As we pointed out in "Direct Exporting: Advantages and Disadvantages to Direct Exporting," there are several different methods of exporting, one being a direct export by way of a distributorship appointment. The appointment becomes an agreement between a manufacturer and a distributor that outlines terms of the relationship, such as manufacturing, distribution, ownership, duration, price and intellectual rights, to name just a few. Here we examine what an international distributor does and what you need to know before appointing one.
An international distributor:
1. Buys the product outright, takes title and assumes the risk of re-selling in the local country.
An international distributor purchases product from a firm in another country at what is often a substantial discount due to the expectation that the distributor will buy in volume to offset the expense of moving the products across thousands of miles. They typically mark up a product to cover their profits. The distributor should be knowledgeable about the market, including local laws, and have mastery over the industry within which the product is being sold.
2. Imports the product on an exclusive or non-exclusive basis.
An international distributor imports the product on an exclusive or non-exclusive appointment and based on the terms of the negotiated contract. A manufacturer can elect to have several distributors in a foreign market provided it is agreed upon within the contract. Alternatively, a manufacturer can appoint an exclusive distributor provided the distributor meets specified sales goals over a specific time period. If they don't, the manufacturer has the right (so long as it is stated in the contract) to revert to a nonexclusive appointment and hire other distributors for the same territory.
3. Stocks the product in his local warehouse.
An international distributor stocks the product in his local warehouse and re-distributes it to his customer base in the local country. It is prudent, therefore, for the manufacturer to visit the facility in person well before signing a contract to ensure it meets all warehousing standards, including inventory management and appropriate labor laws in the local country. Distributors typically act fairly fast with customers in a local country. After all, it's their job and makes their money.
4. Markets and advertises the product in the local country.
An international distributor is responsible for actively promoting and marketing the products via all appropriate online and offline marketing channels, such as trade shows, social media, billboards, direct mail pieces and newsletters. This may also require the translation of marketing materials for the natives of a local country to understand the product's capabilities and usage policy.
5. Communicates with the home office (original manufacturer) with timely progress reports.
Manufacturers can elect to hear from a distributor as often as they deem necessary for measuring progress. This is negotiated in the contract, and the trick is to set a minimum goal - say, monthly or quarterly emails, telephone calls or Skype conversations - to ensure regular communication. Further, you might also include a statement in the contract that encourages a pipeline of new product ideas based on local market trends as well as leads from customers that might fuel a new product extension or new avenue for growth for both parties.
6. Handles all after sales support and service.
An international distributor will be responsible for addressing all customer sales inquiries, warranties, guarantees, technical issues, training and repairs (troubleshooting) that involve the purchase and/or consumption of a product. The distributor must have a competent sales force to adequately serve the market.
7. Absorbs all credit risks and tax liabilities in the local country.
An international distributor incurs credit risk and tax liabilities in the local country on behalf of the manufacturer because the distributor serves as an "independent contractor" for the manufacturer.
8. Performs according to the terms and conditions of the international distributor agreement contract.
Don't forget, the contract should cover pricing, quantity to be ordered, geographic jurisdiction, exclusivity or non-exclusivity appointment, duration of contract, product liability insurance, etc. The more specific and clear it is, the more useful it will be for enforcing everything you expect done.
Putting together a solid agreement contract that meets the needs of both the manufacturer and the international distributor is critical at the outset of the relationship. Hiring an international attorney is highly recommended to minimize potential risks, including but not limited to protecting a manufacturer's intellectual property rights. One last critical detail that everyone tends to overlook: Establish a clear understanding of how to get out of the contract should it not work.