Distribution in China

Common dangers in China distribution networks

Logistics and distribution in China is a lucrative but complicated sector. Setting up effective distribution channels is essential, and it requires much more effort and oversight than it might in Europe or the United States. Haphazardly established channels can cause a loss in both sales and profitability. Despite the value of a unified and strategic approach, it’s common for companies to set up their distribution structure in a reactive way. Below there are some of the common problems facing a company looking at distribution in China.

Distribution network in China are fragmented

Networks of distribution in China habitually involve at 6 to 7 tiers. Wholesalers sell to an unstructured network of distributors, retailers and other wholesalers. China’s contract laws sometimes allow for exclusivity and non-compete clauses, but an often time, that’s not the case. If the brand is a major player in the market, for example, China’s anti-monopoly laws actually forbid non-compete clauses with a distributor without a reasonable justification.

Often, wholesalers rely on distributors for the actual work of delivery and selling of the product. These ad hoc distribution channels results in little oversight, little accountability, few quotas, and ultimately, poor profit margins and poor sales along the line. For example, the beverage distribution structure in Shanghai resulted in a fragmented distribution model that allowed distributors to sell exclusively for high-end venues, hoping to turn a greater profit with the higher price. In the process, they cut out domestic retailers which made up the majority of demand, leading to a loss of sales and shortages of some beverages.

It’s important to enter China with a robust distribution structure already planned out. The clients, distributors and providers should all be agreed on the implementation and execution beforehand, rather than improvising as complications arise. This is the stake of distribution in China.

Logistics Service Providers (LSP) can be unreliable.

Though there has been an increase in the quality of service like warehousing, packaging and processing over the last two years, LSPs still deal primarily with transportation. Many local companies lack understanding and experience with modern management practice, or the know-how to meet the increasingly sophisticated demands and needs of clients. While foreign companies often seek out Chinese providers for their local experience, they find that their partners can’t communicate with foreign customers. On the other hand, while they may be educated, they typically lack soft skills or management experience. There’s a high turn-over of experts in the field, too, which can lead to loss of talents and experienced leadership. Consequently, most companies are hesitant to outsource a significant portion of the distribution processes, as the quality and the cost of the LSPs services cannot be guaranteed.

Furthermore, most LSPs are unfit to deal with the development of online commerce. They don’t have the economy of scale and can’t deliver reliably and cheaply to more remote areas. As ecommerce becomes more and more dominant in the Chinese market, the inability of local distributors to meet customer demand would harm sales.

Selecting a competent LSP leads to excellent returns. By building a relationship and encouraging the LSP to develop its expertise and retain logistics talent, the local partner could become a boon to any company in overcoming Chinese logistics hurdles.

Transportation is complex and expensive

As mentioned, transportation makes up the bulk of local distribution services, but there are serious costs and complications involved. There were 790,000 road transport companies in 2012, and the top 20 companies make up less than 2% of the market share. In 2012, around 78% of cargo was dispatched by road, and tolls accounted for 1/3rd of transport expenditures. This leads to unsafe practices among couriers such as overloading vehicles. In addition, cities levy heavy taxes on trucks in metropolitan areas, to avoid traffic congestion. To counteract this, distributors often operate fleets of smaller vehicles, often without much managerial oversight or accountability on the part of the drivers.

Although foreign companies such as DHL dominate 80% of China’s express delivery system, they still lack the support and structure necessary to cope with demand in the more remote regions of China, where ecommerce demand is higher than in the big cities. In this case, local logistics agents still provide good local transportation and at a much lower cost than state-owned or foreign-owned companies, but producers must often sacrifice regulation, and the lack of an established point-of-sale may confound the smaller LSPs. Increasingly, rail has become a cheaper and more convenient channel for distributing to areas further inland. The rapid development of China’s rail system, the standardisation of cargo fares, and the reduction of a significant amount of paperwork has greatly increased the viability of using rail as a logistical alternative.

Sources:

http://startvaekst.dk/file/372965/mckinskey_rapport_440_byer.pdf

http://www.funggroup.com/eng/knowledge/research/china_dis_issue113.pdf

http://www.ipsosconsulting.com/pdf/Research-Note-Achieving-Successful-Distribution-in-Emerging-Markets.pdf

http://www.mwechinalaw.com/uploads/doc/DistributioninChina-LegalIssues.pdf

http://thestorecheckers.com/