Vietnam Entry: Exclusive Distributor vs OEM vs Cross-Border D2C
Chungdam Bio makes a red-ginseng functional drink and is choosing how to enter Vietnam. A Hanoi distributor offers a three-year exclusive agreement: minimum 60,000 units a year at USD 18 per unit FOB Busan, with 90-day open account payment from year two. The distributor will handle product registration, which takes 6–9 months and costs about USD 40,000, and expects a retail price of USD 45 with a 35% margin on retail. Chungdam's variable cost is USD 12 per unit and freight/insurance to Ho Chi Minh is USD 1.2 per unit. A Japanese supplement company has offered an OEM deal: 40,000 units a year at USD 14.5 FOB, sold under the Japanese brand, with no registration or marketing cost. A third route is cross-border e-commerce direct to Vietnamese consumers: about 12,000 units at a USD 34 retail-equivalent price, but platform fees, delivery and returns would absorb 45% of that price. Chungdam's fixed overhead is USD 250,000 a year.
1. Compute contribution for each route, rank them, and explain what the ranking does and does not settle.
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Use contribution, not profit. The USD 250,000 overhead does not change with the choice, so it must be excluded - including it would penalise the smaller options for costs that exist anyway.
Distributor. 60,000 × 18 = USD 1,080,000 revenue; variable cost 60,000 × 12 = 720,000. FOB means the buyer pays freight, so the USD 1.2 is not Chungdam's cost here. Registration 40,000 in year 1. Year 1 contribution = 1,080,000 − 720,000 − 40,000 = USD 320,000. Year 2 onward = USD 360,000 before any marketing support.
OEM. 40,000 × (14.5 − 12) = USD 100,000. No registration, no freight, no demand risk.
D2C. Revenue 12,000 × 34 = 408,000; product cost 144,000; channel costs 45% × 34 = 15.3 per unit = 183,600. Contribution = 408,000 − 144,000 − 183,600 = USD 80,400 - and that is before Chungdam carries registration and local compliance itself, which it would have to.
Ranking: distributor (320k) > OEM (100k) > D2C (80k).
What the ranking does not settle. First, it ignores risk: the distributor route concentrates everything in one counterparty, and from year two roughly USD 1.08 million of annual sales sits on 90-day open account. Second, it ignores asset value: the distributor route builds a registered brand in a growth market, while OEM builds the Japanese partner's brand and can be replaced by another factory at any time. Third, it ignores feasibility - the distributor's own economics may not work.
2. Test whether the distributor's numbers are internally consistent, and state what Chungdam should ask for before signing.
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The price ladder does not add up. A 35% margin on the USD 45 retail price means the distributor wants to keep 15.75, leaving 29.25 as its selling price to Vietnamese retailers. That 29.25 must cover the import price, duty, local logistics and the distributor's own overhead.
Chungdam's CIF-equivalent price is 18 + 1.2 = 19.2. Even ignoring VAT recovery, a 20% duty adds 3.84, giving a landed cost of about 23.0. That leaves roughly 6.25 - about 14% of retail, not 35%. If the distributor's 35% must come after duty and logistics, the landed cost would have to fall to about 29.25 × 0.65 ≈ 19.0, which implies an FOB price closer to USD 13, i.e. below variable cost at current volumes.
Conclusion: one of three things is wrong - the retail price is optimistic, the 35% target is unrealistic, or the FOB price of 18 is too high for this channel. A deal that does not work for the distributor will not survive year two; it will stall orders and then demand a price cut or a rebate, and by then Chungdam will have spent the registration money.
Ask for, before signing:
- The distributor's landed-cost sheet - duty rate, VAT treatment, warehouse and delivery costs, and the actual retail price points of two or three comparable imported ginseng products.
- A signed sales plan with the first 12-month launch budget and the marketing spend the distributor commits.
- Clarity that the 6–9 month registration runs in the distributor's name but is transferable, or in Chungdam's name - this is the decision that determines who owns the market.
- A trial period or a smaller first minimum, so that the volume assumption is tested before exclusivity is granted.
3. Draft the protective terms Chungdam needs in the exclusive agreement, and decide whether the D2C channel can run in parallel.
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1. Earned exclusivity. Annual minimum of 60,000 units, measured quarterly, with a defined shortfall remedy: loss of exclusivity, conversion to non-exclusive, or a right to appoint a second distributor. Exclusivity without a performance trigger is a free option given to the counterparty.
2. Trademark. Register the mark in Vietnam (directly or via the Madrid Protocol) before disclosing the brand, and state that the distributor acquires no rights in it and must not register it or any similar mark. Distributor-registered trademarks are the most common way small Korean brands lose a market permanently.
3. Product registration. Fix in the contract who holds the registration and that it must be transferable at termination; a product registered in the distributor's name cannot be sold by anyone else without starting again.
4. Payment. Start with a confirmed irrevocable L/C or an advance. If open account is unavoidable from year two, insure it (K-SURE or a private credit insurer), set a credit limit, and require an SBLC or parent guarantee above it. Carrying USD 1.08 million for 90 days costs roughly USD 13,500 a year before any default.
5. Price and FX. USD pricing, a periodic review clause, and a renegotiation trigger if USD/KRW moves outside an agreed band. Be explicit about the Incoterms 2020 rule, who pays freight and insurance, and who bears import clearance.
6. Compliance and liability. Recall and product liability allocation, labelling responsibility, claim wording, audit rights and the right to inspect the distributor's warehouse.
7. Term and exit. Three years with renewal conditional on targets, termination for convenience on six months' notice, a post-termination sell-off period, and arbitration at SIAC or KCAB rather than a Vietnamese court.
Parallel D2C? Not as written. The D2C route contributes only about USD 80,000 and would compete with the exclusive distributor in the same territory - a clear breach of exclusivity and a fast route to a dispute. Either carve e-commerce out of the exclusivity in writing (with a revenue-sharing mechanism), or run D2C only in markets the distributor does not cover. Its real value is market intelligence and brand testing, so treat it as a marketing expense, not a channel.