Evaluating Foreign Distributors
Your company has spent time, money and other
resources to identify potential foreign distributors for your products. Now
you have to decide which distributors are correct for you. What do you do? We
strongly encourage you to contact an international business consultant or
other qualified international business professional. However, before you do
contact an international business consultant/professional, there are some
basic things that you can do yourself to further evaluate your distributor
candidates, thus saving your company some money in making the final decision.
Role of the Foreign Distributor
Your company wants to sell its products in
foreign markets. Increased sales mean increased revenues, which should
translate into increased profits. In order to accomplish this goal, you must
first establish distribution channels in foreign markets. Whether or not you
decide to set up your own export department or you work with an established
trade intermediary, such as an export management company or global trading
company, you will interact in some way with the foreign distributor. Many
people believe that the Internet will eventually eliminate the foreign
distributor. We are not yet convinced that this is true. For the present time,
very few products can be directly sold in foreign markets without a foreign
For all intents and purposes, the foreign
distributor which represents your company in a foreign market (in some
countries you will be compelled by law to work with only one primary
distributor who will in turn work with smaller wholesale distributors in that
market) is YOUR COMPANY. Distribuidoras S.A. in Chile is equal to Widgets
Manufacturing Inc. in Philadelphia, Pennsylvania. The Chileans who buy your
widgets from Distribuidoras S.A. are in fact dealing with your company,
Widgets Manufacturing Inc. Therefore, the decision about which distributor to
select is a very important one.
What Does a Foreign Distributor Do?
Some cynics will suggest that foreign
distributors are quickly becoming obsolete in international trade as the
Internet becomes more important in global commerce. In some instances, this is
very true. Small items such as books, jewelry and clothing can be easily
shipped to a foreign destination via postal mail or by way of several
different express shipping companies such as DHL, Airborne, UPS, Emory and
Federal Express. Upon arrival, such small packages can be easily cleared
through Customs' and if there is any Customs' duty payable, it can be
collected upon delivery. However, most of the products sold in international
commerce are neither small nor easily shipped. This is where the role of the
foreign distributor working in conjunction with the Customs' House
broker/foreign freight forwarder becomes extremely important.
Foreign distributors may be classified in two
A stocking distributor will purchase inventory
from the manufacturer or export intermediary. In this way, he/she assumes some
risk for selling the product to smaller distributors and/or end users in the
foreign market. Generally speaking, a stocking distributor must be a
well-established company with a competent sales force that is large enough to
cover the country or region in which it is located. Stocking distributors
expect manufacturers or export intermediaries to pay some of the costs for
local advertising and in some cases, warehousing for the product. Foreign
distributors call this "distributor support". Paying support costs
is legal and is in the best interests of the distributor and the manufacturer.
Occasionally, unscrupulous distributors will abuse this long established
international commercial practice to solicit bribes so that the products might
be distributed in the foreign country and unscrupulous manufacturers will try
to offer bribes to important foreign distributors in order to prevent their
competitors from gaining entry to the marketplace.
Non-stocking distributors generally maintain
only catalogs and/or samples of a product and take orders from customers in
their market. There are many reasons for this practice; among them would be
the following: ·
custom manufactured products ·
seasonal sales ·
perishable food products
limited number of potential buyers
Both types of distributor are appropriate
depending upon the product being sold. You will very rarely have to choose
between a stocking and a non-stocking distributor. Foreign distributors are
very competitive. Their business is selling your products in their
marketplace. If they can not convince your company to choose them as its
representative in their country, they might be losing a significant business
opportunity. Therefore, foreign distributors have a vested interest in
convincing you to do business with them especially if there is a high demand
for your product in their country.
Foreign distributors work together with the
foreign freight forwarder and Customs' House broker to move your products from
the factory to their warehouse or showroom. A foreign freight forwarder is a
company that arranges for the transportation of your products from the factory
floor to a foreign destination. Foreign freight forwarders work very closely
with trucking companies, railroads, airlines and steamship companies. They
earn their fees by obtaining the best service at the lowest prices for your
company and by properly completing the appropriate forms and executing the
correct procedures so that your shipment is secure and will not be held up in
Customs' upon its arrival in the foreign country. The foreign freight
forwarder is often located nearby your company's factory. Your export
intermediary or in-house international trade specialist is probably very
familiar with many local foreign freight forwarders and can assist you in
choosing the best one for your company. If your shipment is less than a 20' or
40' truck container and will travel overland by rail or truck and then go
overseas via air or steamship, you will then need the services of a
specialized foreign freight forwarder called a freight consolidator. The
freight consolidator buys a large amount of cargo space, typically in 20' or
40' containers for steamships and in some cases in special air cargo
containers, and then sells the cargo space to several smaller shippers like
yourself, thus consolidating many small shipments into one or two containers
and saving your company money on shipping costs. The foreign freight forwarder
and freight consolidator will have Customs' House broker contacts at the
foreign destination. The Customs' House broker's job is to clear the shipment
through Customs as quickly as possible. It is very possible that the foreign
distributor has not participated in choosing any of the other trade
intermediaries, which help move your goods overseas. However, the foreign
distributor knows his/her market very well and will often collaborate with the
export trading company or export department and the other trade intermediaries
mentioned above to assure the quick and efficient movement of your goods from
the factory floor to their distant foreign destination.
After clearing Customs', your products are
shipped to the foreign distributor's place of business. Certain products, such
as home appliances, sporting goods equipment, furniture and toys, may require
the foreign distributor to maintain a large warehouse. Larger foreign
distributors who sell to smaller wholesale distributors might possibly have a
showroom or product display area that is located nearby their warehouse but
not necessarily in the same facility. Stocking distributors will typically
order merchandise based upon their existing inventory and their predicted
sales. Experienced stocking distributors know their customers very well and
are usually able to anticipate their needs. A non-stocking distributor will
notify his/her client of the arrival of their goods and then make arrangements
with a local freight forwarder to move the merchandise from the port to its
final destination. In some cases, especially in the case of custom-made
products, it might be necessary to settle the account that is to complete the
financial aspect of the transaction before the goods are moved. Depending upon
how the transaction is arranged, the merchandise might be stored in what is
called a bonded Customs' warehouse until the buyer makes arrangements to pay
the remainder of the cost of the product.
How Do I Get Started?
Before you begin the process of evaluating
foreign distributors, you must decide upon your company's international
marketing infrastructure. As a manufacturer, you do have several choices of
international business professionals who can add value to your business
activities. However, you really only have two choices for how your company
will set up its international operations in the beginning:
an export marketing intermediary
setting up an international department
1) Working with an export intermediary,
usually an export management company or a global trading company, is probably
the fastest and easiest way to get involved in selling to foreign markets.
Export management companies will function as your export department. Their
name indicates their special orientation but they are merely another form of a
global trading company. Global trading companies act as manufacturers'
representatives in overseas markets. Often these companies have established
networks of distributors in several countries. Their primary role is to assist
you in setting up a distributor network in overseas markets. They rely upon
their years of experience in global trade and their extensive knowledge of
foreign markets to quickly get your products in front of foreign distributors
who have the capability of distributing them in their particular market.
Export intermediaries come in several different
sizes and have varying levels of expertise. In some cases, especially when the
product involves technology, an intermediary's specialized knowledge of the
product could be most important. In fact, some global trading companies will
specialize in certain product areas. In other instances, product expertise is
not very important, but getting into several markets is important. Your choice
of an export intermediary will depend upon the following issues:
a) Does my product require a sales force
knowledgeable in high tech products or some other kind of very complicated
b) What types of companies has this
intermediary represented in the past and what types of companies does it
c) Does this company have enough qualified
people to assist my company in setting up our foreign distributor network as
quickly as possible?
d) How difficult will it be to get somebody on
the telephone to deal with any problems which might arise?
e) Does anybody speak any foreign languages?
f) Does the advice that they offer to you seem
reasonable and how do your other business advisers perceive this company?
g) Does the company offer you both foreign and
h) Is the company willing to allow you to meet
the people who will be actually handling your account or are you meeting with
only top-level executives?
i) Do people working in their office seem
genuinely happy? Do clerks and assistants smile and speak to you? Are they
willing and able to answer your questions?
Export intermediaries really do facilitate the
transition into selling in foreign markets, but they also have a downside.
Global trading companies sometimes seem to be more interested in promoting
their own business interests than promoting their clients' products. However,
there is a very good explanation for this. From my own experiences I can tell
you that many companies say that they want to become involved in exporting to
overseas markets. However, very few realize how much work is involved in
changing a company so that it has the capability of becoming successful in
international trade. Therefore, there is an extremely high failure rate for
companies who get started with exporting but do not have the wherewithal to
follow through and continue onward with a sound business strategy until they
are successful. For very good reasons, global trading companies are reluctant
to damage the goodwill that they have built up with foreign distributors and
other international business experts who help them to work with their clients.
One reason for this can be attributed to manufacturers who do not understand
the function of an international business intermediary. Poor communication
between manufacturer and export intermediary has killed many successful
business opportunities. You have to be completely honest with your export
intermediary because failing to do so will often result in bad feelings with a
foreign distributor. This is not a good thing.
2) Setting up an international department is
your other option. While doing this gives you complete control of your
company's international business activities, it is an option that must be very
carefully considered. Companies seem to make the same general mistakes when
setting up their international department:
a) Choosing the wrong personnel. This is the
most common mistake that smaller companies most often make. There is a
misconception that anybody can figure out how to do business overseas. It's
thought that it is merely a matter of reading a few how-to magazine articles
and you're ready to go. This is wrong. Too often, successful small business
owners want to adapt their style or formula to international business and it
just does not work. The biggest mistake is in thinking that all you have to do
is choose an aggressive salesperson and you will be successful. In reality,
many business owners are afraid to hire a qualified international business
specialist because that means going outside of the company for special
expertise. If you plan to set up your own international department/division,
you need to have a competent and qualified person to run it. It is just that
b) Not paying a high enough salary. If you are
going to set up your own international department, you need to have enough
revenues to be able to allocate a special budget for this purpose alone.
Skilled international business specialists are paid a little more than other
employees are with comparable experience because of their specialized skills.
If you try to hire somebody at less than the market price, you will be hiring
a person who needs a job immediately. I can guarantee you that this person
will leave within a year and will waste your time and resources either
developing their own projects or looking for a better job. Do not be cheap.
Find a qualified person, pay them a decent salary and allocate a sufficient
budget to allow that person to hire experienced and qualified support staff.
c) Insufficient budget. Besides salaries for
top rated personnel, you will have to develop collateral marketing materials
suitable for your target markets. You will also have to pay travel expenses
and several other additional costs. Too many companies do not allocate a
sufficient budget for their international division and therefore set it up for
d) No strategic plan. This is a deadly killer.
You must have a strategy that takes into account your company's capabilities
and the advantages of your product or service. You have to be prepared to
knock down some barriers to entry in certain foreign markets and to deal with
serious competition in others. The time to figure out what you are going to do
is before you actually begin marketing in overseas markets.
e) Failing to do proper research. The Internet
has changed the global playing field in a remarkable way. There is now so much
information available about so many products and services worldwide that
potential buyers have more and better choices. Because there is so much
information available, it is very important to do the appropriate research to
identify your competitors and to fully understand what is happening in your
particular industry worldwide. Too many businesspeople neglect doing the
proper business research, often due to cost considerations. Once again, the
cost for good international business research is higher than what one might
pay for comparable domestic business research. It is better to pay the proper
cost in the beginning because failing to do so will almost always guarantee
that you will pay considerably higher costs later on.
f) Being too impatient. I once worked at a
global trading company that was acquired by an owner of a small manufacturing
business. This man used to pester me for a daily forecast of sales in my
division. Finally, I had to leave because he just got too impatient.
International business requires a longer transaction time. In my experience,
most industrial products require from 9 to 18 months from the first sales
letter until the first order. You are not going to set up your international
division and then start getting orders three to six months later unless you
have developed some exciting new technology that companies want immediately
because it will help them make money. This is a fact about international
business that many companies just ignore when they make their plans.
Your final decision about how you wish to set
up your company's international marketing structure will depend upon your
comfort level and also your available budget. If you do not have a sufficient
budget to hire skilled and experienced international business people, you
should forget setting up your own international department or division and
look for an international intermediary to help you set up your distributor
We are going to assume here that you have
decided to work with an international trade intermediary, which is the most
common choice of companies looking to get into global markets. Therefore, it
will not be necessary to discuss how to find a distributor because that is
exactly what global trading companies do. There are several kinds of working
arrangements between a global trading company (Remember that an export
management company is a special type of global trading company.) and a
manufacturer. The differences will vary only in two ways: will the
intermediary actually take title to the goods and then resell them or will the
intermediary function more as your export department, not taking title to the
goods and receiving a commission? Some manufacturers prefer working with an
intermediary that is actually going to buy the goods outright and then resell
them for whatever price they can get. This method involves much less hassle
and to some extent, less paperwork to get paid. It is also less risky. Its
biggest disadvantage is that the intermediary controls the price of your goods
in international markets. Another problem is that your company loses some
degree of contact with the foreign distributor. On the other side is the
situation where the global trading company acts as your export department,
using your letterhead and only changing telephone numbers and addresses, etc.
and assumes the same risk as your company. This is more risky for your
company, but it allows you to maintain more direct control of your product in
global markets. It also allows you more direct contact with the foreign
distributor. For companies new to export, this is probably the better choice
and the one that we will cover here.
Evaluating a Foreign Distributor
A former colleague of mine, an older lady with
many years' experience as an export manager once told me the following:
"Anybody can find a foreign distributor.
That's easy. Finding a good foreign distributor, however, is very difficult,
but well worth the effort because a good foreign distributor is like a cash
Before making a final decision about a foreign
distributor, your company should know more about the following:
a) What is the company's reputation? Ask for
trade references, (preferably outside of his/her country) and banking
references. If possible, you want to speak with other foreign companies that
his/her company represents. Check with your own country's foreign commercial
service officer or commercial attaché in that country. Check the company's
rating with Dun & Bradstreet. Hire a
local independent consultant to prepare a background report on the company.
Contact the local chamber of commerce as well as your country or city's
chamber of commerce in that market. Contact your state or provincial
government's overseas office in that country or region and request a
background report. Use the Internet to find out as much as you can about the
company via search engines and company directories online as well as a company
home page if available.
b) What is the company's competitive profile?
How many years in business? How many sales people? What is their marketing
technique? How often do they visit customers? Who is their competition? What
is the company's market share as compared to its competitors? What can they
tell you about your competitors in their market? You should ask the CEO/owner
of the company these questions. If he/she hesitates to answer for more than a
second, move on.
c) What does the company expect in terms of
manufacturer support? This is a very important question because it will
determine whether your potential distributor is trying to extort a bribe from
you. More importantly, however, it will tell you how much the company really
knows about their market.
d) Discuss your requirements for purchase of
minimum inventory. Foreign distributors talk a very good game. Your job is to
see if they can deliver on their flowery promises. In some of these areas
mentioned above, your global trading company will have some answers. In other
cases, commercial attaches and other knowledgeable entities can provide you
with good information. Your mission is to ascertain whether or not working
with this distributor is going to be in the best interests of your company. If
the global trading company can not provide you with specific answers to these
questions and tells you not to worry, look very closely at the intermediary.
The questions that I have listed here are designed to help you determine the
viability and credibility of the distributor. Instead of "we can do this
and that, blah, blah, blah", your aim is to make the distributor respond
to specific areas of inquiry and to provide you with a clearer picture of
exactly how your products will be sold in their market. An added benefit is
the fact that these questions will help to evaluate your trade intermediary as
well. One trap that you want to definitely avoid is the buddy-buddy
relationship between the intermediary and the distributor. We did consulting
for one client whose intermediary was being paid bribes or kickbacks by the
distributors for choosing them. The kickbacks caused the price of the
company's products to be too high in the foreign market and the company
started to lose business to a competitor whose product was absolutely
If your intermediary seems reluctant to allow
you access to the foreign distributor, then you must evaluate the intermediary
more closely. Really good foreign distributors expect to have to answer these
types of questions and look forward to doing so with great enthusiasm. You can
avoid problems by asking the questions listed to evaluate the intermediary.
One thing that I have found to be true in over 20 years of international
business: if a foreign distributor is unable or reluctant to answer questions
that will indicate how they sell foreign products in their marketplace and
what distinct advantages they offer over their competitors, look elsewhere for
help in going global.