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The Impact of the Opening of the Distribution Service Market and Policy Suggestions
2001-05-01
Ren Xingzhou
The Sino-US bilateral agreement on China’s entry into WTO concerns the commodity distribution service in the sector of “distribution service” under the item of “service trade”. It mainly includes four parts: commission business, wholesales, retails and franchise business. Each also includes market access, pledge of national treatment and other pledges. In the early years after China enters WTO, the opening of distribution service market and the entry of foreign large commercial businesses will exert major impact over China’s market of distribution service. It is very necessary to carefully analyze this impact and take active countermeasures.
I. Analysis of the impact of the opening of distribution service market
From the WTO agreement, we can find that distribution service means much more than the commercial circulation in the traditional sense. The main services offered from the distribution sector can be summarized as the resale of commodities and a series of related services. Distribution services not only include traditional commercial services (mainly circulation of consumer goods), but also involve the circulation of production materials and industrial products, as well as distribution service systems and networks built or controlled by the manufacturing enterprises. In light of the pledges specified by the agreement and China’s actual situation, the opening of distribution service will exert impact on the following aspects:
I.1 The impact of the opening of distribution market varies on different links of the domestic distribution field.
1. The opening of distribution service market has relatively less impact on China’s retail business.
In the Sino-US agreement, we can find that the current opening of retail market has gone beyond the pledge stipulated by the agreement for the early years of the opening. Although an approval system is adopted over the opening of retail business in principle, the State Council and local governments have approved nearly 300 joint venture retail enterprises since 1992 when trial experiments were first started. The reform has by far exceeded the scope for trial experiments. Some well-known transnational commercial companies have entered China’s retail market. From 1999, trial experiments have extended from coastal areas to all the provincial capitals and central cities. Foreign businesses have been allowed to enter the wholesale business in the municipalities under direct control of the central government. With approval of the State Council, foreign investors are permitted to hold stocks in chain businesses. Sino-foreign manufacturing enterprises have been allowed to set up sales companies to realize sales in other cities, and the opening of after-sales service and maintenance system will also gradually step up. These polices have all surpassed the pledge regarding the opening of retail business in the transitional period set forth by the Sino-US bilateral agreement.
In addition, the competition on the domestic retail market has been going on for quite a period of time. Some large retail enterprises have competitive edge. After China’s entry into WTO, the retail market will be completely open in the interim. More international commercial capitals will enter China’s retail market, and the competition will be even more intense. But in general, foreign firms will not deal a fatal blow to China’s retail market. And, from an active point of view, the foreign retail businesses will bring into China not only the funds that China’s economic development needs, but also advanced operation ideas, technologies and marketing methods, thus promoting the development of Chinese retail business.
But we must also notice that in the early years of opening, the China should give up part of market share after massive inflow of foreign commercial capital. Foreign businesses will get fairly high profit return in Chinese market as commercial capital is the most active capital; the retail sector has a low threshold for new investors; the proportion of fixed capital is low; the return rate on investment is high, and the investment cycle is short. At the same time, foreign large commercial businesses have sharper competition edge, they will exert high pressure on the survival of surrounding medium and small-sized retail businesses. Some enterprises will be plunged into plight or go bankrupt, which may trigger off the danger of structural unemployment. As the opening of distribution service incurs risks, some countries that have joined the WTO have not completely opened their distribution service market. We must get fully prepared for it.
2. The opening of distribution service market will deal a big shock to Chinese commodity wholesale business
Since the market of daily-use industrial products was opened in mid-1980s, the state-owned commodity wholesale enterprises have been in a difficult time, and the whole industry has been in deficit for several years. The material wholesale enterprises have also seen deficit for six consecutive years. Non-state-owned wholesale business has been developing, but they have taken up a small market share and are not competitive. Foreign wholesale enterprises, with modern wholesale technology, management and capital advantage, are much more competitive. At the same time, with the advance of modern IT technology, improvement of transportation and progress in material flow technology, the wholesale enterprises’ marketing area has broken the limit of traditional commercial circle and expanded rapidly. The products of a wholesale enterprise can be sold to all parts of the country or even farther. Many large transnational wholesale companies have their purchase and sales network even covering the whole world. So foreign businesses will be able to use their scale advantage to occupy a large market share by setting up a few large wholesale enterprises. At the same time, according to the bilateral agreement, China will gradually allow foreign-invested manufacturing enterprises to set up sales agencies with corporate entity status. They can deal in wholesale business in China and offer after-sale services. Foreign businesses are allowed to have the right to distribute commodities. In the past, these sales activities were mostly entrusted to domestic enterprises on commission. Once foreign enterprises have this right, they will use their own marketing channels to turn the whole distribution process, from the producers to consumers, into a highly effective chain. This will pose a great challenge to the inefficient domestic wholesale enterprises which have long been characterized by a separation of production from marketing, wholesale from retail and internal trade from foreign trade.
It should also be noticed that under a modern distribution system, the wholesale and retail businesses tend to integrate. The retail business is more penetrating into the wholesale business, especially after foreign large chain store enterprises enter China’s market. Their massive purchase and delivery system has acquired certain wholesale service function. These firms will also take up some wholesale market. The e-commerce will enable foreign wholesale, retail and production firms to have a larger room for market expansion, thus posing another major challenge to China’s traditional wholesale business.
Of course, the entry of foreign wholesale and retail enterprises will also bring about new opportunities to China’s wholesale industry and manufacturing enterprises. With the improvement of production and product quality and variety, foreign firms will definitely increase the purchase of domestically made products and motivate the export of Chinese goods through their worldwide purchase and distribution network. Meanwhile, foreign wholesale enterprises will also bring in modern wholesale management, distribution and materials flow operation technology, which will help China’s whole sale industry reduce cost, streamline channels and raise efficiency. It must be seen, however, that after China’s entry into WTO, foreign-invested wholesale enterprises with obvious competitiveness, modern wholesale management technology and the strength to build wholesale and commodity delivery centres will probably occupy a large share of the domestic wholesale market. The channels of some imported products will be controlled and a large part of material delivery business will be occupied. This deserves our great attention.
I.2 The opening of distribution service market will greatly affect the production and distribution of important industrial products.
In the Sino-US agreement, China offered specific pledge concerning the distribution service of some important products in key industries and set the timetable. The opening is generally started after transitional period (which varies with different products). The industries and products to be more affected are: pharmaceuticals (wholesale and retail of medicines), petrochemicals (petroleum, pesticides and chemical fertilizers), and machine-building industry (mainly automobile).
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