Preparing for China 2020: Effective Distribution Management

I’m writing this blog post with great enthusiasm because the inputs came from more than 40 client meetings I did during my trip to Shanghai in April. In addition to my meetings, I also had the privilege of hosting a workshop for a group of FSG clients, mostly comprised of Heads of Asia-Pacific or GMs of China.

During the workshop, we discussed in detail the implications of the macro environment for MNCs along with break-out sessions on distribution management and government engagement in China.

I have listed some of the key learnings regarding distribution management from my trip below:

1)  Distribution Consolidation—Good or Bad?

MNCs view distributor consolidation as both good and bad. Companies that have been in China for decades want to drive efficiency by consolidating distributors (at times driven by government policies). In some cases, MNCs have more than 350 distributors. A lack of hunger continues to be the biggest inhibitor to convincing distributors to go beyond their respective cities and further expand.

MNCs that have been in China for less than five years aren’t in favor of consolidation, because it would undermine their bargaining power. Some of the late entrants to the market prefer to work with tier 2 distributors, as they are more eager and hungry to grow the business.

2) Breaking the Myths on E-commerce 

It is becoming increasingly difficult for MNCs to strike the right balance between brick-and-mortar and e-commerce operations. Pricing conflicts are on the rise, because country/provincial policies at times tax goods sold via traditional channels but not via e-commerce.

Conflicts with distributors are also increasing, as some smart distributors are opening their own e-commerce platforms at the local level (and selling low-end products).

E-commerce is 2–3 times more costly than traditional channels, because it’s very expensive to drive demand online. Educating consumers on the products is both costly and time-consuming.

3) Distributors as a Threat

It seems to be increasingly important in China for MNCs to reach out to end users directly and own their customer relationships. In the medical devices space, for example, distributors are copying the devices from MNCs and then selling them to clients as a cheaper option.

In many cases, it is the distributor who has developed a close relationship with the buyer (e.g., a hospital or doctor). Because of this relationship, they will be invited into the operating room to help operate the device. As a result, the original manufacturer loses control over its sales and marketing process as well as its brand image.

4) Go beyond “Volume” to “Value-Based” KPIs for Distributors

MNCs are experimenting with new ways of incentivizing distributors; many of these methods utilize KPIs based more on value than on volume. Companies see quarterly reviews with their China leadership as critical to success.

During the workshop, I asked our clients on how their 2014 targets comparison with 2013. Their responses were quite interesting:

China 2020 Polling Graph

■     Extreme views are emerging on China’s 2014 MNC business outlook; 37% of respondents expect growth in 2014 to be less than 5% higher than 2013 or slower than growth in 2013

■     On the other hand, 55% of the respondents expect their business to grow by more than 10% this year, and a staggering 26% expect their business to grow by more than 21%

In FSG’s recent report on distribution management in China, we a) explore in-depth issues around distributor consolidation and how government policies are impacting the business landscape, (b) provide a robust and pressure tested framework for MNCs to consider as they evolve in their game plan to go direct or indirect from tier 1-5 cities in China; and c) provide tactics around what other multinationals have done in China (with inspiration at times taken from local companies in China).

FSG clients may click here to access to report.

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