What is an efficient distribution model in China

2019-02-28

For over 10 years, I managed the distribution for high-tech and high-value (USD50,000+ per unit) product in China. I have established direct sales teams as well as distribution network across China. With a tracking record of achieving rapid business growth in China, people always asked me what could be the best distribution model in China. Although there is no easy answer to this question, I write this article to provide my view and some tips for companies to consider before deciding on their distribution model for China.

 

When people talk about the Chinese market, the first impression people always have is that China is a vast country with a huge population and massive business opportunities. In general, it is still true today even though the growth rate of the economy has slowed down quite a bit. However, people should consider the following facts that lay behind the business opportunities:

 

  1. China is also the most competitive market in the world, your strongest competitors are all trying their best to gain their market share. Beside the distribution network, are you ready to compete in this market, is your product and technology competitive enough, is your price competitive enough, are you ready to embrace the market which may have a very different culture compared to your home country?
  2. The operating (direct and indirect) cost for a business in China is quite high, the cost to acquire talent in China is equal or higher compared to the most developed countries such as U.S and Germany. When you plan to go direct, please make sure that your business plan reflects the correct cost base. When you plan to have distributors, please also make sure that the business plan is attractive to your potential business partner.
  3. Depending on which industry you serve, there’re still a huge territory difference in China between the provinces. In general, the coastal areas are more developed than the inner areas, however, in the recent years, there are more and more investments in the middle and West China especially after the launch of the Belt and Road Initiative. You have more Petro chemical industry in west and middle China, and electronics industry are more established in the south and East part of China. Before you set up your distribution network, you should do the market research to find out the areas in China where you should put your initial focus

 

After going through the above-mentioned questions and coming up with your initial answers. I have put together a comparison of different distribution models that you can consider implementing in China:

 

Distribution Model

Advantage

Disadvantage

Typical Companies to adopt the model

Exclusive distributor

Easy to manage

Strong motivation for the distributor

High risk and cost when the relationship fails and/or business performance not good

Annual revenue opportunity <2M USD

or 50 units

 

Non-exclusive distributor

Good market coverage

Have more than one channel to collect market information

Difficult  to manage without local presence

Risk to damage the brand reputation due to internal competition

Annual revenue opportunity <5M USD

or 100 units

product covers very different market segment which can be clearly defined

Sales agent + factory employed service and application

Easy market penetration

Better service

Direct contact to the customer

service revenue opportunity

High operating cost

Sales agent less motivated and feel threatened

 

Annual revenue opportunity <

10M or 200 units

sophisticated customer service

Direct sales and service

Direct contact to the customer

Better brand awareness

High operating cost

Take time to get the business established

Annual revenue opportunity >

10M or 200 units

 

Distribution manager + local non-exclusive distributors / sales reps

Good market coverage

Semi-direct contact to the customer

Better brand awareness  

High operating cost distributor/agent less motivated and feel threatened

 

Annual revenue opportunity >

10M or 200 units

 

 

*A distributor normally covers sales, service and marketing works for the supplier in the local market

 

Of course, the above is a very rough summary and we all know that different businesses can vary so much and will always need a tailor-made strategy. We are very happy to assist you in the local China market research for your individual business and contribute in the process of implement the most efficient distribution model for you in China.

 

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