DISTRIBUTION NETWORKS WITH CHINESE CHARACTERISTICS

The main distribution models used in China each have characteristics that affect reach and brand awareness.

·         Recently privatized channels  Many of China’s domestic agents and distribution channels are offshoots of the state-owned system and were privatized over the last decade. Such distribution channels—made up of many smaller distribution networks—tend to be large, combine well-established infrastructure networks, and require companies to use strong guanxi at the county- and municipal-government levels (see Three Tips for Distribution in China). Companies that use privatized channels to distribute product in China may find it necessary to build strong relationships to make sure product moves as planned. Even when brand recognition and power is strong, bureaucratic processes may limit efficiency.

·         Concentrated wholesale markets  In the late 1980s and 1990s, merchants began to congregate in various locations to sell branded and similar products. A decade or two later, some cities have become famous for certain products. Suzhou, Jiangsu, offers furniture wholesale markets; Yiwu, Zhejiang, is famous for small commodities. Such focused channels serve as distribution points for small- and medium-sized manufacturers, allowing them greater access to China’s urban consumers. According to a Li and Fung Group report, 4,567 wholesale markets boasted sales revenues that exceeded ¥100 million ($14.6 million) in 2008, up 10.8 percent year on year.

·         Business-to-consumer services  Increasingly, manufacturers have been expanding their business-to-consumer capabilities. Customers that buy directly from manufacturers often get lower prices but receive service that tends to be below industry benchmarks, because customer service lies outside a manufacturer’s core competencies. Few manufacturers have successfully transitioned from original equipment manufacturer to original designer and original brand owner. Among those that have made the transition are Jiangsu Anyang Fashion Co., Ltd. and Shenzhen Kingsun Optoelectronics Co., Ltd. Anyang Fashion began as a US-invested firm that produced garments solely for export. Today, it is a Chinese-owned company with design capabilities and plans for brand and retail expansion. Shenzhen Kingsun Enterprises, the largest high-power light-emitting-diode (LED) lighting product supplier in China, now has a research and development team of more than 400 people.

·         Decentralized distribution systems  With the liberalization of the commercial sector in 2004, a growing number of foreign agents and distributors have established themselves in China. Through complex subcontracting networks, foreign distributors can work directly with traditional retailers. But these networks tend to lack advanced practices in demand planning, inventory management, and logistics networking—which leads to higher operational costs. This is primarily because such networking involves Chinese partners who lack a sophisticated knowledge of international-standard operations and technology.

·         Online distribution channels  The rapid expansion of the Internet in China, which now has more than 400 million users, has created online distribution channels. Alibaba.com Ltd. and its subsidiary Taobao.com reach a broad range of customers. In April 2010, Taobao reported over 190 million users. The combination of Alibaba and Taobao creates business-to-business and business-to-consumer opportunities. Foreign companies are also expanding into this market through such online distributors as JiGoCity.com. JiGoCity works with a large network of consumer service companies to offer collective buying directly to customers through their expanding network of online users.