China distributor relationships can be a muddy (or a clear) path to China success.
Don’t let your China distributor relationships muddy your path to China success.

We are big fans of Western companies using China distributors to market and sell our client’s products in China. Our thinking on this goes as follows:

1. We have seen far too many Western companies spend way too much time and way too much money trying to sell their products into China.

2. We have seen far too many Western companies fail in selling their products into China.

3. China is a difficult country. Most of the marketing clichés about it are true. It is not one market. For instance, you can succeed in Shanghai and never succeed anywhere else. You can succeed in one province and never succeed anywhere else. China is big and China is diverse. And for many products, its distribution and retail or wholesale networks are a mess. Add in the cultural and language unfamiliarity that accompanies all of this for most Western companies and. . ., well you get the point.

4. From a legal prospective, China distribution agreements are relatively easy in the sense that we can draft a distribution agreement that works for China and for our own clients. As can be seen in the following posts, we have for years we have been extolling the ease of “doing” China distribution contracts and of setting up a sound legal foundation for a successful China distributorship:

China Distributor Agreements: A Relatively Easy Way To Sell Your Products Into China

Selling Your Product To China Through A Distributor. Just The Basics.

Selling Your Product In China Through A China Distributor. Easy-Peasy.

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

But….

Getting the right distributor and then establishing the right distribution relationship is not so easy. Not so easy at all.

I was reminded of that today when a food client of mine sent me an email with a link to a Shanghai Scrap post, entitled, The More Things Change in China – Hershey’s Chocolate Edition. The post seeks to dissect what is going wrong for Hershey’s in China, as evidenced by its most recent earnings report showing that sales are “suffering” in China:

Was this just another case of China’s souring economy dragging down another venerable American company? Or was there something else at play here – something more subtle. In search of an answer, I emailed a gentlemen whose judgment on foreign investments in China I trust, and who asked that – for the purposes of this blog – he be referred to as “Cocoa.” He took a look at Hershey’s attempt at an explanation, and used it to form his own. So, with Cocoa’s permission, I reprint Cocoa’s sound explanation for why Hershey’s is tanking in China.

“I think Hershey’s problems in China – and as judged by China – have nothing to do with Hershey’s chocolates taste which is acceptable, design and packaging which is okay, price which is reasonable and all in all an acceptable value (I pointedly dismiss all other products but the chocolates no matter in what form; peanut butter cups probably make the average Chinese gag). Rather, the company bought a pig in a poke, to wit Shanghai Golden Monkey which Hershey now understands has an “unstable distributor network” (call that distributors disloyal to the brand who can’t be won over to push sales without hefty rebates coming into their pockets) and so the “retail customer reach is not as broad as we (Hershey) believed it to be” (meaning the customer base is much, much smaller than was presented to Hershey) and so the consequence that sales in 2015 are US$90 million less than the US$200 million they expected – well, that’s 45% below projections which to anyone in industry is a sure-fire pink slip to all involved. In short, Hershey’s problems in China have nothing to do with chocolates but everything to do with newbies coming to China and being sold a bill of goods. Yep, it’s that simple.”

I have nothing to add to this except to say that, a) I agree, and b) it’s remarkable that after three decades, well-heeled, established companies continue to allow their enthusiasm to run past their common sense when seeking growth in China.

Let me say that I have no idea as to why Hershey’s sales in China are hurting, but both I and the other China lawyers at my firm have most definitely seen our own clients have their China sales stymied due to their distributor. Of course, on the flip side, we have also seen our clients’ China sales soar due to their distributor in China.

So now that you understand the issue, how can you as a Western company choose the right China distributor and then make your arrangement with that distributor work. Two answers, neither of which I realize are going to be terribly satisfying. One, engage in extensive due diligence when choosing your China distributor. That does NOT mean automatically choosing Chinese Company A simply because Chinese Company A called you. That means first understanding your industry and your market in China and then choosing a reputable distributor best equipped to service your industry and your market. Two, think long and hard about what you want your distributor to do in China and about what you want your distribution relationship to look like in China and about all of the things you need to do to protect yourself in China. And then have a contract drafted that advances all of these things.

Not so hard/hard.

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.

  • Josh

    You should do a post on China’s Silk Road, something such as “China’s New Silk Road And Why I Don’t Care” and list the reasons such as the States doesn’t do any business with Russia (sanctions) or Central Asia (dictatorships) and isn’t a member of the Asian Infrastructure Bank, and why it is unlikely any US businesses will get any of that work or business opportunities. No-one has given that angle but you could if you did a bit of research into it. Its an article I’d like to read. Just as a thought for you. It’d get quite a response I am sure as an opposite view to all the media hype. Cheers!