An Introduction to China Cross-Border E-Commerce
Updated: Oct 2, 2019
The digital disruption in China and Chinese consumers’ increasing appetite for overseas premium products have made the momentum of international shopping stronger than ever. Taking advantage of this opportunity to break into the Chinese market is key for UK retailers and brands. Therefore, in this article, we are trying to answer the key questions about how cross-border e-commerce (CBEC) works and what you should do in order to make your online business successful in China.
What is the cross-border e-commerce?
Before China launched the cross-border e-commerce channel, Chinese consumers purchased overseas products mainly through the domestic websites of foreign brands and Daigou group. Daigou is a group of individuals who purchase goods on behalf of customers in China in order to circumvent import tariffs imposed on the overseas products, and its act of selling is identified as grey market in China.
Cross-border e-commerce model emerged as a direct sales channel in China starting in 2013, and back then only Hangzhou and Shanghai were designated as the special pilot zones, which afterwards expanded to more than 30 cities today.
Cross-border e-commerce allows retailers and brands to sell directly to consumers in any country through online stores and ship via international logistics without working with distributors. It helps reduce the threshold for engaging in international trade, avoid setting up brick and mortar stores, shorten the operation cycles, and lower the inventory risk in the local market.
According to eMarketer, China’s cross-border eCommerce market will hit almost $2 trillion in transactions in 2020, occupying 57.42% of the entire ecommerce market.
Figure A: The Cross-Border E-Commerce Sales in China
Why is the cross-border e-commerce supported by Chinese government?
There are three key reasons for Chinese government to encourage cross-border e-commerce model:
1. Crack down on the Daigou group and protect the Chinese consumers from purchasing fake products. On 1 January 2019, Chinese government officially enforced the new e-commerce law, which is the first comprehensive law in the field of e-commerce in China. The new e-commerce law has intensively accelerated the compliance of the cross-border e-commerce industry by bringing cross-border e-commerce operators including Daigou, Weishang (individuals who sell products through WeChat) etc. within its jurisdiction. Moreover, it offers shelter for the consumers when it comes to personal and property safety.
2. Track and impose the tariff on every single item purchased via cross-border e-commerce channel in an improved manner.
3. Encourage the global trade and embrace the new brands and technology.
Which is more suitable for you, cross-border e-commerce vs general trade?
There are two main ways for retailers and brands to enter the Chinese market, which are, general trade and cross-border e-commerce.
If you want to expand your business through general trade model, you have to find reliable distributors, go through complicated long product registration process and set up the localized supply chain and retail operation, which can lead to considerable investment.
However, with the cross-border e-commerce model, you can set up your online store quicker and easier without establishing a local business entity, and sell your products from a domestic warehouse or a HK warehouse or a bonded warehouse in a free trade zone in China without worrying about the inventory risk.
In short, cross-border e-commerce is suitable for brands and retailers of any scale who want to test the Chinese market and the smaller players who want to seek a light-asset way to do their business in China.
What does the cross-border e-commerce import market look like in China?
Netease Kaola, Tmall Global, and JD Worldwide are the three big players in China (see Figure B), dominating the China cross-border e-commerce market for the last 5 years.
Alibaba Group has acquired Netease Kaola in September, 2019. After Netease Kaola integrates into Tmall, it will create the largest cross-border e-commerce platform in China, occupying almost 53% of the entire cross-border import market.
Figure B: China Cross-Border E-Commerce Import Market Share (H1 2019)
What are the main sales channels for the cross-border ecommerce route?
There are three sales channels under CBEC route:
1. Marketplaces (see Figure B) such as Tmall Global, Netease Kaola, JD Worldwide, and other vertical e-commerce platforms (The Little Red Book, Mia.com, etc.)
2. Own e-commerce website
3. WeChat mini-programs
Each sales channel has its advantages and disadvantages. In general,
Marketplace can provide you with already-built infrastructure like payment system and delivery service, and large volumes of user traffic, but you will also fight for customer traffic with competitors and worry about low brand awareness. Besides this, if you want to get on different marketplace platforms, such as Tmall Global and JD Worldwide, you will potentially have to double your investment since Tmall Global and JD Worldwide are using their own ecosystems.
Own e-commerce website is good for long-term brand building and self-differentiation; however, it might be difficult to drive traffic.
Wechat mini-programs makes the ordering process more convenient, benefitting from the Wechat ecosystem (content from Wechat official account to drive traffic-->Wechat mini-program-->Wechat Pay -->Ordering), but is hard to drive the traffic since a stranger cannot view another stranger’s news feeds.
If you are a renowned brand, you may try multi-channels (Marketplace + Own Website + WeChat mini programs) to make your brand fully visible by Chinese consumers; if you are a comparatively smaller brand, you might consider setting up your WeChat mini-program first, and then gradually build your own website and get on a large marketplace platform.
Who are the cross-border ecommerce users?
By using cross-border ecommerce channel, Chinese consumers can get lower prices because there are no intermediary costs and the import duties are lower than the general trade. Besides, lower risk of fake products is also one important consideration for them.
Among CBEC users, most are in the age group 24-39 (see Figure C), who prefer buying high-quality products from overseas at a good price via fast and convenient delivery with their preferred Chinese local payment method such as Alipay, WeChatPay and UnionPay (See Figure D). Many of them are also passionate about learning new brands which best describe their unique taste and lifestyle.
Figure C: Age Distribution for Cross-Border E-Commerce Users in 2018
Figure D: What Cross-Border E-Commerce Users Care About (Q1 2019)
What are the hot products of the cross-border ecommerce?
Beauty products, fashion products like clothes, shoes, hats, and mother & kids products rank the Top 3 most wanted goods by China cross-border e-commerce consumers, followed by bags & accessories, living products and outdoor products.
Figure E: Cross-Border E-Commerce Imported Products by Category (Q1 2019)
Before you decide to enter the Chinese market via cross-border e-commerce route, you must figure out whether there is a demand for your product. If you are a cosmetics brand, this route will help you avoid the animal testing and you don’t have to operate against your company’s cruelty-free principles. If you are a new brand to Chinese consumers, you have to emphasize the uniqueness of your products and invest in marketing campaigns to attract the consumers.
What do you need to start the cross-border ecommerce in China?
Here is the checklist for you:
1. A thorough Chinese Market Research to help you fully understand the digital and commercial landscapes in China, and develop consumer insights
2. IT Support to set up and maintain your online store, and integrate delivery and local payment method
3. Logistics Service to make sure your product can be stored in the most appropriate warehouse and delivered to your clients on time
4. E-Commerce Operation team to run your online store
5. Enough Capital to set up and operate online stores and launch marketing campaigns
Although the cost of setting up the cross-border ecommerce channel is lower than any other channels, you are still expected to invest hundreds of thousands of dollars if you want to use a marketplace platform. Additionally, working with a local e-commerce service provider could be a good choice but will also require an upfront fee and commissions. To enter the Chinese market, you have to move faster and take wiser actions to beat your competitors both in China and outside China.