E-commerce cross-border trade in China is booming and is only set to grow. As Chinese consumers seek out genuine, quality international products, the opportunities for foreign brands are boundless.
E-commerce cross-border trade in China is booming and is only set to grow. As Chinese consumers seek out genuine, quality international products, the opportunities for foreign brands are boundless.
Since the Chinese government’s formalization of cross-border e-commerce trade over the past 18 months, business in this channel is booming. In the first three quarters of 2015 alone, cross-border e-commerce in China grew by more than 30 percent, according to China’s Ministry of Commerce (MOFCOM).
A recent PayPal Ipsos survey also found that more than one-third of Chinese online shoppers purchased products through cross-border channels this year, up from one quarter a year ago.
“The growing awareness of safety issues and appreciation for quality imported goods makes the cross-border trade market one of potentially explosive growth [in China],” says Tony Qiu, Director of JD Worldwide.
Indeed, Kantar Group predicts this sector will increase by 11-fold, up to RMB 800 billion (US$ 123 billion) in gross merchandise volume (GMV) by 2020.
While price remains a significant factor in online purchasing behavior, Chinese consumers want access to good quality, safe and trustworthy products. Qiu says there is strong demand in China’s middle class for trusted and authentic international products, and cross-border trade has significantly opened that up.
Here are three reasons why brands have a promising future accessing the Chinese market through cross-border e-commerce.
The Chinese government is actively promoting cross-border trade through a growing number of free trade zones across the country.
These bonded zones are regulated by preferential government policies, lower taxation and more relaxed market entry regulations not offered to foreign imports through traditional channels. This not only makes market entry into China easier for foreign brands, but the Chinese government is able to collect tax on products that it previously wasn’t.
On the consumer side, purchasing through online cross-border channels has the bonus of low taxation levels.
However, there are still two issues here for brands selling into China through this channel.
Firstly, brands with existing operations in China are being challenged to reduce the price differentials between products being sold in the domestic retail market and those internationally. Chinese consumers have an increasing awareness of global prices, especially as cross-border continues to rise in popularity.
Secondly, as the Chinese government continues to refine cross-border e-commerce channels, brands need to keep up to date with ongoing changes to taxes, tariffs and regulations.
Cross-border e-commerce isn’t new in China. What’s new is the shift from consumers buying from small individual sellers via customer-to-customer (C2C) sites like Alibaba’s Taobao to business-to-consumer (B2C) platforms.
“With C2C sales, consumers never knew if they were buying the real thing or a counterfeit,” says Bessie Lee, chief executive (CEO), WPP China.
These B2C platforms offer a wide range of services from bonded-warehousing, logistics, payment facilitation and marketing and consulting services. Thousands have sprung up in the past 18 months, with two of the biggest being JD Worldwide, which launched in April, and Alibaba’s Tmall Global. Here’s a timeline showing the entry points of some of the major players.
Reduced regulation through cross-border also means consumers have access to more foreign products not available in the local market.
This is particularly relevant for brands in the skin care, cosmetics, organics, and vitamins and supplements categories, where regulatory requirements for domestic (online and offline) channels may require products be tested on animals or have undergone lengthy and expensive approval processes.
Australian vitamin and supplement brand Blackmores operates across 12 markets in Asia. In the past 12 months, China has become its biggest market, largely driven by e-commerce. The rise of cross-border e-commerce and the lack of import duties in China’s free trade zones, combined with the fall of the Australian dollar, has resulted in explosive growth in sales for the business compared to those generated through its domestic Chinese channels.
Blackmores currently sells 15 of its products in China through traditional import channels, such as pharmacies, supermarkets, and e-commerce platforms such as JD.com and Tmall. With cross-border channels, the brand must still register its products, though the process is simple and fast, allowing the brand to sell any number of its 500 products.
As the industry undergoes rapid growth, it is also experiencing its fair share of challenges, such as:
According to Peter Osborne, managing director Asia, Blackmores International, the next year will be critical in the way the burgeoning numbers of cross-border platforms consolidate.
“There’s very rapid segmentation by category and by platform. There has got to be rationalization of those companies or acquisitions,” says Osborne.
He expects to see an increase in specialization of these platforms, but the big platforms will also attempt to acquire the successful smaller ones and move them into the fold. Blackmores, for example, has strategic relationships with the bigger platforms. But it also works with some of the smaller, niche sites including Little Red Book (XiaoHongShu.com), which has carved out a unique offering with strong, reputable user and blogger reviews.
“A lot of these smaller platforms often have a deeper consumer engagement because they are smaller platforms and we find that’s also really good for consumer education, in terms of talking about vitamins and health and well-being,” says Osborne.
Brands need to make strong assessments of any platforms they plan to partner with. Does the platform suit the brand’s needs? What platforms best represent the demographics of a brand’s target consumers? How long has the platform been around? What other brands is it working with?
“If it’s a major platform, but 90 percent of its business is fashion or electrical gear, it’s probably not the right fit for us.”
With a lack of certainty as to how the consolidation of cross-border sites will play out in the next 12 months, Blackmores is hedging its bets around multiple platforms. At the same time, it is developing strategic partnerships with those that have an interest in long-term, mutually beneficial cooperation to drive the brand and to educate and engage with their consumers.
Establishing a cross-border presence is only the start of the journey. Brands need to consider how they will market their products to stand out in an increasingly crowded marketplace. This is where brands can benefit from the large amounts of traffic and wide media and digital reach of the bigger players like Tmall Global and JD Worldwide.
Both sites host country pavilions, where products from the same region are grouped together on special website “malls” within the platforms. For smaller brands, this offers additional marketing exposure from being aligned with bigger reputable brands from the same country.
The strategy is good for brands, especially smaller ones, beginning their China strategy, says WPP China’s Lee. Bigger brands can just sell their inventory directly to JD.com, which will promote your products as it sees fit.
But for a smaller, less well-known company, cross-border e-commerce is a cheaper and easier way to enter the Chinese market, without the overhead costs that come with establishing an offline presence. It also gives brands more data to play with, especially in terms of testing market entry, or new products. Data, for example, might direct a brand’s future offline retail strategy based on the geography of its online sales.
“If you are niche, you don’t want 1.4 billion consumers. You probably only need 1.4 million who are going to be loyal and buy a lot from you,” says Lee, advising smaller, niche brands to begin on a vertical channel or social media platform like WeChat.
With new online shoppers in China peaking in 2011, the big challenge for platforms has been how to get the existing online shopper to buy more, to buy more frequently, and buy more expensively. Cross-border e-commerce is proving a win-win for all parties concerned and with strong government backing, that’s only set to continue.
