Category: Supply chain & Distribution

Digitalizing your company in China

Not merely a tech-business

China seems well ahead on the digitization road: use of new technologies in services (e.g. the mobile payments) , use of artificial intelligence and big data analysis in decision-making (e.g. the Court of Hangzhou), consumers’ behaviors (e.g. the shared bikes), public investments (cf VVR’s article on smart energies)… As a consequence many opportunities arise for European tech businesses in China, but not only. In this article, we will look at the transformation in management, business model, and HR policies induced by the digital transition.

According to a McKinsey report, Internet-linked transformation could contribute to an extent ranging from 7% (in the lowest estimations) to 22% (in the highest estimation) to China’s GDP growth through 2025. The main identified sectors where this growth would mostly happen are:

  • electronic consumer goods (with the Internet of Things, the digital media content…),
  • the automotive (with the supply chain logistics, the development of services thanks to connectivity…),
  • chemicals (with better demand forecast, and production planning, improved R&D…),
  • the financial services (with a decrease in non-performing loans, more efficient banking operations),
  • the real estate (with online sourcing and online marketing),
  • healthcare (with better patient-tracking for chronicle disease, e-commerce for OTC).

To be precise, China is more advanced than Europe when it comes to the use of new technologies, in products or services. Yet, China’s digitization of its industry is less advanced and happening now. Thus European companies already present in China, especially SMEs should take this step towards digitization now, in order to lead the coming disruption (gain in productivity, new business model, new relation to the consumer) instead of feeling threatened by it.

Beyond the development of technology-savvy products for customers (which might not be relevant in all industries), digitization can impact your entire organization in the way things are done, from the product development to the interactions with the client, passing by supply chain management and marketing. In China’s coastal area, most of the companies already initiated their digitization: in an EgonZehnder’s survey over a panel of Chinese companies (2016), 70% of the participants declared that their top management was in support of digitization, and half of them mentioned their CEO as the leader of these changes. Digitization is indeed not only about finding the right technologies to improve your activities, it is first and foremost about having the right team: a team that is able to understand and use these technologies, and that thinks according to this new digital paradigm (for instance, it is about definitely giving up paper-printed presentations). Indeed, a complete shift to the digital age can impact as far as your business model. It requires thus strong adaptation abilities from your company, which need to be developed through the right HR policies.

Given the potential scope of this transition, the top management must design, or at least be associated to, this digitization strategy (e.g. Mengniu’s CEO in VVR’s article on new consumption habits). It might mean thinking about a redefinition of your leadership to better foster collaboration, curiosity and learning in your teams. Besides, there a decision to be taken on whether to allocate digitization to one specific department, in which case you should decide precisely which, to centralize it or to externalize it.

Once the strategy is set, it needs to be taken up by management, as they are essential actors for the teams upgrading, and for the transition towards a more collaborative and innovative-driven way of working. In China, we identify training as crucial: it is indeed easier to train people that are already well integrated in your company rather than hiring and integrating new talents (cf VVR advice on recruitment in China). If, after having upgraded the teams, there is still a HR need, you should pay attention to the peculiarities in China regarding this type of recruitment, making it a rather competitive process.

Indeed, digitization is set to happen faster in China than in any other economy. Thus, several observers pointed out a shortage to come in IT and TIC talents. As such, challenges usually encountered when recruiting somebody in China are exacerbated: finding the right person, negotiating a salary, retaining the new employee… As an illustration, salaries for high-skilled tech talents, especially in the coastal provinces and for people speaking good English, are high, even to European standards.

To smooth the recruitment process and guarantee its success, it is of the utmost importance to carefully follow a rigorous recruiting method. That is to say, first, establish with accuracy the real need(s) of your company that the future employee should satisfy. Then, you will be able to write down precisely the job description and the profile you are looking for (a local Chinese, an overseas returnee, a foreigner…) As digitization is a field in evolution, it is no use to look for specific skills, albeit some basic background is of course required, rather you should be looking for potential. More than ever, recruitment is not about finding a good employee, rather about finding the right person to fit in your company and to hold your company’s vision. Here, analyzing motivations, mentality, and solving approach to new problems might be of a good use.

For more details on recruitment, you may refer to our recruitment department.

To sum up, digitization is happening in China and it opens new doors for products and services, but it also redefines the organization and the vision of each company. We strongly advise to take these steps now, not in an erratic and reactionary manner, but rather in an organized and well-thought strategy, engaging all departments of your company. Two main impacts are to be forecasted in HR: the upgrading of the teams, and the recruitment of new talents.


First, second, third and fourth-tier cities A May 2018 report by Morgan Stanley asserts that the future of China’s growth (by 2030) will lie within lower-tier cities (namely the third and fourth-tier). It is more and more common to see economic analyses regarding China make use of this urban classification. While being a useful analytical...


Taobao : It is Alibaba’s e-commerce platform, launched back in 2003. This C2C platform gathers today over 500 millions of active users. Besides, they also developed a B2C platform in 2008 called T-Mall. These two platforms saw the transaction of some 3 trillion yuans over the year 2017. It is very likely that a large part...


With many Europeans coming back from holidays, their minds full of travel memories, we suggest staying in this ambiance, and to learn this month about how products now travel between Europe and China. Since the President XI Jinping unveiled the One Belt One Road (OBOR) initiative in 2013, most commentators agree to qualify this gigantic...

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First, second, third and fourth-tier cities

A May 2018 report by Morgan Stanley asserts that the future of China’s growth (by 2030) will lie within lower-tier cities (namely the third and fourth-tier). It is more and more common to see economic analyses regarding China make use of this urban classification. While being a useful analytical tool to understand China’s society, the definition of tiers is actually not so obvious and requires that we stop for a while and think about it.  This article thus gives you the keys to better understand this aspect of China, and the resultant opportunities for your businesses.

A ranking of cities

To begin with, there is no official definition of what is a first, a second, a third and a fourth-tier city in China. To give you a general idea, Beijing, Shanghai, Shenzhen and Canton are unanimously classified as first-tier cities, while second-tier cities are generally provinces’ capitals. Yet, some rankings would label Suzhou and Wuxi as second-tier cities because of their economic growth and despite the fact that they are not capitals. Similarly, Hefei, the capital of Anhui province, is sometimes categorized as a third-tier city because of its weak domestic growth. Three-tier cities generally include non-capital cities with a dynamic economy (high economic growth rate). Lastly, fourth-tier cities are important cities in terms of their population size, but which economy is not so flourishing.

Each year, Yicai Media Group’s Rising Lab issues a ranking of the Chinese cities in terms of tier and make part of their methodology open to the public, allowing us to take a look at their criteria (Yicai Media Group is one of the first economic media in China). They use five criteria: the density of commercial resources, the degree of transportation’s connectivity (is the city a hub?), urban residents’ habits (to what extent do they use e-commerce?), the diversity of activities available in the city and the degree of visibility into the city’s future (the real estate market, the fluidity of the road traffic, the pollution, the talents’ attractiveness, the entrepreneurial index…) Be aware, classifying a city in a first, second, third of fourth-tier is likely to have a tangible impact on the city’s real estate price…

Thus, each organization speaking about tier cities is likely to have their own and different criteria. Most criteria revolve around the local GDP, the population size, and the administrative status of the city (whether it is a province’s capital or not). While the type of criteria does not vary so much from a report to another, the way it is measured does, inducing porous frontiers between different tiers: some cities can be classified in different tiers. Furthermore, the denomination “lower-tier cities” technically encompasses second, third and fourth-tier cities. This can be misleading since second-tier cities are generally wealthier than the average Chinese city.

Another limit in this definition is that very different realities are described with the same word. Indeed, second-tier cities include industrial cities (Tianjin, Wuhan, Changsha…) coastal cities whose consumption market is more developed (Nanjing, Hangzhou, Wuxi, Suzhou…) as well as inland cities, often industrial but that are also becoming hubs with the One-Belt-One-Road initiative (Chengdu, Chongqing…)

A map of consumers

Despite these limits, knowing the tier of a city still is useful as a reading grid to understand to some extent the geographical diversity of China. Morgan Stanley’s report is an illustration of it, identifying a 6,9 trillion USD potential for growth within third and fourth-tier cities by 2030. They identify more specifically five city-clusters with high growth potential: the Jing-Jin-Ji region, the Yangtze River delta, the Canton bay, the Mid-Yangtze region, and the Chengdu-Chongqing area.

They support this assertion by several arguments, the first one being political support for growth in these very cities. Indeed, the central government and regional governments have been recently issuing many development plans, respectively inter-regional and intra-regional, allocating wide investments in connectivity infrastructures. As a result, there has been a multiplication of high-speed trains connections which divides the travel time by two and helps dis-enclave cities.

Besides, the cities offer financial allocations to help young talents buy real estate properties, a must do after graduation in China (this refers mainly to second-tier cities which have the financial resources for it). Besides, contrary to first-tier cities (except from Shenzhen) who implement stricter hukou* policies in order to hamper their population’s growth, second-tier cities make the promotion of their hukou policies, easy to obtain for young talents. As a result, Morgan Stanley’s report forecasts a 2.5% annual urban growth in lower-tier cities between 2017 and 2030. Lower-tier cities also have a higher fertility rate which accounts for this higher growth, as life costs (and the costs of having a child) are lower than in Beijing or Shanghai.

For European companies, as well as for Chinese ones, this demographic evolution means that lower-tier cities, especially second-tier cities, will gather an increasingly qualified manpower as well as better infrastructures in the near future. Implementation costs are to decrease, while labor costs are increasing on the coast. Chinese and foreign companies already started to move in these inland cities (cf VVR’s September article).

Another consequence of interest for European businesses lies in distribution. Indeed, more and more retailers are attracted to these new and untapped markets opening in these smaller cities, as they become more accessible and people’s incomes are increasing. Firstly, residents from these cities devote a larger part of their budget to discretionary spending as their fixed costs are lower (rents). Besides, although there is in these cities a smaller part of the population earning enough to afford European products (often more expensive and assimilated to rather high-end products), the quantities bought per consumer are comparatively larger than in first-tier cities. In other words, less people buy European goods, but the ones who do buy more of them.

Turning more specifically to these consumers’ habits, a survey by AlphaWise on more than 3000 households notes that the income gap between first-tier and lower-tier cities is reducing, but also that consumption habits changed significantly. Third and fourth-tier cities’ consumers now pay more attention to the value of the goods they buy: they upgrade their consumption and are increasingly sensitive to brands (mostly local brands for now). They also care about the fastness, quality and entertainment’s aspect of the service. In terms of industries, the sectors of daily consumption goods shall mostly benefit from these changes: house appliance, food & beverage (especially dairy products), beauty products and make-up… Most of this growth is also expected to happen within the e-commerce because of accessibility reasons. The entertainment industry (cinema, tourism) and the education industry are also likely to see some positive trends in their consumers’ pool.

There are yet some limits to this overall positive picture of the economic potential within lower-tier cities.   Firstly, today, the costs and risks of implementation in third and four-tier cities are still rather high: quality retail spaces are still few, and the size of the consumers’ pool remains to be verified. Thus, it is recommended to use e-commerce to test these markets (although this retail channel also bears its own limitations, cf VVR’s July article).

Furthermore, third and fourth-tier cities’ consumers might have a similar spending power as in the first and second-tier cities, this does not mean that they have similar consumption habits: it is crucial to analyze accurately the local consumption habits and to not launch a product merely because “it worked well in Shanghai”. Each expansion strategy must be thought locally and a dose of education on international products (on geographical indications for instance) might very well be necessary.

Lastly, the consumption’s growth in the lower-tier cities is conditional upon regulatory changes, especially regarding the real estate market. Indeed, these cities’ attractiveness relies on their low real estate prices, enabling young households to buy property. Besides, these young households’ budget is also less taken up by rent and more is available for consumption. On that point, there is no study that is today forecasting such a change in the near future.

In short, China has diverse markets, and it is important to understand their local specificity. Tiers are one way to approach diversity and allows for the above analyses. It is then one way, but it is not the only one and it can not account for the entire diversity of China. For instance, it is also important for retailers and employers to understand the different generations in China…

* The hukou is a resident permit that each Chinese citizen gets, binding them to a province (Shanghai’s hukou, Beijing’s hukou, Jiangsu’s hukou). It is rather similar to a province-scale “nationality” and serves to obtain a right to some public services in the location of the hukou.

By Manon Bellon

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Taobao : It is Alibaba’s e-commerce platform, launched back in 2003. This C2C platform gathers today over 500 millions of active users. Besides, they also developed a B2C platform in 2008 called T-Mall. These two platforms saw the transaction of some 3 trillion yuans over the year 2017.

It is very likely that a large part of the Halloween costumes worn this year in the coastal cities all come from the same place: a small village in a rural province of China, which specialized in the confection of costumes that they then sell online. This is what we call a “Taobao village”, another aspect of the retail revolution taking place in China. In this month’s article, we provide you with a reading of this phenomenon, which we hope can also be a source of inspiration for your approach of the Chinese e-commerce. What are exactly these “Taobao villages”? How rural entrepreneurs with few resources at hand managed to appropriate these tools and how do they use it? Knowing about “Taobao villages” and these micro-enterprises can be of interest, especially for European retail companies who also need to appropriate themselves the Chinese e-commerce.

A rural community geared towards e-commerce

The official definition of a “Taobao village” is a rural community in which at least 10% of the families use Taobao for retail, or where 100 online shops were open; and where the trading volume reach at least 10 millions of yuans. This definition is given by Aliresearch, the research department from Alibaba, whose mission is to collect and make use of the enormous amount of data Alibaba have at hands. The “Taobao villages” developed themselves firstly with Alibaba (hence their names, from Alibaba’s famous e-commerce platform). The Chinese authorities were then prompt to support these initiatives as they contribute to reach primordial goals set in the 13th Five-Year Plan: eliminating poverty, developing the Western provinces and slowing down the rural exodus. As a matter of fact, 45% of the Chinese population still lives in villages (often much bigger than our European villages). The dose of personal entrepreneurship at the roots of “Taobao villages” is seen very positively by the authorities: seen as one of the key of the development success of coastal cities in China, entrepreneurship now moves to the countryside. Today, are promoting their own platform to rural communities.

Increasing by 25% in 2015, the number of “Taobao villages” reached 2 118 in 2017, with a total of 120billion of yuans in sales (Aliresearch). Overall, 1.3% of the Chinese population is involved in some e-commerce activity in 2017 (approximately 10 millions). Alibaba’s support is concretized in a 2017-2019 investment plan amounting to 1.6 billions of dollars. Their objective is to open 100 000 Taobao centers in rural places. The Chinese government also makes substantial investments (for the reasons mentioned above). It claims 300 millions of dollars allocated to 200 rural counties to build warehouses, train skilled manpower… The government overtly encourages young Chinese to come back to their native villages to open businesses. It seems so far to be working as 52% of these online entrepreneurs are less than 30.

An experimenting field for micro-enterprises

These statistics seem to point at the success of a rather new business model, with a unique management style: these micro-enterprises are often run by people will low qualification level, who seize the opportunity of low entry barriers to experiment, test their products with the market and adapt them, thanks to the statistics provided by Taobao and the customers feedbacks available. Most of these micro-enterprises produce in the villages and then sell in the cities, but some are the other way around. For those who sell in the cities, e-commerce brought them a significant improvement as it abolishes distances and they could get access to markets where consumers have more purchasing power. Regarding what is sold, there are different strategies. Some villages get specialized in the local food products (Ningxia’s Goji berries, Suichang’s bamboos shoots, tea and sweet potatoes…) while some others get specialized in a product that is not related at all to their localization (outdoor equipment, costumes…) An interesting pattern then stands out: most of the time, the online shops of a village all get involved in the same activity, bringing the specialization to the level of the village (and constructing thereby a sense of identity within the products). The very denomination “Taobao villages” implies an organization to the level of the village. Lastly, it seems that local food products are more successful as consumers await local products that are cheaper and potentially healthier (organic agriculture).

Regional specialization?

Not only do “Taobao villages” bring new products to the coastal cities’ consumers, but it also impacts on the very structure of these villages, creating new associations. In order to guarantee a certain quality for instance, some villages put in place “Taobao associations”, in a way similar to the industry chambers. Moreover, “Taobao villages” require a development of the tertiary sector (sales, delivery, storage), which in some cases amounts to 50% of the local gross product. At last, other activities develop, such as the eco-tourism. This last aspect is all the more interesting as it is also readily observable in Europe. Not mentioning the thematic travels around Europe (such as “Grands Crus tours” in Fance), every year more numerous, one can think of this small Bulgarian village, Momchilovtsi, which local yogurt became extremely popular in China recently, albeit because of a company and not because of e-commerce. As a result, this village now sees buses of Chinese tourists coming to visit. This example is telling as it shows the strength of local identity in nowadays branding in China.

How to fight competition on these platforms

“Taobao villages” actually do not alwqys run so smoothly, and they do encounter some difficulties. First of all, access to digital technologies is still limited in rural China with 1% of the families having a broadband connection in most of the villages (the official goal announced in “Internet+” is a 98% coverage by 2020). Another limit which is more closely linked to the e-commerce characteristics: branding remains limited and many businesses suffer fakes issues. Thus, in Qingyangliu, a “Taobao village”, only 20% to 30% of the businesses are making profit. The identified cause is the fact that the market is saturated and dominated by large companies.

Seeing either as an opportunity, or as a concept with a debatable long-term profit, “Taobao villages” nonetheless are a characteristic trait of the revolution of retail in China. They picture the dynamic entrepreneurial mindset of Chinese businessmen. They also confirm the analysis that e-commerce in China do open many opportunities because of the low entry barriers and larger access, but that many challenges remain when it comes to build a brand image on this already saturated market.

By Manon Bellon

Image credits: Greg Jenkins

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With many Europeans coming back from holidays, their minds full of travel memories, we suggest staying in this ambiance, and to learn this month about how products now travel between Europe and China. Since the President XI Jinping unveiled the One Belt One Road (OBOR) initiative in 2013, most commentators agree to qualify this gigantic project as a political project first and foremost. Nevertheless, it has mainly concretized in infrastructures’ investments so far, and one of the most visible impacts is the organization of a new – or improved – logistics network. What are the concrete benefits that European companies can get from the OBOR initiative? What is existing today, and what is still to come? To answers these much commented on questions, VVR went to see M. Joost van Opstal who works at AEL- Berkman, a logistics company. He answered our questions below:

To start with, let’s explore what is OBOR today. How can one know about all the new infrastructures built within this initiative? Which organization does a follow-up on this huge project?

Right now, OBOR is made of two land corridors: China-Mongolia-Russia and the Southern road, also called the Khorgos way (China – Kazakhstan – Russia – Europe). These roads are aimed at connecting inland China to Europe in a more efficient way. Indeed, for factories that moved to Western China, because of rising labor costs on the coast, the transportation from these inland cities to the Chinese harbors sometimes took up as much cost as the whole transportation from these harbors to European harbors! The two largest hubs on the Chinese side are Chongqing and Zhengzhou. In Europe, the entrance terminal is in Poland, where the custom clearance is done – this rail freight is organized on the same principle as maritime freight: one unique customs document is used for the whole transportation process. Most of the goods for Western Europe then go through Duisburg in Germany.

It is to be noticed that most of the rail network used today under the OBOR name actually existed before the launch of the initiative, which explains that it has been operational so fast.

To know about the advancement of the projects (in pink on the above map), there are constant seminars by consulates and embassies, mostly focusing on the impact on the local country’s economies. All in all, official governmental channels are reliable information sources, as well as the companies involved and the ones who sell this project – such as the Khorgos Gateway. There, one is sure to get the most recent information, but they might be lacking some critical insight.

Which impact do you see OBOR has on European businesses?

The impact is mainly on logistics. As a matter of fact, HP is one of the companies at the origin of the initiative, together with the Chinese government and got involved for that reason. Having moved their entire production to Chongqing, they needed an alternative transportation road for their short-life products. In this technology field, two weeks can be the difference between selling and not selling.

Thus, rail freight comes as an alternative for our clients. However, it is merely an alternative, not a replacement: it will not get over 10% of the transportation on the Europe-China freight lines. Compared to maritime freight, rail freight through Central Asia is faster and not subject to so many time and cost variation, while being approximately three times the cost of maritime freight. Until now, the Maritime Silk Road did not lead to much change in the way the maritime freight is operated from China to Europe. Compared to air freight that is mostly used for perishable goods such as food, rail freight is less expensive, allows for bigger quantities and imposes less restrictions when it comes to dangerous goods. Besides, this new rail network now allows for a reasonable travel time and suitable transportation conditions for these perishable goods.

Another much discussed benefit is the larger playing field OBOR would create for European businesses. Indeed, Chinese authorities also claim a development aspect in this project, which would theoretically lead to the creation of a market of 4.4 billion of customers when one counts all the 68 countries involved today. This information yet need to be nuanced as a large majority of these people have today small income. This gigantic market is thus highly conditional on the success of the development part of the initiative.

What risks do you see linked to the use of the OBOR rail network?

Concerns voiced by our clients revolve mainly around two points: the quality of the transportation infrastructure and the security.

When a problem occur on the train, how is it fixed? This concern is especially high for refrigerated products. Although OBOR officials claim that there is a maintenance station every 8 hours, experience says otherwise.

Another particularly acute concern is the risk of theft, mainly for technological products with a high added-value, as the convoy cross poor areas. Incidentally, one can assess the development of Chinese private security companies’ services along the road, showing that this concern is justified. However, reality shows that this happened so far mainly in Europe.

Of course, a political risk remains as some railroads cross many countries, that are either domestically unstable or with unstable relations with one another.

What type of industries have the most to gain from OBOR?

These industries are without doubt retailers in electronics (laptops, computers), fashion, short-life products (milk powder, agricultural products), machine (spare parts), and pharmaceuticals.

Besides, most of the traffic happens from China to Europe (90%), from suppliers to distributors. For instance, companies who supply distributors such as Lidl must deliver their products fast: a one-day difference can lead to a penalty.  Before air freight, which is extremely expensive, was the only option. Today the train offers a cheaper alternative.

The traffic from Europe to China is only 10% of the total. Yet, given the flow size, these 10% can still be very interesting. A very interesting business case is the one of a Dutch powdered milk company. Using OBOR roads enabled them to develop very successfully in China when they have now a Joint-Venture. Today, they use weekly trains connecting the Netherlands to China. All in all, the products that can benefit the most in this direction are: milk powder – today a large part of the exports; agricultural products – mainly fresh vegetables; and pharmaceuticals.

Another benefit we identify for European companies lies in marketing. Indeed, using this way of transportation is environmentally friendly, and socially responsible. Besides, because of the political value attached to this initiative, it might be possible to receive subsidizes too.

The development of cross-border e-commerce is often mentioned in reports. However, the logistics are then different from retail and do not include rail transportation as the volumes are too small.

What are your thoughts on the way OBOR is going to evolve? What is in it for the future?

The scope of the project became so wide, and so many factors are at play that it is hard to predict how it will evolve, if it will reach the official goals or not. From the information we can get in China, there is no sign of new railway being constructed between Europe and China.

Besides, we see that it already reached some limits today, in terms of volume. With 2 trains a week from every end-city the project encompasses, European hubs are encountering congestions issues.

Established in 1903 in The Netherlands as an energy and coal provider, Berkman Energy service became the starting platform for what has grown from a family business into a global entity. Established in 1998, AEL-Berkman Forwarding (HK) Ltd. started off as a joint venture between two highly experienced and professional freight forwarding organizations. With a combined experience of more than 50 years in this business, AEL Asia Express (HK) Ltd. and Berkman Forwarding B.V ventured together with the objective of developing the China market. They organized their first rail freight on OBOR roads in 2016.

By Manon Bellon

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What is in it for European brands?

Today, no need to be in China to sell in China.

58 million of new Chinese consumers adopted e-commerce in 2017

Among the astonishing figures about e-commerce in China released last May (1.130 trillion USD of sales on Internet in 2017, 40% of the products being international products), the cross-border e-commerce shows the largest boom: from 100billion USD in 2017, it is expected to reach 144billion USD in 2021. Cross-border e-commerce consists in buying directly international goods from abroad, through dedicated platforms. Last year, some 58millions Chinese adopted these platforms. Soon, according to some observers, this number will simply be equal to the total of Chinese using e-commerce. Can this trend be explained by a rising demand in international goods? In any case, it seems to be a good omen for European companies who should hurry to get their products on Tmall Global, JD Worldwide, and NetEase Kaola. By exploring the complex structure of cross-border e-commerce, this month’s article will check what benefits European brands can likely get out of it.

Regulations: work in progress

At first, when they wanted to buy cheaper international products, Chinese were turning to daigous: intermediaries, often from the family or friends, who would travel abroad and bring back with them certain items. As the demand grew and as these transactions were not efficiently regulated, the Chinese government launched in 2012 the first project of e-commerce cross-border in 10 pilot cities: Shanghai, Hangzhou, Ningbo, Zhengzhou, Chongqing, Guangzhou, Shenzhen, Tianjin, Fuzhou and Pingtan. (In China, it is common for reforms to first be launched in pilot zones, where they are tested before being extended to the rest of the territory.) Cross-border e-commerce lessen the procedures burden for foreign companies to sell in China (simplified importation process, only a commercialization license and registration to the CFDA is required). Compared to the daigous, foreign companies need to fill administrative papers for importation just once, and compared to imported goods, no Chinese mark or label is required on the product. Chinese consumers get their benefit in accessing to international products at lesser price. One bemol remains however: goods bought through cross-border e-commerce were considered as personal goods and then required the identity of the recipient to be checked.

Thus was born the cross-border e-commerce

After several reforms, the last one in April 2016, cross-border e-commerce is now equipped with its own customs regulations. Today, a transaction can not exceed 2 000 RMB, and a person can not buy more than 20 000 RMB a year. Considering taxation, the import tax is temporarily set to 0 %, while VAT is at 11.9% and consumption tax is applied according to the kind of good. If one buys a good exceeding the authorized 2 000RMB, the good will be imported through normal trade customs regime. The latest reform also published a list of 1 142 goods than can be sold through cross-border e-commerce (8numbers HS codes). These are daily goods such as food and beverages, clothing, shoes and accessories, home appliances, cosmetics, baby products, toys… A second list authorizes dry fruits and specialized food (food supplements), and medial equipment among others. There has been some confusion within the customs following the publication of these lists (regarding milk powder for instance); thus, they were suspended for one year.

Fight against the extreme competition online: a platform used only for cheaper international products

Cross-border e-commerce offers international brands to stand out from the extreme competition existing online in China, by gathering on a dedicated platform where they can also offer lower prices, thanks to the customs special dispositions. This system also quickly adopted online-to-offline strategies, and developed experience stores; an opportunity for international brands to strengthen their bounds with the Chinese consumers (brands online often suffer from a lack of brand loyalty). In 2015, the customers could see the products, although sometimes only the packaging, in the first experience stores. Yet, this came as a frustrating experience as consumers could not buy and take the product home. Thus, from March 2017, other experience stores opened where this was possible. Having experience stores is also a way to “bring international goods to the door” of those consumers who usually do not buy international products. However, this new kind of experience stores also implies disposing of a cutting-edge logistic organization as there was before virtually no stock for goods in cross-border e-commerce. Besides, stores thus needed to be located within the surroundings of the warehouses, which are only located in the 10 cities mentioned above, and in remoted areas, far from the city center.

Test your product on the Chinese market

Another often-cited benefit from cross-border e-commerce is the fact that it allows foreign brand to test a product on the Chinese market without investing too much, by not requiring sending stocks for instance.

Increasing dependency on the platforms

Cross-border e-commerce present also several complications for European brands to develop their sales in China, most of them being structural. As we saw it, cross-border e-commerce requires high-level logistics, all the more because of O2O. This entails two challenges for foreign companies. Firstly, customers, especially Chinese, have high expectations regarding the speed of delivery and the quality of the service (for instance, the simplicity of return which should also be as cheap as possible for the company). Secondly, the complexity of the logistics, when it comes to the last kilometer for instance, makes it practically impossible for foreign companies not to rely on the platforms. All in all, foreign companies are often overly reliable on platforms when they do cross-border e-commerce, an issue we will develop later.

Limited visibility

Besides, the argument that selling in cross-border can increase people’s bound to your brand thanks to O2O is also weakly demonstrated: low brand loyalty remains a feature of this purchasing channel. Lastly, just like e-commerce, cross-border e-commerce offers a weak protection of intellectual property rights.

Quality products, specialized by country

These are the technical aspects of this new purchasing channel. Let’s now turn to its economic reality: which products are sold there, at which frequency and which price; who are the actors on this market?

In a survey, iiMedia Research found that 57.7% of consumers choose cross-border for the quality of the products, 34.4% for the quality/price ratio, 30.9% for the diversity of the brands available, 30.2% for the guarantee of authenticity it offers (2017). Thus, Japan, Korea, France, Germany and United States are the favorite countries on these platforms. French and German products are mostly cosmetics, baby products, nutrition and health-related products.

Most of transactions are between 300 RMB and 1000 RMB, and consumers often purchase: at least once in the month for 65% of them, more than once a week for 11.6%.

Contrary to local e-commerce, cross-border e-commerce is highly fragmented, and no platform gets more than 25% of the whole market: NetEase Kaola makes up for 24.5% of it, then Tmall Global takes 20.3%, 15.7% and JD Worldwide 12.5%. However, actors change little from one year to another. These platforms are indispensable as they offer a dedicated and experienced team (operation, service, marketing), with facilities in payment (pay the foreign companies in dollars or euros). Besides, they are also insiders to the Chinese market, and know above all about the Chinese calendar, which they contribute to shape with shopping festivals (the most famous being Alibaba’s 11/11). However, foreign companies should be weary of being too dependent on them and should choose their partners carefully. Indeed, they are often costly, and poorly committed in the development of one brand, while one often needs to invest a lot, especially in marketing, to launch a consumer good in China. Therefore, it is recommended to dispose of one’s own operational team for online sales.

As a conclusion, cross-border e-commerce is a platform that is said to offer a more direct link between the Chinese consumers and international brands. However, being relatively recent, it is still developing, and regulations are expected to evolve when it comes to the taxation regime and the list of authorized products. Besides, because of the complexity and volatility of the Chinese consumer goods market, as well as the logistics puzzle induced by cross-border e-commerce, platforms are dominating this market, and come as necessary but costly partners for European companies. A dedicated internal team is crucial for a company who want to develop their sales on the long term through this canal. Regarding the argument that cross-border e-commerce is a cheap way to test the Chinese market for one’s product, some nuance needs to be added as the visibility of the brands remains weak. That being said, an increasing number of Chinese now use cross-border e-commerce platforms when they are looking for a cheaper international product, or for a product otherwise difficult to import to China because of regulations (some food supplements for instance). French and German cosmetics, nutritional and baby products are particularly sought after. Thus, cross-border e-commerce might not be the miracle recipe some would like us to believe, but as any sale strategy, it is worth a thought, on a case-by-case basis.

By Manon Bellon

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Two stories about tea and dairy products

The conclusions of the governmental report that was released in May at the E-commerce Convention in Beijing came as no surprise: e-commerce transactions grew by 11,7% in 2017.

Several facts were as well underlined in this report: the outstanding development of the cross-border e-commerce (+120% in cross-border imports), the fact that online platforms and offline industries are increasingly integrated through the use of big data technologies, and the dramatic changes in consumption habits such as the use of mobile payment which increased by 44%. In other words, e-commerce is today one of the main distribution channels for consumption goods, when it is not the most important one.

This article thus explores how companies, especially in traditional sector (tea and dairy products), adapt to this new (online) normal. Their stories are not only inspiring for tea and dairy products’ companies, they are also characteristic of an essential asset companies must display on the Chinese market: the faculty to adapt.

Tea for the millenials

Tea is to China what wine is to France or beer to Germany, a part of their culture. Now is the time when the “Grands crus” arrive on the market, and some of them can reach several thousands of euros for a kilo of tea leaves (the price is determined by the region where the tea leaves are grown). Yet, tea is less and less affectionate by young Chinese. Besides, it is a challenge for the consumers to recognize a good tea from the taste, and even a bigger challenge to recognize it from the packaging, when buying one’s tea in supermarkets. Contrary to wine, price is not a reliable indicator of quality.

Recently, several tech companies saw an opportunity and came up with innovative business models in order to tackle these challenges: Xiaomi introduced Xiao Guan Tea, NetEase came up with Yanxuan, and Penguin Guide also launched their own tea brand. These undertakings seem at first daring as none of them had previous experience in the tea business where it does matter. Yet, Xiaoguan’s 700 millions yuan sales in 2017 indicates otherwise.

Indeed, these tech companies used their technology and innovative sales methods and adapted them in the tea market. They thus managed to improve and modernize the consumer’s experience, a decisive feature in a brand’s success say all the recent consumers studies in China. For instance, selling on e-commerce platforms gave them a reach to the post-90s consumers, and it simplified the purchasing act for the consumers.  Reaching the post-90s is primordial in nowadays market as they become the driving force of the consumption market (McKinsey survey 2017). These consumers are now looking for high quality unique and traceable products, as well as to a lesser extent, other generations of consumers.

XiaoGuan also used the authority of height “tea masters” for marketing, which provided the brand with an image of know-how, guaranteed quality and uniqueness. The fact that the founder of the brand is himself originating from a traditional growing area surely helped: it brought a feeling of tradition, and a deal of personal history to XiaoGuan’s products.

The opening of offline shops completed this innovative strategy. Decorated by the Apple stores’ designers, these shops are the offline side (consumer’s unique experience) of the online sales (easy purchasing process).

All in all, in adapting their products to the new consumption loci and in developing a branding strategy, these tech companies could enter a traditionally rather close market with success.

Improve your knowledge of your consumers, personalize the consumers’ experience

Certain actors, already since long on their market, are also starting to use big data, such as Mengniu, one of the leaders in dairy products for around one century in China.  For Mengniu’s CEO, Jeffrey, Minfang LU, artificial intelligence is a tool for companies to use to improve their organization and their service to consumers (McKinsey interview, 2017). It is all the more necessary that digitalization of the commerce in China also creates several challenges for big traditional companies. Indeed, in the dairy products’ case, Chinese increasingly buy online and opt for home delivery. Consequently, they buy more often and in smaller quantities. They are thus more often choosing a product in a market that is also having a wider offer, and dairy products’ companies need to convince them more often, and through a different media for what it matters.

A national company such as Mengniu counts more than 20millions of “active” consumers, meaning that these consumers share voluntarily information about their preferences and their consumption habits on e-commerce platforms and social networks. For Jeffrey LU, these data are a goldmine to know how to improve their products and marketing. Yet, the company’s current resources are insufficient to treat all these data. One solution that was found is to cooperate with e-commerce platforms who already collect and analyze these data. For instance, Mengniu has a project with Alibaba to analyze their supply chain and determine where to produce, and how to improve their transportation network to gain in efficiency. Mengniu’s teams also analyze consumers’ data in order to design more personalized products, which the consumers are now looking for.

Lastly, market digitalization is not only an opportunity for companies to gather more data about their consumers, it also opens a new communication channel where they can rather directly reach these consumers. Chinese consumers want healthier products with a better traceability, information that a firm like Mengniu can easily provide as it disposes of data on all their farms and even on their cows. Thanks to nowadays data technologies, Mengniu has the capacity of taking up an informative role towards their consumers, not only providing them with information on the products, but also on the nutritional values of dairy products. Jeffrey LU also sees an opportunity to build a story around their milk: “We are not just a milk manufacturer telling you what we can do; we want to be part of your life.” as he says.

Hence, these two stories illustrate the trends of the markets, and the changing expectations from consumers, whatever the sector, and how companies can deal with that. The tea companies showed innovative capacity and put in place a new business model that seems successful in a market in needs of modernity. Regarding the dairy products industry, Mengniu managed to take advantage of their great pool of data to answer requirements from the consumers in terms of better information, personalized products and service. Exploiting these data is also useful in order to improve the supply chain of the company. In many instances in China today, it is all about building a story with the consumer.

By Manon Bellon

Credits : Photography by 魏徐亮 Wei Xuliang

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Chinese people are getting ready for the dog’s year, French President Macron offered a horse to his Chinese counterpart, yet another Chinese sign is drawing the attention of French exporters to China: the beef. During his official visit, Emmanuel Macron announced the total lift of the Chinese embargo on bovine meat “within six months”. The Beijinger wrote that this decision was welcomed by the F&B industry in China as well as all the meat lovers.

Origin (and end?) of the embargo

In 2001 while Europe was facing the crazy cow outbreak, China decided to shut its market to all European beef importers, then American, as a protection measure. In March 2017, the Chinese market slightly opened itself to French beefs: only deboned meats coming from beefs under 30 years old could be imported in China. Eventually, Emmanuel Macron announced a total lift of the embargo during his visit to China in early 2018, in a speech punctuated with some sentences in Cantonese, much appreciated from the Chinese audience.

An expanding market

This decision comes at the right moment. Many studies emphasize the current evolution in the habits of the 1.4 billion Chinese consumers, especially regarding the consumption of meat. As a result, the market is booming (it was multiplied by 10 between 2010 and 2015) while the French beef market is decreasing by 5% per year. Pork meat still makes the bulk of Chinese meat consumption, accounting for 60% of it. Yet, beef consumption is increasingly growing mainly because of the growth of the middle-class: in 2016, a Chinese would eat on average 4 kilos of beef when it was only 3 kilos in 2005, according to OECD figures. For comparison only, French consumption of beef is four times higher than the Chinese one.

The meat market is all the more attractive for exports that prices have been quadrupled in 15 years (3.5 euros per kilo today). Chinese growing middle class is now looking for quality. Thus, according to a note from the Dutch bank Rabobank, they tend to prefer to import meats despites the price.

Opening of the Chinese food sector to importations

If the Chinese food market used to be difficult to access, this situation changed since the 13th Five-Year Plan (2016–2020). Indeed, the Chinese government officially opened China to the international food markets to ensure its food security. Today, China is a net importer of food with a deficit of 34 billion euros in 2015, according to Chinese custody. Every year 1.7 million tons of meat are imported to China, accounting for 20% of total food imports, as a result of the Chinese thirst for imported products in this domain. Food is also the third-largest sector for French exports to China, although meat only accounts for 9% of all exports. As China is about to become the largest importer of beef worldwide, before the United States, meat’s share in French exports to China is expected to increase in the future Franco-Chinese trade balance.

A high level of foreign and local competition

This decision is following the lift of the embargo on American beef last June. In Europe, France is the third country benefiting from it, after Ireland and the Netherlands. The lift regarding French beef was actually decided on March the 3rd. 2017 but it was in a stalemate because of Chinese health requirements.

For the 150,000 French farmers raising beef (a sector worth 6.6 billion euros), the lift is a real opportunity, yet not a given one. Indeed, about 90% of the Chinese beef market is owned today by Australian, Brazilian and Uruguayan importers, and Chinese beef cattle is about 10% of the world cattle, five times more important than the French one.

Yet, unique French assets

French exporters are expecting about 50,000 tons of beef to be exported at first, which would amount to one fifth of all nowadays French beef exports. The market targeted in China is the high quality and high standing food market, but there is also an opportunity in the sale of unwanted meat pieces in France, such as beef tails, a piece mostly appreciated in China. In the 6 months needed for the lift to be effective, France has the opportunity to promote its French beef for its quality (sanitary traceability), for its specific cattle breed, or as a part of the French art de vivre.

Will poultry be next on the list? Discussions are still undergoing for a lift of the embargo that was imposed by China in 2015 following a bird flu outbreak.

To sum up

The beef market in China has been multiplied by 10 between 2010 and 2015, and still increasing. Both consumption and prices are on the rise in China, due to a growing middle-class. On this market, Chinese people particularly prize imported beef. Within 6 months from January 2018 on, it will be possible to export French beef in China.

By Manon Bellon

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New sales record for Chinese giant Alibaba

Alibaba hit a new sales record on November 11th, 2017 or Singles’ day. The Chinese e-commerce giant reported that sales during what has become over the last decade the world’s biggest shopping day amounted to $25.3 billion, a 40 percent jump compared to the same period last year. Additionally, the retailer set a record $18 billion in just 13 hours on Saturday, eclipsing last year’s record of $17.8 billion in 24 hours. Sales from the Chinese e-commerce’s one-day holiday are nearly double those from Black Friday and Cyber Monday in the U.S. combined.

Just like U.S. versions of shopping holidays, Alibaba offered discounts on 15 million products from 140,000 brands. To celebrate the kickoff of this event, Alibaba founder Jack Ma held a gala at the Shanghai Mercedes Arena, with celebrities like Pharell Williams, Nicole Kidman, and Jessie J in attendance. On stage, a countdown was running on a huge screen, where a billion dollars in revenue from Tmall (B2C) and Taobao (C2C), Alibaba’s platforms, was reached within two minutes. The show was aired on both Alibaba’s video service and on three Chinese TV networks, and was covered by hundreds of Chinese and foreign journalists.

A waning interest

Singles’ Day was created at China’s Nanjing University in 1993 by four friends as a version of Valentine’s Day for people without romantic partners. The college students came up with the idea of celebrating singles on November 11th (11.11) because all four digits for this day are the lonesome “1”. At first, only men partook in the festivities, whereas now both sexes do. The first Singles’ Day sale was organized in 2009 by launching a massive marketing push and offering special “Double 11” deals.

But if Singles Day’ may be the most important timing to achieve annual revenue goal for retail companies, interest seems to be already waning in the country after just eight Single Days. According to the Chinese marketing data technology firm Admaster, only 65 percent of interviewees said they would attend the festival in 2017, compared to 84 percent in 2015. These figures highlight changing consumption trends among middle-class shoppers. If Singles’ Day is renowned for the deep discounts offered by retailers, more and more Chinese are looking for better quality products and services. And for that, they are willing to pay. is now taking advantage of this trend. This direct online sales company, Alibaba’s main competitor in the domestic market, has a major advantage: better logistics management. Alibaba’s platforms put sellers in direct contact with customers, while works more like an online supermarket. The company buys products, stores them in its own warehouses and delivers them through an army of delivery men, who also provide customer support. Its “Double 11” lasts 11days, from November 1 to 11, allowing for more flexible operations.

More international brands

Facing this competition, Alibaba wants to lure more international brands onto its platforms, combating Taobao’s bad reputation for offering counterfeit products. It seems to be paying off. According to Alibaba, out of 100,000 retailers who attended Singles’Day last year, 10,000 were foreigners. This year, out of 140,000 sellers, 60,000 came from abroad, 250 of which were French.

Alibaba is also trying to be more innovative. This year, the giant retailer used an online-to-offline strategy to streamline sales between its e-commerce platforms and the merchants with bricks-and-mortar stores selling on them. For example, Alibaba took the Pokemon Go augmented reality game idea and applied it to Tmall, but with cats (Catch the Tmall cats). Chinese consumers were then able to find discount coupons in different stores, such as the French cosmetics brand L’Occitane. L’Oréal set up an interactive mirror at its Shanghai store where shoppers could try on virtual makeup using augmented reality and then order products on a touch screen linked to an Alibaba platform.

But the blockbuster sales of Singles’ Day create an enormous amount of waste. According to Greenpeace, the manufacturing, packaging and shipping linked to the event produced 258,000 tons of carbon dioxide emissions last year. It would take about 2.6 billion trees to absorb it all. This year’s online shopping frenzy is about to leave an even larger carbon footprint, warned the environmental activist group.

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Is cash an endangered species? China is no exception. On the contrary. It even stays one step ahead of the Western countries. If the latter still enjoy their credit/debit card payments, the Chinese have skipped this stage and gone straight to mobile payment.

All in all in just five years. Paying with a smartphone just by scanning a QR code, a two-dimensional barcode type, in a shop, restaurant or even in front of a vendor’s stall, has become one of the most common gestures one will see everyday. The amount of the transaction is immediately debited from the customer’s account to credit the merchant’s account. Easy, fast and convenient. With this completely dematerialized payment method, one can carry out all daily purchases, without a single yuan in one’s pocket. “I pay everything with my phone from taxi, groceries, gas, bills to my daughter’s tuition fees or to make transfers,” said Wang Xiaofeng, a 42-year-old Beijinger.

Her French husband, David, hesitated for a long time before taking the leap. “It was more complicated for foreigners to link their credit card to mobile payment applications. Neither was I used to buying online, nor did I feel the need. Then, I slowly needed it in my daily life. I started to use mobile payment just two years ago,” he recalled. Today, he does not regret this decision. “It’s convenient. There are plenty of special offers.”he added. “I have not been carrying any cash around for three weeks now.”

The monopoly of two Chinese giants

Like her fellow 650 million eWallet enthusiasts, Wang uses Alipay, WeChat Pay or Tenpay applications and, occasionally, the American competitor, Applepay. Alipay, which belongs to the e-commerce giant Alibaba and WeChat Pay, a payment solution completely integrated inside the social and messaging application of Tencent, share 170 million daily transactions, which represented $ 5.5 trillion in terms of mobile phone payment volume in China in 2016. Alipay and WeChat Pay together make up for 92% of the mobile payment market.

The two Chinese giants have been engaged in a merciless war for several years. Left somewhat behind by its competitor, WeChat produced a genuine masterstroke. Prior to Chinese New Year in 2014, WeChat deftly used a centuries-old tradition where family and loved ones are being handed over red envelopes (hongbao) filled with banknotes during this celebration. Chinese consumers were then able to send their New Year gifts via their cellphones. During the Chinese New Year 2016, WeChat has sent more than 8 billion virtual red envelopes – 10 envelopes per use on average – compared to 1 billion in 2015 and only 16 million in 2014.

Spreading across the United States and Europe

In addition to China, the two colossi also plan to expand their influence in the United States and Europe, especially among the Chinese tourists. The latter can already pay their purchases in France via their cell phones since November 2016. Thanks to some partnerships established by Alipay, including the software producer and payment terminals Ingenico or the banks BNP Paribas and Edel. France was not chosen just by chance. Chinese tourists (2.2 million in 2015 and 1.6 million in 2016) spend an average of 9 billion euros per year, half of what they spend in Europe, according to the French agency of tourism development Atout France.

Alipay and WeChat show the same ambition in the United States. In February 2017, WeChat Pay partnered with the American start-up Citcon to establish the payment solution in 200 locations, including the Caesars Palace, Las Vegas. In May, Alipay formalized its partnership with First Data Corp, a renowned payment processor in New York. Alipay will be used in 500,000 stores throughout the United States and eventually in 4 millionstores.

Despite some mistrust in the country, the future of mobile payment remains promising, “I’m scared of my bank account getting hacked. There are scams,” Wang Xiaofeng admitted. The Chinese disaffection towards their smartphones does not seem to have started yet, even if Alipay and WeChat Pay are starting to charge users for their services, while limiting the amount of transfers allowed (130 euros for WeChat and 2,700 euros for Alipay) beyond which users will have to pay a commission. Finally, nobody knows yet if WeChat will emerge victorious in this digital war, knowing the fact that the group announced, in September, its willingness to disclose and share users’ personal data with the Chinese government.

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