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The Easiest Way Doesn't Work
The easiest way to sell in China would be to find a reliable and capable distributor who just buys products and immediately pays revenues.
This easy way faces many challenges, which may lead to companies losing the opportunity to grow their sales in China and end up completely losing market share. In Mainland, the market is separated in many small units rather than a huge integrated market place. The attribute of “Guanxi” in Chinese society also hinders a distributor’s access to all channels. A distributor with roots in Southern China would have very limited or even no presence in Northern China (e-commerce would be an exception). And so, to cover as many regions as possible and diversify channels, the investor should choose several distributors rather than an exclusive one who just covers a limited region or channel. However, once the foreign company starts negotiation with several distributors, the main handicap faced is aligning interest among distributors. Who doesn't want to be exclusive? Sharing the cake might get distributors to look for short-term benefits rather than long-term growth.
A Tale on Regulations
There might be much complexity due to licensing and certificate limitations. Before selling in China, many foreign companies need to apply for a license that permits the import of the products. The application process is time and money consuming. For example, a CFDA medical device license would take one or two years to obtain, and the company has to choose a distributor to apply on their behalf. However, once the license has been done, the company pretty much has to rely on this distributor in this product field. Normally, the distributor has the right to terminate the license because they are the applicants of the license. In brief, the distributor will always have the upper hand negotiating prices, for the most part.
Not long ago, the convenience on location drove a medical device manufacturer to use a distributor in Beijing to help on a CFDA products license application. However, after the license application had been completed, the distributor didn't give the original certificate to the manufacturer and required all sales in China to be handled by them. The manufacturer had spent enormous efforts and money obtaining the CFDA products license, but the distributor held the original and has the right to terminate it legally.
No Greedy Distributor? The WFOE vs. the Fulfillment Agent
Most people may think they don’t have much choice. They either hope that they can find a reliable or less greedy distributor who is willing to assist them and never become an obstacle for their further business development in China, or else set up their own entity in China to be independent and become able to make market efforts and co-ordinate all distributors, resulting in setting up a WFOE (Wholly Owned Foreign Enterprise). However, this option is not economical and requires too much commitment and liabilities for a foreign company to take on when just starting operations.
A third option does exist, a fulfillment agent acting on their behalf. The fulfillment agent doesn't need to be an expert in the industry to sell products, but it can fulfill and offer profound experience on license application, as well as trading, logistics and financial services. The fulfillment agent can assist foreign companies to file the product license, work on market activities and co-ordinate sales work with varied distributors. If necessary, the fulfillment agent is also able to import goods, hold stock in China, and sell products and invoice locally in RMB. This assistance can provide foreign companies flexibility on business development with full control.
A recent case study is on cosmetics’ CFDA permit application. After the permit was obtained, the agent informed the company that they could only help on license application but not import. However, the regulation on cosmetic import says that the importer has to be the same company as the applicant. The cosmetic company had to face huge CFDA permit change costs and label redesigning costs, which could have been avoided if they have used the right fulfillment agent. For these strictly regulated products, without the registered agent’s cooperation, the change of agent on the license would be impossible.
The Smart Choice
To find an eligible and reliable fulfillment agent would be a solution for foreign companies to build flexibility in managing their multiple distributors and sales channels in Mainland. A well prepared assessment and a well-defined agreement with the fulfillment agent would ensure the company will benefit from this alternative in the long-term.
In summary, the advantages of a fulfillment agent are:
- Fulfillment Agents are willing to co-operate with other distributors, because they don’t have their own sales channel and they don’t have “ambitions” to grab other distributors’ customers and squeeze other distributors’ market share
- Fulfillment Agents are in a neutral position (unlike a distributor) and this solution limits distributors’ conflicts of interest
- Agreements with fulfillment agents can include any and every service the agent should provide and on a clear fee standard