China has become the largest e-commerce market in the world, accounting for over 40% of the global transaction distributed over 5,000 platforms across China; be it integrated platforms that sell a wide variety of goods like an online hypermarket or vertical platforms that focus on a few specialized products. Simultaneously, Chinese government provides further policy and investment supports to encourage foreign companies to take part in the e-commerce development. And with rising incomes, standards of living and greater demand of foreign products, China’s fast expanding e-commerce market has become a major engine of growth for the global economy.
The question is: How do SMEs tap into the cross-border e-commerce market in China estimated to more than RMB 275 billion (EUR 36 billion)?
Opening up
Since 2016 foreign companies have had the opportunity to sell and ship their goods directly from overseas to Chinese consumers at zero tariffs and reduced VAT within certain transaction limits. Yet, despite the continuous opening up of the Chinese economy to foreign trade, China’s unique online eco-system is heavily dominated by local players like Alibaba (Tmall.com), Jingdong (JD.com) and Tencent (WeChat), who charge substantial fees and costs for getting products listed on these platforms.
Alternative Chinese cross-border platforms
Most people underestimated the extent of the Chinese cross-border e-commerce ecosystem, which is actually highly integrated between i) suppliers (retailers, brands); ii) platforms (independent, dependent, hybrid); and iii) support (shopping tool, payment gateway, logistics, bonded warehouse).
The latter model – the hybrid platform – combines the characteristics of the independent and dependent platform models (see below) by selling products in own inventory and inviting other sellers to sell through their brand and platform.
Your platform alternatives: Independent platforms
An independent eCommerce platform is really just an online retailer that you can fully own and control. There are hundreds of thousands of independent e-commerce stores out there based on eCommerce supporting platforms such as Shopify, Big Commerce, WooCommerce, and Magento.
Pros
- No merchant fees
- Full control over the supply chain, logistics, storage, and customer services
- Full control over the brand and customer relationships.
Cons
- Requires massive amounts of resources to break through
- Risk of inventory waste.
Why?
- You already have a strong brand for your product
- You have a solid supply chain established already
- You have a significant cash flow to back up the investment over the long run
- Your product or service emphasizes on quality and features more than quantity and price.
Your platform alternatives: Dependent platforms
A dependent model facilitates online sales from either business to a consumer or a consumer to another consumer. These platforms normally generate revenue by charging merchants.
Pros
- Fast access to a larger user base
- Possible to use original product labels
- No development or IT headaches
- Shorter lead time to sales
- No need for a Chinese business license
- Easy to expand the number of SKUs you sell
- Relatively low risk and low cost at the early stage
- No tariffs and reduced VAT for approved product categories within certain transaction limits.
Cons
- Many competing brands
- Harder to brand your store and to build customer relationships
- Limits on approved product categories
- Often price-sensitive environments that fertilizes price wars
- Higher service fees, sales commissions, as well as higher costs for marketing, logistics costs, warehousing and customer support
- Choosing the right platform is mission critical – your reputation, traffic, and even survival will be dependent on it.
Why?
- You want a low risk / low gain market entry to test the opportunities
- You lack funds and other resources to start your own store handle supply chain, logistics, storage, or customer services.
Alternative Chinese dependent platforms for cross-border ecommerce
The vast majority of foreign SMEs will target dependent ecommerce platforms for foreign companies. Selling your products through these marketplaces is a good compromise for a first experience in the Chinese market. This will provide you with a better knowledge of the regulations, understanding the local market and buying habits, language, logistics, customer service, preferred payment methods, and e-commerce events like Singles Day. The major alternatives are:
- Kaola
- Tmall Global
- VIP Shop
- JD Worldwide
- YMatou
- Xiaohongshu
- Mia
- Yihaodian
Again, there may be solid reasons (such as costs, see below) why you should choose a narrow platform of which there are thousands catering to more specific needs or focus on fewer product categories such as maternity & baby care, sports & outdoors, food & beverages, and cosmetics & skincare. For new, smaller and/or less known consumer brands, it may very likely prove more productive to pick a platform that targets a narrower, specialized user base. These are often less expensive to join and benefit from.
Find a trusted local partner
Your market entry should be supported by an omnichannel marketing execution covering website, WeChat and Weibo that actively engages with the Chinese consumer. Hence, despite the lower barriers to entry via dependent platforms, the key to successful performance is strong, local partnerships with trustworthy local intermediary partners who speak the language, understand the market and the continuously evolving dynamics in the cross-border e-commerce landscape.
Prepare yourself for a steep learning curve
The local partner should help you navigate under the constantly changing market conditions. Not only do the market dynamics change quickly, the Chinese market is, indeed, very different from e.g. European markets:
Online shoppers spend more time comparing products (+20% more time before buying), and product pages are much more detailed, with longer descriptions and multiple photos.
The cross-border e-commerce consumers are young. 36% are aged 19-29 years old, and 74% are 30-40 years old.
There is strong to fierce price competition, so you have to know how to play with promotions, gifts and free delivery. Do not be afraid to reduce prices for certain SKUs.
For delivery times, Chinese online shoppers are used to receiving their order within 24 hours and having access to customer service up until 10 pm.
There is no Facebook, nor Twitter, nor Youtube – they are all banned in China. WeChat is the main application to use for community management and generate supplementary sales.
Don’t assume that your local design enjoys superior brand value in China. Naturally, being the largest market in the world, the Chinese audience is exposed to superior brands and value propositions from all over the world.
The Chinese consumer’s reasons to by cross-border is product quality, value for money, wide brand selection and genuine products and the top product categories are: Cosmetics, Nutrition & Healthcare, Bags & Fashion, Food & Beverages, and Childcare. Approximately 80% of all online purchases of imported products have a total value of less than RMB 1,000. And approximately 20% of cross-border e-commerce consumers spent over 2,000 RMB monthly on online shopping – a high figure when you consider that the average GDP per capita in China hovers around $8,000 per year.
Finally, China is fast moving towards a fully mobile and cashless society.
Tmall Global and JD Worldwide examples
Although Tmall Global and JD Worldwide generally target larger brands and retailers with annual sales above USD 10 million, their terms and conditions define the upper bar of market entry in China through a cross-border platform.
Both platforms enable overseas brands and merchants an easy way to sell their products directly to Chinese consumers without a legal entity in China. Companies must be registered outside China, have a retail or trading license from the country of origin, possess the relevant stock certificate, and either be the brand owner or an authorized dealer. Only imported original goods with a trademark registration certificate are allowed, and seller must offer customer support in Chinese, handle product returns in China, organize local delivery to the Chinese consumer via international parcel service or from bonded warehouse in China.
Tmall Global
Joining Tmall Global is by invitation-only or by applying via an authorized Tmall Partner. Companies can choose to set-up a Flagship Store, Flagship Store Marketplace, Speciality Store or Authorized Store. Approved and certified Tmall Partners offer one-stop solutions covering most of the value-chain or individual services like store design, logistics, sales promotion, customer service and WeChat integration. Tmall Global fees are structured as follows:
- Security deposit: EUR 22,000 (down payment, refundable)
- Service & technology fee: EUR 4,500 annually or EUR 9,000 annually subject to registered product category
- Transaction fee (product price + logistics fee): 0.5 – 5% subject to registered product category.
- Alipay service fee: 1% (of product price + logistics fee)
JD Worldwide
Companies can choose to set-up a Brand Flagship Store, Outlet-Type Flagship Store, Franchised Store or Exclusive Store and choose between three operation models: i) Franchise Business Partner whereby the foreign company opens a store in which JD Worldwide is fully responsible for warehousing, delivery and customer service; ii) Licensing Business Partner whereby the foreign company opens a store and handles all logistics while JD Worldwide supervises / manages customer service and invoicing; or iii) Self-Operation Partner whereby the foreign company opens a store and takes care of own warehousing and delivery. Approved and certified third-party providers offer one-stop solutions covering most of the value-chain or individual services like store design, sales promotion, customer service and WeChat integration. JD Worldwide fees are structured as follows:
- Deposit: EUR 13,400 (down payment, refundable)
- Service Fee: EUR 895 per store annually
- Commission: 2 – 8% (of product price and logistics fee) subject to registered product category
Finally, a few tax perspectives
Products sold in China via cross-border e-commerce can be imported to China at zero tariffs with VAT levied at 70% of the statutory rate of 17% equal to an effective rate of almost 12%. This applies to single transactions with a limit of EUR 260 only and with an annual individual limit of EUR 2,600.
To enjoy the special tax benefits, the products must be listed on the official Cross-Border E-commerce Retail Import Commodity List also known as the ‘Positive List’, which consists of over 1,100 standard product categories with no restrictions respectively +150 selected product categories were certain restrictions.
If Chinese consumers decide to purchase products from overseas that are not on the Positive List or do not comply with the transaction limits of cross-border e-commerce they can still import products classified as ’Personal Effects’. These imports are subject to a Parcel Tax on top of the retail value but exempt from import duties and VAT. The Parcel Tax varies from 60% (on luxury cosmetics, perfume, tobacco, alcohol, jewellery, golf equipment and watches); over 30% (non-luxury cosmetics, garments, sport equipment, bicycles and other items not listed in the other two categories); to 15% (food & beverages, computers, digital cameras, furniture, household appliances, toys & games, newspapers, books and magazines).
Takeaways
Always cooperate with a local partner.
If you are small, go with a narrow cross-border dependent platform outside the top 10.
Your market entry should be underpinned by an omnichannel marketing execution covering website, WeChat and Weibo to actively engage the consumer.
