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1ANINTRODUCTIONTOE-COMMERCEINCHINAWithofficesinShanghaiandBeijing,SovereignChinawascreatedbythemergerofSovereign'sexistingChinaoperationsandtheJLJGroupin2013.
TheJLJGroupwasestablishedin2003toaccelerateinternationalclients'abilitytounderstandandoperateintheChinamarketandhassuccessfullyassistedmorethan600companiesfromover50countrieswiththeirChinamarketentry.
SovereignChinaprovidesasuiteofservicesdesignedtoleadforeigninvestorsthroughthemarketentryprocessandtosupportthemtodeveloplong-termsuccessinChina.
Wearewithourclientsfromplanningtoexecution–fromassistingwithunderstandingthemarketanddevelopingamarketentrystrategy,throughtoestablishingoperationsandprovidingbackofficeandcompliancesupportservices.
2ABOUTSOVEREIGNCHINASovereign(China)LimitedMray@Sovereigngroup.
comSovereigngroup.
com/ChinaHowSovereignCanHelpYouWithofficesinmorethan30countries,TheSovereignGroupisequippedtohelpyouwithyourmarketentryandcorporateservicesneedsthroughouttheglobe.
IntheAsiaPacific,Sovereignhasthecapabilitiestoassistyouinanumberofareas,including:MarketresearchandmarketassessmentPartnersearchandvettingMarketentrystrategydevelopmentLocationanalysisCorporatestructuringTaxandaccountingservicesOtherconsultingandcorporateservicesEnquiriesShouldyouhavee-commercerelatedenquires,orneedinformationonotherareasoftheChinamarket,pleasevisitourwebsiteatSovereigngroup.
com/ChinaorcontactMarkRayatMray@sovereigngroup.
com3MethodologyAndInformationSourcesGenerallyspeaking,conductingmarketresearchinChinaisdifferentandsignificantlymorechallengingthanitisindevelopedcountriesbecauseof1)thesizeanddiversityofthecountry;2)lackoffullyreliablecentralized/officialinformationdatabases;3)thechangeisconstantandextremelyrapid-thewholeChinaeconomicsystemisfarfrombeinginequilibrium.
Thereforesolidmarketresearchworkmustbebasedonmultipleresourcesandactivities.
Inthereport,sourcesarementionedforcharts,tablesandkeydata;secondarysourcesincludedozensofChineseandEnglishsources,includingnewsreports,magazines,publications,variouswebsites,governmentstatistics,andsoon.
Oftenwemention"Sovereignanalysis"asoneofthesources;thisreferstoourelaborationandanalysisofqualitativeandquantitativedatacollected.
Inadditiontosecondarysources,Sovereignconductedanumberofinterviewswithindustryinsidersandexperts.
AkeycontributorisKungFuData,whichprovidedkeymarketplacedataforanalysis.
KungFuDataKungFuDataofferedkeyinsightsandcontributedtothedevelopmentofthisreport.
AsaleadinganalyticsandoptimizationpartnerforTmallandJD,KungFuData'smissionistoleveltheplayingfield.
Expertsinflagshipoptimizationandbrandcontrol,KFDworkswithaselectportfolioofFortune500brandsdrivingrevenuestonumber1intheircategoryaswellasprovidingTMallkeyaccountactivation,thirdpartyauditing,reselleroversight,andperformancemanagement.
KungFuDataofferscompletetransparencyandaccountabilitywithfulldedicatedresources:+70employees,3bi-lingualofficesinBeijing,Shanghai,andSanFrancisco.
Ourclientsenjoythehighestshareofbrand,averageunitprices,andgrowthratesamonglikecompetitorsincategory.
DisclaimerThisreportisintendedtoprovideageneraloverviewofe-commerceinChinaandactasaguideforcompanieswithinterestintheChinamarket.
Itisnotintendedtoprovideexhaustivecoverageofthetopicandreadersshouldbeawarethatpolicies,regulationsandgeneralmarketconditionsrelatedtoe-commerceinChinaevolverapidly.
TheinformationhereinismadeavailableontheunderstandingthatSovereignChinaisnotprovidinglegal,financial,oranyotherformofprofessionaladvice.
Therefore,whileallcarehasbeentakentoensuretheaccuracyoftheinformationinthisreport,SovereignChinadoesnotacceptresponsibilityforanylossesincurredthrougherrorsoromissionsinthisreport.
Anypersonrelyingonthisreportdoessoentirelyattheirowndiscretionandattheirownrisk.
SovereignChinastronglyrecommendsthatreadersobtainindependentlegal,financialandrelatedformsofprofessionaladvicepriortoactinguponinformationinthisreport.
SovereignChinaassumesnoresponsibilityforanycompany,productorservicementionedinthisreport,norforanyactoromissionofanybusinessconnectedwithsuchproductsandservices.
4CONTENTSEXECUTIVESUMMARY5CHINA'SE-COMMERCEMARKET7MarketSituation7ImportanceofMarketplacesinChina9KeyProductCategories9ChineseConsumers10E-commerceEcosystem12ENTERINGTHECHINAMARKET17TraditionalEntry17SettingUpOnADomesticE-commerceMarketplaces18EnteringThroughCross-BorderE-commerce23LOGISTICS27ImportTariffs27Cross-BorderShipments29PAYMENTS31WithinChina31Cross-borderpayments31CONCLUSIONS32Opportunities32KeyChallenges32PracticalAdviceForApproachingTheMarket35EXECUTIVESUMMARYNowtheworld'slargest,China'se-commercemarkethasgrownby50%peryearsince2011andisexpectedtobeworthUSD1trillionby2019.
CompanieslookingtoselltoChineseconsumersshouldseriouslyconsidere-commerceasaviableandcost-effectivechanneltomarket.
Inacountrywheretraditionalchannelsofcommerceareunderdeveloped,e-commerceprovidesChineseconsumerswithanabundanceofchoice,accessibility,andotheradvantages.
MillionsofChinesenowhaveaccesstoahugeselectionofforeignanddomesticproductsthatwerepreviouslyunavailable.
Thisisespeciallytrueinthecountry'sdevelopingregions,whichaccountforamajorityofthecountry'sgeographicalarea.
Chineseconsumers,especiallytheemergingmiddleclass,arespendingmorethaneverbeforeononlinemarketplaces,spendinganywherefrom17to27percentoftheirdisposableincomeononlinepurchases.
Salesareespeciallystrongintheapparelandconsumerelectronicscategories.
Otherkeycategoriesincludecosmetics,food&beverageproducts,andbaby&mothercareproducts.
SellingonlineinChinacanbeassimpleasshippingdirecttotheconsumerfromoverseasusinganexpressorpostalservices,orthroughengaging3rdpartyserviceprovidersthatcanmanageandfacilitatenearlyeveryaspect.
Partnersandserviceproviderscanassistarecompletelymanagethelogisticalprocess,includingcustomsclearance,platformsearchoptimization,payment,brandbuilding,andotherimportantareasrequiredtosuccessfullygetyourproducttoChineseconsumers.
Ifdecidingtoworkwith3rdpartyserviceprovidersandpartners,itisimportanttoworkwithreputablecompaniesthathaveworkedwithforeigncompaniesbeforeandhaveasuccessfultrackrecord.
Althoughthesizeofthemarketisenticing,China'se-commercemarketisnotwithoutitschallengesandrisks.
Governmentpoliciesandregulationsareusuallyopaque,complicatedandpronetochangeswithoutnotice,whichcanbeextremelyfrustratingorevendisruptivetobusinessplans.
CompaniesmustrecognizethattheChinesee-commercemarketisextremelycompetitive(brutallyso)andunforgiving.
Changesinthemarketdynamicscanbesuddenandrapid.
MerelyhavingyourproductslistedonaChinesemarketplacedoesnotmeanthatyouwillbesuccessful,orevenprofitable.
Successfulmarketentryviaanychannelrequiresawellthought-outstrategyandanongoingcommitmentofresources,evenwhensellingthroughe-commercechannels.
AlltoooftencompaniesfailtocommitthenecessarytimeandresourcestotheirChinae-commercebusinessandthenwonderwhytheyarefailing.
56CHINAISTHEWORLD'SLARGESTE-COMMERCEMARKETAlreadymorethanUS$650BillioninSalesExpectedtoreachUS$1Trillionby2019460MILLIONONLINESHOPPERSShoppersare:54%46%andbuy:ElectronicsApparelCosmeticsHomeDecorMaterityBabyWithadisposableincomeof:USD5,00090%OFSALESTHROUGHMARKETPLACESCHINA'SE-COMMERCEMARKETATAGLANCETmall58%JD25%Other7%Suning3%Vipshop2%Gome2%Yihaodian7%Amazon7%POSITIVESARETHAT:UnderdevelopedtraditionalretailsectorReadyconsumersInfrastructuredevelopedNEGATIVESARETHAT:BrandactivationcanbedifficultHighlycompetitivemarketSometimescompetingwithowndistributorsandpartners7MarketSituationGeographically,Chinaisaverylargecountrythatisextremelydiverseandexperiencinganextendedperiodofrapideconomicandsocialdevelopment.
Inmanyways,Chinaisnotasinglemarket,butratherasetofmultiplemarkets.
Becauseofthis,traditionalretailchannelsinChinaarestillregionalizedandhighlyfragmented.
Thiscreatesanumberofchallengesanddifficultiesforretailcompaniesthatarelookingtoscaleupanddevelopnationalcoverage,creatingtheperfectenvironmentfore-commercetothrive.
Chinahasbecometheworld'slargeste-commercemarketwithonlineretailsalesgrowingfromUS$20billionin2008tooverUS$646billionin2015;themarketisexpectedtoreachUS1trillionby2019.
Thechartbelowprovidesanillustrationofthisexplosivegrowth.
CHINA'SE-COMMERCEMARKETOnlineretailsalesgrowingataCAGRof64%from2008-2015Source:Sovereignanalysisonmultiplesources;CAGRCompoundAnnualGrowthRateThreefactorshavebeenthemaingrowthdriversofe-commerceinChina,whichinclude:1.
Demandreadiness–China'smiddleclassnowexceeds400millionpeoplewithanationalaverageincomeofUS$12,000peryearandspendonaverage18to27percentoftheirdisposableincomeononlinepurchases;2.
Technologyinfrastructure–Therearemorethan632millioninternetusersinChinawithapenetrationrateofnearly47percent.
Mobile3Gand4Gnetworkscontinuetoexpandandthesmartphonepenetrationrateisabout66percentandgrowing;3.
Supportinfrastructure–Logisticsanddeliveryserviceshaveexpandedrapidlyinrecentyears.
Servicestandardsoftenincludesamedaydeliveryatminimalcost.
Furthermore,onlinepaymentplatformssuchasAlipayandWechatPayhavemadeonlinepaymentseasierashastheexpandeduseofcreditcards.
OnlineretailsalesgrowingataCAGRof64%from2008-2019(e)200820092010201220112013201420152019E2022831,0006464522982101268CannibalizationofTraditionalChannelsAlthoughe-commercesalesaregrowingrapidly,onlinesalesarenotallsupplementaltothegrowthofChina'sretailmarket.
Inmanycases,consumersareeschewingtraditionalchannelsinfavourofmakingpurchasesonline.
Assuch,onlinesalesare,tosomeextent,cannibalizingsalesfromtraditionalretailchannels.
Forexample,UnileverPLC'ssalesin2014plungedasonlinesalesincrease.
SwissfoodcompanyNestléSAfacedasimilarchallengeastheycouldnotsellthebulkoftheirinstantcoffeeinphysicalstores.
MallssuchasBeijing'sZhongguancunelectronicsmarketwereoncepackedwithsellersandbuyers.
However,theyhavenowevacuatedasE-commerceplatformscannibalizethemarket.
Source:Sovereignanalysisonmultiplesources,includingTheWallStreetJournal9ImportanceofMarketplacesinChinaUnlikee-commercemarketsinmuchoftherestoftheworld,China'se-commercemarketisdominatedbymarketplacesratherthanstand-alonewebsites.
Ane-commercemarketplaceisaplatformwhereproductsarelistedbymultiplepartiesandthetransactionsarefacilitatedandprocessedbythemarketplaceoperator.
Amazonisawell-knownexampleofamarketplaceinNorthAmericaandEurope.
Taobao,thelargestconsumer-to-consumer(C2C)marketplace,andTmall,thelargestbusiness-to-consumer(B2C)marketplace,bothunderAlibabaGroup,dominatetheoveralle-commerceretailmarketaccountingforabout80percentoftotaltransactions.
WithintheB2Csegment,Tmallaccountsforalmost60percentofthemarket.
ThechartbelowillustratestheleadingB2CplayersinChina'se-commerceindustrywiththeirapproximatemarketshare:TmallandJDarethetwodominantB2CmarketplacesSource:Sovereignanalysisbasedonmultiplesources;Note:figureshavebeenroundedMarketShareOfB2CMarketPlatforms(2015)KeyProductCategoriesApparelandconsumerelectronicsarethemostpopularproductcategoriessoldonlineaccountingfornearly50percentofallsales.
Thechartbelowillustratesthekeyproductcategoriesforonlinesales.
China'se-commercemarketisextremelyvibrantandcanpotentiallyprovidecompanieswithanaffordablewaytoaccessChina'sconsumers.
Itisstillimportanthowever,tounderstandtheintricaciesanduniquedynamicsofthemarketandtheconsumersshoppingonline.
E-commerceCategorySales(2015)CategoryPercent1.
Apparel27%2.
ConsumerElectronics20%3.
Cosmetics5%4.
Infant&MotherCare5%5.
Publications3%6.
F&B2%Tmall58%JD25%Other7%Suning3%Vipshop2%Gome2%Yihaodian7%Amazon7%10ChineseConsumersChinahastheworld'slargestonlinepopulationwithmorethan600millioninternetusers.
Thepenetrationrate,however,isonlyabout47percent,leavingsignificantroomforgrowth.
Thenumberofonlineshoppershasgrownrapidlyfrom74millionin2008,tomorethan460millionin2015,acompoundannualgrowthrate(CAGR)ofnearly30percent(seechartbelow).
Thenumberofonlineshoppershasgrownrapidlyfrom74millionin2008tomorethan460millionin2015.
Source:SovereignAnalysisonmultiplesourcesChart:NumberofOnlineShoppersInadditiontothegrowingnumberofshoppers,incomesofshoppershavealsoincreased.
Urbandisposableincomelevelshavegrownatacompoundannualgrowthrate(CAGR)of11percent,risingfromUS$2,500in2008toaboutUS$4,700in2014.
Since2008,urbandisposableincomeshavenearlydoubled,andruraldisposableincomeshavemorethandoubled.
Source:SovereignAnalysisonmultiplesourcesChart:DisposableIncomeImportantNoteAlthoughChina'se-commercemarketprovidescompanieswithanadditionalmeanstoaccessanextremelylargeconsumermarket,itisimportantforcompaniestounderstandtheintricaciesanduniquedynamicsofthemarketandconsumers.
China'se-commercemarkethasitsuniquesetofhurdlesandchallenges,andcompaniesneedtofullyunderstandandcommitthenecessaryresourcestothemarket.
200820092010201220112013201420157410816126%46038030224720322%22%26%21%46%49%MillionofPeopleGrowthRate20082009201020122011201320142,5051,6111,4491,2571,1079408187624,6984,3903,8993,4623,0332,726UrbanDisposableIncomePerCapita(USD/Year)RuralDisposableIncomePerCapita(USD/Year)1120-2956%503%40-498%30-3923%1,001-3,00036%3,001-5,00029%8,00011%5,001-8,00012%MuchofthewealthisconcentratedalongcoastalprovincesandinTier1cities.
E-commerceisprovidingconsumerslocatedintheinlandprovincesandlowertiercities,marketsunderservedbytraditionalbrickandmortarretailchannels,withaccesstoanexpandedselectionofbothforeignanddomesticproducts.
OnlineshoppersinTier1citiesspendthemostmoneybuyingproductsfrome-commercechannels;however,onlineshoppersinlowerTiercities(i.
e.
Tier3andTier4cities)spendahigherpercentageoftheirdisposableincomeshoppingonline.
Thechartsbelowillustratesthis.
Source:McKinseyGlobalInstituteandSovereignAnalysisFifty-fourpercentofonlineshoppersaremale,while46percentarefemale.
Maleshoppersusuallypurchaseelectronicproductswhilefemaleshopperstendtopurchaseapparel,cosmetics,homedécor,maternityandbabyproducts.
Themajorityofonlineshoppersarebetweentheagesof20and39yearsoldwithincomesbetweenRMB1,000toRMB5,000permonth2.
ThechartsbelowprovideanageandincomesnapshotofChina'sonlineshoppers:Source:SovereignAnalysisonmultiplesources,includingCNNICNote:Incomefiguresaretheactualestimatedincomesoftheindividualsshopping.
However,manyindividualsaresubsidizedbytheirparentsinvariouswaysandareabletospendmost,ifnotmorethan,theirreportedincomes.
Onlineconsumptionperonlineshopper(RMB)%ofdisposableincomespentononlineshoppingTier1Tier2Tier3Tier46,8194,9224,6244,467Tier1Tier2Tier3Tier418172127AgeofChina'sOnlineShoppersMonthlyIncomeofChina'sOnlineShoppers(RMB)12E-CommerceEcosystemChina'se-commerceecosystemconsistsofmanystakeholders.
Inmanyways,itdifferssignificantlyfromtheecosysteminothermarkets,especiallyintheareasofproductsearch,delivery,andoperations.
Theecosystemconsistsofmarketplacesandmanythirdpartyserviceprovidersthatsupportcompanieswithlogistics,paymentprocessing,onlinestoremanagement,andinotherareas.
Ahigh-levelecosystemmapbrokendownbyfunctionisillustratedbelow:EcosystemSegementDescriptionExamplesOthermarketsChinaBrandWebsiteAPP/MobilemarketsMarketplacePlatformsPaymentWarehousing/3PLDomesticandinternationaldeliverySoftware&InfrastructureIntegratedPartnersandTPPartnersOnlinemarketingchannelssuchassearchengineoptimization,socialmedia,andtrafficoptimizationwithindomesticandcross-bordermarketplaceplatformsThirdpartyserviceprovidersthatfacilitatepaymentsthroughcreditcardorbankaccountCompaniesproviding3rdpartylogisticsservices(3PL)includingthephysicalstorageofgoodsExpresscompaniesprovidingdeliveryservicestoendcustomerSoftwaretoolssuchasERP,CRM,aswellasthephysicalITinfrastructuretosupportonlinesalesPartnerstowhombrandscanoutsourcecompleteorpartialmanagementandexecutionoftheire-commerceoperationsGooglePaypalUSAFulfillmentUPSFedExOracleDigitalRiverTmallJDAlipayCainiaoSFExpressSinoTransMagentoChinaNetcloudKungFuDataOperations/SupportProductSearchPaymentFulfillmentDeliverySource:SovereignanalysisonmultiplesourcesincludinginterviewswithindustryexpertsAsidefromthegeneralreadinessofChineseconsumersdiscussedearlier,thereareanumberofreasonswhythereisapreferencetopurchasegoodsonline.
Fourkeyreasonsare:Choice–Thetraditionalbrickandmortarretailsectorissignificantlyunderdeveloped.
E-commerceprovidesconsumerswithgreaterchoiceofproducts.
Convenience–DeliveryserviceshaveevolvedrapidlyinChina.
Inmostcases,onlinepurchasesaredeliveredwithinoneortwodays.
Price–Competitiononlineisextremewithpriceoftenbeingakeyfactor.
Thepricesofferedthroughonlinechannelstendtobemoretransparentandaremanytimesthelowestglobalpriceforaproduct.
Furthermore,fulldutiesandVATareusuallynotbeingpaid.
Onlineconsumerstendtogetabetterpricethantheywouldattraditionalbrickandmortarstores.
Trust–Whenpurchasedonamarketplace,retailersarerequiredtoacceptreturnsandexchanges,noquestionsasked,whichisuncommonforsmallbrickandmortarretailsstores.
Furthermore,amarketplacewillusuallyattempttoensurethatgoodssoldarenotcounterfeit.
13ProductSearchBrandwebsiteInChina,companywebsitesareprimarilyusedforbandbuildingorconsumerengagement.
Abrand'swebsiteinChinaisnottypicallyseenasadirectsalesplatform;salestransactionsgenerallytakeplaceonmarketplaces.
FewconsumersinChinaarebi-lingual.
CompaniestargetingChineseconsumersshouldmaketheirsiteavailableinChinesecharacters.
SearchenginesandsearchengineoptimizationTheChinesegovernment'sGreatFirewallofChinablocksaccesstokeywebsitesandsearchengines,suchasGoogle.
Therefore,companiesshouldfocusSearchEngineOptimization(SEO)investmentonChinesesearchengineslikeBaidu.
However,asmosttransactionsareconductedonmarketplace,optimizingthein-platformSEOwillbemorebeneficialassumingthecompanyhasastoreonthemarketplace.
SocialmediaSocialmediasuchasWeChatandWeiboareimportanttotheoverallmarketingofabrandinChina.
WeChatcurrentlyhasover500millionsubscribersinChinaandisextremelypopularamongtheyoungerandaffluentdemographic.
Socialmediaisusedbyconsumerstorateanddiscussproducts,andcanalsobeusedbybrandsformarketing.
AlegalentityinChinamayberequiredinordertoestablishacorporateaccountonsomeofChina'ssocialmediaplatforms.
APP/mobilemarketsMobileapplications(APPs)areextremelypopularinChinaduetothehighpenetrationrateofsmartphones.
Manyleadinge-commercemarketplaceplatforms(e.
g.
Tmall,Jumei,Yhd,andJD)havelaunchedmobileapplicationsallowingconsumerstoshopconvenientlyonmobilephonesandtablets.
Additionally,JDcooperateswithWechattosellsomeproductsontheWechatAPP,asillustratedinthegraphicinthesidebar.
MarketplacesThemarketplacemodeldominatesChina'se-commercelandscape,accountingformorethan90%ofonlineretailtransactionsandisoneofthemostimportantaspectsofthee-commerceecosystem.
ThereareseveraltypesofmarketplacesinChina,includingBusiness-to-Business-to-Consumer(B2B2C),suchasJD,Business-to-Consumer(B2C),suchasTmall,andConsumer-to-Consumer(C2C),suchasTaobao.
Business-to-Business(B2B)sitessuchasAlibabaalsoexistinthemarket.
BelowisanexampleofJD'sadvertisementappearingonaWeChatconversationthread14Inadditiontolargedomesticmarketplaces,therearealsocross-bordermarketplacessuchasTmallGlobal,aswellassmallerspecializedmarketplacesthatfocusonahandfulofproductcategoriessuchasMei.
com.
Marketplaceswillbediscussedinmoredetaillater.
PaymentThird-partypaymentplatformsThird-partypaymentplatformsareanextremelypopularmethodforpurchasinggoodsonlinewithmorethan358millionusers.
ThemajorityofpaymentsaremadethroughChina'stwodominantplatforms;Tencent'sWeChatpaymentandAlibaba'sAlipay.
ApplePaywaslaunchedinChinainlateFebruary2016.
ItiscurrentlyunclearhowwellApplePaywillbereceivedbyChineseconsumers.
CreditcardsTheuseofcreditcardshasbeenexpandinginrecentyearswithpenetrationratesexceeding45percent,makingonlinetransactionsmucheasiertocomplete.
Chinesecreditcards,suchasVisaandMasterCard,areacceptedbydomesticandcross-bordermarketplacesandshouldworkonwebsiteshostedoverseas;howeverthesettlementcurrencywillmostlikelyneedtobeU.
S.
dollars.
Fulfilment3rdpartylogisticsproviders(3PLs)Insomecases,fulfilmentcanbemanagedbythemarketplaceplatform.
However,somecompaniesmaywanttouseanindependentThirdPartyLogistics(3PL)provider.
These3PLscanmanagearetailer'ssupplychainandusuallyofferwarehousingservices.
DeliveryInternationaldeliveryShippingfeesandtimingwillposeamajorhurdletocompaniesiftheproductsareshippedfromoverseasasconsumers,whoareusedtoreceivingonlineordersfromwithinChinawithinjustafewdays,maybeunwillingtowaitseveralweeksforadeliveryfromoutsidethecountry.
ProductreturnswillalsofurtherexacerbateanychallengesfromshippingproductsfromoverseasintoChina.
DomesticdeliveryIfproductsareshippedfromwithinChina,deliverytimescanrangefromthesamedaytoafewdays.
ManyinternationaldeliveryfirmsoperatethroughpartnersfordeliverywithinmainlandChina,butmaybelimitedtoafewkeycities.
DomesticdeliverycompaniessuchasShunfengandEMSareverypopularandhavevastdeliverynetworksthroughoutChina.
15Operations/SupportThirdpartymanagementcompany/Tmallpartners(TPs)Thirdpartymanagementcompanies,alsoknownasTPsorTmallPartners,areoneofthemostimportantpartnersforaforeigncompanytoconsiderforentryintoChina'se-commercemarket.
TPsarethird-partycompaniesthatmanagethestorepageofaretailerinamarketplaceplatformsuchasTmall.
TPsalsohaverelationshipswiththeplatformandcanassistindrivingtraffictoabrand'spage.
Insomecases,theycanactasturn-keysolutionprovidersandalsomanagelogistics,in-platformmediabuysandpromotionalevents.
TPscanalsoutilizedigitaloptimizationinformation,usuallyfromadataanalyticscompany,tooptimizemarketingefforts.
ThegraphicbelowbetterillustratessomeoftheservicesaTPcanprovide.
Source:SovereignanalysisonmultiplesourcesincludinginterviewswithindustryexpertsE-commercemanagementsoftwareprovidersE-commercemanagementsoftwareprovidersandcontentmanagementsystems,suchasMagento,allowcompaniestoactivelymanagetheire-commerceactivities,salesanalysisandothertoolstooptimizeactivities.
Thesetypesofsupportsystemscanbeusedbytheretailerthemselvesorbyathirdpartymanagementcompany,alsoknownasaTP.
ITinfrastructureChina'sITinfrastructureisstilldevelopingandcanposeproblemswithregardtointernetspeedswhensitesareoutsideofChinaareaccesseddueto"TheGreatFirewall",whichcaneffectivelythrottleinternettraffic.
Unfortunately,thereislittleaforeigncompanycandotoaddressthischallengeifitsserversarelocatedoutsideChina.
CompaniesmaychoosetoestablishserversinsideChinaorinoneofChina'sFreeTradeZones,whichwouldrequiretheassistanceofpartnersprovidinginfrastructuresupport.
Brand/RetailerActsonbrand'sbehalfmanagingmarketplacesalesTPOperatesmarketplacesales,digitaloptimizationandtrafficActsonbrand'sbehalfoptimizingmarketplacesalesMarketplaceOptimizeevents,traffic,media,impressions,CTR,conversionConsumers3PL/Delivery$GovernmentTheChinesegovernmentaffectsthee-commerceecosystemthroughpolicyandtrademeasures,suchasimportregulations,tariffsandtestingrequirements.
TheGACC(GeneralAdministrationofChinaCustoms)andSAIC(StateAdministrationforIndustryandCommerce)arethetwomainbureausforeigne-commercecompaniesshouldbeawareof.
TheChineseGovernment,uptothispointatleast,hasallowede-commercetodevelopwithoutagreatdealofintervention.
Somecross-bordere-commercetransactionshowever,areattractingthegovernment'sattentionduetothecircumventionofimporttaxesandotherregulations.
TheChinesegovernmenthasintroducedanumberofpoliciestosupportandregulatee-commerce.
Policieshavebeenevolvingrapidlyinrecentyearsandareexpectedtocontinuetodoso.
16ImportantNoteAlthoughChina'se-commerceecosystemiscomplicated,foreigncompaniesshouldfocusonunderstandingthemarketplaceplatformsandidentifyingastrongTPpartnertoworkwith.
Thesetwoareasarecriticalforsuccessinthemarket.
Identifyingandvetting3rdpartylogisticsproviders(3PLs)willalsobeimportantandcouldaffectthecompany'sdistributionstrategy.
17ENTERINGTHECHINAMARKETTraditionalEntryThereareseveraloptionsavailabletocompanieslookingtoentertheChinamarket.
Onesuchoptionistoestablishacompany(foreigninvestedenterprise,orFIE)inordertoconductcommercialactivitiesandtosupportpartnersinthemarket.
Establishingalegalentityintheformofaforeigninvestedenterprise(FIE)suchasaWhollyForeignOwnedEntity(WFOE)oraJointVenture(JV)inChinaisafrontloadedprocessthatcanbequitearduousduetotheamountofbureaucraticredtape.
Typically,theregistrationprocesscantakeanywherefromthreetoninemonthstocomplete,plusanytimeittakestoconductduediligenceonpotentialpartners.
AfterestablishingalegalentityinChina,localforeigninvestedenterprisesareabletoconductarangeofcommercialactivitiesdependingonthelicensestheyhave,andareeligibletoestablishastoreononeofChina'sdomestice-commercemarketplaces.
IfthebrandhassetupanFIEinchina,theyarealsoabletosetupaflagshipstoreononeofChina'sdomestice-commercemarketplaces.
(Thetypesofstoresavailableonmarketplacesarediscussedinmoredetailbelow.
)Alternatively,foreigncompaniesmayidentifyapartnerorpartnerstoimportanddistributetheirproductsinmainlandChina.
Distributioncansellacompany'sproductsthroughbrickandmortarretailstoresand/orthroughe-commercechannels.
Distributorsareabletosetupstoresonmarketplaces.
DependingonthelicensingandIParrangements,adistributororpartnercansetupasinglebrandstoreonamarketplaceorevenaflagshipstore1.
FormoreinformationonsettingupalegalentityinChina,pleaserefertoSovereign'sChinaMarketEntryHandbook,whichcanbedownloadedat:https://www.
sovereigngroup.
com/china/china-additional-services/china-market-entry-handbook/12016EditionCHINAMARKETENTRYHANDBOOK1|VATofmostproductsinChinais17%;however,VATofsomeproducts(e.
g.
seafood)is13%18SettingUpOnADomesticE-commerceMarketplacesOverviewChina'se-commercemarketcanbedividedintotwobasiccategories:marketplacesandindependentwebsites.
Unlikemuchoftherestoftheworld,e-commerceinChinaisdominatedbythemarketplacemodel,whichaccountsformorethan90percentoftotaltransactionvolume.
Websitesestablishedbyindependentmerchants,evenlargeretailers,accountforlittleinthewayoftransactionvolumeandareprimarilyusedasmarketingtools.
Independentonlineretailerssufferapproximatelya4percentEBITDA2losswhilemerchantsoperatingonmarketplacesexperiencea9percentpositiveEBITDA3.
ThemarketplacemodelhastakenrootinChinafortworeasons;firstly,theunderdevelopedoff-lineretailindustry,andsecondly,thedifficultyinsettingupanindependentretailsite,whichrequiresasignificantamountoftimeandinvestment.
Marketplacesareespeciallyadvantageoustomerchantslackingthevolumeofsalestojustifysuchalargeinvestment.
Forindividualandsmallscalesellers,thebiggestadvantageofsellingthroughmarketplacesistappingintothehugeaggregatetrafficflowthatthesiteshavedeveloped.
Furthermore,marketplacesassistbusinessesinquicklylaunchingstorefrontswithminimalupfrontcosts,providingmanyofthetoolsthemerchantneeds.
Fortheconsumer,marketplacesofferaconvenientlocationtoshopandoftenhavesomeconsumerprotectionsinplace.
Thesemayincludereturnpoliciesandassurancesthattheproductsaregenuine,whichisespeciallyimportantascounterfeitproductsarerelativelycommoninChina.
Thereareanumberofdifferentmarketplacesoperatingundervariousmodels,suchasahypermarketoronlinemall.
Companiesshouldmakeinformeddecisionsonwhichmarketplaceismostsuitablefortheirproducts.
2|EBITDA–Earningsbeforeinterest,taxes,depreciationandamortization3|Source:multiplesourcesincludingMcKinseyGlobalInstituteModelDescriptionHypermarketB2B2C(Business-to-Business-to-Consumer)Theplatforms/marketplacesactashypermarkets,buyingproductsfromproducers/distributorsandfulfillingorderstocustomers.
JD.
comandAmazon(whenAmazonisfulfillingtheorder)areexamplesofthismodel.
OnlineMallB2C(Business-to-Consumer)Theseplatforms/marketplacesallowbusinesstoselltoconsumersviastore-fronts,alsoknownasonlinemalls.
Tmallisanexampleofthis.
Amazonalsousesthismodelwhenproductsarenotfulfilledbythirdpartycompaniesontheplatform.
BazaarC2C(Consumer-to-Consumer)Theseplatforms/marketplacesallowindividualstosellproductstootherconsumers;effectivelyanonlinebazaar.
TaobaoandEbayareexamplesofthismodel.
Source:SovereignanalysisonmultiplesourcesNote:VariousB2Bmodelsexistaswell;however,thesearenotincludedintheabovetableasthisreportfocusesontheconsumeraspectofe-commerce.
Furthermore,itispossibleformarketplacestoincorporatemultiplemodels.
Forexample,JD.
comoperatesbothaB2B2C(hypermarket)andB2C(onlinemall)modelintheirmarketplace.
19HypermarketmodelAhypermarketisamodelinwhichtheforeigncompanysellstheirproductdirectlytoanonlineplatform.
Thisissimilarinmanywaystosellingtoadistributor.
Inthiscase,theonlineplatformmanagesallaspectsofsales,distributionandmarketing,makingitarelativelysimpletransactionfortheforeigncompany.
Withthismodel,thecompanyisnotdirectlyinvolvedine-commerceinChina,butrathersellingtoane-commerceplatform,makingitamorestraightforwardandsimpletransaction.
OnlinemallmodelTheonlinemallmodelallowscompaniestosetup"stores"onthemarketplacewhichareoperatedbythecompanyorapartner.
Inthiscasethemarketplaceactsastheplatforminwhichthestoresoperate.
Therearetypicallythreetypesofstoresavailableonmarketplacesusinganonlinemallmodel,whicharedetailedbelow.
FlagshipStore–Onlythebrandorthebrand'smasterlicenseholderwithfullrightstoIPcanopenaflagshipstore.
Fordomesticplatforms,alegalentityinChinamustexist.
AflagshipstorehasthehighestpriorityforMXD(MingXingDian)traffic(freelivetrafficfromtheplatform)andhasallmediachannelsavailabletoit.
Ifrunproperly,theflagshipstorecanmanageresellers(exclusiveshops),actingasabrandcontroltool,setbrandstandards,andcapturerevenuethroughthebrand'sownchannel.
ExclusiveShop–Anexclusiveshopisasinglebrandstorefrontonamarketplacethatistypicallyrunbyanauthorizedresellerofthebrand.
Theresellerhasrightstousesomeofthebrand'sIP,forexamplethebrandlogo.
BoutiqueStore–Aboutiquestoreisamulti-brandstorefront.
Thestorefrontmaynothaveanyrelationshipwiththebrandasitisjustactinglikeare-seller,usuallywithseveraldifferentbrandsbeingsold.
BazaarmodelAbazaarismodelinwhichindividualsselltheirproductsdirectlytoconsumersviaanonlineplatform.
Inthiscase,theonlineplatformactsastheintermediaryonly.
Theplatformmaybeintegratedwithotherserviceproviderssuchthirdpartypaymentorlogisticsproviders.
Acompanyoritspartnerscansetupstoresonbazaarsinordertosellproductsiftherequirementsoftheplatformaremet.
However,trustisaconcernamongconsumersshoppingonbazaarsandsellingproductsonabazaarmayimpactthecompany'sbrand.
AflagshipstoreisnotnecessarilythebestwaytolaunchabrandinChina.
Itisusuallybesttowaituntilthebrandhasestablisheditselfandrevenueishighenoughtojustifythecosts.
Multipleexclusiveshops,setupbyauthorizedresellers,canexistforasinglebrand.
Thisapproachhasarelativelylowriskprofile,andissimilartoenteringthemarketthroughdistributionpartnersKeydomesticmarketplacesTmall,JD,andYiHaoDianareChina'sleadingmarketplaces,andcollectivelyhaveover600millionregisteredusers.
Thesemarketplacesoperatethroughahypermarketand/oronlinemallmodel.
Somemarketplacessellgeneralmerchandise,suchasJD.
com,whileothersspecialiseinspecificproductcategories,suchasYiHaoDian.
InJune2016,WalmartsoldYiHaoDiantotoJD.
com.
Tmall(www.
tmall.
com)LaunchedbyAlibabaGroupin2008,TmallisChina'slargestonlinemarketplacefordomesticandforeignbrandsandtheirpartners.
Tmalloffersflagshipstorefrontsforbrands,exclusiveshopsforexclusiveresellers,andboutiquemulti-brandstores.
JingDong(www.
JD.
com)JingdongisoneofChina'skeymarketplacesandthelargestonlinedirectsalescompany.
BasedinBeijingandtradedonNasdaq,thecompany'soriginalB2Cmarketplacewentonlinein2004.
In2007,thedomainnamechangedto360buy.
comandin2013itchangedtoJD.
com.
YiHaoDian(YHD)Launchedin2008,YiHaoDianisaShanghai-basedmarketplacefocusedonsellingpremiumgroceries.
Walmartbeganinvestinginthecompanyin2011andeventuallycompletedafullbuyoutinJuly2015.
Thecompanyislicensedtodirectlyimportanddistributegoodsfromoverseas.
InJune2016,WalmartsoldYiHaoDiantotoJD.
com.
2021InadditiontoTmall,JDandYiHaoDian,therearenumerousspecializedmarketplacesinChina.
Inrecentyearsthenumberofnewmarketplaceshasbeengrowingrapidly.
Thechartbelowisasmallsample.
NameWebsiteKeyProductsAmazonwww.
amazon.
cnGeneralmerchandiseDangdangwww.
dangdang.
comBooksTmallGrocerywww.
chaoshi.
tmall.
comF&BSFBestwww.
sfbest.
comF&BFieldswww.
fieldschina.
comF&BEpermarketwww.
epermarket.
comF&B51Shuichanwww.
51shuichan.
comSeafoodFruitDaywww.
fruitday.
comFruitMaijiuwangwww.
maijiuwang.
comAlcohol&spiritsYesMyWinewww.
yesmywine.
comWineWinekeewww.
winekee.
comWineVIPSHOPwww.
vip.
comFashion/luxuryMeiwww.
mei.
comFashion/luxuryVanclwww.
vancl.
comApparelGomewww.
gome.
com.
cnElectronics/appliancesSuningwww.
suning.
comElectronics/appliancesLAMALLwww.
LAMALL.
comBabyproductsMuyingzhijiawww.
muyingzhijia.
comMaternityandbabyproductsSource:Sovereignanalysis22MarketplacerestrictionsandrequirementsIfyourcompanyintendstosellproductsdirectlyonadomesticmarketplacesuchasTmallorJD'sonlinemall,alegalentitysuchasaJointVenture(JV)oraWhollyForeignOwnedEnterprise(WFOE)isrequiredinChina.
Furthermore,thespecificmarketplacemayhaveotherrequirements,includingtrademarkseasoning,registeredcapitalrequirementsandyearsinoperation.
Alternatively,companiescanworkwithplatformsthatactasahypermarket,oralocalpartnerthatcanimportanddistributegoods.
Yourlocalpartnermaybeabletosetupane-commercestorefrontorusetheirexistingstorefrontonvariousmarketplaces.
"Double11"–SinglesDayNovember11this"SinglesDay"inChina,whichisapromotionalsalesdaylaunchedin2009byAlibabaGroup,theoperatorofTmallandTaobao,China'stwolargestmarketplaceplatforms.
SinglesDay,tantamounttoanonlineversionofBlackFriday,caughtonrapidlyandsalesgrewfromRMB1.
9billion(US$300Million)in2010toRMB91.
22billion(US$14.
33billion)in2015.
ThesuccessofSingle'sDayhaspromptedotherplatformstoalsoruntheirownSingle'sDaystylepromotions.
Double11isnowanentrenchedsaleseventforallmajore-commerceplayersandhasbecomeamajorbonanzawithhugeturnover.
However,thesalesnumbersrepresentablitzinbuyingfora24hourperiod.
TheweeksleadinguptoNovember11andtheweeksfollowingtendtoberelativelyslowperiods.
Furthermore,merchandiseisheavilydiscounted,resultinginvirtuallyzeromarginsandtheofficialfiguresdonotaccountforreturnedmerchandise.
RetailersparticipatinginDouble11arerequiredtoprovidedeepdiscounts,virtuallyeliminatinganymargins.
However,salesgeneratedduringDouble11affecttheretailer'soveralltrafficandcanboostsearchtrafficinthefuture.
23EnteringThroughCross-BorderE-commerceSellingproductsinChinathroughcross-bordere-commercechannelsisalowerriskapproachtothemarketasitrequiresrelativelylittleinvestmentfromthecompany.
Cross-bordere-commercehasexpandedsignificantlyoverrecentyearsandthegrowthisexpectedtocontinueinthecomingyears.
Since2012,theChinesegovernmenthasdonelittletorestrictthedevelopmentofcross-bordere-commerce,allowingittoexpandandgrowinarelativelyunregulatedenvironment.
Thishasrecentlybeenchanging,however,withtheintroductionofThePositiveList(discussedlater)andareducedVATthatisnowbeingcollectedoncross-bordergoods.
Still,thismodeloffersforeignretailersameanstoreachChineseconsumerswithoutestablishingalegalentityinChina.
ManyforeignretailershaveusedthisbusinessmodeltotestthemarketinChinabeforeactuallyestablishingbusinessesinChina.
Cross-bordermodelsTherearetwomodelstoapproachthemarketviacross-bordere-commerce:1.
Company'sexistingforeign(non-Chinese)websiteItistheeasiestwaytoapproachthemarketandifthebrandisalreadyactivatedinthemarketcanbearelativelysimplewaytoselltothemarket.
However,ifthebrandawarenessisnotextremelyhigh,thismethodisunlikelytoyieldresultsasChineseconsumerstypicallyshoponmarketplaces.
2.
Cross-bordermarketplaceCross-bordermarketplacessuchasTmallGlobalandJDWorldwideoffercompaniesaccesstotheaggregatetrafficofthemarketplacewithouthavingtoestablishalegalentityinChina,orsellthroughpartnersthatlistondomesticmarketplaces.
Cross-bordermarketplacesoperateinasimilarmannertodomesticmarketplacesasdiscussedearlier;therearehypermarketsandonlinemalls.
Therearecurrentlytwotypicalmodelsforlogistics:1)DirectMailand2)BondedWarehouse(ForwardDeployedInventory).
FortheDirectMailmodel,acustomerplacesanorder,eitheronaregisteredcross-bordere-commerceplatformorthroughthecompany'swebsiteandthentheproduct(s)willthenbeshippedbydirectmailtocustomersdirectlyfromoverseaslocations.
IntheBondedWarehousemodel,whichisoftenusedwhenutilizingacross-bordermarketplace,productsareshippedinbulkandstoredinabondedwarehouseinacross-bordere-commercefreetradezone.
Whenacustomerplacesanordertheproduct(s)willbeshippedtothecustomerfromtheArecentNielsonstudyfoundthat38%ofshoppersintier1citiesand27%ofshoppersinTier2citiesmakecross-borderpurchasesonline.
Cross-bordere-commercetransactionsareexpectedtocontinuegrowing.
However,itisimportanttonotethatcross-bordertransactionsarestillonlyafractionofoveralle-commercetransactions.
Inadditiontostandardcross-bordermarketplaces,therearealsomarketplacesfor"Daigou"shoppers,whichconnectindividualshoppersoverseaswithcustomersinChina.
Daigoumarketplacesactasapeer-to-peerplatform.
Theyarenotnecessarilyusefulforbrandstosellproducts,butcanbeinstrumentalinbrandactivation.
bondedwarehouse.
Asindividualparcels,customsclearanceisusuallyanon-issue.
However,newrestrictionsarebeingputinplacewiththeintroductionofthePositiveList(discussedlater).
Thefollowingthreeareprominentcross-bordere-commercemarketplaces.
Tmall(www.
tmall.
hk)LaunchedbyAlibabaGroupin2014,TmallGlobalisChina'slargestonlinemarketplaceforforeignbrandsandretailerssellingdirectlytoChina.
TmallGlobalhasover5,400brandsfrom53countriesandregions,andover80%ofthementeredChinaforthefirsttime.
Ciaoniao,anaffiliateofTmall,canalsoassistcompanieslistingonTmall.
hk.
JingDong(www.
JD.
hk)LaunchedbyJingdonginApril2015,JDWorldwidehasover1,200foreignbrandsand450stores.
ItcooperateswitheBayonpromotingforeignbrandsonthemarketplace.
Thecompanycooperateswithinternationalthird-partylogisticscompaniesandwarehousesinthreeFTZsinChina(Ningbo,Hangzhou,andGuangzhou)toassistforeignbrandsfrom50+countries/regionswithfulfillmentanddelivery.
2425Cross-bordere-commercerestrictionsandrequirementsTherearenospeciallicensingorbusinessregistrationrequirementsforcompaniessellingproductsfromanoverseaswebsiteoronacross-bordermarketplace.
However,therearerestrictionswithregardtoproductcategories.
SomeproductsarerestrictedorforbiddenfrombeingimportedintoChinawithoutspecificlicenses.
Forexample,seafoodofanykindisnotlegallyallowedtobesoldcross-borderandimportedthroughcross-borderchannels.
Productslikethismustcomethroughnormalimportchannels.
Youshouldcheckwiththerelevantagenciestounderstandifyourproductisrestricted.
ListingproductsandsellingthemononeofChina'scross-bordere-commercemarketplacesisnotsignificantlydifferentfromlistingandsellingonadomesticmarketplace,exceptthatthecompanydoesnotneedalegalentityinChina.
Youwillstillneedtogothroughtheplatformregistrationprocessandprovidetherequireddocumentation.
Recentchangestocross-bordere-commercepolicyInApril,2016,theChineseMinistryofFinanceannouncednewtaxationpoliciestargetingcross-bordere-commerce.
Thenewpolicyreplacesthepreviouslyimplementedpostalarticlestaxappliedtopilotzonesforcross-bordere-commerce.
Underthenewpolicy,retailgoodspurchasedonlinethroughregisteredcross-bordere-commerceplatformsaretreatedasimportedgoodsandaresubjecttotariff,VATandconsumptiontax.
Thenewpolicystipulatesthatproductswithinatransactionlimit(RMB2,000persingletransactionandRMB20,000everyyearforoneperson)aresubjectto70%oftheVATandaconsumptiontax,ifany.
Tariffsarenotapplicablewithintheexemptionlimit.
Anumberofproductssoldthroughcross-bordermarketplacesarenowsubjecttoan11.
9%(i.
e.
17%x70%)VAT,insteadofthepersonalpostalarticletax,whichusedtobeclassifiedatfourdifferentrates(i.
e.
10%,20%,30%,50%)dependingontheproductcategory.
Thenewpolicieseliminatedtheduty-freeexemptionforgoodswhosetaxpayabledidnotexceedRMB50.
TheChinesegovernmentalsoreleasedinApril,2016a"ListofImportedCommoditiesforRetailinCross-borderE-commerce"-oftenreferredtoasthePositiveList.
OnlyproductsonthePositiveListarenowallowedtobeimportedthroughcross-bordere-commercezones(i.
e.
,utilizetheforwarddeployedinventorylogisticsmethod,whichisdiscussedbelow)andthePositiveListissaidtobereviewedonaregularbasis.
Fortunately,theimplementationofthePositiveListhasbeendelayedforoneyear,givingcompaniesachancetoprepareandadjusttheirstrategy.
InApril2016thecentralgovernmentissuedacross-bordere-commerceTaxCircularaffectingthetaxesappliedtoproductssoldviacross-bordere-commerce.
Morerecently,a"PositiveList"wasattachedtothecircularasarider,providingalistofproductsthatcanbesoldbymeansofcross-bordere-commerce.
Productcategoriesaffectedbythisincludecosmetics,nutraceuticals,healthfoodsandsupplements,infantformula,andotherproductswhichrequireaCFDA(ChinaFoodandDrugAdministration)certificate.
Ase-commerceevolves,changesingovernmentpolicyandregulationareinevitable.
Companiesareadvisedtokeepabreastofchanginggovernmentpoliciesinregardstoe-commerce.
ThereareadvantagesanddisadvantagestoeachofthedifferentmethodsofapproachingtheChinamarket.
Thoughtandeffortshouldbeintoyourmarketentrydecisionregardlessoftheentrymodelchosen.
TheChinamarket,withmorethan1.
3billionconsumersandaneverincreasingmiddleclass,istoobigandtooimportanttoapproachhalf-heartedly.
Significantopportunitiesexistbutitisalsoasignificantlychallengingmarket.
Propercareshouldbegiventostrategydevelopmentandtheselectionofpartners.
Thatbeingsaid,theChinamarketisn'trightforeveryone.
2627LOGISTICSImportTariffsProductsenteringChinaarecategorizedaseitherpersonalparcelsorcommercialcargo.
Bothrequiredeclarationatcustomsbyfiling'ArticleLists'or'CargoLists'forcustomsclearancebeforeenteringChina'scustomsborder.
ForproductdistributionandlogisticsfromoverseastomainlandChina,companieswillneedtohirealicensedinternational3PLorfreightcompany.
China'sregulationsonimportingpersonalparcelsandcommercialcargoaresubstantiallydifferentregardingimporttaxes,documentation,CIQinspectionandquarantinerequirements,andlabellingandtestingrequirements.
PersonalparcelsChinahasdefinedpersonalparcelsintheGACCAnnouncementNo.
56,2014onCross-BorderE-commerceTradeSupervision,whichhasbeenineffectsinceAugust1,2014.
Therearetwoimportantcriteriaforpersonalparcels,whichare:1.
ThevalueoftheparcelmustbelowerthanUS$154exceptwhenfromHongKong,Macao,orTaiwan,wherethemaximumvalueisUS$123;2.
Thegoodsintheparcelareforpersonaluse(meaningthequantityisreasonable).
Thecustomsofficerhastheauthoritytodetermineiftheparcelisforpersonaluseornot.
ImporttaxForpersonalparcels,importtaxesareonlyleviedongoodsifapplicable,andthegoodsarenotrequiredtogothroughtheCIQinspectionandquarantineprocess.
Therearenorequirementsonlabellingandtesting;however,goodsforbiddentobeimportedarenotallowed.
Iftaxesarelevied,theyvarydependingontheproductcategory.
ApersonalparcelwithavalueexceedingUS$154issubjecttofullimporttaxwithoutexemption.
Ifimporttaxespayablearenotpaidatcustoms,personalparcelswillbereturnedbytheindividuals/endcustomersorthe3PL/Courier.
Exceptionstotheabovearepersonalparcelscontainingfood&beveragesandcosmetics.
ThetaxexemptionvalueforpersonalparcelscontainingF&BproductsisUS$77,andthetaxexemptionvalueforcosmeticsisUS$15.
CommercialcargoGoodsforcommercialuseand/ornotcategorizedaspersonalparcelsareusuallycategorizedascommercialcargoandmustgothroughcustomsandCIQinspectionandquarantineprocedures.
ImporttaxCommercialcargoissubjecttovarioustypesofimportdutiesandtaxes,suchasanimporttariff,VAT,andconsumptiontax.
Therateandtypeofapplicabledutiesdependsontheproducts'HSCodeclassification(HarmonizedCommodityDescriptionandCodingSystem)aswellasanyfreetradeagreements,mostfavourednationsagreements,orothertradeagreements/disputesthatmayaffecttheimportduties.
Thetablebelowprovidesanexampleoftheimporttaxrate,VAT,andconsumptiontaxforseveralproducts.
28Table:ImportTaxRatesonDifferentProductsSource:SovereignanalysisbasedonmultiplesourcesincludingGACCNote:MFN–MostFavouredNationImportprocessItcantakeseveralmonthsforexportersandChineseimporterstoprepareallofthenecessarydocumentsrequiredforthepre-importprocess.
Forexample,frozenseafoodproductswillrequireSanitaryAdministrativeApproval,originallabelsandtheChinesetranslation,aswellasregistrationandfilingwiththelocalCIQofficeinChina.
Duringtheimportprocess,theinspectiondeclaration,CIQinspectionandquarantine,andcustomsinspectionmighttakeanother1-2weeks.
Ifanyissuesoccur-forexample,wronglabelsormissingdocuments-thegoodsmaytakelongertoclearcustoms.
Alargenumberofimportersregularlyexperiencechallengeswiththeimportationprocessanditisimportanttobeawareofthespecificrequirementsforyourproductcategories.
ProductCategoriesImportTariff(MFN)VATConsumptionTaxBabycareproductsandbabyformula10%00Alcoholandwine50%010-20%Dietarysupplements10%0029Cross-BorderShipmentsTherearetwoprincipalmethodsavailabletoforeigncompaniesengagedincrossbordere-commerceinChinatoshiptotheendcustomer.
Toshipdirectlytotheend-consumerviaaninternational/domesticexpresscompany,ortoshipinbulktoa3PLwhocanwarehousetheproductsinoneofChina'spilote-commercezones,andthenshiptheproductindividuallytoend-consumersasordersarefulfilled.
DirectlyshiptocustomerThesimplestwayforacompanytoshiptocustomerswhopurchasefromthemoverseas(individualparcels)istouseinternationalexpresscompaniessuchasUPS,FedEx,orDHL.
Thesecompaniescanmanagethecustomsprocessandtransfertheparceltotheirdomesticpartnerforfinaldelivery.
Althoughsimple,thedownsideofthismethodisthattransportationcostsarehighanddeliverytimeislengthy.
Dependingontheproductandthevalueoftheparcel,itmaybesubjecttotariffsandotherimportregulations.
ProductShippedDirectlyfromOverseastoEnd-Customer/ConsumerSource:SovereignanalysisonmultiplesourcesShippedfromoverseasandclearscustomsasapersonalparcelpostListingandMarketplacemanagementactivities/$PaymentremittanceCross-borderMarketplace/$PaymentremittanceConsumersOnlinetransactionBrand3PL/DeliveryPartnerManagesexclusiveshopsorflagshipstoreonmarketplace(Optional)30ShippedfromoverseasinbulkandstoredinFTZ.
Asorderisprocessed,individualparcelsclearcustomsanddelivered.
ListingandMarketplacemanagementactivities/$PaymentremittanceCross-borderMarketplace/$PaymentremittanceConsumersOnlinetransactionBrand3PL/DeliveryPartnerManagesexclusiveshopsorflagshipstoreonTmallManage3PLanddelivery(Optional)ForwardDeployedInventorywarehousedinChineseFTZWarehouseproductsine-commercepilotzoneforforwarddeploymentCompaniescanengagea3PLwithwarehousingfacilitiesinsideoneofChina'spilote-commercezonesorbondedareas.
WhenChineseconsumersorderproductsonthecompany'swebsiteorcrossbordermarketplace,theproductscanbedelivereddirectlyfromthewarehouseinsidethepilote-commercezoneaspersonalparcelsshippedtoendconsumers.
Thiscutsdeliverytimesignificantlyandalsobypassessomeoftherestrictiveregulationsaffectingimportedproducts.
Furthermore,ifasingletransactionisunder2,000RMBorwithinayearlycustomerlimitof20,000RMB,VATisdecreasedby30%(makingapplicableVAT11.
9%asopposedto17%).
Therearealsonotariffsappliedtopurchaseswithintheselimits.
Thegraphicbelowprovidesanillustrationofthedeliveryprocess.
Ifyourproductisnotonthenewlypublished"PositiveList"theonlycrossbordershippingoptionreliablyavailableistoshipviaindividualparcelpostoriginatingfromoutsideabondedcross-borderlogisticsarea(FTZ).
ProductShippedVia3PLandStoredinBondedWarehouseSource:Sovereignanalysisonmultiplesources31PAYMENTSWithinChinaAnumberofpaymentoptionsareavailableforcompanieswithalegalentityinChina,includingonlinepaymentplatformssuchasAlipay,WeChatPay,JDPay,andrecentlyApplePay.
Creditcardsandotherformsofpaymentarealsoavailable.
However,someplatformscommonlyusedintheWest,suchasPayPal,arenotgenerallyavailableinChina.
BelowisabriefdescriptionofthecommonpaymentplatformsavailableinChina.
Alipay(Alipay.
com)LaunchedbyAlibabaGroupin2004asanaffiliatecompany,Alipayhasthelargestmarketshare(nearly50percent)ofChina'sonlinepaymentplatforms,withover300millionusersasof2014.
AlipayworkswithVisaandMasterCardandsupportstransactionsindozensofmajorforeigncurrencies.
WeChatPay-TencentWeChatisthemostpopularinstantmessagingAppinChina.
WeChatPay,whichhasbeenintegratedintotheWeChatplatform,isoneoftheprincipalMobilePaymentsystemsinChina.
WeChatpayoffersQRCodepayment,In-AppWeb-basedpayments,andIn-ApppaymentwhenvendorsintegrateWeChatPaySDKintotheirApps.
ApplePay-ApplePartneringwithChinaUnionPay,ApplyPaybeganrollingoutinChinainearly2016.
Althougharelativelynewentrant,Apple'spartner,UnionPay,controlsallcardpaymentsinthecountry;however,AlipayandWechatPayhaveanearly100percentpenetrationrate,anditwillbedifficultforApplePaytocarveoutmarketshare.
Cross-borderpaymentsForoverseasregisteredcompanies,paymentplatformssuchasAlipayandWeChatPayprovidecrossbordere-paymentservices,whichallowbuyerstopayinRMBandsellerstosettleinmajorforeigncurrencies.
Forsellers,thereisalsononeedtoopenabankaccountinChina,asoncethepaymentisconverteditwillberemittedintotheseller'sinternationalbankaccount.
32OpportunitiesManyoftheopportunitiesChina'se-commercemarketrepresentsarequiteobviouswiththesheersizeofthemarketandaccesstoChineseconsumers.
Threekeyopportunitiesforoverseasmerchantsinclude:Consumerreadiness–China'smiddleclasshasbeengrowingrapidlyoverthelastthirtyyears,withdisposableincomelevelsexceedingUS$5,000ayear,whichissimilartothatofthemiddleclassindevelopedcountries.
Furthermore,consumersinChinaenjoytheconvenience,selection,andrapiddeliverye-commerceprovides.
Furthermore,becauseoftheunderdevelopmentoftraditionalretailchannels,Chineseconsumersarefarmorelikelytoturntoe-commercetofulfiltheirshoppingneeds.
Developedmarketplaceecosystem–marketplacesdevelopedrapidlyinChinaasdidthesupportsystemsurroundingthem,creatingahighlycomplicatedbutdevelopede-commerceecosystem.
Theecosystemprovidesarelativelystraightforwardanduncomplicatedwayforforeignbrandstoapproachthemarket.
Thereisacosttosellingonmarketplaces,suchastransactionfeesandnotbeingartisticallyfreetomanageyourmarketplacepage,butthebenefitsarequiteobvious.
Therearepartnerstomanagelogisticsandthemarketplacealreadyworkswiththemaindomesticpaymentprocessingcompanies.
ThemarketplaceitselfisalsofamiliartoChineseconsumerswithasubstantialamountofaggregatetraffic,especiallyduringspecialevents.
Companiesortheirpartnerscanfocusonactivatingthebrandandonmanagingotherdistributorsoperatingwithinthemarketplace.
Cross-bordermarketplaces–ArelativelyrecentdevelopmentinChina,cross-bordermarketplacesprovideforeignretailersaccesstoChineseconsumerswithouthavingtheriskexposureorcostsassociatedwithestablishingalegalentityinChina.
Althoughthetraffictocross-bordermarketplacesisnotashighasitisondomesticChinesemarketplaces,cross-bordermarketplacescanprovideretailerswithacost-effectivewaytotestthemarket.
KeyChallengesUnliketheopportunitiesinthemarket,thechallengesforeigncompaniesfacearenotsoapparent.
TwoofthemostsignificantchallengesforeignbrandsfacewhensellingtoChineseconsumersaredifficultiesinbrandactivationandthebrandcompetingwithitselfintheformofitsdistributorsandresellers.
Botharediscussedinmoredetailbelow.
CONCLUSIONSBrandactivationChinaisnotamagicalmarketwhereconsumersarefightingtoownthenextforeignproducttohitthemarket.
Chineseconsumersaresophisticatedandareawareofmanyofthetopglobalbrandsinmostproductcategories.
However,thisdoesnotmeantheyknoweverybrandandjusthavingyourbrandinChinadoesnotmeanitwillimmediatelyberecognizedorbesuccessful.
Brandsneedtobeactivated,whichmeansthatyourbrandengagesdirectlywithconsumersandhassomeformofbrandloyalty–i.
e.
,yourbrandneedstohavesufficientdemandamongstChineseconsumers.
Brandsareeitheractivatedinamarketthroughadvertisingandbrandbuildingactivitiesorbyaccident.
33KirklandBurt'sBeesNu-LaxFruitLaxativePrivatelabelproductssoldatCostcoformorethan20years,KirklandSignatureproductshaveastrongbrandreputationinChina.
AnAmericanpersonalcareproduct,nowasubsidiaryofClorox,Burt'sBeeshasnearly200naturalpersonalcareproducts.
Itisdistributedinmorethan30,000outletsinmorethan7countries(notmainlandChina)AnAustraliannaturalproductsbrandfirstlaunchedin1937.
Thecompany'sproductsaresoldinanumberofcountries,andaresoldinChinathroughadistributor.
14,000+dailysearchesinChina15,000+dailysearchesinChina20,000+dailysearchesinChinaBrandsareessentiallyactivatedinoneoftwoways:1)targetedmarketingandbrandbuildingactivities,whichcanbeexpensive,especiallyforsmallormediumsizedcompanies;or2)onbyaccident.
Brandsareactivatedonaccidentprimarilywhentouristsorconsumerslivingabroadareexposedtoandlikeparticularbrands.
Throughwordofmouth,thebrandsbecomeactivatedintheChinamarket,eventhoughsomemaynotnecessarilyofficiallybesellinginthemarket.
Threeexamplesofbrandsactivatedonaccidentare:Source:KungFuDataandSovereignanalysisBrandawarenessandactivationforconsumergoodsisanimportantpartofsucceedingintheChinamarket.
AppleiPhoneisanothergreatexampleofabrandandproductthathadextremelyhighbrandawarenessbeforetheirChinalaunch.
Companiesshouldtakethetimeandspendtheresourcesnecessarytounderstandhowwelltheirbrandisknowninthemarketanddeterminehowmuchbrandbuildingwillberequired.
Ifthebrandislucky,therewillalreadybesufficientdemandinChina.
Furthermore,investmentshouldbemadeinunderstandingcompetitors,distributionoptions,andindevelopingasolidstrategyforChina.
ToooftencompaniestrytoenterChina"onthecheap"andendupfailing.
Ifdemandforthebrandistoolowthecompanywillwanttoconsiderallofitsoptionsbeforemarketentry.
Thiscouldrangefromutilizingadistributorfirst,hiringafirmtoassistinbrandbuildingandactivation,orfindingalternativewaystoactivatethebrand.
34CompetingwithyourselfMarketplaces,especiallyTmall,areafundamentalpartofChina'se-commerceecosystemandcompaniesshouldconsiderhavingapresenceononeormultipleplatformsifseriousaboutexploitingopportunitiesinChina'se-commercemarket.
However,operatingonamarketplaceeffectivelycanbeextremelychallenging.
Manybrandsdonothaveaprofessionalteamdedicatedtomanagingtheirmarketplacestoreswellandendupbeingeventdependentandrelyonpricecuttingtodrivesalesvolumes.
ThisresultsinalowvolumeofsalesatMSRP.
Becauseofthis,around85%ofbrandsdonotmakemoneyonTmall.
Belowisanexampleoftypicalbrand'sTmallstore.
"Tmallisamarketwherebrandslosetothemselves;85%ofbrandstoresdonotmakemoney"JoshGardnerCEOKungFuDataSource:KungFuDataNote:Theabovedataisforapopularcerealbrand.
Thebrandandstorenamehavebeenomittedforclientconfidentialitypurposes.
Asillustratedonthepreviouspage,whenpricesaresetatornearMSRP,volumesareflat.
However,whenpricesdrop,salesspike.
AnadditionalchallengefacingbrandsonChinesemarketplacesisthattheywillusuallyfindthemselvesincompetitionwiththeirownauthorizeddistributors.
NikeforexamplehasnearlyonethousandsstoressellinglegitimateproductsonTmall,allofwhichareauthorizedtodosoastheyaredistributorsorresellers.
Thecompetitorscanpotentiallysellatdiscountedprices,belowMSRP,makingitextremelydifficultforthebrandsownstore.
Foreignbrandsopeningtheirownstoreonamarketplacemustspendthenecessaryresources.
China'se-commercemarketisextremelydynamic,rapidlychanging,andfillwithcompetitionthatknowshowtoexploittheintricacieswithintheplatforms.
Ifthecompanyitselfdoesnothavethenecessaryexpertise,itishighlysuggestedthattheyoutsourcethemanagementofthestoretoaqualifiedTP.
250200100500150300,000250,000150,000100,00050,000200,000-6/1/20156/3/20156/5/20156/7/20156/9/20156/11/20156/13/20156/15/20156/17/20156/19/20156/21/20156/23/20156/25/20156/27/20156/29/20157/1/20157/3/20157/5/20157/7/20157/9/20157/11/20157/13/20157/15/20157/17/20157/19/20157/21/20157/23/20157/25/20157/27/20157/29/20157/31/2015SalesPrice35PracticalAdviceForApproachingTheMarketApproachinganynewmarket,especiallyadevelopingonelikeChina,isachallengethatrequirescarefulplanningaswellascommitmentfromalllevelsofmanagement.
E-commerceinChinaisnodifferentfromapproachingthemarketbymoretraditionalmeans.
Althoughthee-commercemarketplacemodelinChinaaddressesmanyofthecommonchallengescompaniesnormallyfacewhensellingtotheChinamarket,thecompanystillneedstoconsiderthefollowing:Facing–Developawebpageand/orstorefrontonamarketplacewiththeappropriate"look,touch,andfeel"thatisinlinewithyouroverallbrand.
Pricingstrategy–Developapricingstrategythatisalignedacrossallchannels.
Competingonpriceisnotalwaystheappropriatesolution,especiallyasyoumayfindthatthebrandiscompetingwithitself.
Investinfindingtherightpricepointforyourproductsandworkwithdistributorstocreateconsistentpricing.
Service–Offerduringandaftersalesservice,eitherdirectlyorutilizinga3rdpartypartner.
Marketing/trafficgeneration–Itisimportantforcompaniestoinvestinactivitiesthatgeneratetraffictotheirpageormarketplaceshop.
Ifinternalcapabilitiesarelacking,consideroutsourcingthistoa3rdpartyserviceprovider.
Fulfilmentandsupplychain–Chineseconsumersareusedtoreceivinggoodswithindaysorhoursofpurchasingthem.
Fastandefficientfulfilmentiscriticaltosuccessinthemarket.
Youalsoneedtobeabletomanagereturnsinanefficientmanner.
Ifyouareunabletodevelopyourownsupplychain,thenconsiderworkingwithanintegrated3rdpartylogisticsprovider(3PL).
Choosingthecorrectmodel–Understandingwhichmodelyoushouldbeusingtoexploitthemarketiscriticaltosuccess.
Itisimportanttospendtimeassessingthedifferentoptionsavailable.
Useathirdpartyconsultingfirmifnecessary.
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