Distribution Contract a Viable Option for the Foreign Companies in China

Despite the recent political crisis between the US and China, this manufacturing heaven is still considered to be the best place for getting involved in a business venture. Beijing has enormous leverage and importance on the international level. According to the Larry Brainard, chief emerging markets economist at investment research firm TS Lombard, China is “facing tariffs on the bulk of their exports to the US for the indefinite future, binding constraints on acquiring US cutting-edge technology and domestic economic dislocation as [Chinese] firms adjust to the tariffs.”

Various distribution structures are available in China, including:

>> Structures Of Distributorship

>> Commission Agency

>> Franchise

>> Trademark Licence

>> Joint Ventures

Why Distribution Contract is an Important Element for the Foreign Companies in China

Most companies and entrepreneurs are sourcing from China for two main reasons. The first reason is the long term objective of creating a market presence in China for the purpose of serving the economy. The other reason is a short term objective of taking advantage of low labor cost in this part of the world. Forming a distribution contract in China is the best possible options for the foreign businesses to distribute their manufacturing goods in the Mainland China. As an overseas company, if you are not willing to appoint agents in China to act on behalf of you, then going for a distribution contract is the ideal way to operate over here. The risk is less and the gains are enormous.

The distribution agreement is distinct from an agency agreement and an introduction agreement to which different Chinese laws apply. China has no requirement mandating payment of any compensation or indemnity to a commercial agent or distributor upon termination or expiry of the agreement. If the agreement provides for compensation upon termination or expiry, the Contract Law will apply.

Any Seller entering the Chinese market would no doubt be concerned about protecting its business secrets and intellectual property rights. In order to deal with this issue, China lawyers put “no registration” provision to the distribution agreement in order to secure the China trademarks of their clients. The provision functions in this way, the Chinese distributors agree that the foreign company owns all the trademarks and other intellectual property rights and the distributor has no rights to those trademarks and the distributor will not register any IP in any way related to their foreign partner’s IP.

In order to make the distribution agreement enforceable in the PRC following things need to be done:

First- The distribution agreement has to be drafted with Chinese law as the governing law.

Second- The Chinese language should be the agreement’s controlling language.

Third- The enforcement of the agreement should be in the Chinese court.

Final Thoughts

Enforcing a contract in China is quite a challenge. Foreign companies need to have a proper legal representation to cope with these challenges and make the most out of the China distribution agreement.

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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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