Joint Venture or Distribution Agreement Which is Better for Selling to Chinese Consumer

There’s no doubt that, with a population more than one billion, China presents a tremendous opportunity for the businesses of all sizes to sell their products. Chinese consumers are open to creating new relationships with worldwide brands. Chinese consumers are getting wealthier fast. More and more Chinese citizens are entering into the middle-class category. So the Chinese consumers are not scared of high prices with their higher disposable incomes.

Brands like Nike, Starbucks and IKEA have become popular with the new Chinese middle class. They are more flexible in terms of their style. In the mind of a Chinese consumer, imported brands will always be better quality than a Chinese brand and that is why it is easy for the foreign brand to gain a good reputation. For everyday product, most people will simply choose the one they trust, either on quality or cost-effective. There are many foreign brands targeting people with above average income. Foreign brands dominate chewing gum with about an 85% market share and chocolate with a market share of more than 70%.

While young women may be less interested in digital products such as Apple’s, they are as concerned about brand names while shopping for clothes or handbags. Keeping this trend in mind, a huge number of Chinese enterprises are desperately trying to convince reputed overseas brands that manufacture their products in China to sell their products in China by forming a joint venture.

Forming a Joint Venture in China

A joint venture (JV) is a form of foreign-invested enterprise (FIE) that is created through a partnership between foreign and Chinese investors, who together share the profits, losses and management of the JV. The Joint Venture structure in China has several advantages such as access to land, distribution channels, business licenses, labor, networks, and Communist-party support.

Under the General Provisions of Civil Law (Civil Law), JVs are specifically divided into the following three categories:

  • Corporate Jvs
  • Partnership Jvs
  • Contractual Jvs

Limitations of Joint Venetures in China

Many foreign companies are shying away from the Joint Venture structure due to the large amounts of inherent risk. For an overseas company located on the other side of the globe, it is nearly impossible to exercise any sort of control over the contract as they cannot have the right to make an instant and decisive contract termination decision.

Framing a Distribution Agreement in China is an Ideal Option

A Distribution Agreement could be the best possible option for the foreign companies to gain upper-hand and better control over its Chinese partner. The distribution agreement is distinct from an agency agreement and an introduction agreement to which different Chinese laws apply. A foreign company that is unwilling to entrust this level of responsibility to a Chinese agent may alternatively prefer to appoint its Chinese partner as a distributor in a specified region, either on an exclusive or non-exclusive basis.

The huge population and rapid development of the economy, the Chinese market now represents a huge opportunity for foreign brands. As a foreign entrepreneur, you simply need to know the type of contract that will work best for you.

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