Distribution in China: Market Opens

China’s recent accession to the World Trade Organization (WTO) will forever change the way foreign firms (and domestic ones) do business in China. Distribution services will be among the areas to first experience dramatic change, as foreign companies will be allowed to enter the wholesale business in China for the first time. This will have affects for all sectors, including pharmaceuticals, nutritional supplements, and medical equipment.

Yu Mingde, Vice Director of the Economic Operation Department of the State Economic and Trade Commission announced recently that China will open its drug distribution services sector to foreign drug wholesalers and retailers as of January 2003. Until then, companies may begin distribution operations through joint ventures with Chinese companies. The Chinese partner must hold at least a 51 percent share of the JV, and must meet certain revenue requirements. The foreign company should have over US$2billion average annual sales for the three years prior to the application’s submission and more than US$200 million in total assets the year prior to the application. These rules are similar to those for the distribution of other products.

Under the previous system, foreign multinational manufacturing companies had been limited to distributing only their products that were manufactured in China. Most multinationals manufacturing in China were also unable to co-mingle products manufactured throughout the country in a single distribution warehouse, or import their own products that could be sold with their products made in China. These problems have led to gross inefficiency and exorbitant distribution costs. Distribution and logistics presently accounts for 40 percent of a product’s total cost in China, compared to about 10 percent in the West.