Distribution in China

Trading companies

At the initial stage of modern China’s process of engaging the world of international commerce, trade with foreign entities was largely restricted to trading companies located in free-trade zones. As a result of liberal policies and, especially, China’s entry into the WTO, trading companies could be established throughout China. Foreign companies can now establish businesses anywhere in China that can engage in local purchasing and selling, and can possess their own important and export licenses.

The central government has more recently issued policies that simplify trade and customs procedures, foreign currency trading, and the establishment of companies by foreign investors in a limited number of geographical areas. These were initially announced for Shanghai, Tianjin, Fujian, and Guangzhou, which were joined by zones in Liaoning, Zhejiang, Henan, Hubei, Sichuan, Shaanxi, and Chongqing on 1 April 2017.

Other special zones exist to allow duty- and tax-free processing of goods with imported components that are destined for export markets, mainly other parts of Asia. Manufacturers need to consider their target market when deciding whether to set up in such a zone or in a part of China that does not enjoy such special treatment.

Commercial agents

Commercial agents can help to make distribution in China more efficient, adapt to the requirements of Chinese customers, and deal with the special conditions of the Chinese market. There is no specific Chinese law that covers dealings with commercial agents, which are simply subject to the corpus of Chinese law that applies to contracts and commercial matters.

Commercial agents can turn into competitors in their own right, and companies that do not wish for their distribution channels to be acquired by their agents should plan appropriately and take a long-term perspective on sales in China.

Violation of intellectual property rights remains a common problem. Commercial agents have, for example, registered corresponding brands in their own name. Therefore, it is important to register the company’s brands (including Chinese names/brands) at or before market entry. Furthermore, it is important to document clear rules and prohibitions in the contract with the commercial agent.

Given the lack of specific statutes that cover the use of agents, investors should use a detailed and comprehensive written contract to document general obligations as well as to satisfy provisions that apply to foreign currency control. The agent’s business license should cover the business activities being offered. We recommend addressing the contract term and conditions that result in termination. In contrast to German law, termination does not necessarily involve compensation, but damages that result from termination are subject to compensation.

The parties can generally prohibit competition as long as such terms do not contravene antitrust laws that bars certain monopoly agreements or the abuse of a dominant market position (e.g., restrictions on territory or agreements on binding prices). In addition to the risk that contracts that violate antitrust law are void, such terms can lead to substantial damages (a certain percentage of the sales in the previous year).

Distributors

The concerns that apply to working with commercial agents generally apply to dealing with distributors. Furthermore, the potential distributor must have a foreign trade authorization.

As is the case with commercial agents, intellectual property rights need to be protected. All brands should be registered in China by the foreign company before entering the market. Any trademark license must be registered with the Chinese Trademarks Office.

The agreement of a reservation of title (also an extended reservation of title) is possible under Chinese law. However, this requires a thorough case-by-case examination. Provisions about the contract term and termination should also be included.