What are the risks of entering the market in China with a local distributor?
You have established your brand in the West and enjoyed a rapid growth in demand. Now you are considering dipping your toes into the China market by having your first retail presence. It is not uncommon to see brands partner with Chinese companies to leverage on their existing sales channels. This is a good way to test products or services while limiting the investment in on-the-ground logistics and infrastructure. You ask yourself: “What could possibly go wrong?” While this sentence may sound like famous last words, this article discusses the common issues that brand owners face and how brand owners can pre-empt issues.
What are the risks?
1. Losing control of your brand: Especially as your brand gains traction, there is a risk that bad actors will explore ways to register things related to your brand such as your IP rights (trade marks, designs, copyright). They may choose to register social media accounts, websites or e-commerce stores to market counterfeit products, or even your own products! Some aim to sell it back to you later, whereas others want to release lookalike or counterfeit products in the same space.
2. Losing your IP, social media, and websites / domains to your distributor: This usually happens in the event of termination. Poorly drafted distribution agreements are usually the usual culprit.
3. Bringing yourself further hardship in the event of termination: this usually happens when a contract is too hard or too easy to terminate, combined with lack of clarification for what happens after a termination. When relationship falls apart, ambiguity of duties is the last thing you need.
4. Closing your other opportunities: this happens when you grant exclusive distribution rights without proper due diligence.
5. Someone else already registered your brand’s Chinese name: only registering your brand in your home language does not ensure that your brand’s preferred Chinese name won’t be used.
6. Discovering products bearing your trade mark or product design being exported out of China: These are usually counterfeits unless you have a production line in China for the export market.
What are the solutions?
1 .Making sure your agreements with Chinese partners cover the use of your IP rights, including:
- Ownership of the IPs (such as your trade mark and copyright images) stays with you and can only be used with permission. They shouldn’t be allowed to register additional rights in their name.
- Authorisation must be sought from you before they could engage in any public presence, such as creating any social media, e-commerce accounts and engaging in marketing campaigns.
- Guidelines on how they should adhere to your brand positioning. For example, whether they can market your products along with competitors.
2. Drafting your agreement to specify issues around termination (such as mechanisms for termination and post-termination duties).
3. Carrying out due diligence with background checks into partners. It is not uncommon for some distributors to sell both counterfeit and original products or use originals to create counterfeit products.
4. Deciding your brand’s Chinese name, then conducting an online search to see if it is already registered by someone else. Take follow up actions to ensure your brand’s Chinese equivalent trade mark is registered (the name that consumers may use to find your products online). You may want to create the name with marketing professionals and then ask for legal advice regarding the name. Or you may wish to find out what Chinese consumers are using to find your products online.
5. Conducting periodic monitoring of Chinese e-commerce platforms to check for knockoffs and bad faith trade mark filings.
6. Registering your trade mark, design patents or copyright works with the Chinese Customs. This helps prevent third parties from exporting products bearing your trade mark or product designs from China. Each recordal filed with the customs is valid until the expiration date of the registered mark and can be renewed by submitting a scanned copy of the renewal certificate before the expiration date.
Common entry steps include partnering with a Chinese distributor with an on-the-ground presence, using Cross-Border e-commerce platforms or setting up your own local presence.
China presents a fantastic opportunity for introducing your products to a new market. But it’s important that taking proactive steps ensuring you have your IP protected and agreements in place with partners, as well as monitoring the marketplace for adverse parties means you can take advantage of the opportunities while minimising the risks of losing control of your brand. Spending some time and resources now can save a lot of costs further down the line if you are forced to reactively solve problems that have festered.
What other problems does your brand need to prepare for?
Get insight and professional advice on the common issues and concerns businesses need to understand and may be facing when entering into China:
- Is your brand moving into new markets? Look (and search) before you leap! What obstacles do brands typically face when expanding overseas?
- How should your brand fend off copycats? What should you do when someone registers your trade mark before you?
- Copyright Customs recordal – your brand’s saving grace? In the absence of trade mark rights, is Copyright Customs recordal an effective last-minute protection replacement?
For further information, please contact:
James Godefroy, Senior Consultant, Rouse