By: Yael Farjun
For many international B2B companies, working with a local distributor is the most common entry point into the Chinese market. Often, the relationship begins when the distributor approaches the company at an international exhibition, other times the company actively searches for a distributor in China. The initial process can seem highly promising: the distributor invites you to China, arranges an impressive tour, introduces you to potential clients (who often don’t speak English), and pays for all your expenses—including meals, accommodations, and drinks. In exchange, he will present attractive sales projections, promise to sell your products to the Chinese conglomerates of your industry, and so on. At some point, they might even request exclusivity, promising to cover the entire Chinese market.
This approach can seem like an easy and profitable solution: you sell to the distributor, who pays promptly and takes full responsibility for sales in China. While this model has its advantages, it’s crucial to understand the potential limitations, and risks, and how to manage them effectively.
Setting Realistic Expectations
While this strategy may have worked seamlessly in other markets, the complexities of doing business in China require a different approach. As distributors bundle together various tasks, including handling customs, VAT, local taxes, and special licenses, you can focus on collecting payments. It sounds convenient—and for many, it is—but if you want sustainable success in China, this mindset won’t suffice in the long run.
Imagine you’re thrilled with your distributor’s initial performance: sales are strong, your shareholders are satisfied, and everything seems to be going according to plan. But at some point (usually within the 3rd or 4th year), sales start to plateau. When you inquire, your distributor might cite pricing issues, increased local competition, the need to adapt to the local technology landscape, or even changes in regulations, as possible issues. Though some reasons are indeed true, the point is, they will never admit that they simply reached their capacity. Instead, they might present new “solutions” like the need to invest in marketing efforts or setting up local manufacturing to step up the game.
Though we fully support the need for any company doing business in China to maintain a good online presence, we also know that this is not a magic fix. We had clients, who at this point asked to meet with the end users in order to survey the market and understand its needs. But the truth is, distributors won’t necessarily want to grant you access to their end users out of fear that you will eventually cut them out. If this scenario sounds familiar, read on.
The Role of Guanxi
You’ve probably heard of Guanxi—the Chinese concept of personal connections. it is important to understand that this concept remains a critical factor in B2B success in China, even in today’s digital age. Unlike other markets, Chinese business networks are more dependent on personal relationships than formal contractual agreements. Distributors in China often rely on their personal and demographic networks, such as family or university connections, to build business relationships. This approach can be advantageous, but it also comes with limitations.
China is vast and cannot be treated as a “one” market; A distributor from Sichuan in the west of China will never have as good Guanxi in the eastern parts as a distributor from Zhejiang province. Therefore, granting exclusivity to a distributor without taking their Guanxi into account is often a mistake.
Additionally, while your distributor may invest significant effort in building a strong relationship (Guanxi) with you, it’s important to remember that you’ll never fully integrate into their local Guanxi network.
Mitigating the Limitations
Relying too heavily on one distributor is risky, as it limits your potential growth. Instead, consider managing multiple distributors across different regions and industries within China. From our experience, clients who hire a local manager to oversee their distributors often achieve significantly better results in a shorter time.
Read more about EOR services: An Employer of Record in China.
Another often overlooked aspect is product-control, or taking ownership of your brand in China. Licensing your products, registering trademarks, and safeguarding intellectual property are critical steps. Failure to do so, or relying on a local distributor to do that on your behalf, can hinder your ability to grow and may lead to significant challenges if you need to switch distributors. For industries requiring special licenses (e.g., food and beverages, chemicals, cosmetics, medical devices), setting up your own entity in China – a Wholly Foreign-Owned Enterprise (WFOE) – is often the best course of action.
You can find all the information on this topic in our guide: Regulations Guide to WFOE Establishment, Registration & Liquidation
Building a Sustainable Growth Strategy
Working with distributors is a valid and effective way to start and grow your presence in China. However, to fully capitalize on the market’s potential, you’ll need to elevate your strategy. This might involve additional learning and external support to avoid common pitfalls and ensure alignment with your company’s global standards.
One solution is to work with a trading partner. Distributors who operate within your specific industry and sell many products, potentially of your competitors, too, might eventually pose a competitive threat. By working with a trading partner, you will be effectively separating the functions of sales and distribution. The trading partner is a neutral party who only focuses on facilitating the logistics and fulfillment parts, while your hired local salespeople can focus on sales, maintaining your company’s branding, standards, and client relationships. This approach provides greater control over pricing, branding, strategy, and sales, while reducing risks. By gradually building your operations—whether or not you establish a local entity at first—you can learn, adapt, and scale effectively. And the best part? You can continue working with your distributors while reducing limitations and optimizing your approach.
Learn How to Boost B2B Marketing & Sales in China – Insider Tips
🔑 Strategic Planning
- Never grant nationwide exclusivity without careful regional consideration
- Register your trademarks and protect IP rights before entering distribution agreements
- Consider your growth timeline – plan beyond the initial 2-3 years
🤝 Distribution Management
- Diversify your distributor network across regions and industries
- Maintain direct contact with key customers when possible
- Consider hiring a local manager to oversee distributor relationships
⚠️ Common Pitfalls to Avoid
- Relying solely on one distributor’s Guanxi network
- Allowing distributors to register your IP or product licenses
- Losing visibility of end-user feedback and market dynamics
- Neglecting to build your own local presence and relationships
💡 Smart Growth Solutions
- Consider a hybrid model using a trading partner for logistics
- Build your own sales team gradually while maintaining distributor relationships
- Maintain control over your product registration and compliance processes
🎯 Success Indicators
- Regular access to market feedback and end-user insights
- Clear visibility of pricing across different channels
- Steady growth beyond the initial 2–3 year period
- Ability to implement global standards and strategies locally
Read more about Logistics Fulfillment & Distribution Services in China
Want to Know More?
If you’re looking for practical solutions to navigate the complexities of sales and distribution in China, contact PTL Group today. Our experts are here to help you build a smart, sustainable strategy and grow your business in the Chinese market.
