Capitalize on the Evolving Channel Landscape in China

Life is getting more difficult for foreign companies in China because of growing Chinese local competition and invasive government policies that obscure the regulatory environment. MNCs which wish to stay for the long-run will have to adapt their channel strategies to this changing environment. China is set to undergo significant changes, and a few new channel models have already surfaced at a rapid pace and have been adopted quite well by a few leading Chinese companies. Multinationals should be aware of those trends and be prepared to revisit China’s go-to-market strategy a minimum of every two years to stay ahead of the competition.

FSG has summarized three key channel trends to help companies better understand the local nuances and capitalize on the evolving distribution landscape in China:

1. Channel disintermediation

The key issue affecting the Chinese distribution landscape is the fragmented nature of the market. As a result of this high fragmentation, goods move through several layers of distributors before reaching the end customer, thereby creating inefficiencies, high distribution costs, and an intensified frequency of channel conflicts (or Chinese Buzz word, “窜货” pronounced ‘cuan huo’). It has now reached a tipping point, where companies across industries are realizing the importance of developing their own sales and distribution arms. They are choosing to remove intermediaries and cut out middlemen to have better market access, or to just go direct in tier 1 cities.

2. Rise of e-commerce in lower-tier cities

Everyone understands the opportunities that China’s e-commerce market provides, as it has overtaken the United States as the world’s largest market. However, not all companies fully comprehend how to utilize the online channel, especially to penetrate into lower-tier cities. The effectiveness of the online channel is more pronounced in less-developed tier 3 and 4 cities. According to the statistics, the online channel in lower tier cities leads to incremental consumption instead of just replacing the offline spending. MNCs across the B2B or B2C landscape need to start building an effective e-commerce game plan to leverage this channel effectively. FSG has in-depth resources to provide its clients a strong starting point in this regard.

3. Distribution consolidation

Government policies laid out in China’s 12th five-year plan call for consolidation of distributors. In some industries, such as pharmaceuticals and automobiles, numerous acquisitions have already taken place. A few leading distributor groups are expected to benefit from expansion and acquisition policies, while manufacturers (including MNCs) might be negatively affected, because their wallet share in their distributors’ business portfolio will be diluted.

Channel Models in China

*Source: Frontier Strategy Group analysis

FSG is hosting a detailed session on effective distribution management for its clients on April 15 in Shanghai.

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