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Working with Channel PartnersA Guide to International Sales

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Irish Exporters Association28 Merrion SqDublin 2T: 01 661 2182F: 01 661 [email protected]

William Fry SolicitorsFitzwilton HouseWilton PlaceDublin 2T: 01 639 5000F: 01 639 [email protected] www.williamfry.ie

Enterprise IrelandGlasnevinDublin 9T: 01 808 2000F: 01 808 2296clients.service@enterprise-ireland.comwww.enterprise-ireland.com

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Published in Ireland April 2005

The Irish Exporters Association28 Merrion Square, Dublin 2Ireland

All rights reserved. No part of this publication may be reproduced or transmitted in any formor by any means, electronic or mechanical, including photocopying, recording storage andretrieval system, without permission in writing from the publisher.

Copies of this book may be obtained from the Irish Exporters Association,28 Merrion Square, Dublin 2

Price ¤25

Irish Exporters Association


Working with Channel Partners

A Guide to International Sales

Edition 12005

Authors:

Mr.John Whelan, Mr.Victor Timon, Mr.Brian English

Published by the

Irish Exporters Association,28 Merrion Square,Dublin 2

In association with William Fry Solicitors and Enterprise Ireland

Editor Mark Galligan

A Foreword by, The Minister forEnterprise, Trade and Employment, Mr. Micheál Martin TD

International trade partners havechanged rapidly over the past fewyears. New production from low costemerging markets have added to thepace and complexity of the supplychain issues involved. Betterunderstanding of the potential for newchannel partnerships and the mostadvantageous use of existing saleschannels is critical to successful globaltrading. Therefore it is very timely thatthe Irish Exporters Association withpartners Enterprise Ireland and WilliamFry Solicitors have collaborated toproduce “Working with ChannelPartners - A Guide to InternationalSales” publication and workshopprogramme.

Channel Management concerns among Irishbusinesses are often discussed in businessnetworks and forums but there has been asignificant gap in terms of real advice andinformation available for channelmanagement definitions, techniques andthe legal implications of agreements withthird parties.

Indeed, in an accompanying survey to thispublication over 60% of respondents saidthat they adopt a different strategy for everyinternational market they enter. The reasonfor this generally was that from region toregion within every country there aredifferent nuances and intricacies for eachand every channel.

The legal implications for companiesentering into agreements with channelpartners can often be misunderstood by theseller. Trade blocks like the EU, NAFTA andMERCOSUR have been created to facilitatesingle market trading conditions howeverthere are issues such as Intellectual Propertyrights and individual legal treatment ofcompany law within the member states thatmust be adhered to in trading relationships.

I welcome and endorse this publication andthe accompanying programme of workshopswill greatly benefit the growth of indigenousIrish enterprise abroad. I would like to wishthe Irish Exporters Association and theirpartners every success with this programme.

____________________________Micheál Martin T.D. Minister for Enterprise,Trade and Employment


Foreword

This publication attempts to communicatethe central ideas of international saleschannel management, and the legalframework that should underpin the chosenchannel mode. This publication is about thepresent day practices of successful companieswho have reaped the rewards of identifyingthe best channel partner structure for theircompany and it's products and services.

We have attempted to make sufficientlyprecise statements in order to create a clearunderstanding of channel partner structures,whether they are agents, distributors,franchisees, licensees or internet users. Wehave also however, striven to keep thelanguage and notation sufficiently familiarto enable business executives to easily cometo grips with the key aspects of each channel.

While there are other publications on thetopic of agents and distributors, what isdifferent and new about this publication isthe analysis of the strategy and emphasis onselection and successful management ofchannels for expanding sales internationally,particularly in Europe.

This publication may be read in one straightsitting or may be used as a handy referencefrom time to time when carrying outbusiness strategy reviews of existing exportsales activity, or when drawing up an agencyor distribution agreement.

The main aim of the authors is that thispublication will help businesses, large andsmall, to rationally decide on the bestchannel structure for their particular productor service in international markets whichthey are active in or targeting.


Preface

Victor Timon

John Whelan

Brian English

Author Victor Timon

Victor is a partner at William Fry Solicitors,which he joined in 2002 following eighteenyears practising in the UK. Victor is a memberof the Technology, Commercial and PPPGroups.Victor has vast experience of generalcommercial transactions including thoseinvolving trading terms, agency anddistribution, franchising, business processoutsourcing and logistics. While practising inthe UK, Victor was included in bothChambers Guide to the Legal Profession andThe Legal 500 as an expert in his field and iscurrently so listed in European Legal Experts,published by Legal Business.

AuthorJohn Whelan

John is Chief Executive of the Irish ExportersAssociation and Director of the Institute ofInternational Trade of Ireland. He is a sciencegraduate of UCD and completed an MBAthere. Many articles in the area ofinternational trade have been published byJohn, in trade journals both in Ireland andthe U.K. He is also co-author of 'IntellectualProperty Management- A Guide forExporters' and editor of 'Irish ExportersEssential Facts' almanac. He also carriesdirectorship of a number of privatecompanies.

AuthorBrian English

Brian English, Independent ManagementConsultant, is a graduate of TrinityCollege Dublin. Brian worked for Artesyn asEuropean Distribution Sales Manager in Corkand the Netherlands, spent four and a halfyears as European VP Sales & Marketing forAstec Power and then held the position ofManaging Director, XP Power Ltd (part ofthe IFX Group). He established the IFXgroups sales infrastruture throughoutcontinental Europe. In 2003 he established aconsultancy practice in Holland and hasassisted many technology companies, largeand small, to establish and expand their salespenetration in Europe. Brian's consultancyhas developed the widely acclaimed Programfor Advanced Channel Technology (PACT).

EditorMark Galligan

Mark Galligan is Managing Director ofEuroman Consulting, an independentstrategy consultancy with a network ofassociates that specialise in businessdevelopment and turnaround in the food,retail, and technology sectors. Prior to hiscurrent role, Mark worked for AndersenConsulting in London (now Accenture) wherehe managed pan-European strategyassignments. Mark worked with a fooddevelopment agency in France and forseveral years with the Irish Trade Board inItaly where he was responsible fordeveloping channel management strategiesfor Irish exporters. In 2004, he co-producedthe Forfas report, Innovate Market Sell, areview of the sales, marketing andinnovation capabilities of Irish exportingSMEs. Recently he developed the exportpromotion programmes for Albania andBosnia Herzegovina. Mark is a non-executivedirector of House of Ireland, a leading luxurygifts retail group. He holds a Bachelor ofCommerce from UCD, Graduateship of theMarketing Institute of Ireland, and an MBAfrom IMD, Switzerland.


Bibliographical Notes

The authors wish to acknowledge withthanks all those who were consulted in thepreparation of this book but especially thefollowing:

John McGarr of Enterprise Ireland Kenneth Cunningham of William FryNiamh Moore of William Fry

Muiris Kennedy, Director, Bord Bia

Michael O'Dwyer, Marketing & BusinessDevelopment Director, LAKECommunications

Susan Brindley, Marketing CommunicationsManager, Corvil

Fergal O'Callaghan, Sales Director SelatraCeletronix Power

Desmond Byrne, Celetronix Power

Argos

We would like to acknowledge thecontribution and expertise of the followinglawyers in putting together this publication:

United States of America

Mr John Reilly, Mr Oliver Edwards & MrRichard CrowleyHolland & Knight LLP195 BroadwayNew York, NY 10007United States of AmericaTel: + 1-212-513-3200Fax: + 1-212-385-9010Email: [email protected]: [email protected] Email: [email protected]: www.hklaw.com

Australia

Mr Rob SimpsonGilbert & TobinGPO Box 3810SydneyNSW 2001AustraliaTel: + 61-2-9263-4256Fax: + 61-2-9263-4111Email: [email protected]: www.gtlaw.com.au

Japan

Shinichi Matsui and Akiko SekinoNagashima, Ohno & TsunematsuKioicho Building3-12 KioichoChiyoda-kuTokyo 102-0094JapanTel: + 3-3288-7000Email: [email protected]: [email protected]: www.noandt.com

China & Hong Kong

Vivien ChanVivien Chan & Co15/F, One Exchange Square8 Connaught PlaceCentral Hong KongHong Kong SARTel: + 852-2533-2001Fax: + 852-2845-9205Email: [email protected]: www.vcclawservices.com


Acknowledgements

Introduction (i)

PART ONE: Reaching Target Markets 11 The Benefits of Marketing Channels 1

Summary 3Going for international growth 3Market forces driving channel expansion 4Benefits of using marketing channels 6

2 The Optimal Channel Mix 9Summary 11Formulating channel strategy 11Channel choices 13Channel selection 17Channel support 18

PART TWO: Channel Options 213 Agents & Distributors 21

Summary 23Agent - Supplier relationships 23Distributor - Supplier relationships 25Comparative characteristics of Agents & Distributors 26

4 Franchising & Licensing 29Summary 31Franchising 31Licensing 33

5 E-Commerce 35Summary 37Introduction 37On-line strategy 37Optimising website functionality 38Enforceability of on-line contracts 41

PART THREE: Channel Management 456 Managing Costs and Profitability 45

Summary 47Costs of establishing channels 47Evaluating profitability and growth potential by channel 50

7 Channel Audits 51Summary 53How To Conduct a Channel Audit 53Audit Practicalities 55

PART FOUR: Legal Issues 578 Legal Treatment of Agents and Distributors and Overview of

Intellectual Property Rights in the EU 59Introduction 59Agents in the EU 59Distributors in The EU 61Overview of Intellectual Property Rights in the European Union 62

9 Legal Treatment of Agents and Distributors and overview of Intellectual Property Rights in the USA, Australia, Japan, China and Hong Kong 65USA 67Australia 70Japan 73China 76Hong Kong 78

10 Appendices 81

1. European Sales Channel Audit 832. Agent/Distributor Agreement Checklist 86


Contents


Effective channel management is a key stepto successful international growth.Developing channels in export markets cantake years particularly where there is a lackof a structured approach to establishing,maintaining and adapting channels.Marketing channel decisions can be highlycomplex and challenging as each channel hasits own nuances that create different levelsof sales potential and different costs.Exporters no longer consider channelstrategy as a minor element of the marketingmix to be addressed occasionally. How firmsreach their target market has become asimportant as what they sell and buildingcompetitive channel advantage is now acritical part of business strategy.

Marketing ChannelDefinitionA marketing channel is a set ofinterdependent organisations involved in theprocess of making a product or serviceavailable for use or consumption1

For the purposes of this guide it is importantto set out the basic definition of a marketingchannel. Marketing channels can beconsidered as the marketing intermediariesthat enable producers reach customers withtheir products or services. Marketingchannels are sometimes referred to as tradechannels or distribution channels.

Target Audience forWorking with ChannelPartnersThis guide to Working with Channel Partnersis intended to be used predominantly byexporting firms based in Ireland that arelooking to review and improve their existingchannel strategy in international markets.The majority of readers are likely to comefrom small and medium sized enterprises(SMEs), since according to the 2004 Forfasreport, Innovate Market Sell2 , the vastmajority of Enterprise Ireland and Bord Biaclient base (3,000 and 700 respectively) areSMEs. Collectively these firms accounted for¤11 billion of exports in 2003. As Ireland hasa very small domestic market, Irish firms tendto internationalise at an earlier stage thanSMEs in larger countries. However, gaining afoothold in international markets and

establishing distribution channels can bedaunting and problematic. However largercorporations will also find the highlydisciplined methodology for the identification,selection , engagement and effectivemanagement of sales channels outlined in thepublication, of significant value.

Working with ChannelPartners is a best practiceto channel development This guide should prove highly beneficial toexisting exporters looking to substantiallyincrease their current level of export sales, aswell as the first time exporter, looking todevelop and manage marketing channels innew markets. The text contains the essentialsneeded to understand channel strategy andprovides easy tools and frameworks to helptime-constrained exporters reach a quickerunderstanding of their strategic choices. Thecontent of the guide is based on experienceand knowledge of a range of Irish andinternational leading practitioners of bestpractice in the field of promoting exports, ofestablishing marketing channels, and ofadvising exporters on the practical legal issuesto be considered when using intermediaries.

The text focuses on priority issues thatexporters grapple with when dealing withexport markets:

• How can exporters reach target marketsin the most efficient manner?

• What are the best channel optionsavailable?

• How best to manage channels?

• What are the key legal issues associatedwith channels?

The answers to these issues are provided inthis simplified guide that is structured intonine chapters grouped under four mainareas:1. Reaching target markets2. Channel options3. Channel management4. Legal Issues

Part One, Channel Functions and Structures,examines the imperative for Irish firms tointernationalise and the benefits of usingmultiple channels to successfully grow exportmarkets.


Introduction

(i)

1. Marketing Channels (6th Edition),Prentice Hall - Stern, El-Ansary,Coughlan, Anderson

2. Innovate Market Sell - Review of theSales, Marketing & InnovationCapabilities of Irish Exporting SMEs(MDR/ Quaestus, Euroman report forForfas - November 2004)

Chapter One provides the case for employingmultiple channels to reach customers ininternational markets. There are a numberof market forces driving channel expansion:global competition, changing trends incustomer needs and level of sophisticationdue to increased access to information oncompetitive offerings, opening up of newmarkets with the expansion of the EU, andthe emergence of e-Commerce that lowerthe risks and costs of reaching a widerpotential market.. Managing internationalsales activities can be a daunting task. MostIrish small and medium sized enterprises(SMEs) lack the resources, time andinternational experience to successfully relyon a direct sales approach to target exportmarkets. Consequently while there aremultiple channel options most Irish exportersare faced with forming partnerships in themain with foreign agents and distributors.Exporters realise that increasing the numberof channel options is a key factor inachieving growth and profitability in exportmarkets.

If a single channel limits the exportersoptions, then how many channels should theexporter consider and what is the best mix ofchannels? This is the subject of Chapter2.There is no one optimal channel and channeltrends and market coverage can vary bymarket and geographical region. Chapter 2explains that before the appropriate channelmix can be evaluated, exporters need to havea full understanding of target customersegments. In assessing the optimal channelmix, the chapter introduces two simple tools:the Stategy Pyramid to illustrate howdifferent customer segments may be servicedby different channels and the ChannelAdequacy Matrix that helps assess the targetmarket can be covered by using multiplechannels.

Part Two: Channel Options focuses ondescribing the characteristics, and duties ofagents and distributors, two of the mainchannels used by exporters. There is asignificant level of detail regarding thedifferences in characteristics and the chaptercloses by summarising these differences in twouseful frameworks that examine degree ofcontrol factors as well financial and marketingfactors. Chapters 4 and 5 examine the meritsand legalities regarding other channels:Franchising, Licensing, and e-Commerce.

Part Three: Channel Management addressesthe opportunity to monitor and reducechannel costs as well as increase profitabilityand three useful frameworks simplify theassessment of the channel's performance. Atool for carrying out Channel Audits pre andpost selection of agents or distributors isprovided.

Part Four: Legal Issues examines thedirectives and legislation governing supplier-agency and supplier-distributorshipagreements in Chapters 8 and 9. While legalissues can be complex, an overview of themain issues is provided for a number ofgeographical regions and should prove to bean invaluable reference resource.

(ii) Irish Exporters Association

1CHAPTER

The Benefits ofMarketing Channels

1

PART ONEReaching Target Markets

Irish Exporters Association Part One Reaching Target Markets2

Summary

Global trends have changed completelythe pattern and reasons forinternational growth. Due to theincreasing threats of global competitionand the small Irish domestic market,manufacturing and traded servicescompanies of all sizes in Ireland have tothink about how to growinternationally and more critically howto do so at an early stage, and inmultiple markets.

This first chapter provides the context andreality of the business environment in whichmanufacturing and traded servicescompanies in Ireland are operating and whythey need to expand internationally. Themarket forces that are driving channelexpansion are described and finally, theimportance and benefits of establishingmarketing channels for successfulinternational growth are explored.

Going for InternationalGrowth

Threat of global competition to firms in Ireland

The recent Forfas report, Innovate MarketSell3 , highlighted the vulnerability of Irishfirms to global competition where there hasbeen a significant shift in globalmanufacturing to low cost productioncentres in Eastern Europe, India and Chinaamongst other regions. Ireland is nowconsidered to be a relatively high costproduction base by comparison with theseregions and only by excelling in marketingand sales capabilities will firms based inIreland succeed in maintaining suppliercustomer relationships. Shifts in technology,and changes to the regulatory environmentand industry structures pose threats to Irishfirms but they also represent opportunitiesfor those who are flexible enough to adaptto change and exploit niche opportunities.

International markets more accessibleSuccessful international growth requires thedevelopment of a strategic view of markets

and an ability to manage allianceseffectively, including agents, distributors andother channel partners. Companies such asthe Kerry Group and the Irish Dairy Boardhave dominated Irish exports in the foodsector for decades, while Glen Dimplex hasbecome a market leader in the internationalelectrical appliances sector. Global computersector giants like Dell and Intel have beensuccessful for many reasons but primarily dueto their ability to effectively manageinternational expansion out of theirproduction base in Ireland. Each of thesefirms was among the most influentialmultinationals out of Ireland in the 1980'sand 1990's and each still ranks among theleading exporting companies today.

The domestic market is too small in mostcases to offer enough opportunity tomanufacturers and firms involved ininternationally traded services. The need toexport at an early stage of a firm's evolutioncan pose problems where there is a lack ofinternational management skills and know-how related to handling issues associatedwith new market entry and theestablishment of marketing channels.However, improved communications andtechnology, lower transportation costs,deregulation and the creation of moreaccessible markets, mean that the risks areoften lower and the opportunities greaterthan ever particularly for SMEs willing toinvest resources in international expansion.

Successful Irish exporting companies havefully accepted and embraced the newdynamics of international growth. They nolonger confine themselves to selling inadjacent or primarily English-speakingmarkets. If they can offer a cost-effectivesolution to a customer's need then they sellanywhere. Whereas, historically a customerwould be concerned about buying from asupplier thousands of miles away, today thatis no longer the case. In recent years, theinternet has dramatically lowered barriers tointernational growth, making it possible toaccess customers in many different countriesin a short time. A recent Irish start-up that isachieving global success in a relatively shortperiod with the help of the internet isSelectra, a java games developer. Selatra hasa multi-channel approach to export marketsthat has been the basis of its successfulinternational expansion.

3Irish Exporters Association Part One Reaching Target Markets

1. The benefits of Marketing Channels

3. Innovate Market Sell - Review of theSales, Marketing & InnovationCapabilities of Irish Exporting SMEs(MDR/ Quaestus, Euroman report forForfas - November 2004)

Best Practice Example: Selatra(www.selatra.com)

Selatra began operations in September 2002,in Cork's developing software hub, and hasachieved exceptional worldwide success. Thecompany provides a service to host, deliverand manage Java games on mobile handsetsfor GSM operators, media organisations,telecommunications companies and mobilecontent resellers. Selatra's end-to-endsolution allows its clients to sell and deliverJava games through technology that enablesthe games to be downloadable to mobilephones all around the world.

Initially Selatra invested heavily in R&D, stafftraining and international marketing effortsthat helped them penetrate export markets.Once Selatra's over-the-air deliverytechnology (needed to deliver the games tohandsets) was completed, the companylaunched its commercial prototype in the UKand gained a first mover advantage in thatmarket. The website for its UK online brand,fonearcade, became the first site in the UKto be exclusively dedicated to selling javagames for mobile handsets, generatingrevenues in its first month of operation.Selatra's focus is global, with less than 2% ofits revenue coming from Ireland. Thecompany now has access to 300 millionsubscribers in 30 countries worldwidethrough their channel partners. Thesemarkets are serviced by a network of salesagents and 105 distributors, of which 12 arenetwork operators. Whenever a customerdownloads one of the games over the airfrom Selatra's delivery platform, thepublisher shares the revenue with the gamedeveloper and with its local channel partner.

Market Forces DrivingChannel Expansion

Markets today are more complex than everand firms based in Ireland recognise not onlythe threats to their businesses frominternational competition but also theopportunities that changes in market forcesbring. “Go-to-market” strategy is a termoften used in the US to describe the strategyof reaching customers through multiplemarketing channels. It is a simple conceptthat looks at trying to exploit many ways ofreaching the customer. The options forreaching new markets and customers areever increasing for firms based in Ireland dueto a number of market forces that aredriving change, principally the:

• Creation and enlargement of singlemarket trading blocks

• Advancement in global communicationsand new technologies

• Improvements in transportation andlogistics

• Deregulation and privatisation ofindustries

The following section describes the impact ofthese market forces:

Creation and enlargement of singlemarket trading blocks

The enlargement of trading blocks such asthe EU 25 has created single marketconditions eliminating traditional countrybarriers to trade and transforming thedefinition of the home market. Similartrading blocks have been created in the pastdecade in South East Asia with the formationof the ASEAN trading block, the SouthAmerican Single Market MERCOSURinvolving Brazil, Peru, Argentina and theNorth American trade block, NAFTA,involving Canada, the USA and Mexico. TheWTO has brokered the reduction of tradebarriers between the trading blocks and inthe process has opened up markets globally.These enormous changes in internationaltrading conditions have resulted in anexplosion in opportunities for all companies,particularly small to medium sizedcompanies.

4 Irish Exporters Association Part One Reaching Target Markets

Advancement in global communicationsand new technologies

Sweeping improvements in Information andCommunication Technology (ICT) have meantthat companies can identify opportunities forgrowth and manage global activities in away unimaginable a few years ago. Therapid and all pervasive influence of theinternet and the oncoming wave of wirelesstelephony have brought the ability to enternew markets and manage global customerbases at affordable costs for small as well aslarge companies.

Achieving a market presence, supporting adistribution network in multiple markets andoffering customers after-sales supportservices are now within the reach of allcompanies through the use of informationtechnology.

A new generation of exporting companieshas evolved using the outsource facilities ofcall centres, web portals and multi-lingualorder processing websites. In particular, theservices industry has benefited from therapid innovation in ICT facilities. Thefollowing is an example of an indigenousIrish firm that successfully exploited theadvancement in new technologies to attracta major strategic channel partner with aglobal presence that allows the firm expandits operations internationally.

Best Practice Example: Corvil Networks(www.corvil.com)

Corvil was founded in 2000. It develops andmarkets a unique product set incommunications and networking software. Itstechnology improves the instrumentation ofInternet Protocol (IP) networks by a factor of60,000 times more than the currenttechnology, for no added overhead, enablinga fundamental breakthrough in the ability todeliver voice, video and data applications overthe Internet with certainty over the optimalbandwidth and quality of service operatingpoint. The company describes the end resultas 'IP certainty' - knowledge that gives usersthe ability to cut their costs by running widearea networks at fuller capacities.

Corvil was a start-up company offering a keyand compelling technology. The issue was howa relatively unknown company such as Corvilcould gain market acceptance - relevance inthe market - and develop a market presence.The bottom line for Corvil was how to get itsproduct placed into the huge installed base ofequipment and networks. Persuading carriersto add another solution, another box, intotheir networks on a large scale was a verydifficult selling proposition.

It was clear from the outset that Corvil wouldneed a large partner that could see thepotential of the technology, adopt it, and thenhelp Corvil to seed the market - to the benefitof both parties. In 2003, Corvil attracted ¤10minvestment from investors including theworld's biggest network equipment-maker,Cisco Systems. With the backing of such amajor strategic partner, Corvil plans to partnerwith leading network equipmentmanufacturers and global system integratorsto achieve broad market adoption.


Improvements in transportation andlogistics

A quiet revolution has also taken place in thefreight industry, due to the trend towardscontainerisation and the emergence of trans-global freight integrators such as TNT, FedEx,UPS and DHL. As a consequence,transportation costs have dropped dramaticallyover the past decades. This has increased theeconomic benefit of producing goods far fromthe markets where they are sold.

Due to the lower market entry cost levels,there is an increasing number of marketingchannel options and entry to a multiplicity ofcountries, both adjacent to and distant fromthe exporter, is now economically morefeasible. Ninety five per cent of world cargovolume still moves by ship. However, therapid move to containerise any product thatfits into the 40 x 20 x 150 standard containersize has facilitated mechanisation and theproliferation of super freighters.

Over the past 20 years, scale efficiencies havedriven unit transport costs down considerably:container freight costs on the strategicallyimportant Europe-USA route have decreasedby nearly two-thirds when adjusted forinflation. There has been a similar trend incost reduction on the key Irish Sea route to theUK and on the English Channel route to theEuropean continent. There has been a rapidexpansion of Roll-on Roll-off (RO-RO) shippingcapacity on this route. Some of the world'slargest Ro-Ro ships are operating on the IrishSea routes. This has driven the unit shippingcosts down significantly as well as increasingthe frequency of shipments substantially.

While sea freight takes the lion's share ofexports, both globally and from Ireland, airfreight is critical to high value productexporters. Companies such as DHL andFederal Express have created a new breed ofair-freight services over the past few decades,with guaranteed international delivery timesincreasing customer satisfaction.

In addition to these improvements in thephysical movement of goods, logisticsinformation systems have been developed tocommunicate shipment status in real-timeover the internet, thus improving shipmentefficiency, reducing customs clearance timeand eliminating paperwork.

Improved communications andtransportation mean that companies canspread their processes and activities aroundthe world, performing each step in the mostadvantageous location. Companies can carryout design and marketing processes inIreland, locate call centres in India,manufacture in China and supply a networkof agents and distributors in England, France,Germany and Italy.

Deregulation and privatisation ofindustries

The privatisation of industries includingtelecommunications, financial services,aviation, gas, electricity and many heavyindustry sectors has opened up new marketsfor foreign traders. The deregulation ofthese industries has triggered off anotherwave of internationalisation. Seeking the most advanced technologies,scores of countries in all parts of the world,developed as well as developing, haveoffered licenses for tender, such as those formobile telephones. A sub-supplier to themajor industry player in one country mayfind itself forced into early and rapidinternationalisation as it chases its channelpartner on international bids. A carefulprocess of sequential entry is not possible inthese circumstances - accelerated entrybecomes a necessity.

Deregulation has allowed major domesticbusinesses to shift to create global productofferings for other state clients whileretaining the basic service to the localdomestic client base. ESB International is aclassic example of this.

Benefits of usingMarketing ChannelsFundamentally the choice facing mostexporters is: to sell direct, or through channelintermediaries, or a combination of both?The choice for most firms exporting fromIreland is usually a compromise between theneed to keep control over distribution andthe need to minimise distribution costs.Direct selling can be used where there is alimited number of potential buyers, a highdegree of geographical concentration, a highdegree of technical product/servicecomplexity and a relatively stable demand.Few exporters from Ireland face these stable


market conditions and few can afford toemploy a direct sales policy alone, due to thesignificant costs of establishing a field salesorganisation, holding stock in theinternational market, and adequatelycovering the market and servicing clients

More and more companies are entering intoalliances with various channel partners intheir quest to manage the complexity ofmultiple market entry, to speed up theirinternational growth and to reduce theirfinancial exposure. There are many reasonsto form an alliance for cross-border trade,however it is essential to fully analyse thepotential markets internationally and decidewhich market and what channels ofdistribution are operating in each market,before commencing the selection of channelpartners.

Some channel-partner alliances are createdto cut the cost of market entry and are oftengeared to exploit economies of scale orscope. Some alliances aim to leverageexisting capabilities whilst others are set upto create new product offerings. Alliances,however, should always be selected on thebasis of strategic objectives and the ability toachieve them in any particular market. Thismay in turn mean different channel partnersfor different markets. There is a range ofissues that companies seeking channel-partner alliances must consider, including theselection of partner type, the form ofalliance and the question of control.Contracts are important and must providethe framework for a win-win strategy ratherthan be the cause of conflict and division.



2CHAPTER

The OptimalChannel Mix

9

PART ONEReaching Target Markets


Summary

Agents, distributors, original equipmentmanufacturers (OEM) and otherchannel partner alliances are an integralpart of international growth.Companies are forming alliances for awide variety of reasons, from exploitingnew opportunities in expandingmarkets, to dealing with technologicalchange and coping with economic andpolitical uncertainties. Channelmarketing alliances must be properlydevised, assessed, implemented andcontrolled. Many alliances do not liveup to expectations and they showpersistently, high rates of failure.

This chapter introduces tools and frameworksused to:• Understand the structure of the target

market in terms of: customer segmentsand the structure of the channels to reachthese segments

• Determine the optimum choice of channelstructure to ensure market coverage thatmatches the exporting firm's market entryand development strategy

Suppliers need to do more than establish achannel structure. The original channelstructure requires periodic review andmodification to meet the expansion targetsof the suppliers and the market conditions.Equally, changing buying patterns, increaseddemand in new markets, increasedcompetition, and new innovative marketingchannels provide the opportunity to modifyand reconfigure channels. The ChannelAdequacy framework is a simple analytic toolused to successfully reconfigure channels, anumber of examples of which are given inthis chapter. The Channel Adequacyframework allows suppliers add or dropchannels in an incremental manner. It allowssuppliers examine new ways to sell goods inall target markets and provides a quick wayof analysing market coverage that willultimately impact on growth targets for salesand profits.

The chapter expands on how to selectchannel partners, how to minimise the risksof failure, and how to maximise channelrelationships.

Formulating ChannelStrategyUnderstanding the customer base

Many Irish businesses, large and small alike,have high levels of expertise in the productsthey produce and in the applications or usesof these products. As a consequence, inpreparing to embark on channel expansionactivities, exporters often tend to describetheir target customer groups in genericterms, such as “small bakeries”, “tea-drinkers” or “telecom equipmentmanufacturers”.

These are certainly valid end-userdescriptions but in the context of embarkingon an export drive they are whollyinadequate. Before beginning the search forsales channels exporters must develop a verysolid understanding of both the targetmarket's channel structures and the specificintermediaries that will buy their product orcomponent. This means listing end-customernames and lots of them, including not onlythe companies' names but also the decision-makers within the companies! It is only whenthe exporter's familiarity with the market hasreached this level that he/she will be in aposition to seek out and engage thechannels that own the target customerrelationships.

Estimating the approximate conversion rateof prospects to customers can help inunderstanding the size of the marketcoverage required by marketing channel.Consider a scenario in which a channelsucceeds in making a sales appointment inthe coming two weeks with just one in fiveof the prospects contactable. The window ofopportunity to sell products is not open withall prospects all of the time. Out of theprospects visited, short-term business canresult from as few as one in sevenappointments. Thus only one prospect inthirty five leads to orders in the short-termunderlining the need to target a very largebase of qualified prospects to increase thenumber of potential orders attainable.


2. The Optimal Channel Mix

Many companies are of the view thatcustomer profiling is the channel partner'sresponsibility. It isn't. Gaining in-depthknowledge of the target customer base, theirbuying preferences in terms of channels, thecompetitors, their products and their relativestrengths and weaknesses are all within theremit of the exporter. Failure to go throughthe process of customer and competitoranalysis at this early stage leaves channelselection strategy to chance and invariablyleads to poor decisions that can prove costlyto the exporter.

The need for multiple channels

• For the majority of companies, it isnecessary to develop multiple channelstrategies for different target customergroups. Few companies can manage toget by with a one-size-fits-all channelstructure that meets the needs of both,high volume, high revenue prospects aswell as the large number of lower volumecustomers. A more structured approach isto describe the range of potential directand indirect channels and identify thespecific characteristics that distinguish thebuyers within these channels.

The Channel Strategy Pyramid

A Strategy Pyramid such as the exampleshown below is a useful framework that canbe used to quickly structure and summarisethe above relevant information bysegmenting the customer base and defininga clear approach for each tier. The exampleused shows how a typical software firm couldsell or promote its software solution in anumber of ways:

• Directly to large Original EquipmentManufacturers (OEMs) as a component of alarger software solution. In the examplebelow, the description indicates that thereare less than 10 OEMs that can be targeteddirectly and that the average spend (averagetotal order value) by OEM is ¤50,000.

• Indirectly to systems integrators, to reachend users, potentially reaching a widercustomer base than the software firmcould reach with its own limited resources..The software firm could agree with thesystem integrator to share revenuereceipts, receive one-off or extendedlicence income fees, hosting charges, and arange of other income generating options.

The example shows that there are three tofive principal system integrators that maybe worth approaching and that theaverage spend per system integrator is lessthan ¤50,000. In this particular case, thesoftware firm's sales strategy is togenerates fees for software designassistance and insist that the systemsintegrator agrees to only market thesoftware solution under a specific brandname, thereby retaining reinforcing theproprietary brand and potentially avoidingchannel conflict where a similar productmay be sold through other channels.

• Indirectly to SMEs, large indigenouscompanies and Multi NationalCorporations (MNCs) via distributors. Thethousands of customers within thiscustomer segment would make itimpossible for the software firm to reachdirectly. The wide range of average spendper end customer from ¤1,000 to ¤100,000and the dispersed nature of the marketmakes it imperative to use third partydistributors with regional coverage thatcan reduce the selling costs for thesoftware firm.

• Indirectly to buyers, by association withstrategic partners who may be industryleaders with extensive market presenceand a significant customer base at a globallevel. The key to successful alliancesthrough this channel may be for thesoftware firm in this example to provide aspecific technology solution that meets amarket need and thereby enhances theimage of the strategic partner.


Figure 1: The Strategy Pyramid for Planning an IntegratedChannel Strategy

Source: Brian English, benglish bv

In principle there is no reason why direct andindirect sales channels can not successfullyco-exist. Problems arise when there is lack ofclarity in relation to their respective roles orcustomers and when they are consequentlyallowed to compete with one another.Clearly defining the direct and channelcustomer bases avoids this significant risk.

Channel ChoicesIn the Preface to this guide, marketingchannels were broadly defined as anyintermediary that facilitates the sale of acompany's products or services. Exportersneed to keep an open mind in this respectand allow for the possibility of creating asales channel where customers indicate thattheir preference is not currently available.This underpins the importance of carryingout in-depth market profiling at the initialstages of determining market entry strategy.

There are many potential channels toconsider including but not limited to thefollowing.

• Representatives• Agents• Brokers• Franchisees• Catalogue resellers• Internet auctions and shop-fronts• Distributors• Systems Integrators• Value-Added Resellers (VAR)• Original Equipment Manufacturers (OEM)• Private Label Resellers• Virtual Sales Offices.

With the exception of franchisees all of thesefall into one of two categories: channels thattake title to the goods and resell them atprices determined by the channel andchannels that facilitate direct sales from thesupplier to the customer on a commissionbasis. This is an important distinction and hasfar-reaching legal consequences in terms ofcompensation, liability and anti-competitivetrading practices.

Franchising is a process whereby thefranchisee (the party acquiring the franchise)adopts the business model and certainintellectual property of the franchiser andpayment is usually made in the form of anup-front fee and/or a percentage payment ofrevenues, gross margins or profits. In general,

it is better suited to companies selling abusiness process or service model rather thana range of products. Franchising agreementscan be complex and onerous and should notbe entered into lightly.

The Optimum Channel Mix

With 25 member states and some 450 millioncitizens, Europe now accounts for a sizeableportion of world trade. For all but a few Irishexporters attacking this opportunity base is ahuge task that will consume significant businessresources. It is critical, therefore, that suchtrading blocks are approached methodicallyand with a high degree of opportunity-basedprioritisation.

Some top-level segmentation of the market, byregion or vertical industry segment is necessary.In most sectors detailed reports can be boughtfrom market research companies and forbusinesses wishing to conduct their ownprimary research, there is a great deal of directassistance available from industry organisationssuch as the IEA and from semi-state bodies likeEnterprise Ireland, Udárás na Gaeltachta, BordBia and the Shannon Development Authority.

Covering the market

It is important to size the opportunity in eachsegment or region, to assess the marginsavailable through pricing and competitivedata and to set all of this in the context ofthe channels through which the customersprefer to buy. The Channel Adequacy Matrixis a useful graphical tool for capturing therelevant information in this regard. Itprovides a visual overview of the opportunitybase and facilitates the first level ofprioritisation of activities.

Consider the example below in Figure 2 of anexporter of food products to a particulargeographical region such as the UK. Theexporter assesses his current sales accordingto the various types of end-user segmentsand how those segments are served(highlighted in green):

• 20% of sales are direct to a fewgovernment departments

• 10% of sales to a number of restaurantsare made through a representative

• 10% of sales to a hotel chain are achievedthrough a private label arrangement withanother supplier


• 60% of sales are handled by wholesalersthat sell into a wide range of customersegments

The figure shows the market share of eachend user segment as a percentage of totalsales. It also indicates that in total theexporter's market coverage is about 5.5% ofthe total market available. The graphicillustration helps in the process of prioritisingwhere the best opportunities lie. In thisexample, it might be a realistic objective totarget 15% coverage within a six-monthperiod. Further analysis of margins availableby end-user segment and by channel shouldassist the exporter in selecting theappropriate coverage to maximise the returnon investment.

As its purpose is to illustrate current marketcoverage, it is appropriate to first compile a“current situation” Channel Adequacy Matrixand then create an additional matrix thatshows the future market coverage at theconclusion of the channel building phase.


Figure 2: The Channel Adequacy Matrix

Best Practice Example: Celetronix Power

(1) Background

Celetronix Power is a division of a large multinational technology conglomerate. It is a leader in the electronicssector and its business is currently centred on power solutions, memory devices, RFID4 and design and assemblyservices. In 1999, the Celetronix Power division had European sales of $150,000, almost all of which were in theUK.

What was frustrating the international management team was that they had been successful in penetratingimpressive top tier companies but the levels of sales and margins were not providing adequate return oninvestment nor adequate customer spend on power products.

Celetronix took a courageous step by recruiting a sales channel manager instead of recruiting a sales managerfor Europe. The individual chosen to drive the program was an Irish national living in Cork and consequently thecompany chose to establish its European base in Ireland. The company decided not to build its business, primarilywith the large OEMs, but rather with the thousands of small companies across the continent that were buyingpower solutions from distributors and value-added resellers. A detailed analysis of the channels that thecompany's target customer groups were buying from was completed. The following figure shows whatCeletronix's channel adequacy matrix looked like in the initial analysis. The UK, France and Germany accountedfor two-thirds of the total European market. At the time Celetronix had just 4% market coverage and wasfocused mainly on selling direct to buyers in the UK.

Celetronix then decided to undertake a detailed analysis of end-market price/performance levels for theirproducts in Europe. Having a technology that was unique in its market space, the company found that customersin the more technologically advanced markets of central and northern Europe were willing to pay higher pricesfor the Celetronix technology. Moving further south, technology became less of a concern to buyers, whilepricing became more and more competitive and margins were steadily eroded.

4. Radio frequencyidentification -use/attachment ofelectronic chips toproducts or equipmentthat can communicatereal time tracking data

Sch

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Pris

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s

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Dep

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Can

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s

Res

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Caf

es /

Bar

s

Ho

tels

20%

10%

10%

60%

Direct

Rep

PL

Whole-sale

Coverage 15% 20% 30% 15% 10% 5% 5% 10%

5.5%



Figure 3: Celetronix Channel Adequacy Matrix (2000) - channels & markets


(2) Channel Strategy

Therefore, the strategy the company evolved was to concentrate first on establishingfranchised distributors in the Nordic and central European markets. Their second prioritymarkets were Italy and Iberia, followed by Israel, France and Switzerland. Only when Celetronixwas established in these markets would it invest time and focus in smaller, more distantmarkets such as Australia, South Africa and Eastern Europe.

Identifying and securing was initially difficult and at times frustrating. Months of negotiationswith a carefully selected channel often came to nothing at the last minute due to unforeseenor uncontrollable reasons. Despite the obstacles, Celetronix persisted with its strategy and thechannel adequacy matrix today looks quite different from the original assessment. Celetronixexpanded its presence in the UK, French and German markets via a combination of direct salesto buyers and sales through representatives and value added OEMs. Celetronix also chose towiden its selling options across all the main European markets through a combination offranchising and catalogue sales. The net effect of this dynamic channel strategy was thatCeletronix was able to increase market coverage from its original 4% to 75%.

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20%

8% PL

40%

7% Catalogue

Direct

Rep

VA/OEM

Franchise

Coverage 21% 19% 24% 9% 9% 5% 4% 9%

4%



Figure 4: Celetronix Channel Adequacy Matrix (2005) - channels & markets


(2) Restructured Channel Market Coverage

The figure above shows the market coverage strategy that has proven to be very successful forCeletronix. There is still more work to be done in developing the channel market coverage.However, since 1999, Celetronix's results have shown a substantial improvement. Under thenew channel structure sales have increased steadily from $150,000 to over $6 million in 2004.

Perhaps the most striking aspect of the Celetronix success in developing a third party channelinfrastructure is not its revenue growth, but rather the fact that its total headcount still standsat just three people!

No

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UK

20%

5%

20%

8% PL

40%

7% Catalogue

Direct

Rep

VA/OEM

Franchise

Coverage 21% 19% 24% 9% 9% 5% 4% 9%

75%


Channel Selection

Finding the right International ChannelPartners

For the majority of companies search andselection is a frustrating and resource-intensive process. However, there are twoguiding principles that can anaesthetise thepain: ensuring that an ideal channel profile isdeveloped, based on five or six pre-requisitecriteria; and researching a large number ofprospective channel partners.

The profiling of the ideal profile willfacilitate the screening of potential channelpartners. Compiling a large base of potentialchannel partners will ensure that the exercisewill not have to be repeated if the companyfails to engage its first choice(s).

In searching for potential partners, there issignificant help, both government andcommercial, available to Irish companies inthis area. Moreover, high-speed internetaccess in combination with a quantum leapin the quality of the information companiesare publishing about themselves on the webhas made it infinitely more feasible forexporters to do these searches themselves.

Factors Affecting the Choice ofChannels

Only potential channel partners satisfying allof the pre-requisite selection criteria andconditions should be profiled in detail. Theprofiling stage demands research on allaspects of the channel's business includingfinancials, margins, customers, penetrationby segment and region, competing andcomplimentary principles and mostimportantly, how they sell and market theirwares and support their customers. Some ofthis information is in the public domain butan interview at the channel's place ofbusiness is imperative in order to compile ahigh-quality profile. Many Irish exportersface the same challenges but these can varywidely in importance from one company toanother. It is therefore appropriate at thisstage to weight the various selection criteriaaccording to their importance to theexporter before scoring the candidates.

After the data-gathering to profile shortlisted channel candidates, personal

relationships begin to be formed betweenthe key individuals in the principle and thechannel partners who will have to dobusiness on a day-to-day basis. Chemistry andtrust ought not to be under-estimated in thisprocess. Neither should cultural factors beoverlooked at the beginning of therelationship, as the lack of culturalunderstanding can ultimately lead to abreakdown in the relationship over thelonger term.

As the supplier-channel contact increases,more information relating to the channelemerges and the supplier can build anaccurate profile of the candidates' strengthsand weaknesses. The following figure maybe used as a useful reference framework inassessing the candidate's capabilities. It lists35 criteria used in profiling channels andgroups them under five main areas: financialand company strengths; product factors;marketing skills; commitment; andfacilitating factors. In practical terms,exporters need to pick out the criteriarelevant to their needs and other criteriamay be disregarded where not consideredimportant in developing sales. As discussedabove, key elements from the selectionbelow to include would be: product andmarket expertise; quality of managementteam; experience with target customers;knowledge of supplier's sector; geographiccoverage; ability to finance initial sales andsubsequent growth; complementarity ofproduct lines; commitment to achievingmimimum sales targets; ability to financeinitial sales and subsequent growth; andtrack record with past suppliers.


Fall-back alternatives important

It can be a source of great frustration, at thisstage, especially to smaller companies withlittle brand recognition or market position, tofind that the channels they have worked sohard to identify are either simply notinterested in the product or don't have thetime or resources to evaluate the opportunity.In this event it is vital to have a broad base ofalternative options to fall back on.

Channel SupportMotivating and Managing SalesChannels

Successful and enduring sales channelrelationships are only achievable if thecommercial objectives of the channel arebeing realised. No amount of argument,training, joint customer visiting or beratingcan overcome this fundamental truth. Theentrepreneurial nature of sales channelsdictates that it must be so and exportersneed to recognise that their competition ismore often within their channel than in themarketplace.

A wide number of factors influence thesuccess or otherwise of the channel'sendeavours in the marketplace but nonemore than supplier support. Competentselling organisations do not necessarily makeaccomplished sales channel managers. Thesupplier should provide adequate salessupport to the channel in their selling effort.Failure to recognise these roles can be acontributing factor in the demise ofsupplier/channel relationships. It isimportant for exporters to realise that theyare managing a facilitative process asopposed to a sales process. The latter is theresponsibility of the channel.

The supplier's role is one of guidance,support and discipline. Guidance is neededin relation to new products and respondingto market dynamics. Support is requiredacross the full range of commercial andtechnical activities in which the channel isinvolved. Discipline is an essential in allsupport areas from special pricing to jointcustomer visits, from technical services todistribution, and from logistics to regularface-to-face reviews with customers in themarketplace.


Figure 5: Channel Selection Criteria

Financial andCompany Strengths• Ability to fInance

initial sales andsubsequentgrowth

• Ability to raiseadditional funding

• Ability to provideadequatepromotion andadvertising funds

• Product andmarket expertise

• Ability to maintaininventory

• Quality ofmanagementteam

• Reputation amongcurrent and pastcostumers

• Ability toformulate amdimplement 2-3year marketingplans

Product Factors•• FFaammiill iiaarriitt yy wwiitthh

pprr oodduucctt•• CCoommpplleemmeenntt aarryyiittyy

ooff pprroodduucctt ll iinneess• Quality and

sophistication ofproduct lines

• Condition ofphysical facilities

• Patent security

Marketing Skills• Experience with

target customers• Geographic

coverage• Customer service• On-time deliveries• Sales force• Market Share• Participation in

trade fairs• Member of trade

associations

Commitment• Volatility of

product mix• % of business

accounted bysingle supplier

• Willingness tokeep sufficientinventory

• Willingness tocommitadvertising dollars

• Commitment toachievingminimun salestargets

• Undividedattention toproduct

• Willing to invetsin sales training

• Willingness todrop competingproduct lines

Facilitating factors• Connections with

influential people• Working

experience withother exporters

• Track record withpast suppliers

• Knowledge ofsupplier’s sector(adapted)

• Proficiency inEnglish

Overall Qualification

Source: Adapted by Euroman Consulting from Cavusgil, S.T. Yeoh, P. and Mitri, M. (1995) “Selecting foreign distributors: Anexpert systems approach”, Industrial marketing management, Vol.24, p.300.

Irish Exporters Association Part One Reaching Target Markets

Supplier-Channel Training & NeedsIdentification Matrix

The failure of key people in the supplierorganisation to properly understand andappreciate a distributor's business is a majorcause of difficulty in many channelrelationships. Add to this poor suppliersupport and inadequate product or applicationknowledge in the channel and failure of thechannel to succeed is almost a certainty.

Upon engagement of a channel an exportershould devise a comprehensive trainingprogramme for all of the key peopleinvolved in interacting between bothorganisations: supplier and channel. Thetraining programme could be delivered inone day at the supplier's place of business.Above all, it should receive the fullcommitment of the management of bothcompanies. The following figure illustrates auseful framework example for identifyingthe key areas where training is needed andthe target audience for this training.

The key areas are:

• An overview of the channel productportfolio e.g. product descriptions, keybenefits, promotional material

• Pricing policy e.g. pricing lists, permittedprice discounts, volume discounts

• “Channels who, where, why, when” -description and clarification of roles andresponsibilities

• Mutual support service e.g. provision ofproduct and market information to thechannel, and channel feedback to thesupplier; support to reduce delivery times

• Provision of marketing communicationprogramme

• Communication on marketing strategye.g. growth targets for differentcustomer segments, financial targets,competitive strategy

19

Figure 6: Supplier-Channel Training Needs Identification Matrix

Comprehensive two-way communication inall of the above areas defines and builds thebusiness relationship early on between bothsupplier and channel and minimises the riskof failure.

Module 3

trainingPACT©

Channel ProductPortfolio

Supplier PricingPolicy

Reseller PricingPolicy

Channels (who,where, why, when)

Supplier MarcomProgram

Supplier StrategicMarketing

Mutual Service

Supplier Channel

Gen Direct Channel Management Gen Tech

Mgmt Sales Sales Admin Apps Eng QA SCM Mgmt Sales Admin Support SCM


Minimising Risk and Likelihood ofPartners' Failure

The hidden costs of poor channel selectionare immense. Quite apart from themeasurable consequences such as stockreturns, travel expenses, marketing collateraland training, a whole host of less tangiblebut equally significant costs are created.

Market lock-out and re-entry much later inthe product life-cycle are two of the mostimportant consequences of poor channelselection. During the whole year it has takenan exporter to establish that he hasappointed the wrong channel, his producthas been out of that market and assumingthat a good channel can be engaged, it willnow enter much later in its life cycle whenmore competitors are likely to be presentand the price point is significantly lower.

The entire cost of engagement and re-launchwill be incurred again and he may now evenneed to overcome a negative brand image inthe market.

The three key factors that are vital in theentire selection process are: the gathering ofhigh quality market knowledge before anyselection decisions are made; the agreementof a business plan with the channel beforecontracts are exchanged; and the rapidexecution of the training and supportprograms once the relationship is cemented.

The following chapter examines the differentcharacteristics of two of the mainintermediary channels: agents anddistributors. An understanding of thesedifferent characteristics should make it easierfor exporters to decide which channel ismore appropriate for their needs.


3CHAPTER

Agents andDistributors

21

PART TWOChannel Options

22 Irish Exporters Association Part Two Channel Options

Summary

Agency and distribution relationshipsprovide the most common channelframework

Agency and distribution relationships providethe most common framework for the co-operation of independent undertakings atdifferent levels in the supply chain, inbringing the goods or services of themanufacturer or supplier, (whether by activesales or promotion) to the market place. Inappointing an agent or distributor, thesupplier is effectively sub-contracting theselling function of its business. The suppliermay want to do this for a number of reasonssuch as taking advantage of an agent's ordistributor's local knowledge and establishedtrade connections, or as a cheaper alternativeto establishing your own selling operation. The different attributes of an agent anddistributor will be key to deciding which typeof partner to choose. It may be the case thatone type of relationship works well in onecountry and not in another, so it is quitelikely that suppliers will have a mixture ofchannel partners. In practice, there is a gooddeal of confusion about the use of the terms"agent" and "distributor" with manybusinesses referring to their agents asdistributors and vice versa. It is critical forlegal purposes, particularly when consideringtermination rights, to ascertain the correctlegal status of the individual or company.

Selecting agents versus distributors dependson a range of legal, financial and marketfactors. There is no one best standardsolution

There are a considerable number of factorsto consider when appointing a channel inthe international market and it can bedaunting for the exporter to make the choicebetween agent versus distributor, whenother cultural factors such as language anddistance from the market are added to theequation. However, it is important for anycompany considering a channel partnershipto understand the differences, in practicaland legal terms, between appointing anagent and a distributor. The chapter startsoff by highlighting the characteristics of bothchannels and then discusses the duties andresponsibilities in the relationship betweensupplier-agent and supplier-distributor. It is

important to note that the typicalcommercial duties of an agent or distributorset out later in this chapter are not all set instone. Except where there are legal reasonsrequiring the inclusion or exclusion of aparticular provision, all of these can benegotiated.

An understanding of the legal duties andresponsibilities of all parties will clarify thedegree of control and the constraintsimposed on the supplier. There is no onebest solution in the choice between agentand distributor and the decision will dependvery much on the circumstances andobjectives of the supplier as well as marketfactors, such as the ability of the channel toexploit the market potential. It is thereforecritical to examine the differences betweenagent and distributor not only from the legalperspective but also from the perspective ofa range of additional factors such as:

• The product range or services to bemarketed

• Market dynamics (e.g. Market size, levelof competition, target sales required andmarket coverage needed)

• Financial factors (e.g. Purchases, pricing,payment, and the burden of credit risk)

• Customer-facing activities (e.g. A targetmarket and marketing perspective.

While it can be hard to remember all thecharacteristics, duties and responsibilities ofchannels and the supplier, the chaptersimplifies the exporter's understanding bygrouping the characteristics of agents versusdistributor in two simplified summary tableformats for direct comparison according tothe main factors discussed in the text.

The following sections describe thecharacteristics and duties of agents anddistributors, the influencing factors and thecomparative advantages to be considered inappointment of either channel.

Agent SupplierRelationshipsCharacteristics of a Commercial Agent

An agent generates sales between a principal(supplier) and its customers and is rewardedby earning commission - usually tied to thevalue or volume of goods or services sold.

23Irish Exporters Association Part Two Channel Options

3. Agents and Distributors


Title, possession or risk in goods does notordinarily pass to the agent at any stage.This reduced risk is one of the reasons anagent would normally receive lessremuneration (consisting of commission)than a distributor that can set its ownmargins.

In an agency agreement the supplier retainscontrol over key areas such as marketingstrategies, product price lists and thecustomer base. The contract for sale of thesupplier's goods or services is between thesupplier and its customer, with the agentacting only as a facilitator.

Figure 7

Agent - Supplier Duties

Duties of the AgentA supplier would typically want to oblige anagent to:

(a) make proper efforts to negotiate and,where appropriate, conclude thetransactions it is instructed to take careof;

(b) comply with reasonable instructionsgiven by the supplier;

(c) act only within the limits of its authority;(d) use diligence and care;(e) have no conflict of interest with the

supplier;(f) keep the supplier's information

confidential;(g) account to the supplier for property and

money of the supplier which is under itscontrol;

(h) keep the supplier informed of allmarketing and promotional activities;

(i) provide a forecast of likely orders for theproceeding period in question;

(j) satisfy itself of the financial stability ofintending purchasers of the goods;

(k) keep separate and proper books ofaccount showing all enquiries;

(l) promptly pass on any complaints orclaims arising in relation to the goods;

(m) assist the supplier in clearing importedgoods through Customs and Excise;

(n) meet the minimum sales target set by thesupplier;

(o) refrain from marketing or sellingcompetitive goods in the territory; and

(p) indemnify the supplier for any breach ofits obligations.

Duties of the SupplierA supplier's duties would typically includethe following:

(a) to act dutifully and in good faith;(b) to provide its agent with the

documentation and informationnecessary for the performance of theagency contract;

(c) to send a representative to the agentwhere necessary, to accelerate promotionand sales of the goods or services;

(d) to provide training and support to theagent relating to the demonstration ofthe goods and the provision of after salesservice;

(e) to notify the agent once he anticipatesthat the volume of commercialtransactions will be significantly lowerthan which the agent could normallyhave expected (example, where aparticular product line is beingwithdrawn, or sales forecasts will not bemet); and

(f) to inform the agent within a reasonableperiod of his acceptance or refusal of anorder or contract which the agent hasprocured for him.

CommissionThe agency agreement will set out howmuch commission is due to the agent, theamount of commission being directly linkedto the value or volume of sales; if no salesare generated then no commission is paid.Commission normally becomes due once thecontract between the supplier and itscustomer has been concluded (ie when thecustomer has paid for the goods or servicesin question).

TerritoryIt is important for the supplier to set out theterritory (whether geographical or not) thatthe agent is confined to. The territory couldbe a specific group of customers in aparticular area (e.g. all fitness centres inLondon) or simply a defined geographic area(eg Japan). Accordingly, an agent will be inbreach of the agreement if it sells or marketsthe goods outside the relevant area orgroup. The bargaining position of theparties will be key here, as an experiencedagent may seek exclusivity for a substantialterritory.


Distributor - SupplierRelationships

Characteristics of a Distributor

Under a distributorship agreement, thesupplier or manufacturer sells its goods tothe distributor that then sells the goods ontoits own customers adding a margin to coverits own costs and profit. In purchasing andreselling the goods, the distributor contractsboth with the supplier and with its owncustomer and title to the goods in questionnormally passes through the distributor.Contrast this with the agency positionconsidered above where the contract for thesale of the goods is between the supplier andthe customer, the agent generally having nocontractual liability to the customer. Thereare different types of distributorship in themarket place, and it is imperative for thesupplier to be fully aware of the legal effectof the terms used to describe the distributorsappointment. The following is a briefsynopsis of the most common forms ofdistributorship:

(a) Exclusive DistributorshipAn exclusive distributorship is anarrangement whereby a supplier agreesto sell the contract goods only to thedistributor within a certain definedterritory and agrees not to appoint otherdistributors or sell the goods directly toother customers within that territory.The supplier may make exclusivitydependant on meeting sales targetswithin a specified period. It is importantto note that the appointment of anexclusive distributor can raise seriouscompetition law issues.

(b) Sole DistributorshipThe term “sole distributorship” isgenerally used to describe an agreementwhereby a supplier appoints a distributoras his sole or only distributor within aterritory, but the supplier reserves theright to supply the goods directly tocustomers in that territory.

(c) Non-Exclusive DistributorshipA non-exclusive appointment gives thesupplier complete freedom both to selldirectly and to appoint other distributorswithin that territory.

(d) Selective DistributorshipIn appointing a distributor as part of aselective distribution system, the supplier

agrees to appoint distributors only ifthey meet certain criteria. Thiseffectively limits the number ofdistributors that will be appointed withinthat territory.

Figure 8: Distributor - Supplier Duties

Duties of the DistributorA supplier would typically want to oblige adistributor to:

(a) use its best or reasonable endeavours tomarket, promote and extend sales of thegoods in the territory;

(b) maintain an adequate inventory ofgoods to meet anticipated customerdemand;

(c) keep up to date books of accounts andrecords;

(d) refrain from making representations orwarranties in respect of the goods thatexceed the suppliers;

(e) provide rolling forecasts of likely sales;

(f) meet minimum purchasing or salestargets;

(g) refrain from actively selling the goodsoutside the territory;

(h) indemnify the supplier for any breach ofits obligations; and

(i) refrain from marketing or sellingcompeting goods (if sole or exclusive).

Duties of the Supplier

A supplier's duties would typically includethe following:-

(a) to supply the distributor (not necessarilyfree of charge) with such amounts ofsamples of the goods and of advertisingmaterial to promote sales of the goodswithin the territory

(b) to give the distributor such technical,marketing and advertising support andadvice both by correspondence andmeetings as is considered necessary; and

(c) to use reasonable efforts to protect therights afforded to the distributorpursuant to the agreement.

Comparative Characteristicsof Agents and Distributors

Which channel the supplier selects dependson a number of factors that must beconsidered in terms of the impact on thesupplier's business. There is no one “bestsolution” to channel choice and the decidingcriteria will vary widely across suppliers. Thechoice between an agent or a distributor willbe determined by the level of control that isrequired, the product offering, financialfactors, marketing factors and the marketdynamics (e.g. market size, level ofcompetition, target sales required andmarket coverage needed). The followingsections describe some of the principalcontrol factors and financial/marketing(customer facing activities) factors forconsideration. The chapter closes with twosummary tables that summarise thedifferences between agents and distributorsdiscussed in detail below.

Control Factors that influence Suppliers'choice of Agent versus Distributor

The following section examines some of thecontrol factors to be considered by supplierswhen making the choice of agent versusdistributor.

(a) The Goods Where the supplier wishes to retain title tothe goods to be sold until they reach thecustomer, an agent is the correct choice.Ordinarily an agent would not take title, risk,or even possession of the goods. On theother hand the distributor takes title, riskand in most cases possession of the goods.

(b) The CustomersA distributor has a direct relationship withthe customer base, they are his customersrather than the supplier's customers. Thus,the distributor with his superior knowledge,can often dictate the product and marketingstrategies for his territory. Crucially, if thedistributorship is terminated, the supplierwill not have any direct link with thedistributor's customers and there is a riskthat the distributor will supply them with acompeting product. An agent, however, hasa less central role in the customerrelationship since the supplier retains directcontact with each customer. Accordingly thecustomers are those of the supplier ratherthan of the agent. This type of relationship

would therefore seem to be more relevantwhere customer contact is essential.

(c) The PriceIf a supplier wishes to retain the right tocontrol the price of the goods, theappointment of an agent rather than adistributor is probably the correct choice. Inmost jurisdictions, the supplier will beprohibited from setting the resale price for adistributor, though it can make arecommendation. An agent would notnormally set prices (though he may havediscretion to negotiate within certain bands).

(e) Financial RiskIn a distribution agreement, sometimes thesupplier is used as a source of interest freecredit, as a distributor may purchase fromthe supplier on longer credit terms thanthose it provides to its customers. This canleave the supplier exposed to taking thecredit risk for all of the distributorscustomers. If the supplier were to use anagent however, it can separately assess thecredit risk of each individual customer beforedeciding to do business.

(f) The MarketIf the goods require on-site technical supportand after sales service, an agency seems lesssuitable as in most cases, the commission willnot be sufficient to fund the investmentrequired. Where this option is not feasiblethe supplier must find a local operator whowill undertake the investment to provide afull service local operation; in this case adistributor would be more preferable.

(c) TerminationIn the EU, an advantage of appointing adistributor over an agent is that theCommercial Agents Directive does not applyto distributorships (and therefore there is norequirement to pay compensation or anindemnity to a distributor at the end of theagreement). However, a distributorshipagreement is subject to certain CompetitionLaw rules.

Summary of Supplier's Level of ChannelControlThe following figure provides a summaryoverview of the level of control that asupplier may expect to exercise in an agentor distributor relationship.


Financial and Marketing Factors Criticalin Choice of Agent versus Distributor

The above summary of characteristics ofagents and distributors highlight potentialconstraints on suppliers and degree ofcontrol that the supplier may exercise.However, the supplier must always bear inmind that successful principle-channelrelationships are built on a “partnership”approach of trust, shared objectives, andgood communication. Of criticalconsideration in the choice of agent versusdistributor is the channel's potential toexploit the supplier's market potential. Thefollowing figure highlights the keydifferences between agent and distributorprincipally from a financial and marketing (orcustomer-facing activities) perspective.

• Financial Factors: There are five decision criteria groupedunder the perspective of the FinancialImpact on the supplier: cost of importingthe products, purchases, payment, pricing,and the burden of credit risk.

• Marketing Factors: There are five criteria to consider underCustomer Facing Activities: channelrelationship (representation or customer);customer relationship; after sales service;distribution; and promotion.


Figure 9: Comparative characteristics of Agents and Distributors

Factors for Consideration Agency Distributor

Control over price and other terms of sale Yes No

Ability to dictate choice of customer Yes No

Direct contact with customer Yes No

Close control over marketing Yes No

Ability to offload risk of stock No Yes

Commission payable Yes No

Compensation payable for termination or expiry of agreement Yes No

High risk of Competition law issues No Yes

Simpler tax position No Yes


Figure 10: Financial and Marketing factors that influence choice of Agentversus Distributor

Decision Criteria

Facilitation ofImports

Purchases

Payment

Pricing

Risk Burden

ChannelRelationship

CustomerRelationship

After salesservice

Distribution

Promotion

Agent Distributor

Cu

sto

mer

Fo

cuse

d A

ctiv

itie

sFi

nan

cial

Fac

tors

May assist in facilitatingimports

Not financially involved in sale- agent does not purchase theproduct from supplier

Agent works for supplier andis paid by supplier in anagreed way - normally sales'commission. Payment is usuallymade following delivery of thegood and after supplier hasbeen paid

Must sell to agreed supplierpricing

Does not take on customercredit risk for supplier

Acts as representative of theexporter - tends to be smallerorganization than distributor,with close customer relations& fewer customers thandistributors, & often have alimited sales team & limitedfinancial resources. Lowervolumes than distributor buthigher margins achievable forsupplier

Customers may be associatedspecifically with supplier dueto product interest/demandbut many agents also havetheir own customer base

Not normally responsible forafter sales service

Supplier responsible & coversdistribution costs

Unlikely to carry outpromotional activities

Imports the product (reduces cost& resource burden for supplier)

Buys for own account, ie. thedistributor purchases thegoods/services from supplierand then sells on to customers

Applies mark-up to supplier'sprice to cover additional in-market costs of ownership(stockholding), selling,distribution and administrativeexpenses. Receives paymentfrom intermediaries and directcustomers

Applies a mark-up and controlsselling price

Will assume customer creditrisk

A customer of the exporter -usually tends to be largerorganisation than agent & maywield stronger bargainingpower than desired. Handles arange of product lines formultiple suppliers, & usuallysells through multiple channelsto achieve high marketcoverage. Higher volumes &lower margins for supplier

Distributor has a strongrelationship with customers inthe retail/wholesale field

Responsible for after salesservice and in some caseswarranty and guarantee issues

Responsible for distribution

Assists in carrying out &funding promotional activities

Source: Euroman Consulting ©

4CHAPTER

Franchising andLicensing

29



Summary

This guide focuses to a large extent onagency and distributor relationships,being two of the channels most oftenused by suppliers. However, in order tooptimise growth potential, exportersneed to extend their market coveragethrough multiple channels. This chapterdescribes two further channels forconsideration: franchising and licensing.Franchising is predominantly successfulin the services sector, while licensingmay take place where the product orservice has a very high technology andknowledge content that is protected byintellectual property (IP) rights.

There is a small percentage of Irish basedfranchisees. In order for franchisors to attractwidespread interest, they must have: a businessconcept that has already succeeded; a strongbrand; specific know-how that can beprotected; and an easily transferable operation.

Franchising provides an opportunity to growsales at a faster pace than possible throughorganic growth and capital costs ofexpansion can be passed on to franchisees,thereby lowering the risk for franchisors. Afranchise agreement is usually a long termagreement (usually of 5 to 10 yearsduration). Defining the franchisee's territoryis a crucial part of any franchise agreement. Licensing enables a licensor to exploit othermarkets by allowing the licensees to apply

the licensor's invention in that market. Thesuppliers' licensing strategy should considerwhether a sole, exclusive, or non-exclusiveagreement is the best route.

FranchisingFranchising is one of the fastestgrowing areas of the services industry

For certain products or services franchisingmay be considered as the preferred channelfor expanding a business both nationally andinternationally. In Ireland, as with the rest ofthe world, the growth of franchising isrunning parallel to the growth of the serviceeconomy and in 2003 contributed ¤1.2bn tothe national economy, as the figure belowshows. As the service economy becomes anincreasingly important creator of wealth,franchising itself, as a service, is set forcontinued growth.

Still significant room for growth inIreland by comparison withInternational marketsInternational surveys in the US and UKindicate the staggering economic impact offranchising in terms of turnover and numbersemployed:

• USA: franchising provided in excess of 9.7billion jobs and the industry had aturnover of ¤624 billion, according to a2001 Pricewaterhouse Coopers' survey onbehalf of the International FranchiseAssociation

• UK: franchising was estimated by NatWest Bank/British Franchise Association tocurrently provide approximately 330,000jobs and industry turnover has reached£9.6 billion.


Franchising and Licensing

Figure 11: Growth in Turnover of Franchise Systems in Ireland (1995-2003)

SURVEY YEAR* 1995 1997 1999 2001 2003

TURNOVER** ¤0.256 ¤0.397 ¤0.571 ¤1.02 ¤1.272

CHANGE ON PREVIOUS +62% +55% +43% +79% +24%

SURVEY

* Bank of Ireland survey - 2004; (** Sales in Billions of Euros)

One of the significant findings in the Bank ofIreland 2004 Survey of Franchises in Ireland isthe continuing small number of franchiseesthat originate in Ireland. This situation islikely to continue unless there is a morecomprehensive attempt by the state agenciesto nurture and develop the indigenous Irishfranchise sector. The traditional retail outlet,restaurant or coffee shop can become anexport earner through adopting thefranchise model. One of the most successfulmodels of this is the O'Brien's Sandwich Barfranchise.

The Franchising System

Franchising, in general terms, is a system wherea business (the franchisor) allows someone else(the franchisee), to run a similar type ofbusiness, in a specified area or territory usingthe franchisor's business system, know how,utility models, trade marks, intellectualproperty and other business secrets in returnfor an initial fee, an advertising levy and apercentage of the franchisee's turnover.Franchising has featured strongly in the servicessectors in Ireland in a wide range of areaswhere franchisors originating in Ireland haveproven to be very successful: fast foods(Supermac), video rental (Extra Vision),health/fitness centres (Crunch Fitness), realestate management (Sherry Fitzgerald, Gunne,Property Partners), and numerous other sectors.

Advantages and Disadvantages ofFranchising

There are a number of advantages tofranchising as a method to expand thesuppliier's business, include the following:

• An opportunity to grow sales at a fasterpace than possible through “organic”growth (owner only expansion)

• The franchisor can pass all the capital costsassociated with expansion such asacquiring premises, the fit out , and thecosts associated with training employees tothe franchisee;

• The greater the number of franchisedoutlets, the greater the purchasing powerof the franchisor, leading to reduced costsof stock and a higher profit margin

• There is a large pool of potentialentrepreneurs that are attracted tofranchising as a tried and testedfranchising concept

• As the franchise grows, all franchiseesbenefit from the national andinternational brand building that is fundedthrough the pooled advertising levy.

Of course there are also certaindisadvantages associated with franchisingand examples would include:

• Loss of control that could erode the brandand corporate image- (the franchisee willhave a large degree of autonomy);

• Disclosure of “know how” and the risk ofsharing trade secrets that may have takenyears to build up.

Preconditions for business growththrough franchisingA profitable business with a successful trackrecord might consider the option offranchising the business as a means ofexpansion. To embark on this path is a majorstrategic move and requires the preparationof a detailed franchise development plan. The following pre-conditions are usuallynecessary to enable a business to successfullytransfer itself into a franchise channeloperator;

o A tried and tested profitable businessconcept

o Intellectual property, know-how, tradesecrets

o Clear identity/brand

o A transferable operation

o Depth of management skills

Tried and Tested Business Concept

The franchiser's track record should besuccessful enough for potential franchiseinvestors to be attracted to the investment.The profit margin must be high enough toenable each franchise outlet to generatesufficient profit to pay the franchisor's feesas well as being capable of generatingsufficient return for the franchisee's owninvestment.

Intellectual Property

It is essential for a franchisor to review itsintellectual property (IP) rights (trade-marks,copyright, patents and registered designs), inrespect of the target market. Pursuant tothe franchise agreement the franchisee willreceive a licence to use such IP. Therefore, IPprotection is essential, and if not in place this


should be attended to as a matter ofurgency. As importantly, it is necessary tocheck for any pre-existing, conflicting rightsin the target territory. Franchisors havesometimes launched in a new country only tofind they were infringing a registered trademark of an existing business in that market. It is advisable to instruct a suitably qualifiedtrade mark agent to process the trade/servicemark registration. For further information inthis regard see the “Exporters Guide toIntellectual Property”, published by the IrishExporters Association, Enterprise Ireland andTomkins & Co. The operation of a franchiseagreement is also likely to involve theimparting of confidential information,notably know-how and trade secrets, whichhave to be protected by use of suitableconfidentiality provisions.

Clear Identity/Brand

Successful franchise companies are clearlydifferentiated from the competition bymeans of a “distinctive image”. Thiscomprises many features including adistinctive logo and branding on all of thestorefront, furniture, uniforms and transportof the franchised business. The distinctiveimage and consistency of the branding fromregion to region and country to country,ensures that customers can readily identifythe products or services belonging to thefranchisor.

Roll-Out of the Franchise

A key ingredient of all successful franchiseoperations is their ability to be rolled-outfrom one location to another while ensuringconsistency of the products or services to thecustomer. To help achieve this, structuredtraining programmes, to ensure that thenecessary skills and knowledge (trade secrets)are also transferred, are essential. Typically,the training should be delivered with thesupport of “operation” manuals detailingthe methodology for running the franchise.Obviously the content of the operationsmanual must be subject to the confidentialityagreement.

Management Depth

A franchise-able business requires a distinctset of operating skills wheninternationalising the business. The ability ofthe management team to develop eachregion with well selected franchisees' cannot

be done successfully if management arealready fully stretched coping with thedomestic franchisees.

The Franchise Agreement

A franchise agreement is usually a long termagreement (usually of 5 to 10 year'sduration) under which the franchisee islicensed to use the franchisors' know-how,trade marks, trade names, patents,copyrights and business secrets. It is essentialto seek legal advice when negotiating afranchise agreement as it will encompassintellectual property, employment, realproperty and indeed competition law issuesthat will need to be addressed.

Defining the franchisee's territory is a crucialpart of any franchise agreement. LargerFranchisors may appoint “master franchisees”who then appoint their own franchisees insub-sets of that territory. Small franchisorsmay appoint their own single franchisees inthe territory. O'Brien's Sandwich Bar, is anexample of the former. It operate a masterfranchise system whereby it grants the rightto develop a particular territory in Ireland orin other countries, with the franchisee freeto develop as many outlets as they wantwithin that territory.

LicensingGeneral

Licensing agreements provide an alternativeto the traditional channels when expandinginto international markets - and arguable aless risky one. Due to the high cost ofmanufacturing, particularly in highlydeveloped countries such as Ireland, and thecomparatively small scale investment of alicensing programme, many of the risks thata company would otherwise face inexploiting its products, services or technologyare transferred to the licensee.

There are, of course, inherent risks inlicensing technology for both the licensorand the licensee. However, an effectivestrategy will minimize the risk for bothparties.

The licence is the means by which the owner(the licensor) of a patent gives permission toanother person (the licensee) to carry out


certain actions or operations that, withoutsuch permission, would infringe on thepatent. A licence can thus allow the licenseeto legitimately manufacture, use or sell aninvention protected by a patent. In return,the licensor will receive royalty payments.

Before licensing the patent into foreigncountries, you should ensure that you havepatented your product in each country towhich you intend to export. Foreignprotection of patents can be costly and maytake a long time to acquire.

The Benefits of Licensing

Licensing enables a licensor to exploit othermarkets by allowing the licensees to applythe licensor's invention in that market. In theprocess, the licensor avoids incurring thecosts associated with penetrating the marketby itself. Licensing also allows the licensorthe ability to enter market sectors where itdoes not have a sales or service capability, by“tapping into” the licensee's localknowledge and market base.

Licensing Strategy

Licensing can be an effective tool for achievingbusiness goals, particularly in export markets.In addition to patent licensing you may alsoconsider the use of trademark licenses andcopyright licenses, depending on what type ofbusiness you operate. In some instances all ofthese may be included in the one agreement.

Suppliers' licensing strategy should also considerwhether a sole, exclusive, or non-exclusiveagreement is the best route. The selected typeof agreement may affect the royalty structure ortax implications of a license.

• A “Sole” Licence is generally used todescribe an agreement whereby thelicensor appoints a licensee as his sole oronly licensee within a territory, but thelicensor reserves the right to license theproduct directly to customers in thatterritory.

• A “Non-Exclusive” licence means thelicensor can sell directly and license thesame right to a number of licenseeswithin a specific territory.

• An “Exclusive” licence means the licenceis given to one licensee in a specificterritory, even to the exclusion of thelicensor.

In a typical licence agreement the licensorwould oblige the licensee to:

• Exploit, market and advertise thelicensed products

• Adhere to the channels of distributionspecified

• Adhere to the quality standards specifiedincluding the requirement to providesamples, inspections and test results

• Meet sales targets or other performancestandards

• Achieve profit targets or royaltystructures

The ideal licensing strategy should take intoaccount the company's own long term goalsin terms of manufacturing, control, patentregistration in different markets, speed ofinternationalisation and tax considerations.Royalty income is free of corporate andincome tax in many markets. The beststrategy should also focus on identifyinglicense partners with the necessary resourcesand financial strengths to carry the productprogramme through.


5CHAPTER

E-Commerce

35



Summary

The internet exponentially extends themarket reach of exporters.The internet has created an instantaneouselectronic market place that exponentiallyextends the market reach of exporter tocustomers across the globe at low cost. Toexporters developing their web presence forthe first time, the internet can be dauntingin learning how to target and maintain loyalonline customers, how to provide up-to-dateinformation content through a dynamiccompany website, and how to ensure thatadequate return on investment is achievedfor the company's time and resources that gointo the development of the company's e-business.

Effective development of an online B2Cand/or B2B presence helps grow salesand strengthen customer relations

This chapter describes the key steps thatshould be carried out by exporters whenplanning or developing a company's webpresence and e-commerce or e-businesssolutions. A practical case study is providedof an electronics company exporting fromIreland and how it developed its Business toBusiness (B2B) and Business to Consumer(B2C) website to grow its international salesand secure its customer relationships for thelong term.

Legal issues to be considered regardingcontracts and jurisdiction

The chapter describes the legal issues to beaware of in relation to electronic contracts.It highlights that an offer is accepted by thevendor when payment is made and there isan intention to enter into legal relations, thespecific circumstances of which are outlinedin the text. An important distinction is madebetween an “offer” and an “invitation totreat”. The safest approach advised is tomake it very clear in the vendor'scommunication on the website that thevendor's advertisement of any goods orservices constitutes an invitation to treat. Inthis way any mistakes, such as providingincorrect pricing, can be easily rectified. Thevendor's terms and conditions should providethat a contract will only be formed if thecustomer's order is accepted. Websites arepotentially subject to the regulatory regimesof jurisdictions all over the world which can

expose vendors to potential litigationanywhere in the world. Different regulationsapply to B2B online contracts versus B2Ccontracts. Website terms and conditions ofuse and of sale/supply should therefore bereviewed (and where appropriate local legaladvice sought) to ensure that jurisdictionover disputes is confined to the Irish courtswhere possible.

IntroductionExporters, both large and small, arediscovering that the Internet can be a fast,cost-effective and efficient way to marketand sell their products to buyers around theworld. It can be used to supplement anagency or distributor structure andsimultaneously handle on-line selling directlyto customers in many markets.

The Internet has created an instantaneousglobal and electronic market where thosewho master the rules of e-commerce can bestexploit it. Irish exporters find themselvesdrawn into this global e-commerce market bytheir need to export in the early stages oftheir business. As the Internet and itsbusiness matures, more and more businesswill be conducted over it. According to CSOfigures5 in 2002 over 80,000 Irish enterpriseswere engaged in e-commerce with a totalturnover of over ¤222 million. 12.5% of thisturnover figure related directly to e-commerce activity. Other relevant statistics include:

• ¤152 billion worth of on-line sales areexpected in Europe by 20066

• 40.9 million Europeans made a purchaseand/or used an e-commerce service in thelast six months7

• Almost 400,000 people in Ireland use theInternet at least once a day8

On-line StrategyThe Internet presents huge opportunities,but also brings daunting challenges some ofthose would include how to:• Engage and retain the fickle on-line

customer

• Dovetail the internet with current saleschannels

• Manage the content requirements of adynamic medium


5. E-Commerce

5. Source “Information Society Statistics-Ireland 2004” CSO Dublin

6. Source Forrester Research

7. Source Forrester Research

8. Source “Information Society Statistics-Ireland 2004” CSO, Dublin

• Change the organisational culture of thebusiness

• Ensure that the Internet delivers lastingvalue

Successful on-line ventures are grounded in astrategy that is aligned with anorganisation's goals and brand values.

Cisco has produced a very useful model forInternet strategy development. It starts withbasic e-mail and builds up in steps to a fullynetworked organisation.

Companies need to plan this transitioncarefully and avoid being carried along by thesurge of the networked world. The first stagein the planning process involves an assessmentof the current position of the business.

Current Internet SituationAny strategy development must start with ananalysis of the company's current use of theinternet and internet technologies. Typically,this will range across the following areas.

• Current Infrastructure

It is important to analyse the currenthardware and software used by thebusiness. Does the infrastructure permitthe optimum use of the internet? Issome out of date or tired? An old orantiquated system will prevent theoperations and the web-site frommaximising to fullest extent what thebusiness has to offer. This in turn couldlead to lost sales and a disinterestedtarget market.

• Current Branding

It is important to review the company'scurrent branding. How are thesereflected in outgoing e-mails, web frontpages, domain names and on-linecatalogues? The branding of thebusiness distinguishes it from itscompetitors, and therefore it can not beoverlooked.

• Current Barriers

For various reasons ranging fromgeographical location to prohibitive costs,some companies and their target marketsmay suffer from poor internet access. It isworth mentioning that it is the customerand its use of digital channels thatdetermines the success of on-line

companies. However, staff competency ininternet use or web-marketing may, infact, be the greatest barrier to furtherInternet usage within a company,therefore adequate training is key.

• Web Content

Updating the web content to a highstandard is essential to ensure a real-timelink between the company's services andits customers. Content should becompelling and portray the company'sbranding in an effective manner.

Optimising WebsiteFunctionalityThe analysis described above should enable acompany to decide which step on the e-adoption ladder they are on. Moving furtherup the ladder will entail a cost-benefitanalysis. However, core to any improvementin use of the Internet is the company'swebsite. A well designed website that iscontent-rich, optimised for both searchengines and users and easily updated willmaximise the online selling capacity of anycompany. Well-designed websites are morethan electronic brochures, they are powerfulcost-effective channels to do business andbuild strong, interactive relationships withcustomers both at home and abroad.


Cisco Model

The following figure provides a usefulreference point in terms of functionalityfeatures of some best practice websites:


Figure 12: Best practice website functionality features

CONTENT MANAGEMENT AVAILABILITY

Article Management (All content on the site can be content managed.Documents, Links, FAQs etc)

News Management

Newsletter Management

MULTIPLE PUBLISHING SUPPORT

Ability to publish to Internet, Extranet and Intranet

Integrated Search Engine

Advanced and Parametric Searches

Dynamically controlled Site Map

Printer Friendly Versions of Pages

Text only Support

Dynamically controlled Bread crumbs

ACCESSIBILITY AND COMPLIANCE

Web publication Guidelines

Accessible Site (AAA)

Auto Generation of Irish Public Service Metadata (IPSMS)


The following case study illustrates how oneIrish firm strengthened its channel partnerrelationships while reducing costs andincreasing customer loyalty through theeffective implementation of an e-businessstrategy.

Best Practice Example: Lake Communications

Founded following a management buyout of Landis & Gyr in 1991, Lake Communications hasbecome a leading supplier of wireless and wired communications products for residential andsmall office customers since 1991. The company has a broad global base to its operations withthe USA and Australian offices providing a network of sales support teams ensuring 24x7worldwide coverage. The key to the company's success lies in its ability to attract leadinginfrastructure partners - major Telecom Operators and Internet Service Providers (ISP's) - inexport markets. Each of Lake's products are branded according to the individualTelecommunications Operator, who in turn, ship LAKE's products directly to their endcustomers. Its UK partner, BT, gave Lake strong international credibility, as did Belgacom andTelecom Italia. In Australia, Lake's market entry strategy was to partner with the then Telstrasubsidiary, Commander Communications, which has excellent retail sales channels.

LAKE sees itself as a company of partnerships, with each of the channel partners forming astrategic part of the business. These groups work together to reduce the overall cost base andmaximise efficiencies. The company have won market-leading positions in all core marketsthrough a clearly focused approach to defining target markets and segments.

In 2001, Lake invested significantly in its e-businesss operations to reduce escalating costs instorage at their distributors warehouses, improve visibility with customers , improveforecasting, and provide on line support. The introduction of a Business to Business (B2B) andBusiness to Consumer (B2C) website and related systems ensured tighter levels of controlrequested by international telecoms were met. The implementation of e-business systemsguaranteed delivery times to international clients, thereby increasing customer satisfaction.The net effect is that a wider network of channel partners has been created and the businessrelationships are more secure for the long term.

Enforceability of On-lineContracts

A business wishing to generate sales andrevenue using the internet as a sales channelwill need to ensure the contract of sale islegally enforceable. Recent legislativeinitiatives at national and EC level havetackled the applicable legal issuesextensively. The following section discussesthe principle initiatives.

The Electronic Commerce Act 2000

The Electronic Commerce Act 20009 (the“Act”) implemented into Irish legislation theprovisions of the Electronic SignaturesDirective and certain aspects of the E-Commerce Directive. The Act provides thatan agreement in electronic format will belegally valid and enforceable where it meetsspecific criteria. The Act also provides for thelegal enforceability of an electronicsignature, and the admissibility of evidencein an electronic format.

Four Basic Elements Present in anElectronic Contract

A business using a website to sell goods orservices must ensure that the terms andconditions of sale are clearly brought to theattention of the customer by having them ina conspicuous position on the website. Itmust be clear to customers that they haveaccepted the terms and conditions, the mostpopular method of doing this is through theuse of “click-wrap” terms and conditions. Inthis way the prospective customer has to scanthrough and accept the terms and conditionsbefore being allowed to proceed with theorder. However, this brings us onto thequestion of when is the contract for the saleof the goods or services actually concluded?

First we must go back to the basics of contractlaw and a couple of high profile examples willshow the difficulties that a firm can get into ifit does not get this right.

What is a contract? Essentially it is anagreement or a bargain between two parties that is enforceable. There are anumber of basic requirements before acontract is created:• Offer;

• Acceptance;

• Consideration;

• Intention to create legal relations.

Offer accepted when payment is made& there is legal intent

From the above it can be seen that contractsconcluded on-line are legally enforceable (E-commerce Act, 2000). A contract is formedwhen one party makes an offer, which isaccepted in unequivocal terms by anotherparty and that acceptance is thencommunicated to the party who made theoffer. There must be consideration (paymentessentially) and there has to be an intentionto create legal relations.

So, if the vendor displays goods or servicesfor sale on their website, does that constitutea legal offer which would give rise to abinding contract, if a customer goes throughwhatever ordering and payment proceduresthat may be on the website?

Important distinction between offerand invitation to treat

It is important here to distinguish, as theexamples will highlight, between an offerand an invitation to treat. An “offer” is anindication by one party of his or herwillingness to enter into a contract on thestated terms and conditions, provided thatthe terms and conditions are accepted by theother party to whom the offer is made.However, an “invitation to treat” is intendedto provoke an offer from another party. Themost common example given of an invitationto treat is the display of goods in a shopwindow or on supermarket shelves. Thepicking up of the goods by the shopper andtheir presentation at the check-out amountsto an offer which can then be accepted bythe cashier.

The test is based around the 'intention' ofputting the information in relation to thegoods or services onto the website. Does thevendor intend to be bound by a customerresponse, in which case the vendor has madean offer? Or, does the vendor, in basic terms,want a chance to check the price, andavailability etc of the goods or services,before accepting the customer's offer? Inwhich case an “invitation to treat” is all thatshould be intended.


9. Electronic Commerce Act2000(27/2000) came intoeffect in Ireland in 2000.


Intention to treat - The Argos Case

In September 1999, Argos, the UK retailer ofhousehold goods, in error, advertisedtelevisions for £2.99 instead of the intendedprice of £299 on its website. It is reportedthat almost £1,000,000 worth of orders atthe incorrect price were taken before themistake was noticed. There was oneopportunistic customer who placed an orderfor 1,700 TVs. In becoming aware of thepricing error Argos declined to fulfil ordersbecause they said the price on the websitewas an invitation to treat not an offer andtherefore, it was not obliged to fulfil orders.Unfortunately, this case did not go to courtand as a result we do not have a decisionthat can be relied on as precedent, howeverit highlights the difference between an“offer” and an “invitation to treat”.

Importance of advertising the invitationto treat

The safest approach is to make it very clearthat the vendor's advertisement of any goodsor services constitutes an invitation to treat.If the vendor does this, then mistakes can beeasily rectified without a panic.

Contract will only be accepted ifcustomer's order accepted

The vendor's terms and conditions shouldprovide that a contract will only be formed ifthe customer's order is accepted. The termsshould therefore state clearly whether thetaking of payment from the customer's creditcard or debit card constitutes acceptance ofthe offer or not. If not, it is important at thispoint, that the terms point out that even ifpayment is taken for the particular goodsordered, no contract will be formed untilsuch time as the customer accepts the offer.

When the customer then presses the “Iaccept” button, and the credit card detailsare processed, a confirmation email shouldbe sent to the customer that indicates thatthe order has been received and that it isbeing processed, but it should not confirmthat a contract has been formed unless thevendor is ready to do so.

In the absence of an express statement oractual knowledge by a customer that thevendor does not intend to be bound, it will

be for the court to establish the vendor'sintention from an objective perspective as towhether an offer or invitation to treat wasmade.

E-Commerce is an ever changing andcomplex area and considering theimportance of “internet sales” to a thrivingbusiness, it is important that vendors haveterms and conditions of sale reviewed and/ordrafted by a suitably qualified lawyer toensure that such are fully enforceable.

Applicable Legislation to ElectronicSales & Jurisdiction for Disputes“My website is in Ireland. I sell all over theworld. I sell Business to Business (B2B) andBusiness to Customer (B2C). Which lawapplies?”

Websites are potentially subject to theregulatory regimes of jurisdictions allover the world

A website can be viewed in every jurisdictionwhere internet access is available. In principle,therefore, websites are potentially subject tothe regulatory regimes of all such jurisdictions.As these regimes vary widely, this may giverise to serious difficulties, as illustrated whenthe UK company, Virgin Atlantic Airways, wasfined US$14,000 by the US Department ofTransport for misleading advertising on its UKbased website (through administrative error)regarding its transatlantic airfares. This case isbut an example of a large number of casesworldwide that demonstrate an increasingtendency on the part of national courts toimpose domestic laws on websites based inforeign jurisdictions.

Key principles regarding jurisdiction ine-commerce disputes

The following section discusses the nuancesof jurisdiction relating to Business to Business(B2B) electronic sales, and Business toConsumer (B2C) electronic sales.

B2B contractsGenerally in the EU if both parties to adispute are located in countries subject tothe Brussels Regulation10 the basic principleis that any action must be brought in thecountry of the person being sued.Therefore, a German company accessing anIrish-based website would have to sue thesupplier in the Irish courts.

10. Regulation 44/2001 onjurisdiction and the recognitionand enforcement of judgmentsin civil and commercial matters,OJ 2001 L12/1.

However, there are a number of exceptionsto this general rule which include:

• In respect of copyright infringement, anaction may be brought where theinfringing act takes place

• An action for passing off may be broughtin the court of the state in which theperson bringing the action has sufferedharm to his goodwill, which will usuallybe the country in which he is based

• Disputes arising from a B2C relationship

In B2B cases, the risk of a foreign country'slaw being held to apply to a contract may bemitigated by incorporating in online contractterms an express choice of Irish law as theapplicable and governing law.

B2C contracts

In the case of "consumer contracts", (aconsumer is generally regarded as a personacting outside of his trade or profession) byvirtue of the provisions of the BrusselsRegulation the consumer may bringproceedings in the courts of the country inwhich the consumer is domiciled (or in thecourts of the member state in which theother contracting party is domiciled). It isessential to note that a business cannotcontract out of this right by providing thatthe courts of its home country are to haveexclusive jurisdiction over disputes.

Position outside Europe

The issue of jurisdiction depends on theprovisions of any applicable agreementbetween the countries concerned or, in theabsence of such an agreement, on nationalrules. It is not possible to deal extensivelywith other jurisdictional approaches but it isimportant to make brief reference to the USA.

Where a web site is available to US customersthe Brussels Regulation will not apply, andthe US courts will decide on jurisdiction,based on their own approach.

Those web sites that are “clearly conductingbusiness”, will be subject to the exercise of USjurisdiction e.g. websites providing gamblingservices, or those sites which allow customersto order online with credit card details.

It is likely therefore that if a company cansell into the US, a US court will acceptjurisdiction in any matters where a dispute

may arise in relation to the web site. Acompany should not conduct internetactivities with disregard for US law in thebelief that operating outside of the US willhelp it avoid liability in the US.

Reducing the risk of liability underforeign laws

The practical approach to dealing with issuesarising from trading with customers inforeign countries is to firstly determine themarkets that are to be targeted and then toinvestigate the laws that apply in thatparticular market. It is always important tocomply with the laws of those jurisdictions towhich products may be specifically advertisedor sold. For example, some jurisdictionsrequire that certain business' must have alicence to operate in that jurisdiction, andsome countries require that the websitecontent must be available in the locallanguage for the contract to be enforceable.If vendors do not want to sell into aparticular country they should incorporateinto their online order form adequate meansfor screening orders from that country. Inaddition they may wish to put technicalsystems in place so that orders received froma country to which the product is not to besold can be refused.

If the vendor has taken steps to preventresidents of particular jurisdictions fromusing or purchasing from the vendor'swebsite, then the vendor will be in a muchbetter position to defend themselves againstany claims by individuals or authorities inthat particular jurisdiction. Website termsand conditions of use and of sale/supplyshould therefore be reviewed (and whereappropriate local legal advice sought) toensure that jurisdiction over disputes isconfined to the Irish courts where possible.

Disclaimers

In general, a website which advertises goodsand services of third parties shouldspecifically state that the owners of thewebsite do not vouch for the goods andservices, although all reasonable attemptshave been made to ensure their informationon the website is correct.

Where a business deals with the customer asa consumer (i.e. the customer is notpurchasing the goods in its normal course of


business and the goods are of the typegenerally used for ordinary domestic use)certain warranty exclusions such as thoserelating to the merchantability of the goodswill not be enforceable because of thespecial protection afforded to consumers.Therefore it is essential to be aware of themandatory provisions of consumer legislationin force in the target market and in thisregard it is important to seek advice from alocal lawyer as to what is and what is notlegally enforceable.

The internet can greatly improve theefficiency and effectiveness of doing businessinternationally. Therefore, a marketing planfor the internet should be carefullycoordinated with the overall marketing planfor the business. Notwithstanding theabove analysis the contractual risks for on-line trading should not act as a deterrent forthe competent business person who obtainsthe correct advice.


6CHAPTER

Managing costsand profitability

45

PART THREEChannel Management

46 Irish Exporters Association Part Three Channel Management

Summary

This chapter highlights the need forexporters to closely manage costs andprofitability of channels. Exporters needto calculate management time goinginto the development of channels anda useful framework is provided tocalculate these costs.

Exporters need to ensure when transitioningto indirect sales that they review the extentof their selling operations and ensure thatthey are not duplicating the selling efforts ofthe channel, otherwise this can lead to anerosion of profit margins.

It is important to review channels andcompare performance in the target marketand across target regions. Understandingwhich channels are profitable for thesupplier and which hold the most potentialcan have a significant impact on thesupplier's growth potential in the market,without having to make significantadjustments in expenditure. Using sales dataalone for assessing channel partners is notalways useful. A more realistic picture ofprofitability by channel partner can beunderstood by allocating costs by function.

A simple matrix is provided in the chapterthat allows suppliers visually assess trends insales by channel and the actual profitabilityof each channel. This can be used to mapchannels according to their growth potentialand their comparative account profitability.It then becomes easier to understand: whichchannels need urgent attention; whichchannels may need to be reviewed orterminated; and which channels needsupport from the supplier to become the starperformers.

Costs of establishingChannelsIn building up third party channelinfrastructures, exporters face three maincost burdens:

1. The cost of the time taken up by thesupplier's staff in searching and engagingchannels

2. The sustained costs involved in managingand supporting channels

3. The margin the supplier has to give away

The first two of these are real costs but canbe regarded as investments rather than sunkcosts and the third is only a reality whenactual sales arise.

From the moment a company takes adecision to expand into an overseas market itsets itself on an expenditure path that willnot realise a return on investment foranything from several months to severalyears. The levels of investment varyenormously from one company to another,from market to market and between thetypes of channels being sought and can be inthe form of commitment of internalresources, hiring of outside expertise andstraightforward cash expenses.

The figure below shows some of the mainactivities that the supplier's managementteam will carry out in order to establish achannel. Costs may be determined accordingto the time taken up by each member of staffengaged in the activity, in addition to anyresearch costs, external advisory costs, andcosts incurred for travel to the target marketand for meetings with potential candidates.

47Irish Exporters Association Part Three Channel Management

6. Managing costs and profitability


Figure 13: Supplier activity-cost relationship in establishing channels

In some way, all of these costs are significantand suppliers embarking on exportprogrammes need to do a robust analysis ofeach area. Equally, time needs to be spent onthe business plan in order to establish whatthe return on investment is likely to be andwhen it is likely to be achieved.

Step Activity Typical Cost Factors Estimate (¤)

1

2

3

4

5

6

7

8

9

10

11

12

13

Definition of the products to beoffered for sale through third partychannels

Engineering, marketing, sales,senior management resources.Legal, H&S expertise.

Identification and articulation ofthe unique selling features of eachproduct

Marketing and sales resources

Identification of the customer needs(or perceived needs) that will besatisfied by the products

Marketing and sales resources;possibly external marketexpertise

Analysis of competitor strengths andweaknesses

Marketing, sales andengineering resources; possiblyexternal testing facilities and/ormarket expertise

Compilation of prospect lists andqualification of prospects

Sales resources, externaldatabases or market experts

Planning an integrated channelstructure to reach the prospects andpromote the products to them

Marketing, sales and seniormanagement resources,external expertise

Identification of target customerswith known needs that can besatisfied by the products

Marketing, sales and seniormanagement resources,external expertise

Identification and profiling ofoptimum channels to reach thetargets and close sales

Marketing resource, externalreports, field visits, externalexpertise

Channel engagement External expertise, field visits,internal logistics, finance, legalcosts

Training Travel costs, all internalresources, external facilitator

Preparation of marketing“collateral” material

Translations, printing,packaging, press releases,promotion, samples

Ongoing support; coop promotion;channel management

Joint customer visits,commercial support, technicalsupport, field visits, shows,advertising, mailing

Discount pricing Reduced margins

Once a channel has been appointed thehidden costs involved in supporting it can besignificant and principals are well-advised toimplement some kind of activity-basedcosting system that will enable them to trackthe resources being expended, to cost theseand to set them off against the sales andmargins being generated.

To many companies a sales channelrepresents nothing other than a cost factorthat accounts for 30% to 40% of the endselling price of a product. The conclusionmany companies reach as a consequence isthat it makes more sense to set up a directsales structure and keep all of the marginwithin the business.

This is certainly relevant in some situations,but in many others the perception existsbecause the company fails to reduce oreliminate the selling costs associated with adirect structure when it migrates to ordevelops an incremental indirect structure.

Again, the distinction mentioned in Chapter2 between “selling” and “managing salesthrough channels” is emphasised and thesignificantly different resources required forboth activities. The figure below illustratesthe mistake often made in relation to thereduced margins experienced by companieswho migrate from a direct to an indirectselling structure and neglect to adjust thecost of their sales processes.


Figure 14: Direct to Indirect Selling - impact of poor planning on supplier's sellingexpenses

Direct Selling Indirect Selling The Mistake

Materials Materials Materials

Labour Labour Labour

General and

Administrative

General and

Administrative

General and

Administrative

Selling

SellingSelling

Gross ProfitChannel GP

Gross Profit

Channel GP

Gross Profit

ESP

Evaluating Profitability andgrowth Potential byChannel

Where a number of channels are used toreach target markets, companies sometimesassume that their largest channel partnersare their most profitable ones. This canoften lead to suppliers ignoring smallerchannel partners with potentially higherprofitability and who may simply requiresome small support from suppliers to realisetheir full potential. Understanding whichchannels are profitable for the supplier andwhich hold the most potential can have asignificant impact on the supplier's growthpotential in the market, without having tomake significant adjustments in expenditure.

Using sales data alone for assessing channelpartners is not always useful. A morerealistic picture of profitability by channelpartner can be understood by allocating costsby function e.g. take the total promotionalspend or total cost of carrying debtors ortotal costs of financing etc and allocate thesecost to each of the channels. When sales bychannel are assessed and the total channelfunctional costs are allocated to eachindividual channel, then the true picture ofthe profitable or negative contribution eachchannel is making becomes clear.

By looking at trends in sales of each channeland the actual profitability of each channel(as outlined above) a simple matrix can beused to map channels according to theirgrowth potential and their accountprofitability. The figure below illustrateshow useful this can be if applied to multiplechannels in a specific target region or targetsegment of the market. Equally the tool canbe used to assess profitability and growthpotential of all channels across all of theregional markets where the supplier isrepresented. By using different colours forchannels in different countries, a visualpicture emerges of where the mostprofitable channels are and what theprospects (indicated by the direction ofarrows) for growth are in those markets,based on recent sales trends and profitabilityand other external factors that indicate thechannels competitive strength in the market.

It then becomes easier to understand: which

channels need urgent attention and whosecontracts may need to be reviewed orterminated; and which channels needsupport to become the star performers.

Figure 15: Channel profitability andgrowth potential matrix


Co

ntr

ibu

tio

n M

arg

in p

er c

han

nel

Growth Potential

40%

50%

60%

70%

¤3.5m ¤1.8m ¤1m ¤0.27m

Low

High

High Low

SystemIntegrator

Distributor 1

Source: Euroman Consulting ©2005

7CHAPTER

Channel Audits

51

PART THREEChannel Management


Summary

While Chapter Two focused on theestablishment and development ofchannel structures, this chapter focuseson the control function required toeffectively manage channels.

In the context of sales channels, an audit canbe regarded as an in-depth examination ofall aspects of the supplier-channelrelationship and of the selling process. Just aswith any other commercial activity, channelrelationships should be audited formally andregularly. Suppliers need to be able to assesswhether the existing channels are not onlymeeting the objectives agreed in theirbusiness plan, but also whether they arecapable of meeting the emergingrequirements of the business as it develops,grows and evolves. All too often mediocre,but sustained growth in sales can give rise tocomplacency in channel management andsub-optimised revenues and profits for thesupplier.

How to conduct a ChannelAudit

To carry out a meaningful audit, whether it isbeing done prior to appointment of thechannel or several years into the relationship,the supplier needs to delve deeply intovarious aspects of the channel's business.Much of the information may be available inthe public domain and if so, it should beassembled beforehand. This will addsubstance to the audit process and enablethe supplier to test the quality of theinformation he is being given by the channel.Appendix 1 of this guide provides a detailedtemplate to assist exporters in carrying outchannel audits. The template can be used tocarry out an audit prior to appointment ofthe channel or when reviewing the channelsperformance following at a future point inthe relationship. The following sectiondescribes the main areas for considerationwhen carrying out an audit.

Financials

In the majority of well-managed companiesaccounts-receivable personnel keep a checkon the credit worthiness of their customers,including sales channels. Such assessments

are often provided by independent firms likeDun & Bradstreet and as a minimum,suppliers should conduct regular creditchecks on their channels.

However, there is another aspect to financialassessment that falls within the remit of thebusiness manager and that is the availabilityof working capital within the channel to growthe business at the rate expected by thesupplier. If cash is tied up, for example, ininventory or extended receivables for otherprincipals' products, it means that it is notavailable to grow sales of your products. Theonly way to assess this is by examining, on aregular basis, the channel's point-of-sale (POS)data for your products and its balance sheet.Although many channels are privately heldcompanies whose accounts are not thereforeavailable in the public domain, all well-runbusinesses produce monthly or quarterlymanagement accounts and should beprepared to share these with their principals.

The value of channels is the customerrelationships they own and many channels,therefore, will not be prepared to providesuppliers with POS data which detailscustomer names. Even without this, POS datashowing volumes of products shipped andvalues invoiced is of great value to a supplierin assessing the dynamics within the channel.

Growth Profile

A critical element in the long-term success of a supplier/channel relationship iscompatibility of growth rates. It is highlyunlikely, for example, that a companyseeking to double its business every year forthree years will be successful with a channelthat is being managed as a lifestyle business.Aggressive growth in sales demands, almostby necessity, a similar growth profile in thechannel (or in that section of the channel'sbusiness relevant to the principal) andsuppliers are well-advised to assess the pastand projected growth profiles of theirchannel partners.

Long-term Business Strategy

During the engagement phase of arelationship, a great deal of attention isnormally given to the long-term goals of thechannel and their compatibility with those ofthe principal. However, as time passes thesecan change - driven by market dynamics,


7. Channel Audits

relationships with other principals, finances,key employees and many other factors. It isincumbent on the supplier to remain alert toany significant changes in this regard -changes which may well be kept from him -and to act upon them quickly and decisively.Monitoring the long-term strategy of thechannel is a key part of the audit.

Products and Principals

To many channels the greatest threat thatexists to their business is the termination by aprincipal of their contract or the appointmentof a competing channel. Similarly, one of thegreatest opportunities they experience is theirappointment by a new principal and thetransfer of existing business to them. Suchevents happen regularly and can have anenormous impact on other principals in thechannel's portfolio. Suppliers need to be alertto such events within their channelinfrastructures as they can present suddenopportunities or risks to sales and profitability.

Synergies and Conflicts

A regular assessment of the products andprincipals carried by the channel in terms ofwhether they conflict or are synergistic withyours is required. For the reasons givenabove, these can change frequently and ifsignificant, can shift the whole basis onwhich the relationship is built.

Segments and Regional Markets

A thorough audit should establish in whichregions and segments the channels' sales aregrowing and declining. It is vitally importantto the supplier that the channel is presentand continuing to grow in the areas whereits greatest customer opportunities exist. Apoorly-performing regional sales person or alucrative new customer in a differentsegment may be all it takes to switch thechannel's focus away from the areas wherethe principal's interests lie. Therefore,whether it be a distributor, agent or an OEMchannel, the principle should carry out arobust assessment of where current andfuture sales are coming from.

Customers

Although resale channels are, in general,reluctant to provide end-customer namesand details, they will invariably talk freelyabout their main customers, if only to

demonstrate their competence and value. Anaudit should pick up any significant changesin the profile of the channel's top customersand also in the key targets they are currentlyattempting to penetrate. Clearly, thereought to be a high level of compatibilitybetween these customer names and thetarget customers of the principal.

Sales and Marketing

Significant changes in the sales or marketingstrategies of channels should ring alarm bellsat their suppliers. They may be taking placefor very good, clearly thought throughreasons, but they may also be happening inorder to shore up a gap or mitigate a risk.Either way, the principal should be aware ofwhat's happening and be in a position toassess if and how it will impact his sales.

It is also possible and relevant for a principalto bring about changes in the sales ormarketing strategies of its channels, so this isa critical part of the audit.

Customer Support

The levels and quality of pre-sales and post-sales technical and commercial supportprovided by sales organisations to theircustomers are frequently the determiningfactors in the overall success of the business.For Irish suppliers, these are often the keyreasons that channels are engaged topenetrate overseas customer bases.Therefore, it is vital, not only to the level ofsales but also to the price points andconsequently the margins, that appropriatestandards are established in these areas fromday one and are kept under continuousassessment through the audit process.

General Management

The members of the management team areultimately responsible for the direction abusiness takes and its success or demise. Insales channels these factors often weighheavily on one or two individuals so it isimportant for principals to identify thesepeople, forge good working relations withthem and be aware of any significant shifts intheir views or positions within the company.

The Audit Scorecard

Much of the information gathered duringthe channel audit will be qualitative and


difficult to measure, unlike a financial audit.Therefore, some personal judgement isrequired to assess the data and drawconclusions. One such method is to score thechannel in a number of areas as shownbelow and in parallel to derive a set ofactions designed to:

• Eliminate or dilute risks

• Build on strengths and opportunities

Figure 16: Example of an AuditScorecard Exercise

Three further practical issues need to beaddressed in terms of the channel audit andare discussed below in the next section.

Audit Practicalities

How often should the audit be carried out?

It is recommended that a full, formal auditbe carried out at least once a year, but theaspects of the audit relating to financialperformance, products and principals carriedby the channel, customers, sales andmarketing strategies, customer support andsynergies and conflicts should be kept underconstant review and should be formallyassessed at least once a quarter.

Where should the audit take place?

Some of the information can be gathered atthe supplier's office and this should be donebeforehand. The audit itself should becarried out at the channel's place of business,by prior appointment and with a clearagenda so that everyone understands what ishappening.

Who should perform the audit?

The individual in the supplier's organisationresponsible for the day-to-day“management” of channel will probablyhave most trust and credibility. He/she istherefore more likely to succeed in compilingall of the information necessary to completea worthwhile audit and should therefore bethe person to carry it out.


Financial Strength 5

Scale 2

Vertical Penetration 3

Regional Penetration 4

Access to Target Customers 2

Level of Brand Awareness 5

Quality of Principals 2

Product Compatibility 2

Marketing Program 3

Strength of Sales Force 1

29

Rate the channel in each of the categoriesbelow on a scale of 1 to 5:1 being weakestand 5 being strongest.

Score Interpretation1-25 The channel is not suitable

26-35 Can the weak areas or threats be fixed?

36-50 The channel is a strong potential candidate


8CHAPTER

Legal Treatment ofAgents andDistributors andOverview ofIntellectual PropertyRights in the Eu

57

PART FOURLegal Issues

58 Irish Exporters Association Part Four Legal Issues

Introduction

Common Types of Agreement

There are a number of forms of agreementthat can be reached between the supplier orprinciple and the channel. Examples include:

• informal agreements

• heads of agreement

• formal agent/distributor agreements

The Handshake Agreement Or InformalAgreement is not recommended as it canquickly lead to disputes where roles andresponsibilities are not clearly defined.Without a formal written agreement, it canbe difficult to manage and control thechannel. Further legal difficulties could ariseon termination of the agreement.

Heads of agreement can be a useful way ofbuilding trust over a short termprobationary period and in practice are usedwhere the principal wishes to test themarket in the short term and wishes to limittime and costs in establishing more formalagent/distributor legal contracts. Suchagreements usually include:

• Description of products to be sold

• Sales territory

• Duration of the agreement

• Termination clauses

• Date for review of the agreement

• Performance metrics to be reached e.g.sales targets, number of new customeraccounts

Formal agent or distributor agreementsusually require engaging expert advice oflegal firms. The major benefit of agent ordistributor agreements is that they clearlydefine the duties and responsibilities of bothparties and the rights of both are recognisedunder specific legislation.

The following sections in this chapter andchapter 9 highlight the various regulations indifferent jurisdictions and how they applyspecifically to the supplier-agent/distributorrelationship.

Agents in the EU

Commercial Agents Regulations in theEuropean Union

This chapter concentrates on the extent towhich the relationship between the supplierand its agent is regulated by the CommercialAgents Directive (the “Directive”) . The purposebehind the Directive was to harmonise therights and obligations of the parties to anagency agreement throughout the EU.

Discretionary implementation by EUmember states

Member States were allowed a certaindiscretion as to how the Directive wasimplemented, the most important of whichare dealt with below. For a comparativeanalysis of how the Member States(excluding the accession states of May 2004)dealt with each of the “discretionary” areaslisted below, please see Figure 14 below.

1. Local advice needed to assess applicationof EU Directive to goods and/or servicesAlthough the Directive does not apply toagents for the supply of services, this isnot entirely conclusive. Some MemberStates had similar protection in place forsuch agents prior to the Directive, whichthey have maintained and others haveextended their local implementation ofthe Directive to cover such agents.Therefore when considering theappointment of an agent for the supply ofservices in a Member State get local adviceto see if the Directive includes such agentsin that country.

2. Agreements to be evidenced in writing12

Member States could exclude oral agencyagreements from the scope of theDirective. This has been done in Ireland,for example.

3. Notice to terminate can be increased fromthree to six months 13

Member States had the option to increasethe mandatory notice period oftermination from three months, to sixmonths, for agreements which were for anindefinite period and which were inexistence for six years or more.

59Irish Exporters Association Part Four Legal Issues

8. Legal Treatment of Agents andDistributors and Overview of IntellectualProperty Rights in the Eu

11. Council Directive 653/86 on the Co-ordination of the laws of MemberStates relating to self-employedCommercial Agents.

12. (Article 13(2) of the Directive).


4. Remedy of Indemnity or Compensation akey factor in selection of agent ordistributor The supplier must (subject to very limitedcircumstances) provide the remedy of anindemnity or compensation upontermination or expiry of the agencyagreement14. Many suppliers find thisprovision to be a decisive factor indetermining whether an agent ordistributor should be appointed. TheDirective gave each Member State anoption as to which remedy should beprovided. Therefore, it is important tocheck locally to see which option wasadopted.

Where an indemnity is payable, it iscapped at 1 years' average annualremuneration of the agent over the

preceding 5 years or over the life of theagency agreement if shorter.

Alternatively, where compensation ispayable, this has no monetary cap. Whilstthere are no guidelines provided incalculating the compensation payable,previous cases have shown thatcompensation is normally calculated at 2years remuneration over the average ofthe previous 3 years. Compensation by itsnature would also allow a court to takeinto account a wide and varied range offactors in calculating the award payable -for example loss of future business.


Figure 17: Discretionary application of EU Commercial Agents Directive (653/86)across EU Member States


Austria Belgium Denmark Finland France Germany Greece Iceland Ireland

Italy Liechtenstein Luxembourg Netherlands Norway Portugal Spain Sweden UnitedKingdom

1. Goods orservices? orboth?

Goods

Goods Goods Goods Goods Goods Goods Goods

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

SeeBelowC

Optionnot

adopted

Optionnot

adopted

Optionnot

adoptedA

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

Optionadopted

Optionadopted

Optionadopted

Optionadopted

Optionnot

adopted

Optionnot

adopted

Optionnot

adopted

Optionadopted

Optionadopted

Optionadopted

Indemnity

Indemnity Indemnity Indemnity Indemnity Indemnity Indemnity IndemnitySeebelowD

SeebelowE

Indemnity Indemnity Indemnity Indemnity Indemnity IndemnityCompensation Compensation

Optionadopted

Optionadopted

Optionadopted

Optionadopted

Optionadopted

Optionadopted

Optionadopted

OptionadoptedB

Goods Goods Goods Goods GoodsGoods andServices

Goods andServices

Goods andServices

Goods andServices

Goods andServices

2. Evidencedin writing

3. Notice toterminate

4. Indemnity orCompensation

1. Goods orservices? orboth?

2. Evidencedin writing

3. Notice toterminate

4. Indemnity orCompensation

A A post termination restrictive covenant must be in writing.

B Unfortunately what “evidenced in writing” means is unclear.

C The agreement must be in writing. If there is no such agreement the agent can prove the existence of the arrangement by any evidence available to him.

D The indemnity alternative has been chosen but the law refers to the remedy as “client compensation”

E Unless the indemnity option is specifically chosen, the compensation alternative will apply.

Distributors in the EU

In general laws governing the appointmentand operation of a distributorship vary fromcountry to country. Subject to some MemberStates' rules that require distributionagreements to be registered and local lawsrelating to the quality, specifications orcomposition of the products, the relationshipof supplier and distributor is largely left tothe intention and agreement of the parties.

However, EC Competition law is an exceptionto the above. The treatment of distributionagreements under EC law (commonly referredto as vertical agreements) has been simplified,reducing the regulatory burden on companies.If a supplier's market share is below 30% andthe agreement does not contain certain“hardcore” restrictions it can benefit from theblock exemption that provides relief fromcertain provisions of the EC Treaty.

1. EC Law and Distribution Agreements

A “vertical agreement” is one that is enteredinto between businesses operating atdifferent levels of the economic supply chain.Thus it includes distribution agreements.From 1 June 2000, a vertical agreement thatfalls within the new Vertical AgreementsBlock Exemption will be exempt from theprohibitions of Article 81(1) of the EC Treatywhich outlaws anti-competitive agreements.

The Vertical Agreements Block Exemptionuses a market share threshold of 30% of therelevant market. It is necessary to definethe relevant product and geographicmarkets in order to establish the marketshare of the supplier. Where, following thisanalysis, a supplier's share is less than this,no market power is presumed and itsagreement may benefit from the blockexemption unless the agreement containscertain “hardcore restrictions”.

The block exemption requires that:-

• The agreement must be between two ormore undertakings;

• Each undertaking must operate at adifferent level of the production ordistribution chain; and

• The agreement must relate to theconditions of purchase, sale or re-sale ofgoods or services.

2. Hardcore Restrictions

If a distribution agreement contains one ofthe “black list” vertical restraints the blockexemption cannot apply (even if the marketshare threshold is not exceeded) and such arestraint prevents the entire agreement fromobtaining the benefit of the block exemption.

Typical “hardcore restrictions” are thosethat:-

• Involve fixed or minimum resale pricemaintenance.

• Restrict the territory into which, orcustomers to whom, the distributor maysell the goods or services (subject tolegitimate restrictions such as aprohibition on active selling outside theterritory).

• Prevent active or passive sales tocustomers by a member of a selectivedistribution system.

• Restrict cross supplies betweendistributors within a selective distributionsystem.

• Restrict the supplier to selling thecomponents as spare parts to end usersand others in certain component supplyagreements.

In addition to the hardcore restrictionsdescribed above, the block exemptionidentifies a number of other non-exemptedrestrictions. These are however, severablefrom the agreement, so the benefit of theblock exemption is not totally lost.

These non-exempted restrictions include anydirect or indirect:-

• Non-compete obligation which lastsindefinitely or exceeds five years; there isa limited exception where thegoods/services are sold from premisesleased or owned by the supplier.

• Non-compete obligation placed on thedistributor after termination of theagreement (subject to very limitedcircumstances).

• Obligation preventing the members of aselective distribution system from sellingthe brands of specified competingsuppliers.


Comment

It is primarily distribution arrangements thatEC competition law seeks to regulate, andimportantly the European Commission hasstated that where an agent bears nofinancial or commercial risk in relation to theactivities for which it has been appointed (asin an agency relationship), the Europeancompetition regime under Article 81(1) ofthe EC Treaty will not apply.

Because of the EC competition law effect ondistribution agreements within the EuropeanUnion and the local competition law regimesthat may be in place in each Member State,it is absolutely paramount that a supplierseeks advice from a suitably qualified locallawyer before entering into any form ofdistribution agreement, in the EU.

Overview of IntellectualProperty Rights in theEuropean Union

It is beyond the scope of this chapter to dealwith intellectual property rights (notablypatents, trade marks copyright and designrights) in each individual Member State ofthe EU. Accordingly this chapter will providea brief overview of intellectual propertygenerally and touch on the relevant ECLegislation in place15.

Trade Marks

(a) What is a Trade Mark?At its most basic level, a trade mark is atype of sign which is capable ofdistinguishing the product or service ofone manufacturer from another, andtherefore it serves as constructive noticeto third parties that the particularproduct or service is owned by someoneelse. Registration of a trade mark is anexcellent way of protecting your brand.

Generally a trade mark may consist ofwords (including personal names),designs, letters, numerals or the shape ofgoods or of their packaging.

(b) Registration of a trade markA trade mark maybe registered eithernationally, internationally or both.

The most common systems for obtainingregistration are:-

(i) a national filing at the Irish PatentsOffice;

(ii) a Community Trade Mark (CTM)filing at the Office forHarmonisation in the InternalMarket (OHIM) in Spain;

(iii) filing for an international (Madrid)registration; and

(iv) separate filings for registration inthe Trade Mark offices of otherjurisdictions where there is (or isexpected to be) significant trading.

It is always advisable to speak to a suitablyqualified trade mark attorney to discuss whatprocedure affords you the best protectionbefore making any trade mark application.

Patents

An invention is generally patentable if it issusceptible of industrial application, is newand involves an inventive step. A patent willnormally give the inventor the right, for alimited time period, to exclude others frommaking, using, or selling the invention. InIreland, patents can either be a short termpatent (10 years) or long term patent (20years). As in the case of trade marks, patentapplications can also be filed on aninternational basis, for example, under thePatent-Co-operation Treaty (PCT) or theEuropean Patent Convention (EPC). It iscurrently not possible to apply for a singleEuropean patent. Although the EPC willresult in a European patent it is effectively abundle of national patents in the countriesdesignated by the applicant.

Copyright

(a) What is Copyright?Copyright is a property right and subsistsin a wide variety of work. It is notpossible to register copyright, it subsistsfrom the date of its creation. Whilst it isnot necessary to insert the copyrightsymbol ©, it is advisable to do so, as itmay act as notice to third parties thatcopyright is asserted, and hopefullydiscourage infringement.


15. It is important to note that thischapter is a very brief overview ofa very complex area and advicefrom suitably qualified locallawyers should always be soughtfor each Member State.

The author of the work is usually the firstowner of the copyright, and the authorgenerally means the person who creates thework. There are exceptions to this rule, e.g.where the work is created by an employee inthe course of employment. Subject to anyagreement to the contrary the employer isthe first owner of any copyright in such work.

The duration of copyright varies according tothe type of work. Typically, copyright inliterary, dramatic, musical or artistic works willlast for the life of the author plus 70 years.

(b) The European Union

A number of legislative provisions havebeen introduced by the EuropeanCommission to harmonise copyright lawthroughout the EU. There have beenvarious EC Directives in this regard, whichinclude for example Directives dealingwith the protection of computerprograms, the lengthening of the periodof protection available, and the rights ofthe author to rent and lend theirprotected works.

Design Rights

(c) What is a Design?

A design can be described as the outwardappearance of a product or of a part of itresulting from the lines, contours, colours,shape, texture, materials and/or itsornamentation. The “product” caninclude industrial items, packaging, getup, graphics, and symbols but generallyexcluding computer programs. Normally,to be afforded protection, the designmust be novel and not functional, designrights only protect the appearance of theproduct, not the functionality.

The design of a shape or product canbecome synonymous with the brandingand image of a company, its products orboth, and for these reasons it is importantto consider the value of such designs andthe ways of best protecting same.

(d) Protection of Industrial Designs

Industrial designs are registerableintellectual property rights. As is the casewith trade marks and patents anindustrial design may be registered locallyor internationally. There are two types of

design protection available on an EUlevel; (a) an Unregistered CommunityDesign Right (UCD) which protects adesign for a period of 3 years from thedate on which the design was first madeavailable to the public within the EU and(b) the Registered Community Design(RCD) which initially has a life of 5 yearsthat can be renewed to a maximum of 25years. A RCD affords greater certainty inthe case of infringements.

For an overview of intellectual propertyin respect of other countries andjurisdictions dealt with in this publication,please see Chapter 9 that deals with eachindividually.



9CHAPTER

Legal Treatment of Agentsand Distributors andOverview of IntellectualProperty Rights in the Usa,Australia, Japan, China AndHong Kong

65


Introduction

The US legal system consists of (1) Federallaws of general applicability throughout theUnited States and (2) State and local lawsthat apply to activities in a particular State orlocality.

Federal Laws

Federal laws particularly relevant to Agencyand Distribution arrangements will includethose relating to Competition/Anti-trust,product regulatory matters and taxation.

1. Anti-Trust Restrictions

It is important to consider US FederalAnti-Trust laws in connection with mostbusiness transactions in the United States.US Anti-Trust law in general would haveimplications on particular types ofprovisions such as: territorial restrictions,exclusivity arrangements, and resale pricemaintenance conditions.

2. Regulation of Particular Products

As the laws and rules change and no listcan be exhaustive, prior to shipment ofgoods to the United States, U.S. counselshould be asked to advise regardingspecial regulation of particular goods, suchas alcoholic beverages and goods whichmay be classified as drugs. Speciallabelling requirements may also apply forsuch items, food items and other products.

3. Taxation

(a) Income and Withholding TaxesUS Federal income and withholdingtaxes apply to interest paid orpayable by a US resident to an Irishresident creditor and to license fees(royalties) paid or payable to an Irishresident licensor for the right to usein the United States any copyright,patent, trademark, design or model,plan, secret formula or process, orother similar intangible property,unless the Irish resident is eligible forthe exemption provided by the U.S.-Ireland income tax convention.

(b) Permanent EstablishmentIf the agreement between anexporter and a US resident company

gives the US company authority andrisks that an agent customarily has,or provides that the Irish exporterwill share the risks and rewards ofthe US resident company's marketingefforts, the US company could bedeemed to be a permanentestablishment of the Irish exporter,with the result that the Irish exporterwould be required to report and payUS Federal income tax on the profitsattributable to the permanentestablishment.

US State Law

1. It is important to consider the UnitedStates as a group of 50 individualmarkets when appointing an Agent orDistributor.

Regulations that are relevant to agencyand distribution arrangements at statelevel would include:-

• The Uniform Commercial Code (the“UCC”), which applies to the sale ofgoods within a particular State;

• The Uniform Computer InformationTransactions Act (the “UCITA”), whichgoverns, inter alia, contract law thatapplies to computer software, multi-media products etc.;

• Sales representative laws, whichgenerally protect the right of agentsto receive a commission;

• State franchise and businessopportunity laws, which regulate thetreatment of franchisees and the offerand sale of business opportunitieswhich can include distributorships;

• State “doing business” laws, whichrequire the registration of entitiesdoing business in a particular State;and

• Intellectual property and trade secretlaws.

It is also important to note the impliedcovenant of “good faith” and “fair dealing”which protect the interests of agents anddistributors will be applicable to mostcontracts that are governed by the laws of a US state.


USA

2. Term and Termination of Agency andDistribution Contracts in the UnitedStates

State franchising and businessopportunity laws could restricttermination rights in a distributionagreement and may require registrationof the agreement itself. State salesrepresentative laws are particularlyrelevant in relation to agency agreementsas are other state laws of generalapplication, such as the implied covenantof “good faith and fair dealing”.

3. Taxation

Each state has its own tax laws, whichmay apply to a transaction between anIrish exporter and a resident of the state.State tax laws are not uniform and arenot covered by the US-Ireland income taxconvention. State taxes that may applyto a transaction with a state residentinclude income tax and sales tax. Statetax law variations preclude concisegeneral summary. It is wise to check theapplicability of state taxes to a particulartransaction at the outset and not waituntil an assessment notice arrives.

4. Frequent Queries Relating to State Law

Irish suppliers intending to use a channelpartner in the United States are oftenconcerned that the laws of particularstates will afford special protection toagents or distributors.

GOVERNING LAW: It is difficult to identifyany state of the United States as one whichparticularly favours the manufacturer/supplier in an agency or distributioncontext. It would be best for the Irishcompany to first identify a likely agent ordistributor, and then check with U.S.counsel to see if the jurisdiction in whichthe agent or distributor is located has anyparticular good or bad local laws or rules.Of course, knowing the issue is mostimportant, since a state might have veryfavourable laws and rules on all except theimportant one in the case at hand.

Some states and territories do, however,afford significant or special protection toagents or distributors, and U.S. counselshould be consulted to see if suchprotections apply in the state or states

being considered. Such protections caninclude making termination of theagreement very difficult or requiringpayment for lost goodwill, and requiringstatutory notice periods for terminationnotwithstanding the parties' writtenagreement specifying a shorter period.Without providing a complete list, PuertoRico, California, Florida and Wisconsinare likely to afford some such protection.

JURISDICTION. If an arbitrationprocedure is chosen, it will be that notusually of a state, but of a particulararbitration group, such as the AmericanArbitration Association (“AAA”), TheInternational Chamber of Commerce(“ICC”) or The Society of MaritimeArbitrators, to name a few. Once thegoverning law for the Agreement hasbeen chosen, say New York, and AAA orICC rules have been chosen, the venuefor the arbitration needs to be specified.While Dublin would probably bepreferable, few U.S. companies will wantto come to the suppliers “home court”.Equally so, the Irish suppliers will notwant the venue to be in the agent ordistributor's home state. Usually a“neutral” venue can be picked whichboth parties have to travel to and inwhich neither is “local.” New York City isoften used, as both AAA and ICCarbitration is available here.

It cannot be over emphasised that forimportant commercial relationships, it isprudent to obtain advice from suitablyqualified US Counsel, since local law,decisions or practice may vary on a stateby state basis.

Intellectual Property Rights

Agency and distribution agreements shouldcontain restrictive clauses regarding use ofthe supplier's intellectual property by theagent or distributor.

1. Patents

A United States Patent gives an inventorthe right, for a limited time period, toexclude all others from making, using,selling, offering for sale, or importingthe invention. The statutory guidelinesfor obtaining a patent in the United


States are governed by the Patent Act1952, as amended. Patents are grantedby the US Government in a documentcalled a “Letters Patent” issued by the USPatent and Trademark Office.

When a patent issues, patented productsmust be marked with the word “Patent”or an abbreviation “Pat.” and the USpatent number. If the patented productsare not marked accordingly it may leadto difficulties in the recovery of damagesfor infringement.

2. Trademarks

In the United States, a trademark can beany word, phrase, design, symbol, sound,colour or scent which is used in businessby an entity to identify their goods orservices and distinguish them from others.

A registration of a trademark granted bythe US Patent and Trademark Officeprovides a nation-wide constructive noticeto third parties of the owners exclusiveright to use their trademark in conjunctionwith the goods or services for which it hasbeen registered. Once a registration hasissued, the owner should use a statutorytrademark notice of an R in a circle, ®, orReg. U.S. Pat. & Tm. Off., or Registered inU.S. Patent and Trademark Office, inconnection with the mark.

An owner of a registered trademark mayalso record the trademark with the USCustoms Service in an effort to preventimportation from foreign countries ofgoods bearing an infringing mark.

3. Copyright

Authors of a work own the copyright inthat work created. In the United States,copyrights subsist from the date ofcreation. Registration is not necessary tosecure a copyright; however, bothregistration and use of a statutorycopyright notice are advisable. Underthe Copyright Act authors receiveexclusive rights in their works for certainperiods of time, these exclusive rightsare: (i) the right to reproduce the work;(ii) the right to produce derivative worksbased on the original work; (iii) the rightto publicly distribute the work; (iv) theright to publicly perform the work; and

(v) the right to publicly display the work.

Intellectual Property is a complex andtechnical area, and the above is merely abrief overview. Therefore where an Irishsupplier seeks to protect and enforce itsintellectual property, it is essential toseek advice from suitably qualified UScounsel.


Introduction

The Commonwealth of Australia is afederation of six States (Victoria, New SouthWales, Queensland, South Australia, WesternAustralia and Tasmania) and two self-governing Territories (Northern Territory andAustralian Capital Territory) with a FederalParliament. When entering into anytransaction it is important to take intoaccount the laws of all the relevant Statesand Territories and to seek legal advice froma suitably qualified lawyer in respect of alljurisdictions that the agreement will cover.

The Trade Practices Act 1974 (Cth) (“TPA”)and its State / Territory counterparts (FairTrading Acts) are the most relevantlegislation in relation to agency anddistribution agreements.

Agency Agreements

1. General Relationship

There is no equivalent to the EU'sCommercial Agents Directive in Australia;the relationship of supplier and agent hasevolved by the Common Law. Though it iscommercially and legally prudent toappoint an agent in writing, an agent canbe appointed orally in most jurisdictions.However, in Tasmania, Australian CapitalTerritory and Northern Territory,legislation specifically requires agents tobe appointed in writing where the agencyis to continue for more than one year.

2. Termination and Compensation

There is no legislation which entitles anagent to compensation where theagreement is terminated by notice inaccordance with the agreement, or expiresdue to the effluxion of time. However ifan agent relies on a representation fromthe supplier that the agency agreementwill be renewed, to the agent's detriment,an agent may have a cause of action andmay be awarded damages.

Normal contractual damages may beawarded in the event that the agreementis terminated by the supplier in breach ofthe agreement. Conversely, a supplier maybe able to recover damages where itterminates the agreement for breach bythe agent.

Distribution Agreements

1. General Relationship

There is no specific Australian legislationdealing with distributors, nor is there anequivalent to EC Commission Regulation2790/99 (which deals with the VerticalAgreements Block Exemption). However,competition law principles like thosecontained in the TPA are relevant tovertical arrangements.

2. The Trade Practices Act 1974 (Cth)

Part IV of the TPA which deals with anticompetitive conduct is particularly relevantto distribution agreements. Very briefly,examples of provisions in respect of whichthe TPA should be taken into accountwould include: (a) where the supplier isfree to charge different prices andcontract upon different terms with two ormore of its distributors; (b) where thegrant of exclusivity in respect of aparticular territory is permitted; (c) therefusal to grant a distributorship (i.e. toprotect the grant of an exclusivedistributorship); (d) where there are“exclusionary provisions” (collectiveboycotts) whatever the effect oncompetition; (e) the practice of re-saleprice maintenance; and (f) the impositionof an obligation to deal exclusively withthe supplier in respect of the products(“first line forcing”).

The application of the relevant TPAprovisions requires careful consideration ofthe nature of the distribution relationshipand the characteristics of the market for thegoods or services in question. Advice shouldbe sought from a competition law expert.

3. Compensation

The rights of a distributor to compensationon termination or expiry of an agreementare determined by the terms of theagreement and the general law. There isno specific legislation providing forcompensation to distributors.

Intellectual Property - Trade Marks

Suppliers and agents should considerregistration of the supplier's trade mark inAustralia prior to the commencement of anydealings. Since Australia is a signatory to the


Australia

Madrid Protocol, trade mark registration inAustralia is a relatively simple process for anIrish supplier. Under the Madrid Protocol, atrade mark becomes registered in Australiaupon the filing of an international trademark application. This useful device is alsoeffective for trade mark protection in othercountries which are also signatories to theMadrid Protocol.

Also, where an agent has the right to use thesupplier's trade marks it is always advisablefor the parties to enter into a trade marklicence agreement to expressly negate certainimplied rights of an “authorised user” whichare provided for under the Trade Marks Act1995 (Cth). As an added protection, all trademark protection clauses should be drafted to“survive” the termination or expiry of theagency agreement.

The desirability of a trade mark licenceagreement is also very relevant in relation toa distributor. It is generally not advisable fora distributor to be permitted to register asupplier's trade mark (including registrationof the trade mark as a trading name inAustralia) to avoid complications in the eventof a break down of the relationship.

General Agreements

1. Tax

Irish suppliers should be aware thatAustralia imposes a withholding tax oninterest, unfranked dividends and royaltiesoriginating in Australia but paid to non-residents (unless paid to an Australianpermanent establishment of a non-resident). While the Irish supplier is liable topay the withholding tax, the tax willactually be withheld and remitted to theAustralian Taxation Office by the partymaking the payment to the Irish supplierfrom Australia (e.g. the agent ordistributor). The payer is given the statutoryright to recover the withholding tax paidfrom the non-resident. It is generally in thebest interest of Irish suppliers to negotiate(where possible) a requirement that theiragent will automatically increase paymentsto the supplier to offset such withholdingtax. Such action, where appropriate, wouldensure that income anticipated in theagency / distribution agreement wouldactually be remitted to the supplier in full.

Where an agency agreement is chosen,the nature of the relationship and thesurrounding circumstances may give riseto an Australian permanent establishmentfor the supplier. If it does, Australia willassert the right to tax so much of thesupplier's worldwide income as isattributable to its Australian permanentestablishment. Accordingly, great carewill need to be taken if this is not thedesired result. Generally, this issue shouldnot arise under a distribution agreement.

2. Jurisdiction: Arbitration

The International Arbitration Act 1974(Cth) would apply to an arbitrationbetween an Irish supplier and anAustralian agent or distributor. Under theAct, the arbitration would be determinedin accordance with the UNCITRAL ModelLaw on International CommercialArbitration. While the parties can agree inwriting that they will submit to arbitrationin a certain Australian State or Territory,the arbitration will still be conductedunder the International Arbitration Act1974 (Cth) because the arbitration is of aninternational character.

There is no reason unique to Australia asto why an Irish supplier would avoidarbitration in Australia. However, thetypical disincentives (e.g. limited appealsand the inability to compel third partiesto submit to arbitration) still apply.

3. Jurisdiction: Proceedings in General

Each Australian jurisdiction has differentlaws on limitation periods in bringinglegal actions and in enforcing judgementsand arbitration awards. For example, inmost states, an action for damages carriesa 6 year limitation period, whereas thesame action in the Northern Territorycarries a 3 year limitation period. Whiletechnical variations such as these applyacross the spectrum of legal remedies andthe enforcement of judgements andawards, no one jurisdiction could be saidto offer a meaningful advantage overallto the supplier.

4. Laws and Regulations affecting theimport of goods

Importing of goods into Australia isaffected by government regulation.


Irish suppliers should be aware that theremay be legislation affecting theimportation of specific goods. Forexample, the Copyright Amendment(Parallel Importation) Act 2003 allowsAustralian software retailers to sidestep“authorised” domestic distributors infavour of legitimate, overseas suppliersthat may offer cheaper products, greatervariety or faster service. Previously,Australian software retailers andwholesalers were only able to sourceproducts from “authorised” domesticdistributors. These distributors were able toinfluence how much consumers were beingcharged and the manufacturers themselveswere able to limit the types of productsthey chose to release onto the Australianmarket. Whether this facilitates or impedesan Irish supplier depends on their strategicpositioning and outlook. It may openopportunities for establishing agency ordistribution agreements for some suppliers,or impede the ability of others becausethey can no longer offer their channelpartners exclusive distribution rights inAustralia. It is essential for the supplier toseek legal advice specific to its productsand circumstances.


Introduction

The most important sources of law whichimpact on distribution and agencyagreements in Japan are regulatory statuessuch Anti Monopoly and Intellectual Propertylegislation, and the Commercial and CivilCodes. Whilst the regulatory statutes areimplied into most contracts, the commercialand civil code leave some discretion to theparties as to their applicability.


In comparison to agency agreements,distribution agreements are subject tosignificant regulatory control - in particularanti-monopoly legislation with respect toresale price maintenance, and moreparticularly where the supplier grants adistributor exclusive import distributionrights for a product in Japan. The“Guidelines concerning Distribution Systemsand Business Practices under the Anti-Monopoly Act” (the “Guidelines”) was issuedby the Japanese Fair Trade Commission toguide businesses and trade associations onhow not to violate the Anti-Monopoly Act.

1. Exclusivity

Where a supplier is in a strong position(i.e. where it has a market share of noless than 10% and it is ranked in the topthree of its relevant market), enteringinto an exclusive distributorshipagreement with a competitor may havean anti-competitive effect. To determinewhether the agreement is anti-competitive, the effect it has oncompetition in the relevant market needsto be examined, taking into accountfactors, including, but not limited to, (i)changes in the market share and rank, (ii)the overall business capabilities of thesupplier, and (iii) the characteristics of theproducts in question. If an exclusivedistributor agreement could beconsidered as an unfair business practiceunder anti-monopoly legislation there is apossibility that the agreement will beprohibited. On the other hand, where asupplier has a market share of less than10% or is ranked outside of the topthree, the agreement would in principle,not be presumed as anti-competitive.

In accordance with the Guidelines, otherprovisions which are subject toconsiderable scrutiny, will include, resaleprice maintenance, restrictions on thehandling of competing products duringand after the agreement, restrictions onthe sales territory, restrictions on dealingwith (the distributor's) customers orsuppliers, and the unreasonableobstruction of parallel imports.

2. Competition

If a distributor is already dealing inproducts prior to the distributionagreement it might not be permissible forthe supplier to demand that thedistributor ceases dealing in suchproducts. Even where the distributor isnot already dealing in competitive goods,such restrictions are also likely to beillegal from the viewpoint of anti-monopoly legislation, if the supplier is ina dominant position in the relevantmarket and competing suppliers will beadversely affected.

Restrictions following termination of theagreement are generally unacceptable ifthose would restrict the business activitiesof the distributor and obstruct entry intothe market. However, such restrictionscould be acceptable with properjustification such as (a) the necessity forprotecting confidential information or (b)the termination of the agreement wasdue to the fault of the distributor inquestion; provided the duration of therestriction is reasonable and only to theextent necessary under the circumstances.

3. No Compensation on Termination

The Civil Code generally regulates thetermination of contracts and anyresulting damages that may be payable.However, it is important to note thatthere are many instances where theJapanese courts have held and adoptedthe “Continuing Contract Theory”(notably in relation to contracts that arefor an undefined term). Where acontract is deemed a “ContinuingContract” it may only be terminatedeither (i) immediately with “good cause”or (ii) upon the provision of reasonablenotice or compensation (i.e. 6-month'snotice or compensation for 6-month's


Japan

profits). Experience has shown thatdistributorship agreements are typical ofthose where the Japanese courts wouldapply the Continuing Contract Theory.Accordingly it is essential to ensure thata written agreement is put in place whichspecifically sets out the duration of theagreement so as to avoid the inadvertentapplication of certain rules on thetermination of the agreement.In addition, under the Civil Code ordinarycontractual damages are available in theevent of breach of the agreement.

Agency Agreements

The supplier/agent relationship is generallyless regulated than that for thesupplier/distributor relationship, particularlywith regard to anti monopoly legislation.

4. Competition

An agent must refrain from engaging incompetitive activities with its supplierexcept with the permission of thesupplier. However, if the agent wasalready selling competitive products at thedate of the agency agreement, experiencehas shown that the Japanese courtsconsider that the supplier has granted theagent an implied permission to continuedoing so for the term of the agreement.

Restrictions on competitive activityfollowing termination should be treatedseparately and in this regard the criteriareferred to for distributorship agreementsabove is also relevant here.

5. Compensation

An agent is not entitled by law tocompensation or an indemnity ontermination of the agreement andtherefore there are generally norestrictions on the parties agreeing toexclude such on termination. However,there is a risk that the “ContinuingContract” theory (discussed above) maybe applicable to the agency agreement,depending on the circumstances.


Japan is a signatory to the conventionestablishing the World Intellectual PropertyOrganisation and other major conventionswith respect to intellectual property rights.

Therefore Japanese Intellectual property lawis not dissimilar to other jurisdictions coveredin this publication.

To ensure the best protection going forwardand to avoid potential problems in the eventof a breakdown in the relationship, it isadvisable for an Irish supplier to apply forthe registration of its trademarks or servicemarks in Japan in its own name. Where atrademark has been infringed it is the ownerof the mark who should take theproceedings against the alleged infringerand not the distributor or agent as the casemay be.

It is best to set out in the particularagreement that in the case of a knowninfringement, the agent or distributor shallco-operate to the fullest extent possible toassist the owner of the trademark inpursuing the infringer.

The protection and enforcement ofintellectual property is a complex area, andJapan is no different in this regard. It isalways advisable to seek the advice of asuitably qualified local lawyer to ensure thebest protection of your intellectual property.

Tax Issues

Irish suppliers should be aware that theJapanese Government imposes a withholdingtax on interest, dividends and royaltiesoriginating in Japan and paid to non-residents (unless such interest, dividends androyalties are deemed to be paid to theirJapanese permanent establishment, if any).While the Irish supplier is theoretically liableto pay the withholding tax, the tax willactually be withheld and remitted to theJapanese Taxation Office by the Japaneseparty making the payment to the Irishsupplier from Japan (e.g. the agent ordistributor). In other words, the Japanesepayer (but not the Irish supplier) is directlyliable to the Japanese Taxation Office underJapanese tax law, while the Irish supplier isliable to the payer in turn. Thus, it should benoted that, unless the agreement betweenthe Irish supplier and the Japanese payerspecifically provides that the withholding taxwill be borne by the Japanese payer, the Irishsupplier should bear such withholding taxvis-à-vis the Japanese payer.


Where an agency agreement is chosen, thenature of the relationship and thesurrounding circumstances may give rise arisk to create a Japanese permanentestablishment for the Irish supplier. If this isthe case, the Japanese Government willchallenge and assert the right to tax so muchof the Irish supplier's world wide income as isattributable to its Japanese permanentestablishment. Accordingly, great care willneed to be taken if this is not the desiredresult. In principle, this issue should not ariseunder a distribution agreement.


Introduction

Under new laws that have been releasedpursuant to China's WTO commitments,foreign investors are now permitted toconduct agency activities. In addition, underthe Administrative Measures of theCommercial Sectors for Foreign Investment,foreign investors are also permitted toengage in the sale of goods by theappointment of wholesale distributor's underconsignment contracts.

Competition law in China includes the LawAgainst Unfair Competition, which requiresbusiness operators to follow the principles ofequality, fairness, honesty, credibility, and toobserve generally recognized business ethicsin its market transactions. It is theadministrative departments for industry andcommerce that have authority to superviseand inspect suspected anti-competitive acts.

As with every commercial arrangement in aforeign jurisdiction, it is imperative that thesupplier seeks suitable taxation advice, so asto identify any applicable taxation liabilitiesthat it may have in that foreign jurisdiction.In China, an enterprise that conducts businessin China will be subject to business tax andcorporate income tax.

Agency Agreements

There is no equivalent to the EC CommercialAgents Directive in China. The parties to anagency agreement are free to agree to theprovisions relating to termination in theagreement, and if the agreement is silent asto the provisions for termination, theagreement will be terminable by the supplieron reasonable notice. As there is noequivalent to the EC Commercial AgentsDirective in China, no compensation will bepayable to the agent if the relationshipterminates by agreement, or expiry. In theevent that the agreement is terminated byeither party due to a breach of the otherparty the ordinary principles of contract lawwill apply and damages may be payable.


(i) Terms of Appointment

The Supplier is generally free to contractwith distributors on whatever terms it

considers fit. A direct result of this is thatprovisions like, front line forcing, resaleprice maintenance, and subject to thebelow, restraint of trade clauses aregenerally not prohibited.

(ii) Restrictive Covenants

The Supplier is generally free to imposerestraint of trade provisions during theterm of a distribution or agencyagreement. This is contrasted torestrictive covenants in anemployer/employee situation in China,which may be subject to local laws thatimpose strict obligations on an employer,e.g. the obligation to pay compensationfor a stipulated period of time to an ex-employee who agrees not to work for acompetitor. There are also various lawsin relation to confidential informationand trade secrets that would need to beconsidered.

(iii) Compensation

The absence of a right to compensationunder termination or expiry of an agencyagreement discussed above, also appliesto distribution agreements.


(i) Trade Marks

The registration of trade marks arecurrently governed by the Trade MarkLaw.

Under the Trade Mark Law, theregistered owner of a trademark maylicense the trademark to a third party. Insuch case, the licensor shall supervise thequality of the goods in respect of whichthe licensee uses its registered trademark, and the licensee shall guaranteethe quality of the goods in respect ofwhich the registered trade mark is used.The Trade Mark Law further requires thatthe name of the licensee and the originof the goods must be indicated on thegoods that bear the registered trademarkand that the licence agreement shall besubmitted to the Trade Mark Office.

It is important to note that fees underlicensing agreements received from asource in China by a non-resident


China

corporation or individual will be subjectto a withholding income tax. Theresident tax payer must withhold the taxon behalf of the non-resident. The rateof withholding tax is generally 10%.

(ii) Copyright

In China, no registration is required forcopyright protection. Copyright subsistsfrom the date of its publication. Goodsshould be labelled to indicate thatcopyright subsists in them, by including astatement to this effect on the goodsthemselves or by the use of the universalcopyright symbol ©. However, theowners may register the work on avoluntary basis. The advantage ofvoluntary copyright registration is to addweight to the proof of copyrightownership. In order to qualify forcopyright protection, foreign copyrightowners must meet one of the followingrequirements: (a) such work must havebeen published in China prior topublication in other jurisdictions, or (b)the author of such work must be anational of a country of which, inaccordance with an international treatyor agreement, both that country andChina are signatories.

(iii) Comment

Both civil and criminal sanctions areavailable in China where intellectualproperty rights are infringed. Forexample, where a trade mark has beeninfringed, the local administration forindustry and commerce has the power toinvestigate the infringing acts and it maytransfer the matter to the relevantjudicial bodies for possible criminalsanctions.

The above is merely an overview of some ofthe issues that need to be considered by anIrish supplier intending to use a channelpartner in China. Accordingly it is alwaysadvisable to seek specific advice from a locallawyer before establishing a sales channel inChina.



Introduction

Hong Kong has continued to be animportant commercial centre due to anumber of factors including its favourablegeographical position, a well establishedbusiness community, the English language iswidely used in commercial and financialcircles, a low tax jurisdiction, a common lawsystem, and the absence of exchangecontrols. Hong Kong's return to ChineseSovereignty on July 1 1997, after 150 years ofBritish Rule and the post hand-over ofGovernment has been referred to as 'onecountry two systems', reflecting theguarantee from the People's Republic ofChina that Hong Kong will be granted aspecial status of a capitalist, autonomous andcommon law jurisdiction for at least 50 years.

Agency Agreements

There is no equivalent of the EC CommercialAgents Directive in Hong Kong. As withevery agency arrangement in a foreignjurisdiction, it is imperative that the supplierseeks suitable taxation advice, so as toidentify any applicable taxation liabilitiesthat it may have in that foreign jurisdiction.In addition, if a foreign supplier is “carryingon business” in Hong Kong it is important tobe aware of the regime in place that mayhave to be adhered to, i.e. registration of anoverseas company within one month ofestablishing a place of business in HongKong, and other statutory requirements suchas submitting annual returns and annualaccounts.

1. Termination and Compensation

The parties to an agency agreement arefree to agree to the provisions relating totermination in the agreement, and if theagreement is silent as to the provisionsfor termination, the agreement will beterminable by the supplier on reasonablenotice. As there is no equivalent to theEC Commercial Agents Directive in HongKong, no compensation will be payableto the agent if the agency agreementterminates by agreement, or expiry. Inthe event that the agreement isterminated by either party due to abreach of the other party, the ordinaryprinciples of contract law will apply anddamages may be payable.


Hong Kong currently has no anti-competitionlegislation and very few regulatory controlsor consumer protection laws.

1. Terms of Appointment

As there is currently no anti-competitivelegislation in Hong Kong, the supplier isgenerally free to contract withdistributors on whatever terms itconsiders fit. A direct result of this isthat provisions like front line forcing,resale price maintenance, and subject tothe below, restraint of trade clauses aregenerally not prohibited.

2. Restrictive Covenants

The supplier is generally free to imposerestraint of trade provisions during theterm of a distribution or agencyagreement. However, the considerationswhich apply to restrictions oncompetition after the expiry ortermination of the agreement aredifferent. Such restrictions are primafacie void and regarded as being anunreasonable restraint of trade, but maybe enforceable if it can be establishedthat the restraint is reasonable andnecessary to protect the commercialinterests of that party.

3. Compensation

The absence of a right to compensationunder termination or expiry of an agencyagreement discussed above, also appliesto distribution agreements.

Tax Issues

In Hong Kong, profits tax is territorial innature and only those profits that arise in orare derived from Hong Kong will be liable totax. To be liable to profits tax on tradingincome, a company must (1) be carrying on atrade, profession or business in Hong Kong;(2) derive profits from such trade, professionor business of a type which are subject toprofits tax (which will include tradingprofits),and (3) such profits must have aHong Kong source. For the purposes of theInland Revenue Department, the importantfactor in determining the source of tradingprofits is the place where the contract of saleand purchase are effected (which will cover

Hong Kong

the negotiation, conclusion and execution ofthe terms of the contracts).

However, a non-resident supplier, subject tocertain rules, can be made chargeable to taxeither directly or indirectly in the name of itsagent in respect of all profits arising in orderived from Hong Kong, whether suchagent has receipt of profits. The tax socharged can be recoverable out of the assetsof the non-resident supplier or from theagent. Each case must be considered on itsfacts and circumstances.

Additionally, it should be noted that wherefor example, an agent in Hong Kong paysroyalties to an offshore person or companyfor the use of intellectual property in HongKong, those royalties may be considered aschargeable to profits tax by the non residentrecipient. Moreover, the agent in HongKong would have a duty to withhold therelevant tax from the royalties paid onbehalf of the non resident. The amount ofassessable tax varies, and may range from100% (in the case of an associate) to 30%.


1. Trademarks

Registration of trade marks are currentlygoverned by the Trade Mark Ordinance(Cap 559).

Under the Trade Mark Ordinance, wherethe agent will be using the supplier'strademark under licence, the licence willnot be effective unless it is in writing andsigned on behalf of the supplier. Further,the trade mark licence can be registeredat the Intellectual Property Department,with details of the parties to theagreement and the particulars of thelicence (e.g. whether it is an exclusivelicence). Failure of registration by thelicensee may affect the right to claimdamages in the event of breach of theagreement by the licensor.

2. Copyright

Copyright Law in Hong Kong is similar insome regard to that in the UK. There isno registration procedure for a copyrightowner and the work of authors from anyplace may qualify for copyrightprotection in Hong Kong, which will

subsist from the date of its creation.Goods should be labelled to indicate thatcopyright subsists in them, by including astatement to this effect on the goodsthemselves or by the use of the universalcopyright symbol ©.It is an offence toimport or export pirated materials, andliability for such an offence will extend tooutside of Hong Kong where the piratedgoods are imported into Hong Kong.

The above is merely an overview of some ofthe issues that need to be considered by anIrish supplier intending to use a channelpartner in Hong Kong. Accordingly it isalways advisable to seek specific advice froma local lawyer before establishing a saleschannel in Hong Kong.



10CHAPTER

Appendices

81

82 Irish Exporters Association Appendices

83Irish Exporters Association Appendices

1. European Sales Channel Audit


85Irish Exporters Association Appendices

The following is arecommended checklist ofmatters for inclusion in anagent or distributoragreement:

Parties

Territory

Products involved - description,catalogue

New Products - policy for new products

Period of Agreement - depends on theproduct, usually three years with right ofrenewal. A termination clause should beincluded - so many months' notice byeither party and anytime by mutualagreement

Probationary period - one year withreview of performance after six months.

Prices - refer to the price list

Discounts - promotional discounts andresponsibilities. The agreement shouldinclude the principles to work on, notthe detail

Method of payment and timing

Minimum orders

Production Scheduling and lead times

Exporter to sell through distributor interritory exclusivity

Exporter to refer enquiries to distributor

Distributor not to re-sell out of territory

Restraint of trade following terminationof agreement.

Spares and Stock - distributor to holdstock/spares but not an agent.

Communication costs - each party tocover their own costs

Performance measures

Training and technical support

Samples

Advertising and promotion

Ownership of Brand

Distributor to protect trademarks,patents, etc

Exchange of market information

Procedures for defective goods

Distributor to keep books of accounts

Relationship management - contact list,official addresses

Confidentiality

Early termination for breach ofagreement

Transfer of rights - distribution rightscan not be transferred withoutpermission

Country in which legal action/arbitrationto take precedence

Arbitration - a last resort


2. Agent/Distributor Agreement Checklist16

16. Agent & Distributor Selection - Sept 2002,New Zealand Trade & Enterprise

Working with Channel PartnersA Guide to International Sales

Working

with C

hannel Partners–

A G

uide to

International Sales

Irish Exporters Association28 Merrion SqDublin 2T: 01 661 2182F: 01 661 [email protected]

William Fry SolicitorsFitzwilton HouseWilton PlaceDublin 2T: 01 639 5000F: 01 639 [email protected] www.williamfry.ie

Enterprise IrelandGlasnevinDublin 9T: 01 808 2000F: 01 808 2296clients.service@enterprise-ireland.comwww.enterprise-ireland.com

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