Lac Tran, EVP Global E-Commerce, Web2asia gives an insider’s view of ecommerce in China
THE CONSTANT buzz around China’s ecommerce economy has been growing at an unsurpassed rate, an increase of 30% in 2015 according to the Ministry of Commerce, which has resonated to every worldwide brand. In 2014, China outgrew the US as the largest ecommerce market and over the next 5 years it is expected to double in size. In March, Alibaba became the world’s largest retail platform as its trading volume surpassed Wal-Mart’s annual sales.
This booming market is seen as a great opportunity for brands that are not present in China yet seek to acquire Chinese consumers, who want differentiated imported products.
Ecommerce has developed unique features in the past years to facilitate consumer usability and integration: first, the establishment of bonded warehouses in pilot free trade zones and overseas that enable integrated fulfilment and optimised order management with Chinese marketplaces. Second, development of mobile commerce mixing social media and mobile payment for a faster purchase decision. Online orders carried out with mobile devices account for more than 70% of total online sales. Lastly the development of O2O as an important strategy to integrate online and offline activities. For merchants present in China, it became an important tool to drive traffic and sales to offline stores. These were China’s ecommerce trends in 2014 and 2015, and now cross-border ecommerce is the biggest growth segment in the country.
Dominant marketplaces in China, such as Tmall and Jingdong, understood the cross-border opportunities in 2014 and 2015, respectively, and quickly provided foreign merchants with global cross-border platform catering to the Chinese market. This initiative attracted several foreign brands that would never consider China due to the perceived trade difficulties, distance and company registration process.
Cross-border ecommerce has already surpassed 40% in growth, reaching more than 1 trillion rmb (£105bn) in value for all B2B, B2C and C2C transactions.
Who are the Chinese cross-border consumers and what they are looking for? Initially, there was a straight forward answer to this question – online shoppers were educated, middle class and in their late 20s to mid 30s. With the internet reaching all over China now, cross-border is no longer confined to coastal cities, but is expanding to T3 through T5 cities. This is a niche still to be explored for greater market expansion.
Cross-border Chinese consumers’ main reasons to choose cross-border are trust and quality. As other Chinese consumers, they are also price sensitive, but for some categories such as infant formula, price is less important than trust. Cross-border consumers have more knowledge of foreign brands’ reputation and their price point overseas.
The hottest categories for purchasing cross border are skincare, women’s apparel, cosmetics, perfume, healthcare, women’s accessories and baby formula. Sports and food categories (organic and fresh food included), even out of the list, have grown consistently in the past year, with several new merchants such as foreign supermarkets opting to open online stores instead of following the traditional model of opening physical stores. Some merchants plan to expand their business offline having used online to “test drive” market entry.
The top countries of origin are: USA, Hong Kong, Sweden, UK, Malaysia, Taiwan, Holland, Japan, South Korea and Denmark, which explains the categories consumers are looking at as described above. Japanese and Korean cosmetics brands are very popular among Chinese consumers from all classes, so too are Dutch baby formulas.
Dozens of countries are already represented on Chinese cross-border platforms, and some of them still have the potential to reach top 10; Australia and New Zealand are strong in the food and supplement segments respectively. In order words, top categories and top countries are easily changeable, depending on the rise of offers of brands that have high awareness among Chinese consumers.
Cross-border facilitated online business in China, mostly due to the simplistic process if compared to import trade: there is no need for merchant local business registration, animal testing and other licensing, just to mention few.
WHAT TO CONSIDER BEFORE COMING TO CHINA?
In order to choose the right cross-border business model, merchants need to understand their specifies and how their product can benefit from each model: marketplaces, localised standalone store and specialist cross-border ecommerce platforms such as the haitao networks – cross-border is done differently than in the ‘West’. The channel is thus the first thing merchants need to consider. There is no accurate answer to which approach to use since it depends on industry segmentation and a holistic plan to acquire targeted consumers.
Since ecommerce, and especially cross-border ecommerce, is facing its gold-era, the need for further regulation became important. While a new Ecommerce Law is expected to be promulgated in 2016, new regulations have focused on consumer protection and taxation.
The latest ecommerce regulations ‘Notice on Import Tax Policies for Retail of Cross-border E-commerce’ (the ‘Notice’), effective as of 8 April, and the ‘Circular 18’ show cross-border ecommerce import duties. Tax rates can be up to 60% depending on the category: toys’ tax rate is around 12%, while milk powder is 8.4%, 31% or even 60% for diamonds, depending on product price, order quantity and from where the product is shipped, overseas or bonded warehouse. New merchants and those that already have established online businesses in China need to comply with these two new regulations.
"Chinese cross-border ecommerce has surpassed 40% growth reaching more than £105bn"
The ‘Notice’ limited the amount of cross-border purchases to 2,000 yuan for a single transfer and a maximum of 20,000 yuan per person per year, at a temporarily set zero tax rate. Goods that exceed these limits will be levied the full taxation. With these new regulations, it became clear that retail goods purchased online via cross-border channels are no longer treated as personal postal articles but as imported goods.
These regulations have as their main objectives public consultation and to fill consumer protection gaps. Industry experts need to ‘weight’ them in and provide government agencies with their feedback. In addition, the costs involved depend on the cross-border method chosen.
Ecommerce and cross-border ecommerce are projected to have consistent growth in the next few years and it is unlikely that the new regulations will influence this growth.
In order to succeed, brands must not only understand how to approach Chinese customers, but have a certain knowledge of cross-border ecommerce regulations to enable better cost allocation and an efficient pricing strategy.
Foreign brands do not need to necessarily abandon their DNA, rather adapt it to the Chinese market. The most common questions we are asked by foreign merchants relate to Chinese clothing sizes, whether or not to localise flavours, usage of western or Chinese models, how to reinforce product authenticity, the right price range and choosing between a standalone store and marketplace – among many others.
Through proper market research targeted to a certain industry, it is possible to determine the latest trends of Chinese consumers as well as leveraging opportunities to build up strong short and long-term strategies.
Expanding or not to the Chinese market is no longer a question. Instead it is one of how to leverage a cross-border strategy in China.