As multinational companies expand their market presence in China, local distribution partners are crucial due to their advantages in local networks and market expertise. However, China has a very fragmented distribution landscape with local-market nuances, making it difficult to design an effective indirect channel strategy.
FSG has built a three-pronged strategic framework and compiled a few best practices illustrating how MNCs and local companies have successfully improved their indirect channel sales in China.
Here are three crucial strategic areas for distribution management in China to consider:
- Enhance indirect channel design
China’s ever-changing distribution environment—a product of distributor fragmentation, regional market differences, rapid online channel development, relationship-based business culture, and policy changes—requires an effective yet flexible distribution channel design strategy. Regularly evaluate your distribution structures and plan for channel transitions carefully.
To prepare for China’s policy-driven industry consolidation, some multinationals have started to consider potential channel restructuring options, such as reducing lower-tier distributors by outsourcing sales support to contract-based sales organizations (CSOs), investing strategically in Tier 1 distributors to eliminate one layer of sales transaction, and establishing self-owned sales platforms.
Reduced distribution layers allow for enhanced long-term customer access and channel transparency for companies. In the short/medium term, effective policy scenario planning for regulatory changes and implementation timelines will also help MNCs get ahead of competitors.
- Align indirect channel incentives
As MNCs expand in China, their lack of local market networks and expertise often requires more local distributor support. To ensure that the channel partnership power dynamics are not tilted in favor of distributors, especially in China’s less sophisticated lower-tier markets, offer appropriate incentives to keep partners and internal stakeholders engaged.
Some MNCs have streamlined their channel networks by adopting a national partnership program for each tier and rewarding distributors with status-based incentives. Some have prioritized sales team and distributor monetary incentives on sales-out metrics (e.g., sales volume to end customers) to help distributors better manage inventory levels and financial volatility, which are common challenges for small, immature distributors in China.
While financial incentives are critical for pricing and value chain alignment across the sales process, non-monetary incentives are also key to driving partner loyalty. In fact, personal engagement tactics have proven very effective in fostering trusted partnerships, especially in lower-tier markets in China where guanxi (relationship) prevails. We have seen many foreign companies actively investing in personalized interactions with their Chinese partners to address the challenge of distributor business disengagement, leveraging tactics including senior executive visits, joint sales meetings/calls, face-to-face workshops, one-on-one joint business reviews, and frontline sales rep events.
- Offer distributors essential support
Because distributors in lower-tier cities tend to be less sophisticated and lack essential sales capabilities, you will also need to develop a solid partnership support system to help distributors learn and grow.
For example, financial instability has been an issue for many SME distributors in China; they sometimes cannot accept larger volumes for potential sales because of financial pressure resulting from holding inventory. An increasing number of MNCs have been helping distributors get around credit risks through global financial partnerships. One industrial MNC in China used its global leverage to motivate banks to underwrite distributor credit in China, mainly targeting large syndicated financial institutions. In other cases, MNCs don’t necessarily need to serve as credit guarantors for distributors at the bank in China. Offering documentational and in-person support when distributors negotiate with the bank is sometimes enough for distributors to obtain stronger financial backing, which in turn enhances MNCs’ supply chain management.
It’s also important to conduct a behavioral segmentation exercise to identify sophistication gaps in distributor sales and/or customer needs for targeted education.
- If distributors are not aligned on your solution-oriented value proposition, then training programs on value-based selling will be essential.
- In situations where distributors may be able to drive the much-desired technical sales, but the immature local customer base does not respond to value-based selling very positively—which disincentivizes local distributors—you will then need to further localize products and services to cater to local market needs (e.g., middle market segment), and work with distributors closely to educate local customers in the long term.
As China’s customer sophistication and distribution landscape further evolve, MNCs must develop an effective distribution management strategy by localizing distribution structures, offering the right monetary and non-monetary incentives, and providing essential commercial support to build sustainable channel partnerships. MNCs can leverage FSG’s strategic framework and 15 case studies in these targeted areas to improve indirect sales in China.