Why China remains a key market for online retailers

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Despite major regulatory changes to China’s ecommerce cross-border trade earlier this year, experts say the channel should still be included in an ecommerce strategy for this market.

China’s cross-border ecommerce sector came to a grinding halt in April after new tax laws and regulations were announced. General items which had been taxed at around 10% suddenly faced new taxing categories of 15%, 30% and higher.

Despite this, the outlook for cross-border ecommerce remains promising.

According to an eMarketer report released in June, more than 180 million people (15% of the Chinese population) are expected to purchase something from abroad in China this year. This is up from 128 million (11%) in 2015. This year alone, China’s retail cross-border ecommerce will be worth US$85.76 billion. By 2020 it will almost double in value to $158 billion.

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Lower taxes and duties haven’t been the only benefit of cross-border ecommerce. International brands had also been benefitting from loop-holes which allowed them to bypass regulatory enforcements applicable to Chinese domestic distribution channels. For example, Blackmores, an Australian vitamin and supplement brand, could sell any of its 500 products via cross-border channels without having to undergo lengthy and expensive approval processes for each one. In contrast, only around 15 of these products were approved for sale on the domestic Chinese market via pharmacies, supermarkets, and domestic ecommerce platforms, JD.com and Tmall.

All of that changed in April as China introduced changes to custom clearance documents – effectively meaning products in the cateogries like vitamins, supplements and some cosemtics would require the same distribution licences as those products being sold domestically.

Blackmores operates across 12 markets in APAC, but China is proving to be its most lucrative cash cow, largely as a result of cross-border channel distribution. This graph shows the sudden drop in Blackmores share price immediately after the new regulations were introduced on April 8.

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However since a low at the end of June, the stock price is gradually picking up again. As is often the way with newly introduced laws in China, they are a work in progress, and cross-border ecommerce is still proving to be a very valuable, lucrative and viable entry point into the Chinese market.

Catherine Tsang, tax partner at PwC Hong Kong, says some of the regulations introduced on April 8 have now been delayed as the regulatory bodies assess and digest initial feedback on the proposed changes. In particular, changes to customs clearance documents have been delayed for 12 months. A list outlining which commodities can continue to be exported into China through cross-border channels is also being continuously updated.

Tsang believes cross border is still an important route to market for many international brands – whether that is for those new to the Chinese market or those with an existing presence.

Market entry and testing

One of the major advantages to cross-border ecommerce is that a business can avoid the additional costs of setting up a registered entity in China.

“Setting up a presence in China which may not cost a huge amount, but imagine that you set up in Shenzhen or Shanghai, you can’t cover a very a large area. But, in China, if you really want to target people in tier-two or even tier-three cities, definitely ecommerce will be one of the most favorable platforms to penetrate the market. Otherwise, you will have to set up 200 or 300 branches or retails shops to basically market your products,” says Tsang.

She adds that people in China are used to buying goods via the Internet, especially among the younger generations.

O2O / Omnichannel

For brands with an existing domestic presence in China, cross-border can be a valuable add on to an omnichannel and O2O marketing strategy.

“If you have never touched the midland of China, this allows you to test the market. Before you set up your own store or domestic trading platform, why not use cross-border as a marketing tool basically to build a brand in China and to introduce your brand in China,” she says.

Tmall Global and JD. Worldwide

China is already the world’s biggest ecommerce market, set to be worth more than US$1 trillion by 2017.

Online shopping in China grew by more than 70% in 2015, according to eMarketer. This rapid surge in adoption is in part due to improved standards of living in China and greater exposure and knowledge of foreign products.

Cross-border’s biggest asset is trust. Foreign goods being sold via cross-border ecommerce channels are perceived in China as being better quality and having more variety.

eMarketer expects to see a shift in purchasing habits from C2C to the established B2C cross-border players, JD Worldwide and Tmall Global. These platforms are not only more professional and organized, but merchants selling on these B2C platforms must be authorized, and are therefore considered more trustworthy.

Different regulations and tax categories depend on each product. Therefore the easiest and fastest way to get products into China is by working with these established cross-border ecommerce platforms, says Haixia Wang, vice president, Forecasting, eMarketer.

“In addition to already having a mass digital buyer audience to tap into, these big players can also provide all the regulatory and marketing supports. It’s a great approach if cost and risk are big factors,” Wang says.

Do your research

Do your research, verify your data with multiple people and if it looks too good to be true don’t go for it, says Simon de Raadt, general manager at Mains International.

There can be grey channels in China, especially in tier-two and tier-three hubs due to different interpretations of the rules. That can result in short-term gains for a business but result in long-term problems as the business grows.

A more centralized ecommerce landscape is resulting in a more level playing field, however the majority of goods bought online in China are still done in eastern China, says de Raadt. For this reason, you should have goods entering China in this proximity. This will mean faster delivery, lower costs and as a result, a happier customer.

The big losers of the new regulations are the smaller players including Daigou, (overseas Chinese with side businesses of buying and posting foreign products to a network of friends and relatives back in China). This is because any additional tax charges will be born on the end buyer resulting in price increases. Losing that price advantage, might drive consumers to other channels, says eMarketer’s Haixia Wang.

Cross-border ecommerce is still a viable channel for foreign brands, says de Raadt. Despite a freeze period after April 8 for incoming goods as businesses reorganized their purchasing and logistics strategies, the landscape is becoming clearer and it is picking up to where it was.

As an example, de Raadt says there are now more goods being stocked in Hong Kong and Taiwan that were previously stored in China free trade zones. “That is the beauty of China – in finding pragmatic ways to stay in business,” he says.

Things keep on changing, but it seems the market is digesting all the changes and also finding a way to adapt to the changes, says PwC’s Tsang. “The volumes, the transaction numbers, are still huge numbers for cross-border trade in China.”

*Are you interested in learning more about ecommerce and cross-border strategies for market entry in China? Join us at ClickZ Live in Shanghai on September 19-21 to hear from industry experts and enhance your knowledge and understanding of China’s lucrative ecommerce sector.

*Featured image: Pixabay

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