So you’ve decided it’s time your company expanded into China. Inexperienced, unfamiliar with the market and concerned about high upfront costs, you are, however, not ready to take the plunge fully into uncharted waters. Working with a local distributor is often touted as an ideal first step, one that promises a soft landing. But is it? The apparent ease and efficiency of partnering with a distributor to kick-start your expansion in China may belie perils and pitfalls – if you are not careful.

In a nutshell, a distributor is a middleman between a producer and another entity in the supply chain, be it a wholesaler, retailer or the end consumer. As a reseller of products, a distributor buys directly from the producer and sells the products to those further down the chain. The main advantage of this entry model is that you can ride on the coattails of a distributor’s already established network of sales channels without a substantial initial outlay on infrastructure and logistics. Furthermore, since a distributor’s scope of operation can be very wide – encompassing customs clearance, storage, shipping, sales and marketing – those opting for a more comprehensive service may be inclined towards this method.

Distributors can be found, for example, at trade shows and exhibitions, through referrals or third-party specialist agencies, via introductions by chambers of commerce and on e-commerce platforms. While it may be tempting to choose the first prospective distributor that comes along, rogue distributors have the potential to break your business in China, so proceed with caution and circumspection.

Do conduct sound due diligence

Before engaging in any kind of business with a distributor, you should vet them thoroughly via a meticulous due diligence process. In order to ensure that they are legitimate, you should check that they have been properly registered with the Administration for Industry and Commerce. Central to this verification are the registered name of the company, its unique identification number and the name of the legal representative. A credit check should be performed by examining, for example, debt records, bank statements, bank loans and mortgage records. In addition, a hallmark of reliability and credibility is the quantity of positive references from customers and suppliers that can be produced.

Do have contracts in place

It is essential that proper legal safeguards are in place to protect your company’s interests from the very outset. Contract provisions should delineate the distributor’s scope of operation and actions to be taken in the event of non-compliance or breach. The role of the distributor should be clearly defined: are they to act as an agent, whereby the contract of sale is concluded between you and the end customer with them pocketing commission; or as a mere reseller, purchasing from you directly and selling the products on?

A partnership that involves the distributor adhering closely to your guidance, a transfer of proprietary knowledge and pronounced use of your trademarks and brands may – against your intention – slip into a franchiser-franchisee relationship. This can spell trouble if relative simplicity is your top-of-mind priority, as you may find yourself confronted with a slew of regulations governing franchise arrangements.

It should also be noted that China’s Anti-Monopoly Law forbids price control, which means you cannot stipulate that your products be sold at a specific resale price by the distributor to retailers.

Don’t automatically assume a smooth transition after a break-up

The contract should provide for the eventuality of the partnership ending. Matters to take into account include:

• The transfer of ownership of social media accounts, websites and e-commerce stores
• The means by which and the jurisdiction under which disputes will be resolved
• The fate of unsold stock – whether this is to be repurchased from or sold off by the distributor

The upside is that, unlike the legal protection bestowed on distributors elsewhere, who may be able to claim compensation or an indemnity payment, no such privilege is available to distributors under Chinese law, which makes termination comparatively inexpensive and straightforward.

Do consider whether you want to put all your eggs in one basket

Another important consideration is the kind of partnership between you and the distributor. Traditionally, there are three types of distributorships: non-exclusive, exclusive and sole.

• In a non-exclusive arrangement, you engage multiple distributors, thereby spreading the risk and potentially gaining access to a wider range of retailers. Given China’s sheer size and heterogeneity, working with a number of different distributors would offer better coverage.
• In an exclusive arrangement, however, you appoint one single distributor, who acts as the only point of sale in a given territory. The lurking danger is that, while you are restricted to working with just one distributor, your distributor is – on the contrary – free to market and sell on behalf of other brands that may be your competitors. Beware of sleights of hand on the distributor’s part, who may unilaterally decide to “shelve” your product under the pretext of exclusivity so as to oust you from competition with their other brands.
• A sole distributorship is similar in that there is only one distributor, although you are allowed to sell your own products in a given territory.

Do set sales targets

In the case of an exclusive distributor arrangement, it is especially advisable to set sufficiently high sales quotas to ensure that the distributor puts their nose to the grindstone and does not fall into complacency. You may wish to set the same target across the board or different targets for different products. It is common practice in China for such quotas to be set on a quarterly basis, and they are usually not categorised into provinces. In order to ensure that the distributor knows what is expected of them in terms of sales, targets should be formulated with clarity and specificity. The contract should provide for the event of the distributor’s performance falling short, which can lead to the loss of exclusivity or even termination of the partnership.

Do make sure your brand already has a level of recognition

If you are envisaging a partnership where your distributor is committed to working shoulder to shoulder with you to consolidate your brand in China, you are unfortunately going to be disappointed. Distributors tend to be short-sighted realists in that they value short-term gains over long-term rewards. This is also partly due to the fickle tastes and shifting preferences of Chinese consumers, whose brand loyalty is known to be low; therefore, distributors are keen to avoid having too much inventory pressure.

You may fall into a Catch-22: your brand is new to the market and does not yield high returns yet, although it may have every potential to do so in the future. For this very reason, distributors are reluctant to take on your product. The underlying irony is, of course, that the lack of distribution channels would stop sales growth dead in its tracks. To circumvent this trap, you should aim to acquire a level of brand recognition prior to entering the Chinese market, particularly through e-commerce platforms.

Don’t forget about IP protection

The importance of properly registering all your intellectual property to guard against infringement – before doing business in China – cannot be stressed enough. China has a first-to-file, as opposed to a first-to-use, system, which means that you will not receive any protection unless the trademark has been registered. Unfortunately, this also has the unintended consequence that, up until full registration – which takes around a year to a year and a half – a third party can use your trademark, flagrantly disregarding your de facto proprietorship. Furthermore, beware of “trademark squatters” who scout for successful brands overseas and appropriate their trademarks, with the intention of selling them back to their rightful owners upon their entry into the Chinese market.

Most importantly, be sure to register your trademarks in your name, never in your distributor’s name. Although there are often cases of the distributor registering trademarks on a foreign company’s behalf due to the latter’s tardiness in doing so, this is generally not advisable. If your distributor does not dutifully hand over the ownership of rights, you may find yourself caught in a costly and protracted wrangle, which may lead to the loss of your trademarks altogether.

As long as you exercise prudence and prepare thoroughly, working with a distributor could very well offer a softer landing upon your initial entry into the Chinese market. But if you end up being yoked to a rogue distributor, it may turn out to be a case of the blind leading the blind.

This article is part of a series on exporting to China. See all the articles in the series below.

Part 1: How to conduct market research
Part 2: Protecting your trade mark

Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC’s Launchpad service gets your company boots on the ground in China quickly and cost effectively.

This article was provided by our content partner, CW CPA

The post Exporting to China: The Dos and Don’ts of Choosing a Distributor appeared first on Focus - China Britain Business Council.

The size, growth and maturity of the China market must mean there is space for everyone to win, right? Maybe. According to Andrew Cameron, director at Asia-based brand consultancy The Silk Initiative, there are seven common questions that come up time and again when he speaks to brands about expanding into the China market.

Which products are in high demand?

Knowing what Chinese consumers are clamouring for really requires boots on the ground. But, that doesn’t mean you’re out of luck if you can’t hop on a plane. Popular sites like Xiaohongshu (aka Little Red Book) and Douyin (Chinese TikTok) make it easy to see what consumers are paying attention to and talking about. Likewise, there are a number of services tracking sales on e-commerce platforms like T-Mall and JD.com that make it easier to understand trends within your specific category.

Projects should start with an initial market landscape analysis that includes a look at what’s trending in a specific category and industry. Beyond the approaches above, an agency like TSI can also help to interview experts within the industry, which provides a top-line view of popular products in any given category, helps paint a clearer picture of the industry as a whole, and provides indications of the direction it is moving in.

How do I conduct robust competitive analysis?

Competitive analysis is a two-step process. First, you have to understand who your competitors are. Then, you must understand what they’re doing well (and not so well) and what that means for your brand.

Identifying competitors may seem as simple as searching for your product category online. With a hyper-segmented market like China, however, it’s important to also look at tangential categories, different domestic regional players, and even multinational case studies that may not have done so well.

This is why it is almost always best to speak to real consumers in China to understand the lay of the land. A useful exercise is placing your products with consumers and having them document their experience over the course of a week. This allows for understanding of product occasions as well as insights into the broader competitive set.

When it comes to understanding how your competitors perform, desk research is also a good starting point. According to Cameron, TSI tends to look through a brand’s product ranges, price points, and communications or positioning. Again though, speaking to consumers is always the best approach. This helps you gain a good understanding of how competitors perform and how they’re viewed in the mind of your target audience.

How much should I charge?

Once you’ve identified your competitors, it’s important to then understand the best price point for your product. The first step is to understand the price your competitors are charging. Fortunately, this can often easily be done online. The harder part is in layering on your brand strategy and intended positioning in the market.

For new brands importing to China, a big element of their pricing strategy will be tied up in logistics costs. This means they often have to charge a premium relative to their competitors. Again, speaking to consumers can help you understand how much consumers expect to pay for your product relative to the competition. Just be sure you can always justify any price premium.

Be aware that consumers will do their homework. If your price point in your home country is dramatically different than in China, or if it differs across e-commerce platforms, consumers will notice.

Where do I launch my product first?

The sheer size of China means that there are distinct regional differences that you must take into account. Understanding where to launch first comes down to two main factors – the most important of which is ensuring reliable distribution. For obvious reasons, this is often the biggest decision for new brands.

However, this is also why a lot of brands tend to default to Tier 1 cities such as Shanghai, Guangzhou, or Beijing. This might seem like an easy first step, but brands should consider looking beyond just these cities and into other locations where competition might not be as fierce.

The second factor is understanding what consumers across China want. Each region, and even each city, in China can have its own dialect, climate, competitors and local flavour preferences.

For instance, TSI once worked with a client developing an oat-based snack bar. TSI saw that consumers in hot and humid Guangzhou in the south preferred a lighter, flakier version. Their northern counterparts in Beijing, with famously frigid winters, preferred a heavier, stodgier product. Examples like this show why understanding the market is critical.

What government bodies or associations are there to help?

With travel to China very limited, having a partner in market is more important than ever. Luckily, there are plenty of bodies and associations that can help, including CBBC and UK-government trade bodies like the Department for International Trade.

These organisations can help put you in touch with the right people, provide invaluable advice, and often hold knowledge-sharing sessions that can help you on your journey.

Should I localise my product?

In a word, yes.

Some level of localisation is almost always a good idea. This is especially true in food and beverage, where sentiment has shifted away from outright trust of and preference for foreign brands. Over the last decade, local brands have done an incredible job at closing this gap. At the same time, they’re more attuned to what local consumers want and can bring new products to market much more efficiently.

China is also now flooded with brands from around the world. The UK has a great reputation when it comes to producing high-quality food and beverage, but so too do Australia, New Zealand, Germany, and many more. Localisation can help differentiate.

Whether you are launching new products, flavours or packaging, some level of localisation is one of the ways foreign brands can stand out. Even a well-crafted Chinese brand name can help with word-of-mouth marketing and recommendations, as well as online searches. Consider localisation as one of your first steps, not an afterthought.

What’s the most common mistake companies make?

China today is not the China of ten years ago. Getting things right requires time, money, and patience. Success is also no longer guaranteed. Domestic competition, with huge amounts of capital and a “fail forward” mentality, consistently outpace foreign brands. Many of the issues we see brands facing here simply boils down to the local team not having the right amount of support from home offices to succeed. Having robust two-way communication is paramount and should be prioritised above all else.

While all of this might seem daunting, opportunities for success still abound. The key is to know what you’re getting yourself into. Market research, including the right landscaping, competitive analysis and consumer understanding, remains the best first step towards reaching your goals. Being thorough in setting the right foundations, rather than believing you’ll be an overnight success, is how brands exporting from the UK must approach the China of today.

This article is part of a series on exporting to China. See all the articles in the series below.

Part 1: How to conduct market research
Part 2: Protecting your trade mark
Part 3: How to choose the correct route to enter the China market
Part 4: The dos and don’ts of choosing a distributor
Part 5: How to find and hire staff in China

This article was provided by Asia-based brand consultancy The Silk Initiative 

The post Exporting to China: How to conduct market research appeared first on Focus - China Britain Business Council.

According to China’s Ministry of Commerce, China has become Britain’s 6^th most important trade partner with food & beverage exports amounting to £330 million in 2018. Hindering further growth are the risks associated with market access in China, specifically the possibility of Chinese customs rejecting consignments of British goods.

In general, customs officials reject consignments on two major criteria: deviations from Chinese national standards and food safety/hygiene issues. With reference to Chinese customs data, approximately 423 batches of food products exported from the UK were rejected from 2015 to 2018, with beverages, pastry and biscuits and candy and chocolates being the top three categories of British food rejected.

ChemLinked summarised the top 5 reasons for import failure below:

1. Exceeding shelf life

In 2017, 209 batches of British food products were rejected due to violations of shelf-life requirements, accounting for 70 percent of all batches of British food rejected that year. The obvious logistical challenges of transporting perishable goods from Britain to China are further compounded by the time necessary to complete customs and quarantine inspection at Chinese ports, which in the past has taken an average of 20 days.

In this respect, there have been several extremely positive developments for British exporters. Policy reforms affecting administrative processing of consignments of goods will greatly improve the situation and should lead to greatly expedited customs clearance times. Customs officials have already implemented a series of trade facilitation measures that include simplified documentation requirements and integrating customs declaration and inspection. Under the new policy environment, it is possible for certain foods to receive customs clearance in just three days.

2.Lack of required documents or evidentiary materials

High risk food products such as meats and seafood, as well as special foods (infant formula, health foods, etc.), must obtain market access approval prior to importation, with the enterprise submitting a full test report based on the items listed in national food safety standards. With imported dairy for instance, a quarantine permit is mandatory for raw milk, raw milk product and pasteurized milk. ChemLinked strongly advises stakeholders to have a firm understanding of all market access obligations prior to exportation and to prepare all required documents in advance.

Customs officials reject consignments on two major criteria: deviations from Chinese national standards and food safety/hygiene issues

3. Products fail to meet Chinese national food safety standards

China’s regulatory framework for foods and beverages is a complicated system of horizontal standards that specify rules for all foods, including labeling, use of food additives, nutrient fortification requirements, etc. In addition, there are vertical standards which specify the individualized product specific requirements for various categories of foods. Deviation from these standards is another major headache for British exporters and another common reason for goods being rejected by Chinese officials during customs inspections.

In recent years, China’s regulatory framework has undergone a period of rapid change as it struggles to keep pace with China’s evolving socioeconomic environment. For exporters, staying abreast of these changes can be a daunting prospect and in certain sectors confers considerable risks to investment; the almost cyclical changes in regulation of China’s infant formula sector is a particularly difficult area. Recently China has again proposed revisions to national food safety standards for dairy products, cheese, and infant formula food.

4. Improper use of food additives/nutritional fortification substances

Improper use of food additives/nutritional fortification substances is another significant contributor to Chinese customs rejecting consignments of British foods. Even large multinationals like Nestle suffer in this regard. Importantly, mistakes in this area have the potential of impacting subsequent consignments as China implements a blacklisting system whereby compliance violations are recorded, and the stringency of future inspections stratified are based on the track record of the importer. Importers with a history of violations are subject to more stringent customs inspections. GB 2760 (food additive standard) and GB 14880 (nutrient fortification standard) lists permitted food additives/nutritional fortification substance and stipulates their usage requirements in China. The standards are long and complicated and correctly interpreting compliance requirements can be difficult.

5. Labelling non-compliance

From 2015 to 2018, approximately 5.7 percent of British food exports violated Chinese labelling regulations with tea, beer and biscuits most significantly impacted. As part of the trade facilitation measures previously mentioned, label filing for prepackaged imported food will no longer be required from 1^st October 2019. It will be regarded as a normal sampling inspection item during customs release and the importer shall bear the major responsibility of the label issue.

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