Selling to China through Cross-border E-commerce
In the past, in order to sell to Chinese consumers, retailers/brands located overseas would have to 1. target Chinese living or traveling abroad, or 2. export their goods to China through a wholesaler or importer, via B2B general trade.
Cross-border e-commerce, a sales channel that emerged in 2013-14, changed the ballgame by enabling foreign companies to sell and ship imported products directly to Chinese consumers, without having to register a Chinese company or apply for local product licenses. This opened up new opportunities for smaller brands and retailers who didn't have the resources to invest in a full-blown China market entry strategy.
We give some context as to where cross-border e-commerce fits in the grand scheme of cross-border trade and talk about some of the pros and cons.
Selling to Chinese tourists and gray-market daigou agents
Targeting Chinese tourists and daigou agents provides a low-risk way for brands to target affluent Chinese consumers who are visiting stores overseas. Many international brands in China are first discovered by Chinese consumers living or traveling abroad, and spread via word of mouth back home in the China market.
But the downside is that sales are limited as brands can only sell to Chinese customers when they are traveling to visit retail stores abroad, and there are limited avenues to retain and target them for subsequent marketing campaigns. Gray-market daigou agents have emerged over the years, in which certain buyers will purchase goods on their clients’ behalf and sell them in mainland China for a slightly marked-up price.
While purchasing via daigou agents is popular amongst many consumers, the process can be inefficient and the daigou trade is fraught with instances of fake goods, which can potentially harm your brand image as well.
Selling to China through general trade
To sell to China through general trade, a brand has to find a trusted partner in mainland China who is authorized to import foreign goods. The partner also should be expected to both market and distribute the brand properly, while being able to uphold one's brand values and integrity.
A brand could choose to enter China on its own, but would have to set up a China entity, hire a local China team, and deal with a host of different product registration and legal issues that may arise.
For example, those selling health supplements would have to wait a very long time for China FDA approval. Those selling cosmetics brands would have to undergo stringent product testing requirements, which include animal testing measures that many cruelty-free brands are averse to.
Additionally, import taxes for certain categories such as luxury goods and cosmetics can be very high, which oftentimes turns off consumers who may choose to purchase through friends or daigou agents overseas.
The Rise of Cross-Border E-Commerce
Beginning in 2013, cross-border e-commerce as a sales channel began to emerge. The Chinese government designated CBEC pilot zones in cities such as Hangzhou and Shanghai, later expanding the scope to include 37 cities today.
To put it simply, cross-border e-commerce is the online purchase of goods from abroad, typically from merchants that operate in different countries, different jurisdictions, and even different languages.
This means that brands can sell and ship products directly to Chinese consumers, through special customs clearance regulations that are different from those of general trade. China’s CBEC pilot zones and their special customs clearance gateways enable them to do this.
International retailers and merchants can stock goods in their home countries or bonded warehouses in Hong Kong or Chinese free trade zones, reducing the inventory risk of exporting to China and stocking them in Chinese warehouses. This eliminates the need for wholesalers or importers in the middle.
Cross-border e-commerce lowers trade barriers and upfront costs for retailers. The elimination of middlemen means that there is less mark-up on an imported product sold to a Chinese consumer.
Preferential tax regulations lower the price differential between CBEC goods and goods purchased overseas to a point where Chinese consumers are willing to purchase through CBEC.
Cross-border e-commerce sales channels include standalone e-commerce websites, WeChat mini-programs, and marketplaces such as Tmall Global or JD Worldwide.
Standalone e-commerce platforms include individual websites operated directly by the brand/retailer or a dedicated agency, and includes desktop/mobile H5 sites, mobile apps, and, recently, WeChat mini-programs.
Tmall set up its own cross-border platform, Tmall Global, in March 2014; Competitors JD Worldwide and Netease Kaola launched in the following year, and the three companies dominate the CBEC market today, with a combined 61% market share.
Such marketplaces either choose to sell inventory purchased in bulk from leading brands, or enable brands to operate their own stores on the platform.
We’ve summed up the benefits of cross-border e-commerce here:
- Requires less capital investment
- Less inventory risk
- Does not require the set-up of local business entities or local China teams
- Does not require lengthy product testing or registration processes
- Quick set-up process
- Flexible; can scale quickly or exit market altogether
Why is the Government Encouraging Cross-Border E-Commerce?
The government encourages the practice of cross-border e-commerce for three main reasons:
1. They recognize growing Chinese consumer demand for foreign products, many of which cannot be produced in or exported to China for various reasons.
2. They want to clamp down on grey market daigou selling, partly to protect consumers from the sale of fake/shoddy goods
3. They can better track and tax cross-border e-commerce, compared to daigou sales
WeChat Mini-Programs + Cross-Border E-Commerce
WeChat mini-programs provide a way for smaller brands and retailers to set up their own cross-border mini-stores without having to rely on third-party marketplaces or investing in a standalone e-commerce website.
The set-up costs are lower and mini-programs can take advantage of WeChat's billion-plus user base in China. You also have more freedom and space to tell your brand's story. However, driving traffic is still tricky and you will have to come up with creative marketing campaigns to attract and retain customers.