China Britain Business Association(CBBA)

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Name: China Britain Business Association
Tel: +44(0)1733 748114
Fax: +44 (0)8719001188
Mobile: +44 (0)772 6762828
E-mail: info@cbbauk.org
Add: London Office: Suite 18629 Low Ground Floor,145/157 ST. John Street,City of London,EC1V 4PY Registered in England NO: 7927992(Previous NO.7243974)
MSN: services@cbbauk.org
MSN: services@cbbauk.org

Agent/Distributors Business Centre

Agent/Distributors Business Centre

 1. DISTRIBUTORS & AGENTS:

Selling your products through distributors or agents is the “easiest” way to penetrate the Chinese market. It does not require a high investment and it allows assessment of the Chinese consumer’s reaction to your product.

It is not free of risks, though, as you may find yourself in the middle of a chaotic distribution network that is difficult to control.

a) Distributor vs Agent: Different Roles/Responsibilities

- Distributors buy and sell the products; their profit is the difference.

- Agents act in the name and on behalf of the foreign investor; they receive commissions on sales.

- Degree of trust: The agent generally enjoys a higher degree of independence and is able to change certain conditions without the explicit consent of the principal.

b) Tips on how to deal with agents/distributors in China

- Tip #1. Licences: Ensure your distributor/agent has the required licences to retail your products.

- Tip #2. Exclusivity: Try to reduce the exclusivity territory (you may attach a map to the contract). Generally, exclusivity for all China is a bad idea.

- Tip #3. Establish sales targets and regulate your rights in case they are not met (e.g. termination or end of exclusivity).

- Tip #4. Commissions: describe clearly the calculation basis for commissions in the agency agreement.

- Tip #5. IP Rights: Define the use of IP rights, promotion and publicity materials. Do not grant property on IP rights; grant instead a licence of use.

- Tip #6. Termination: Reasons for termination are a key issue in distribution/agency contracts. Do not forget to regulate the consequences of such termination (e.g establish sale of stock to third parties / to the foreign investor, destroy / return the promotion materials, etc.).

- Tip #7. It is quite common for entrepreneurs and SMEs to initially “test the waters” with a distributor or an agent, and once they understand the market better and how their product works, they take it to the next level.

2. FRANCHISE:

a) Franchisors: Laws & Regulations

Under applicable laws and regulations, there are certain conditions imposed on franchisors in China:

- Legal form: Having a commercial company in China (JV or WFOE) or abroad. Individuals cannot establish a franchise in China.

- Previous experience: Having at least 2 own shops operated directly by the franchisor (in China or abroad), for more than one year.

- Business model: Having a business model and the ability to render assistance and give instructions to the franchisee, as well as technical support, training and other services.

- IP rights: Having a trademark, patent or know-how (suggestion: register your IP in China).

- Registration of confidential business information: For every signed contract, franchisors must register with the competent authorities highly detailed (and usually confidential) information, such as: original franchise contract, marketing plan, franchisee manual, etc.

b) Franchisees: Some things you should know about their rights

Your Chinese franchisee has some rights that you should be well aware of:

- Your franchisee has the right to unilaterally terminate the contract without paying an indemnity if:

1) the franchisee claims that the information supplied is incomplete or untrue.

2) after a “reflection period” the franchisee decides to back out.

c) Tips on how to deal with your potential franchisee

- Tip #1. Make the franchisee sign a receipt acknowledging that the information received is complete.

- Tip #2. Clearly define in the contract how long this “reflection period” will last and try to make it as short as possible (i.e. within 1 day from the execution of the franchise contract).

- Tip #3. Enter a non-disclosure agreement (“NDA”), as you will be sharing all your business information.

d) China Franchise: Main issues

- Lack of payment by the franchisee is common; there is not a real franchise culture in China.

- Lack of confidentiality.

- Difficulty in controlling brand image.

- Legal uncertainty due to:

a) franchisee’s right to unilaterally terminate the contract.

b) reclassification risk: if, in order to avoid the disadvantages, the franchisor has established a distribution network that works as a franchise in practice, authorities may reclassify the legal relationship and impose a penalty (RMB10,000 to RMB500,000).

e) Recommendation

- If possible, enter the market initially managing your own stores, so that you can fully understand the market before you start granting franchises.

f) Conclusion

For obvious reasons, the franchise regime is very restrictive for franchisors and inevitably favours franchisees. As a result, some companies establish a distribution network that works de facto as a franchise. As we have pointed out, there is a risk of reclassification into franchise and the consequent sanction. In addition, in the new draft of the Catalogue for Foreign Investment (which regulates which are the encouraged, permitted, restricted and prohibited activities to be carried out by foreigners in China), the franchising business is now encouraged, which make us think that in the future the regime will be less restrictive and more favourable for foreign investors.

 3. CORNER

This is an individually tailored mini-shop whereby the company rents a small space in a mall. The rent has often a fixed element (based on the number of sq. m. occupied) and a variable part (that is a percentage of the sales made).

a)Laws and Regulations

- You don’t need to establish a company in China to start your business through a corner – you may do it through a local agent.

- Your agent needs to have the so-called “Tax Payer General Status” (1).

- The term of these contracts is usually from 6 months to 1 year.

- Renewal is subject to sales targets being met.

b) Advantages

It is a small investment; it allows making the products known, understanding the potential client profile and checking consumers’ reaction.

c) Tips

-Tip #1 You should be aware that many malls impose restrictive conditions in terms of the brand (e.g.it must be a reputable international brand).

-Tip #2 The tenant must ensure a minimum profit in the first months.

-Tip #3. Often the contract (which is usually short term) may be terminated unilaterally by the landlord.

4. SHOP LEASE

This could probably be, from a financial perspective, your riskier option. The main advantage, though, is the full control you have on your operation.

a) Laws & Regulations

- Shop equals Branch: So, for every shop that you open, you need to register a branch (it takes 1-2 months if branches are on the same city and 3 months when it is in a new city)

- Contract Length: 3-5 years

b) Advantages

- Not subject to specific sales targets being achieved. You pay a rent and a deposit

c) Tips on how to negotiate a shop lease

-Tip #1 Understand who is renting the space to you (i.e. the owner or a lessee) – you might be renting the space from a person who is not actually the landlord (but, for example, a tenant who is trying to sub-lease the premises). In such case, if the tenant does not manage to renew the contract with the landlord, you may be forced to leave the shop, after having invested in decoration, marketing, etc. You should therefore always ask the supposed landlord for his/her certificate of ownership of the premises.

-Tip #2. Understand what is the legal use of such premises (e.g. residential, commercial, etc.). In the certificate of ownership, you will be able to check what is the use of such premises. Please note that if the premises do not have a commercial use and, for example, they have a residential use instead, you are not supposed to locate a shop in such place- the authorities would deny the registration of this shop as a branch or as the registered office of a company. Furthermore, if you have an inspection, you will be exposed to sanctions.

-Tip #3. Try to negotiate renewal conditions in the initial lease contract (e.g. a maximum percentage rise per year) so that you don’t see a big hike in rental cost when the renewal time arrives

- Tip #4.If your shop will be in a mall that is currently under construction, we advise you to sign a letter of intention first and to negotiate the lease once the mall has the required licence.

5. INTERNET SALES

a) Recent history

Joint Ventures and WFOEs have been allowed (theoretically) to engage in retail activity through the internet since 2004. The reality has been quite different though. Central MOFCOM had to approve these activities and approvals have either been put on hold or suspended.

Foreign companies used to navigate this difficulty in two ways:

- Avoiding setting up in China: but there are a number of hassles (logistics, currency exchange …)

- Partnering with a local broker

b) Update on Law & Regulations

This type of retail activity has now seen some encouraging signs. MOFCOM issued on 19 August 2010 the ”Circular on Several Issues Concerning the Approval and Administration of Foreign Investment in Sales via the Internet and Automatic Vending Machines”. The main changes that this circular represents are:

1. For established FIEs:

Internet sales are regarded as an extension of an FIE’s regular sales activities and can be conducted without any need to obtain additional approvals.

2. For Companies trading only through the internet:

Applications for the establishment of an FIE specialising in Internet sales are to be submitted for approval to the appropriate provincial-level agency under MOFCOM instead of central MOFCOM, which has two positive implications:

-speeds up the approval process, and

-promotes competition among regional administrations to capture foreign investment.

3. Some requirements on-line businesses should meet:

-display its business license in a prominent position on its website home page or on the website where it conducts sales activities.

-establish a comprehensive system for the return or replacement of goods.

-strictly protect consumers’ personal privacy.

-abide by China’s consumer laws and regulations.