China: Trend: Taking control of distribution in China

Last Updated: 1 July 2015
Article by Maarten Roos

In international media, one of the leading economic stories in recent years has been the slowing growth of the Chinese economy. Indeed, China's GDP officially grew by only 7.4% in 2014, slipping from 7.7% in 2013. However, this is not making China less interesting as a target for international business. Heavy industries may be suffering, but the demand for consumer goods and services from China's consumers, for example, is booming. Modern shopping malls are rising across China including in smaller cities, China has taken over as the world's largest car market, and the Chinese have become the biggest buyers of international tourism and education abroad.

For many international businesses, this means a renewed focus on China, and how to reach a middle-class which is growing larger than those of Europe and North America combined. This requires a commercial plan, combined with some crafty legal structuring.

Traditionally, many international brands have outsourced sales in China to distributors in China. A Chinese (incl. Hong Kong) company was deemed more familiar with consumption practices in China, could build and maintain close relationships with customers (incl. state-owned ones), and was even willing to share in some of the cost and risk. In all kinds of sectors from fashion to medical devices, to equipment and to F&B, international businesses relinquished control over distribution in China. Recent trends show that many businesses are eager to take back control over their Chinese distribution channels.

In the remainder of this article, we focus on some of the legal challenges that international companies face when restructuring distributor relationships: how to build self-owned distribution channels, how to terminate distribution contracts, the importance of ensuring IP / trademark ownership, and managing product registrations.

  1. Building Self-owned Distribution Channels

Although many international companies have been taking advantage for years, for others it will be news: China allows, and in fact encourages, foreign investors to establish self-owned distribution companies. Over the past two decades, most economic sectors have been opened to foreign investment, with restrictions remaining for only a few sectors that are deemed of national interest. Chinese-registered companies solely invested by foreign businesses (so-called wholly foreign-owned enterprises, WFOE in short) can thus engage directly in the domestic and international trade of all kinds of products. They also have the choice of opening retail outlets to reach individual consumers.

It is no longer difficult to establish a WFOE in trading or retail. Procedures are inevitably more complicated than in "lighter" jurisdictions such as Hong Kong, but there are plenty of good lawyers that can help to navigate China's bureaucracy. Minimum investment requirements have mostly been abolished, while companies have much freedom to determine their own corporate governance structures. The new PRC Foreign Investment Law, which is currently in draft and may be promulgated later this year, is another step to make life easier for international businesses to set-up shop in China.

It is also important to remember that a subsidiary established in one location can do business all over the country. If it makes sense commercially, it can open subsidiaries, branches or liaison offices to have people on the ground in other cities, for example to conduct sales or support local customers. And local partners can be engaged to provide support in building and maintaining relationships with special customers, such as government departments. But from a legal perspective, all trade can be organized through and financially consolidated in the one Chinese entity.

  1. Terminating Existing Distribution Contracts

One legal challenge that many companies will face, is to terminate relationships with existing distributors. In some cases this is easy: if the distribution agreement was properly drafted, termination clauses should provide clear and unabridged guidance how to manage termination, and at what cost.

Where the distribution contract is not exclusive, another choice may be to let it run parallel to self-owned channels. Or perhaps it is beneficial to directly acquire the Chinese distributor or its distribution network – as is permitted under Chinese law. A detailed due diligence will be needed, but if it can be implemented then it will allow for a flying start to further developing the business. The best distribution agreements may already foresee in such an option, though in the end this will usually be a matter of negotiation.

International businesses may face tougher residence if the distribution agreement is exclusive, and does not include any termination clauses, while the Chinese counterpart refuses to deal. A choice will have to be made between breaching the exclusivity term and building a parallel structure, or terminating the distribution agreement without cause and risking claims for damages. A legal analysis will have to be made on a case by case basis, but in practice loopholes can often be found to minimize the risks to potential claims for damages. It is good to remember that filing claims in Chinese courts can be a difficult and cumbersome process for your opponents, acting as a natural barrier to all but the strongest of legal claims.

  1. Ownership of trademarks / intellectual property

A key part of any distribution strategy, is to establish the ownership of relevant brands in China. Risking limited contractual claims is one thing, but making large investments without brand security may prove to become an insurmountable hurdle to overcome. Some particular issues in the Chinese setting:

  • China's system for protection of trademarks is modeled on international standards, which means that trademarks must be registered in China (either directly or through the international Madrid system) to be protected in China. By applying the first-to-file rule, China does not offer specific protection to international trademark owners who are late to register their trademarks. As a result, trademark squatting by business partners (incl. distributors) and third parties is very common.
  • In the context of a distributor relationship, international businesses often discover late that their Chinese distributor has taken the initiative to register relevant brand names – if not the international company name and brand names for specific product lines, then at least the Chinese equivalents thereof. This can result in a major dispute. If registered in bad faith, the international owner may have the legal grounds challenge the trademark registration of a distributor, but this will take time and success is not guaranteed. Meanwhile, the distributor continues to hold the trademark rights, and can threaten legal action if the international brand owner tried to enter China directly.

Even international brand owners that are not (yet) contemplating a change to their business model should review whether they own exclusive trademark rights in China; and if they do not, should develop a strategy to either obtain such rights (whether through legal action or friendly acquisition) or build new brand names (e.g. in Chinese) that they control. Even with a less-than-perfect reputation for legal protection of IP rights, it is not advisable to roll out a distribution strategy while being under constant threat of seizures and lawsuits.

  1. Managing Product Registrations

Another focus point that deserves attention, is that of product registrations. Many categories of goods are not subject to special licensing, which means that a Chinese trading company (including one with foreign investment) can import such goods and then sell them in China without obtaining specific product registrations or approvals. Other categories of goods, however, are subject to special supervision and/or approvals, and this includes certain food and feed products, medical devices, health products, pharmaceuticals and active pharmaceutical ingredients, cosmetics and ingredients, and even various electronic goods (which are subject to CCC certification).

Product registrations are usually very bureaucratic and therefore take a lot of time to complete, while existing certifications from foreign countries generally do not count for much. As a result, product registrations are very valuable, and so where possible companies should avoid placing distributors in charge of product registrations. Examples abound where distributors take advantage of their powerful position in the distribution chain to extort their international counterparts. If using distributors in product registrations is unavoidable (for legal or for commercial reasons), then the acquisition or renewed filing of product registrations will become an important part of the strategy to take over distribution through a wholly-owned entity in China.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Maarten Roos
Similar Articles
Relevancy Powered by MondaqAI
R&P China Lawyers
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
R&P China Lawyers
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions