Our China lawyers often get calls from companies that want to get their product or service into China or increase sales there. These companies often believe that they have two choices: go it alone via a China WFOE or form a joint venture with a Chinese company. Most of the time, they believe that forming a China WFOE is their only option, oftentimes because they have been told this by an unscrupulous or ill-informed China entity formation company. You have other options, oftentimes better options. As you should realize by now (just by the fact that this is Part 12 on how to form a China WFOE) that forming a WFOE in China is expensive and time consuming and maintaining and closing down a China WFOE is not piece of cake either.
When is a WFOE absolutely necessary? If you will be employing anyone in China or want to get paid within China, forming a WFOE will almost always be the way to go. For almost everything else, you probably have other options. If all you want to do is sell your product or service to China, you have other options. This post discusses how entering into a distributorship relationship with a Chinese company (or companies) is another option. Future posts will discuss licensing arrangements and simply selling from your home country, be it the United States, England, Sweden, or wherever.
From a strictly legal perspective, distribution (and agency and reseller) relationships between foreign and Chinese companies are fairly straightforward. They certainly are easier and less risky than joint venture deals and they are almost always far less costly and time consuming than going it alone via a China WFOE.
From a business perspective, taking most products into China (both industrial and consumer products), marketing it, selling it, and then delivering it, is a massive task for most companies. China is a big and diverse country and it should be viewed as many markets, not just one. Using an experienced Chinese distributor or distributors is oftentimes the best way for foreign companies to sell their product in China.
Distribution contracts with Chinese companies have much in common with US distribution agreements, but they also almost always also have stark and important differences. The United States provides distributors with all sorts of legal protections. In the United States, it can be difficult or expensive to terminate a distributor and it is not at all unusual for distributors to pursue litigation when their distribution relationship terminates. Chinese law has no special protections for distributors. China has no requirement for payment of any special compensation to a distributor whose distributorship is terminated. Our China distribution agreements nearly always provide for applying Chinese law in a Chinese court and they typically do not bother with provisions that try to work around distributor protections.
One huge issue with nearly all of our China distributor agreements is IP protection. We usually put into our distributor agreements what we call a “no registration” provision to further protect our clients’ China trademarks. In this provision, the distributor agrees that 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. We use the words “further protect” because the first line of protection for your trademarks in China is to register them properly in China. It also bears mentioning that if you do not use your trademark in China for three years you are at risk of having it cancelled. Your distributor agreement needs to protect against your China distributor in 3.1 years claiming that it used your China trademark in China, but you never did.
One other difference between a Chinese distribution agreement and that for the United States or for Europe is that the signature line in a Chinese distribution contract should provide a place for the distributor to affix its company seal as unsealed distribution contracts are arguably not valid under Chinese law.
Since China’s Anti-Monopoly Law prohibits retail price maintenance — which includes requiring a distributor sell the goods at a minimum resale price to third parties — China distribution agreements should not require the distributor sell your goods at a certain price.
Bottom Line: Do not forget the option of using a distribution relationship to get your product into China as doing so can be both relatively simple and effective.