BEIJING, Aug. 14 -- Mobile phone maker Nokia may dominate the Chinese market with a 40-percent share but it has upset some of its distributors so much they are threatening to hold a protest outside the Finland embassy in Beijing.
The distributors are angry over the fines imposed on them if they sell a product outside a specified area, normally a provincial or city boundary.
Liu Youming, a Nokia distributor, said with sales falling 10 percent in the first half of this year they are under extreme pressure and need to sell wherever they can.
"In the current economic situation, many distributors have no choice but to risk selling products in other provinces," said an industrial analyst who asked not to be identified.
Liu said Nokia had imposed fines of as much as 5 million yuan across seven provinces in South China in July last year. Most of the fines imposed before August last year were refunded when distributors threatened action, which it was feared might disrupt the Olympics. However, the fines imposed after the Olympics, at a rate of up to 10,000 yuan for every phone sold outside its assigned zone, were not refunded. Some estimates put the total fines last year at 400 million yuan.
Distributors have also sent letters to various Chinese authorities, accusing Nokia of imposing a monopoly on prices and of tax evasion, citing the fact they never received invoices for the fines they say were imposed and kept.
In a statement, Nokia said the distributors who were protesting did not have a direct business relationship with the phone giant but were part of a second tier of distribution. It denied the allegations made against the company.
"The protestors cannot represent interests of most of our distributors," said Cai Yun, head of Nokia's public relations department. She said the reason that Nokia does not allow products to be sold across the assigned regions is to protect the interests of local distributors, who have already invested a great deal in marketing and establishing local networks. She said the fines that Nokia imposed are "insignificant".
Cell phone shipments in China fell by about 10 percent in the first half of this year because many distributors had overstocked based on incorrect market assumptions, driving them to find markets wherever they could.
Nokia's current distribution system started in 2003, when the company changed from a centralized system that mainly focused on urban areas to one that targeted the emerging rural market where potential users were highly scattered.
Under this system, which it called Fulfillment Distribution (FD), Nokia reduced the number of national distributors and set up several provincial FD distributors and city-level distributors, called WKAs.
FD distributors could only sell products to the WKAs within their provincial boundaries and WKAs, who often hire their own distributors and retailers, were also not allowed to sell products outside their assigned boundaries.
But the new system also put more pressure on the distributors. According to Liu, Nokia demands a deposit of between 5 and 10 percent of the value of the goods sent to distributors, according to how many are ordered. If a distributor meets his target, that percentage is used as down payment on the next consignment. The deposit is not refunded if the distributor fails to meet the sales target or is discovered selling products outside his boundary.
This system began to cause tension between Nokia and the distributors last year. Some distributors even reportedly refused to sell Nokia products.
James Lei, an analyst from research firm In-Stat, said the distributor protest will not have much impact on Nokia's business in the short term as its market share in China is huge. "But its brand will get hurt if the protest continues, and will have a long-term impact on its business," he said.
Liu said Nokia's new distribution system, with its system of deposits, prevented distributors from escaping the phone company's clutches in a declining market. "Once you start doing business with it, you can't stop," he said. "It's like Nokia is clamping our neck."
