and European distribution agreements, but they also have stark and interesting differences. The United States and Europe generally provide distributors with all sorts of legal protections. These countries often make it difficult or expensive to terminate a distributor and it is not at all unusual for distributors in these countries to sue or threaten to sue when a distribution relationship sours. Chinese law has no special protections for distributors. In particular, there is no legal requirement in China for payment of any special compensation to a distributor upon termination of the distribution agreement. For these reasons our China distribution agreements call for applying Chinese law. For these same reasons, we usually do not bother with provisions devoted to trying to work around distributor protections.

One big issue in China (of course) is IP protection and so it usually makes sense to put into the distributor agreement what we call a “no registration” provision to further protect our clients’ China trademarks. In this provision, the distributor agrees our client has exclusive ownership of all trademarks or other IP that might be at risk, that the distributor gains no rights to those trademarks, and that the distributor will not register any IP in any way related to our client’s IP. I use the words “further protect” because the first line of protection for your trademarks in China is to register them properly in China.

One other difference between a Chinese distribution agreement and that for the United States or Europe is that the signature line in a Chinese distribution contract should provide a place for the distributor to affix its company seal; unsealed distribution contracts are arguably not valid under Chinese law. 

Since China’s Anti-Monopoly Law prohibits retail price maintenance (requiring someone like a distributor sell the goods at a minimum resale price to third parties), distribution agreements generally must not mandate that the distributor sell its goods at a certain price to retailers or consumers. 

Anyway, do not forget the possibility of using a distribution relationship to get your product into China as they can be both relatively simple and effective.  

What are you seeing out there?

  • Anon.

    It had never occurred to me that I might be able to do a distributorship agreement with a Chinese company to get my company’s products sold in China. It never occurred to me because my China consultant (who I am going to terminate) told me that I would have to do this by using a joint venture and he would be charging me $35,000 to help set that up.

  • vicky

    Dan: Thanks for the clear explanation. I know this all seems very basic to you, but there is so much misinformation out there on things just like this that it is a relief to see it put in this form and to know that there are some simple things we can do to make sure we are both operating in China legally and protecting ourselves. It is for posts just such as this one that I am always referring your blog to my friends and co-workers. I know I am gushing here, but keep up the great work.

  • Joseph M.

    Well, it makes sense not to put all of your eggs in one big, Chinese basket. Especially in a foreign business market.