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.
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%, vip.com 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