Euro News

Have Distributors Set Up in Europe? Now What?

In the November/December issue we discussed how to find, analyze and select distributors in Europe. Now we will discuss how to handle everything that happens after you arrange work with those distributors. Let’s get started.

Preparing Contracts

Perhaps you have selected a distributor in France, and the time has come to ink a contract. Now you have many considerations to evaluate.

Rene van de Zande

One thing that gets many companies in trouble is the issue of exclusivity. Yes, the distributor may be excited about your product. Yes, it may have vast coverage in France. But be wary of distributors that will only agree to take your product if they can have exclusivity.

That’s not to say that exclusive arrangements are bad. With an exclusive, the distributor may put more focus on pushing your product.  However, what if the distributor doesn’t market your product as promised? What if the relationship goes sour, or you find a better distributor? In general, try to avoid exclusive agreements—and avoid pan-European agreements altogether.   

Make sure your contracts clearly define the sales regions your distributor will cover. Let’s say you sign a new distributor in France that’s also strong in southern Germany. If you already have an exclusive agreement in place with a distributor for Germany, your contract with the French distributor should specify that the territory covered is France only. Otherwise, you’re asking for trouble.

Other important issues to consider are the conditions under which the contract can be cancelled (minimum service levels, sales levels, etc.), how products will be returned, conditions of sale, legal governance and other standard issues. That being said, don’t be afraid to explore the “handshake agreement” and try things out for six months before agreeing on a contract. Sometimes this is the best way to get things moving quickly.

Handling Payments

For purposes of simplicity, we will discuss three common payment methods: Payment in Advance, Letter of Credit and Terms. Each represents increasing levels of risk to the exporter. Payment in advance is exactly as it sounds—the distributor pays you up front before the shipment leaves your loading dock. Typically, this is done through wire transfer and only at the beginning of the relationship, until trust has developed.

The second option involves a Letter of Credit (LOC), which is often used for larger orders but protects both you and the buyer at the same time. LOCs are letters issued by banks to authorize the seller to collect money from the buyer’s bank account only if certain conditions set forth in the letter are met (eg, proof that the products were shipped).     

The final form of payment is called Open Credit or Terms—typically Net 30. Providing terms to a supplier usually happens after the first shipment. However, do not underestimate the risk of doing so. There are many stories of buyers who place a few smaller orders, prepay to establish trust, then place a large order, ask for terms and then don’t pay or pay very slowly.

Collecting your money from a company in Europe has a lower success rate than collecting from a company in Virginia. Be vigilant. The Export-Import Bank of the USA (EXIM Bank) has an excellent export credit insurance program for US medical equipment manufacturers. To learn more, visit www.exim.gov.  

If you export from the United States, also be aware of currency fluctuation and the impact this can have on your market share. If you are in a price-sensitive category, this could have a substantial impact on your sales in the market. One option is to open a European bank account.

Documentation

If you are shipping products from the United States, you cannot simply slap a shipping label on the crate and send it on its way. Make sure all your documentation is in order before you ship. When in doubt, ask your distributor or freight forwarder for guidance. Customs officials can hold your shipment if the necessary paperwork is not attached and may even go so far as to destroy your merchandise (we have seen this happen recently in Italy).

Shipping and Duties

There are many types of shipping: CIF, FOB, DDP, Ex Works, etc. I won’t explain them here, but I do recommend you visit www.iccwbo.org to determine which method is best suited to your situation.

You should also know that every product imported to a country is assigned an HTS code by Customs. Many medical devices fall under Chapter 90 of the HTS and have duties that range from 1% to 8%. Many others have no duty.

Customs officials in the country where your product first enters the European Union will determine the classification of your product. This is relevant because the first classification made by a Customs official in the European Union is used from then on to determine your product’s rate of duty. You can see the entire HTS code in PDF format by visiting www.usitc.gov/tata.

VAT

Europe has a tax called the Value Added Tax (VAT). It’s much like the US state sales tax but is levied regardless of whether the goods will eventually be resold in the European Union. The distributor will need to pay the VAT (rates range from 15% to 25%)—but will also collect a refund on the amount paid because the goods are intended for resale.

Governments can be slow to process refunds, so there is a short-term burden for distributors—and plenty of paperwork. 

Returns and Servicing

Do not forget to consider the critical issue of product returns and servicing. Will your distributor handle returns? How will damaged products be handled? If your product is serviceable, will it be returned to the United States for service? If so, what is the cost of doing so?

Shipping between the United States and Europe can cost up to four to eight times more than domestic shipping. That’s important to understand, because there comes a point where shipping costs and administration outweigh the value of the product.

If you manufacture a serviceable product, the cost and time associated with product returns and repairs are important considerations in choosing a distributor. For example, if your product costs $900 wholesale, can you afford to have the distributor return it to you for servicing if the cost of speedy return shipment is $150 (and this doesn’t include your time to repair it and ship it back to Europe) plus duties?

Perhaps it may be best to outsource that task to the distributor or a European device repair facility. These decisions depend on the value of your product, complexity of servicing, frequency of repairs, customer service needs and liability issues. Consider all the implications before signing a contract.

Performance Management

Who will manage the ongoing distributor relationship after the honeymoon? Many companies handle this in-house, but it can be a challenge to deal with companies in Europe because of differences in time, culture/business practices and language. Companies often underestimate the amount of work involved in nurturing these relationships and end up disappointed by their sales in Europe.

You may want to consider outsourcing that role to a company with a presence in Europe.

Resources

Sites such as www.export.gov and www.customs.gov have excellent information on exporting, and you should explore all they have to offer. One final point should be considered: The most important key to success in Europe (or anywhere) is remembering that every successful relationship depends on reciprocity and respect. Success is sustainable only if it’s mutual.

Rene van de Zande is president and CEO of Emergo Group, a consulting firm that provides quality assurance, regulatory affairs and distribution services.