Our China business lawyers often get calls from companies that want to get their product into China or increase their product sales there. These companies often believe they have but two choices: go it alone via a China WFOE 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 legal perspective, distribution (and reseller) relationships between foreign and Chinese companies are fairly straightforward and far easier and cheaper and generally less risky than going into China alone or via a China joint venture.
From a business perspective, taking most products into China (be they industrial or consumer), and then marketing, selling and delivering them (and providing warranty service, etc.) 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 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 the following:
- The Basics On China Retail — Creating Your Own Customers Is The Key.
- China Distribution Contracts: The Basics
- Exclusivity In China Distribution Agreements
Distribution contracts with Chinese companies tend to 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 and they often make it difficult or expensive to terminate a distributor. Distributors in these countries often sue or threaten to sue when their 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 and are drafted in Chinese for the benefit of the Chinese courts. 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 our China IP lawyers call a “no registration” provision to further protect our clients’ China trademarks. In this provision, the distributor agrees our client exclusively owns all trademarks or other IP related to the products being distributed in China, the distributor gains no rights to those trademarks or other IP, and the distributor will not register any IP related to our client’s IP. We use the words “further protect” because the first line of trademark and other IP protections in China is to register them properly in China. See China Trademarks — Do You Feel Lucky? Do You?
One other difference between a Chinese distribution agreement and that for the United States or Europe is that the signature line in Chinese distribution contracts should provide a place for the distributor to affix its company seal; unsealed distribution contracts are arguably not valid under Chinese law. See China Contracts That Work.
Since China’s Anti-Monopoly Law prohibits retail price maintenance (requiring someone like a distributor sell goods at a minimum resale price to third parties), distribution agreements generally must not mandate that the distributor sell at a certain price to retailers or consumers.
Do not forget the possibility of using a distribution relationship to get your product into China as this can be relatively simple and effective.
What are you seeing out there?