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

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%, 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