By Ren Xingzhou

The Sino-US bilateral agreement on China's entry into WTO concerns the commodity distribution service in the sector of "distribution service" under the item of "service trade". It mainly includes four parts: commission business, wholesales, retails and franchise business. Each also includes market access, pledge of national treatment and other pledges. In the early years after China enters WTO, the opening of distribution service market and the entry of foreign large commercial businesses will exert major impact over China's market of distribution service. It is very necessary to carefully analyze this impact and take active countermeasures.

I. Analysis of the impact of the opening of distribution service market

From the WTO agreement, we can find that distribution service means much more than the commercial circulation in the traditional sense. The main services offered from the distribution sector can be summarized as the resale of commodities and a series of related services. Distribution services not only include traditional commercial services (mainly circulation of consumer goods), but also involve the circulation of production materials and industrial products, as well as distribution service systems and networks built or controlled by the manufacturing enterprises. In light of the pledges specified by the agreement and China's actual situation, the opening of distribution service will exert impact on the following aspects:

I.1 The impact of the opening of distribution market varies on different links of the domestic distribution field.

1. The opening of distribution service market has relatively less impact on China's retail business.

In the Sino-US agreement, we can find that the current opening of retail market has gone beyond the pledge stipulated by the agreement for the early years of the opening. Although an approval system is adopted over the opening of retail business in principle, the State Council and local governments have approved nearly 300 joint venture retail enterprises since 1992 when trial experiments were first started. The reform has by far exceeded the scope for trial experiments. Some well-known transnational commercial companies have entered China’s retail market. From 1999, trial experiments have extended from coastal areas to all the provincial capitals and central cities. Foreign businesses have been allowed to enter the wholesale business in the municipalities under direct control of the central government. With approval of the State Council, foreign investors are permitted to hold stocks in chain businesses. Sino-foreign manufacturing enterprises have been allowed to set up sales companies to realize sales in other cities, and the opening of after-sales service and maintenance system will also gradually step up. These polices have all surpassed the pledge regarding the opening of retail business in the transitional period set forth by the Sino-US bilateral agreement.

In addition, the competition on the domestic retail market has been going on for quite a period of time. Some large retail enterprises have competitive edge. After China's entry into WTO, the retail market will be completely open in the interim. More international commercial capitals will enter China's retail market, and the competition will be even more intense. But in general, foreign firms will not deal a fatal blow to China’s retail market. And, from an active point of view, the foreign retail businesses will bring into China not only the funds that China's economic development needs, but also advanced operation ideas, technologies and marketing methods, thus promoting the development of Chinese retail business.

But we must also notice that in the early years of opening, the China should give up part of market share after massive inflow of foreign commercial capital. Foreign businesses will get fairly high profit return in Chinese market as commercial capital is the most active capital; the retail sector has a low threshold for new investors; the proportion of fixed capital is low; the return rate on investment is high, and the investment cycle is short. At the same time, foreign large commercial businesses have sharper competition edge, they will exert high pressure on the survival of surrounding medium and small-sized retail businesses. Some enterprises will be plunged into plight or go bankrupt, which may trigger off the danger of structural unemployment. As the opening of distribution service incurs risks, some countries that have joined the WTO have not completely opened their distribution service market. We must get fully prepared for it.

2. The opening of distribution service market will deal a big shock to Chinese commodity wholesale business

Since the market of daily-use industrial products was opened in mid-1980s, the state-owned commodity wholesale enterprises have been in a difficult time, and the whole industry has been in deficit for several years. The material wholesale enterprises have also seen deficit for six consecutive years. Non-state-owned wholesale business has been developing, but they have taken up a small market share and are not competitive. Foreign wholesale enterprises, with modern wholesale technology, management and capital advantage, are much more competitive. At the same time, with the advance of modern IT technology, improvement of transportation and progress in material flow technology, the wholesale enterprises’ marketing area has broken the limit of traditional commercial circle and expanded rapidly. The products of a wholesale enterprise can be sold to all parts of the country or even farther. Many large transnational wholesale companies have their purchase and sales network even covering the whole world. So foreign businesses will be able to use their scale advantage to occupy a large market share by setting up a few large wholesale enterprises. At the same time, according to the bilateral agreement, China will gradually allow foreign-invested manufacturing enterprises to set up sales agencies with corporate entity status. They can deal in wholesale business in China and offer after-sale services. Foreign businesses are allowed to have the right to distribute commodities. In the past, these sales activities were mostly entrusted to domestic enterprises on commission. Once foreign enterprises have this right, they will use their own marketing channels to turn the whole distribution process, from the producers to consumers, into a highly effective chain. This will pose a great challenge to the inefficient domestic wholesale enterprises which have long been characterized by a separation of production from marketing, wholesale from retail and internal trade from foreign trade.

It should also be noticed that under a modern distribution system, the wholesale and retail businesses tend to integrate. The retail business is more penetrating into the wholesale business, especially after foreign large chain store enterprises enter China's market. Their massive purchase and delivery system has acquired certain wholesale service function. These firms will also take up some wholesale market. The e-commerce will enable foreign wholesale, retail and production firms to have a larger room for market expansion, thus posing another major challenge to China’s traditional wholesale business.

Of course, the entry of foreign wholesale and retail enterprises will also bring about new opportunities to China's wholesale industry and manufacturing enterprises. With the improvement of production and product quality and variety, foreign firms will definitely increase the purchase of domestically made products and motivate the export of Chinese goods through their worldwide purchase and distribution network. Meanwhile, foreign wholesale enterprises will also bring in modern wholesale management, distribution and materials flow operation technology, which will help China's whole sale industry reduce cost, streamline channels and raise efficiency. It must be seen, however, that after China's entry into WTO, foreign-invested wholesale enterprises with obvious competitiveness, modern wholesale management technology and the strength to build wholesale and commodity delivery centres will probably occupy a large share of the domestic wholesale market. The channels of some imported products will be controlled and a large part of material delivery business will be occupied. This deserves our great attention.

I.2 The opening of distribution service market will greatly affect the production and distribution of important industrial products.

In the Sino-US agreement, China offered specific pledge concerning the distribution service of some important products in key industries and set the timetable. The opening is generally started after transitional period (which varies with different products). The industries and products to be more affected are: pharmaceuticals (wholesale and retail of medicines), petrochemicals (petroleum, pesticides and chemical fertilizers), and machine-building industry (mainly automobile).

In general, the opening will have much impact on these products, especially chemical fertilizers, automobiles and medicines. This is due to two factors: First, the competition in the domestic market of these products has been limited by the monopoly business system. Protected by this system, the current distribution teams and agencies do not have adequate competitiveness. An efficient distribution service network that can meet market demand has not been built. Of course, such system, with a high market concentration, can also help curb excessive competition and prevent market chaos. But such relatively monopolized distribution system has restricted competition, and is not helpful to the shaping of China's distribution service system. Second, transnational companies have the strength to seize the distribution market of these products. For instance, large international automobile companies all have a highly efficient distribution network covering the aspects from production to after-sale service. Once the automobile distribution service is opened, it will deal a hard blow to the China's automobile sales. In view of the fact that the China's auto production is separated from marketing, the domestic firms will be placed in an inferior position in the competition of distribution service.

The opening of distribution service market will have a major impact on China's manufacturing enterprises. In a buyer's market, manufacturers must occupy the market through effective distribution channels. Grasping distribution channels means control over the market and initiative in the competition. Chinese manufacturing enterprises, long under a system where production and marketing are separated, do not have a strong sense of distribution or the distribution capability. After the opening, the entry of foreign distribution firms will affect mostly the manufacturing enterprises that rely heavily on distribution channels.

I.3 The opening of distribution service market will help speed up the development of China's franchise business According to Sino-US agreement, the Chinese government pledged to allow foreign firms to engage in marketing activities through franchise business, and all the restrictions will be eliminated before 2003. The current policy has allowed foreign companies to grant Chinese firms franchise, but does not allow foreign-invested firm in China to grant such right to other Chinese firms. After a three-year interim, more foreign firms in and outside China will grant Chinese companies franchise. The impact will be two-fold. On the one hand, more enterprises will expand their franchise activities in the name of well-known foreign brands and increase the penetration of foreign brands into Chinese market. On the other hand, this method will help China’s dispersed small and medium-sized firms organize better and sharpen their competitiveness.

II. The country’s distribution service industry can hardly cope with the challenge from market opening

Since the launching of reform, domestic commodity distribution and circulation industry has seen substantial development, and the market mechanism has been playing an increasingly important role. Generally speaking, however, its development cannot adapt to the trend of further opening, and the industry is still not competitive due to the restriction of current system and immature market.

First, regional protectionism and market separation have prevented the establishment of a unified domestic market. This is obviously in contradiction with the WTO principles and also hinders the development of domestic distribution network. WTO rules require each member to form a unified and competitive national market. On this basis, the commodity distribution service sector will be opened to create necessary conditions for the free flow of commodities.

Second, the chaotic market and abnormal competition behavior have affected the healthy development of distribution service. The unregulated competition is mainly reflected on two aspects. First, the competition rules are not standardized, and there lacks a normalized and transparent market access system; Second, the trading order is not regulated, and there lacks an open, fair and just trading order and competition environment. All these have affected the healthy development of distribution service industry.

Third, the industrial and departmental monopoly as well as insufficient competition have affected the development of the distribution service of some important commodities. The distribution of some important commodities are still covered by the exclusive sale system with a strong colour of monopoly. The circulation and distribution remain under control of the government departments. This system has led to a limited market access to the distribution market. Competition is very limited, as the domestic market has not been open.

Fourth, serious separation between production and distribution has led to a weak sense and ability of distribution of some manufacturing enterprises. Chinese manufacturing enterprises pay more attention to the structure, technological level and product development rather than the distribution process and channels after products are made. Upon the study of the impact and countermeasures after China's entry into WTO, these enterprises still focus on the impact on the production and relevant protection measures. Far from enough is their study on the relationship between industrial development and distribution service and on how to build up distribution channels and network in light of the characteristics of industry and products.

Fifth, the circulation is poorly organized, and the low efficiency of scale has restricted the development of the distribution sector. The long-standing separation between internal and external trade has led to a low level of domestic distribution service and competition. The small scale and poor organization of enterprises have hindered the establishment of a distribution system. Chain operation, franchise business, standardized agency system and other modern marketing and organization methods are still at introductory and initial stage. In general, the industry lacks competitive capability.

Sixth, the lagged development of intermediary organizations has led to the lack of industrial regulation and self-discipline in the commodity distribution industry.

III. Policy suggestions

III.1 Removing market barriers as soon as possible and setting up a unified open domestic market. First, we should sort out and cancel the policies and rules of localities and departments which have been hindering the free flow of commodities, and then formulate unified national economic and trade policy and rules in order to unify the competition rules.

III.2 Regulating market order to promote fair competition, formulating and improving market access system and its transparency. At the same time, the products' market access standard will be specified, and a unified national advanced and reasonable commodity technical standards and compulsory technical rules will be formulated so as to have a strict supervision mechanism over product quality and technical standard. We should break the industrial and departmental monopoly, reform the exclusive sale system for some key commodities, further open the domestic market to other business players, and raise the enterprises' competitive ability and adaptability to changes.

III.3 Improving the laws and rules concerning distribution service industry. While sorting out the current rules and documents, we should spare no time formulating laws compatible with Chinese conditions and WTO rules regarding distribution service. During the transitional period, China should enforce Anti-monopoly Law and Anti-dumping Law as soon as possible to safeguard fair competition and protect the legal rights of manufacturers. At the same time, key industries and departments should come up with rules concerning market access and industrial management.

III.4 Formulating an overall development plan for the distribution service market. We should follow the market law, set up national distribution service system step by step, build up and improve various distribution organizations and channels so as to speed up the maturing of this market. We should also make a plan and formulate standards and rules regarding the layout of the distribution channels and construction of distribution facilities and network.

III.5 Accelerating the reform of distribution sector and raise the competitiveness of domestic distribution enterprises. Through listing and transferring enterprises’ operation mechanism, we should speed up the reform of distribution enterprises and improve their organization by merger and restructuring. By building enterprise groups and developing chain business, we will improve the organization structure of distribution enterprises, support the development of large trans-regional and trans-industrial circulation groups involving trading, manufacturing, science and technology, finance and information to raise their competitiveness. Meanwhile, we should speed up the modernization of circulation.

III.6 Establishing industrial intermediary organizations and giving full play to their role of management and self-discipline. We should make full use of the guiding, service, communication, regulation, self-discipline and supervision functions over domestic distribution service, and restrict and discipline the domestic and foreign distribution enterprises through industrial organizations and rules. By drawing on foreign experience, we will give full play to the role of industrial organizations in lawsuit and investigation concerning anti-dumping and anti-subsidy cases in order to curb unfair competition and protect the interests of domestic and foreign businesses

Project leader: Sun Xiaoyu

December 2000