Designing effective channel strategies in China remains a critical issue for most multinational corporations, despite the fact that many of them have been operating in the country for decades.
Among all distribution management topics that B2B multinationals are concerned with, distributor capability alignment and channel visibility are particularly elusive in the Chinese market, creating further impediments for foreign companies to gather necessary market information through indirect channels and expand to lower-tier cities with less developed infrastructure networks.
(Above – Sources: FSG Channel Performance and Transitions Benchmarking Survey)
As a crucial step toward the successful designing and execution of multinationals’ channel strategy in China, FSG has identified five key distribution challenges that B2B multinational executives must understand and closely monitor:
1. Distributor Fragmentation
Multinationals face a highly fragmented B2B distribution landscape in China. With limited geographic reach and relatively little capital, many small distribution players are unwilling to expand across regions or to develop new business for product suppliers, forcing multinationals to seek partnerships across provinces and through multiple channel layers. With a recent distributor consolidation trend driven by the government, China’s business environment becomes even more complicated for foreign enterprises, especially for those in the pharmaceutical and automotive industries.
2. Regional Market Differences
Great variations among China’s regional markets limit pricing strategies and require different distributor capabilities. Multinationals are prevented from adopting varied pricing strategies across regions, which would allow distributors to engage in opportunistic and harmful arbitrage activities outside their designated geographic markets. Many distribution industry practitioners have also expressed concerns over inconsistent commercial law, as regulations are interpreted and enforced differently across regional markets.
3. E-commerce Threat
With China being the world’s largest e-commerce market, its rapidly growing B2B online platforms pose a potential threat to multinationals’ existing offline distributor networks. As the online model becomes essential for many companies hoping to thrive in the Chinese market, how to craft a multi-channel strategy to optimize distribution management without hurting offline channels will become a key area of concern for multinationals.
4. Tightening Credit
Many local B2B distributors tend to be small startups with limited access to financing options and usually insufficient capacity to carry inventories. As the Chinese leaders become increasingly concerned about mounting local government debts and entrusted loans, credit tightening in the overall economy is likely to exacerbate credit situations for smaller distribution players.
5. Legal Complexities
Foreign firms entering the Chinese market, especially in the pharmaceutical industry, must seek local channel partners with sufficient capabilities to deal with the multi-layered legal approval process. In addition to maintaining high standards under increasingly stringent government scrutiny, multinationals must often spend extra time and resources navigating China’s immature regulatory system to avoid potential distributor violations in Foreign Corrupt Practices Act (FCPA), intellectual property rights, and environmental protection compliance.
Aiming to help our clients better align distributor capabilities with their market strategy under China’s complex B2B distribution environment, FSG has developed a three-pronged approach, “Evaluate, Motivate, and Support,” to tackle the issues of insufficient operational transparency and lack of long-term trust in channel partnerships.
I will follow up next week with several successful B2B distribution cases in which multinationals have managed to effectively address these challenges.
For a full report on B2B Distribution Management in China: Understanding and Enhancing the Performance of Your Channel Partners, FSG clients can visit the client portal. Not a client? Contact us for more information.