Posted Monday 5th February 2024
China is a country with a vast population, market and opportunities. The Chinese industrial and manufacturing sectors are unrivalled and China has functioned as the workshop of the modern world for decades, exporting $3.38 trillion of goods and services in 2023 – but it also has enormous purchasing power in its own right importing $2.56 trillion in the same year. There are fortunes to be made for brands that can crack the Chinese market, but it is no easy feat in a country where there are pitfalls and cutthroat competition at every corner.
At Joelson, from time to time we are asked for support by our clients who are looking to launch, expand or reconfigure their businesses in China. We are able to leverage upon some fairly unique experience in order to do so: Guy Francis, an associate within the Commercial team and Mandarin speaker, spent five years living and working in China as a Commercial Director at a large importer and longer still working as a commercial lawyer in England. Harry Davies, also in the Commercial Team, speaks exceptionally good Mandarin Chinese and the firm has fostered relationships with Chinese law firms across the course of several business development visits to the country. In this article we share some of our experience, insights and knowledge which may be of assistance if you are looking to take your products or services along the Silk Road to the Middle Kingdom.
Before a distribution agreement is signed or tradeshows are visited, any brand which has even the remotest of intentions to enter the Chinese market should get its trademark registered. China operates a ‘first shot wins’ trademark registration system and there is a long list of household names and famous brands who have had their names squatted or floundered with IP issues. It is possible to bring claims to dispute a bad-faith trademark registration, but China is a challenging jurisdiction you will require local legal assistance and the engagement and support of the Chinese authorities in a case against one of its own citizens.
A trademark registration is not particularly expensive and it is essential for success in China. Besides the obvious risk of having a trademark squatted (thereby blocking your entry to the market with that brand or suing you), without a trademark certificate it is not possible to open a webshop on any of the major online platforms such as JD.com or Tmall.com or sell within most department stores.
Squatters will often have taken a trademark with the intention of selling it back to the brand owner, but it goes without saying that these are never straightforward negotiations. It is always best to get registered before someone beats you to it.
When drafting distribution agreements for China, we typically include a clause prohibiting distributors from registering a brand in its own name and other protections requiring support and information from the distributor.
If you only take one thing away from this article, it should be this: register your trademark in China before you take any steps towards entering the market.
Some Western brand names are difficult for Chinese consumers to pronounce and as such they are routinely translated into Chinese. A translated brand name also makes it easier for native Chinese speakers to read, write and remember.
A phonetic translation is the usual approach: for instance Coca Cola is
可口可乐, kekou kele – cleverly “可口” means ‘tasty’ and the homonym
“渴口” means ‘thirsty’ and “可乐“ means ‘happy’, but sometimes a literal one (Apple is 苹果, pingguo, being the word ‘apple’).
It is important to get translations correct – there is all sorts of wordplay in the Chinese language and homonyms that can imply both unfortunate and positive meanings, particularly when numbers and pricing are at play. Sometimes what might sound good in Cantonese (spoken in Hong Kong and parts of southern China) might be terrible in Mandarin, which is the most commonly spoken language. There are specialist consultants that can assist with a brand translation names, or a good distributor can be willing to help. Any translation which is used should be checked against the Chinese trademark database and it is worth considering registering the translation. We can recommend such consultants – get in touch if so.
Not every product will be right for the Chinese market and the fact that there are a lot of people in China does not mean that everyone is a potential customer. Just because a product is good quality and sells well in the UK does not mean it will do so in China – the barriers that tastes and culture can create may be insurmountable. For instance, you might produce a beautiful, refined English sparkling wine which flies off the shelves back home, but since many Chinese customers (i) don’t drink cold drinks (room temperature beer, baijiu and red wine being the norm); (ii) aren’t used to alcoholic drinks with high levels of acidity; (iii) may not be a fan of fizzy drinks; and (iv) have never heard of English wine, you may not be onto a winner. Do your research, speak with people who understand the market and explore whether your products will work before you begin to invest any effort or money in entering the market.
Getting the right distribution partner and structuring the business in the correct way is absolutely key. There is no real shortcut or magic to selecting a distribution partner – the best thing to do is to meet with the key members of the team and make a visit to see their operations. Some key considerations include:
It can be worthwhile asking for recommendations or visiting trade shows to meet new contacts.
Many Chinese distributors will demand exclusivity at the outset and potentially refuse to take on any brands which do not agree to grant it. There are good reasons for this – if there are too many sellers then the competition can be intense, eroding profits and reducing the incentive to sell or push a brand. Adding in too many partners or inappropriate distributors can also ruin a brand’s reputation with retailers and customers if the strategy within the territory is not aligned. Having exclusivity also makes building a market and investing in marketing a brand more worthwhile for the distributor.
The obvious drawback of exclusivity is that you can find yourself tied in with a partner who may end-up underperforming. Serious thought should be given to the duration of the exclusivity period and rights to terminate.
Sometimes a compromise position can be found – some distributors may be happy with exclusivity in a certain region, or with a cap on the number of distributors that you engage. Breaking up the market by sales channels can be an effective approach as well: if you are selling tableware, for instance, you might want one distributor for hotels/hospitality and one for retail, as those channels work in very different ways and require different skill sets and contacts. You can also limit the duration of the exclusivity and/or link it with financial targets. You should, however, be very wary of agreeing to a long period of exclusivity for nothing and with no way out.
When launching in a new territory it is difficult to know what to expect and harder still to define what ‘success’ and ‘failure’ look like. Building a new market takes time and results are rarely instantaneous.
Where exclusivity is not being granted, at the outset it can be unrealistic to ask for binding purchasing targets. We typically recommend using shorter term agreements in these instances – or ones which can be terminated by either party after 12 months – and seeing how things go. If there are no positive signs or evidence of progress then you can call time on the arrangement. You can always look to add another distributor if the first one is disappointing.
Where exclusivity is granted to a distributor, especially as part of a long term arrangement, then it is worth incorporating targets to ensure that you are not tied in with a partner who is going nowhere. Consider how other international launches have progressed historically and what level of revenue would make you feel satisfied. Resist the urge to multiply your domestic revenue on a per capita basis – not everyone in China is going to be your customer.
The Chinese market represents a huge opportunity if it is approached correctly, but it is undoubtedly a challenging place to do business successfully. The intellectual property considerations are of existential importance and balancing the commercial concerns in a way that suits both parties is key at the outset of an exporter/distributor relationship. Once agreed, we would strongly recommend that a formal written agreement is entered into to record the terms, set out the licences and obligations of each party and help to reduce the scope for disputes in the future.
While the examples listed above are considerations when drafting any commercial/distribution agreement, the culture, attitudes and expectations in China are different. The experience of our team means that we understand the local nuances and are able to help our clients navigate them efficiently and effectively.
If you have any questions concerning distribution in China or if you require any assistance with the preparation of a distribution agreement, please contact Guy Francis (guy.f@joelsonlaw.com).
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.
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