Overview of China's e-Commerce Industry
- Title: Overview of China's e-Commerce Industry
- Date: May 12th, 2016
With rising disposable income levels and an expanding internet penetration rate, the Middle Kingdom is perfectly positioned to be the world’s premier e-commerce market for the foreseeable future.
In this podcast, Dezan Shira's North America Director Richard Cant provides insights to China's e-commerce industry. During the podcast we provide a consumer analysis of the Chinese market, take a look at the main industry players, and examine the various investment models that are available to foreign companies.
Download our China Briefing magazine: China Investment Roadmap: the e-Commerce Industry for more information on the subject.
Thanks Dustin, pleased to be here with you again.
So, let’s dive right in. For people who are not as familiar with the e-Commerce market in China: can you just address its size and potential? Why is it drawing so much attention?
There’s been a lot of press about this, particularly in the ways of going to the Chinese market, but I think at the moment we’re looking at retail sales in e-Commerce of about USD 620 billion. That dwarfs any other market in the Western world and represents a 33% increase in 2014. The prior year-on-year growth since 2010 has also been about 50% per year. So this trajectory is enormous and it’s probably the fastest growing online market in the world, and one of the most dynamic. Figures in 2010 show that the size of the market was around USD 70 billion and last year the size of the total market was around USD 620 billion. By 2020 the size of the Chinese e-Commerce market is said to overtake the US, UK, France and Japan combined – so there are an estimated 750 million online shoppers showing this markets potential for continued growth.
Yes, that’s quite a large number and bigger than all these major economies combined should draw attention. I’ve heard that mobile technology in China, as elsewhere, is playing a big role in this sector and driving growth for it. What are some other recent trends for e-Commerce, can you touch on that Richard?
Well I think the mobile technology aspect is very important. China very much leads the Western world when it comes to the use of mobile technology, it’s far above and most online users use mobile phones for their e-Commerce technology. In fact, I think the percentage of online shoppers in China who utilize mobile technology for e-Commerce is way over 50% and if you look for comparative figures in the West, it is significantly lower. I think the other thing driving the Chinese E-Commerce is that the average shopper is very young in comparative to the west. We’re seeing that around 50% of the online users are between 20-29 and they are not necessarily high-end or rich consumers but they are certainly 50% of middle income consumers, university and white collar education consumers.
Right. So who are the big players in the market? Who are the big companies, the big names, that we should know about and what differentiates them?
Sure. So the e-Commerce market in China is relatively new as we know and it has been dominated since the early years by one company: Alibaba. (Who was recently listed in the New York Stock Exchange with the biggest IT and e-Commerce IPO ever.) So at Alibaba’s initial start they had two major sites, one of which is Taobao, which is mainly a Chinese C2C or B2C outlet and then also Tmall. The combined market share of Taobao and Tmall is about 60%. It used to be up to 80-95% but it has been influenced by a number of other players in the recent time. The biggest new player is JD.com, an extraordinary success story. It started only recently and has been stunningly successful and captured about 25% of the market, and most of that from Alibaba. Other major players are Sunning, which used to be an old-style electronics and consumer goods store who has barged into the online space (3.5%), VIP Shop (2.5%), DangDang who started out as sort of Amazon-style (1.3%), Amazon.cn (1.2%). I mean there’s a plethora of other new players and existing players. It’s the most competitive and vibrant market in the world and it changes dramatically every 6 months, so not even the Chinese players know what’s going to happen next. It changes dramatically, and the rise of JD.com, which is employing a different model than Alibaba, shows that it [the market] can be disrupted quite easily.
Yes, so we see that it’s very dynamic, fast moving and changing a lot. In any sort of market with those qualities it’s pretty difficult for an outside company to really break through. We know that there are a few different models for investors to tap into that market, but first can we talk a little bit about why selling directly to Chinese consumers from a website hosted outside of mainland China often fails?
Of course, the size of this market and the dynamics and the growth of this market means that everyone wants to participate, and you know that when I was talking about who are the biggest players in China, they’re mainly all Chinese companies. Basically, the Chinese e-Commerce base has proven to be quite difficult for foreign players to enter. I was mentioning that Amazon was getting a small share, but only a very small share. For foreign investors that want to take part in this space, there is a couple of models that we can talk about, and the first one you mentioned by asking “can you tap into that market from a website hosted outside of China?”- That’s possible - and it’s the simplest way of getting involved with the Chinese market. I mean it doesn't mean you don’t have to have a Chinese website set up in China, and really, you can do it from a Western company.
But there is a whole set of drawbacks, the most important drawback is that it is really difficult for Chinese consumers to find your website. As I mentioned, this is the biggest market in the world and there is a plethora of different E-Commerce players and websites there. Unless your website is marketed quite well to the Chinese consumer, you simply won’t have the ability to find it. Most Chinese consumers will use Baidu as their search engine, opposed to Google. Google is not popularly used in China at all. Although Baidu works really different to Google, it really is designed for Chinese consumers and not Western consumers. Western SEO (Search Engine Optimization) doesn’t really work in China. So, you can have a great load of trouble in having Chinese consumers find your website unless you can optimize yourself on Baidu and so forth. Even if you have a Chinese language version of your website, it still is going to be very difficult for Chinese consumers to find you.
The other problem is Western star websites are not really that appealing to Chinese consumers, who are used to a very different approach when it comes to looking at websites. It also reminds that Chinese consumers are very different to Western consumers: different interests, different price ports, different ways of approaching product purchases. So if you are using a Western style website which hasn’t been properly developed for Chinese purposes then it really isn’t going to do the job in China.
The last point is that when you are shipping products from a Western Website directly to Chinese consumers, then there is going to be quite high shipping and import duties that have to be paid by the Chinese consumer. There is also going to be a delay in the delivery time and increased costs. Of course, not many Chinese consumers are interested in paying these higher prices and also taking the extra time delays.
Yes. So you’ve laid out a pretty clear case on why foreigners looking to break in need to essentially “bite the bullet”, establish in China and work through a Chinese company. If an investor were to establish an own website in China to sell online – what steps need to be taken and what do they need to be aware of?
Sure. This is a big area, let’s go through some basics. There really are 3 ways apart from selling directly from a Western website. The first is to set up your own website in China. This seems to be a good strategy and a lot of people try to do this. The problem with this approach is that it does require that you already have a Chinese company. One of the requirements of the Chinese government in this area is that if you want a Chinese website, you have to have a Chinese company. So setting up a Chinese company can be a long and expensive business. Unless you already have a good business model already operating in China it might not make sense to set up a company and then a website in China. If you do want to set up a company in China you have to get it registered by the Chinese government, through what we call an Internet Content Provider (ICP) Registration. If you want to host your own goods that's quite simple, but if you want to provide other services or host other people’s goods on your website in China then you require an Internet Content Providers License – and this is quite difficult to get for foreign companies in China. Although China is liberalizing its approach to this, it’s still quite difficult for foreigners to get ICP Licenses. So it’s not that simple to just set up your own website in China and start selling products.
The second way, is to sell the products through a third party B2C platform in China. And these are the platforms I just talked about -Tmall, JD.com and various other platforms. It’s also quite difficult to sell products through these platforms because the actual Content Portal Providers have certain regulations. For example, Tmall: if you want to set up a presence on Tmall you are required by Alibaba to have had a presence in China for at least 2 years, you are required to have a company in China, you are required to have a certain level of capitalization and that can be maybe 500.000 – 1.000.000 RMB and you’re also required to have a relatively good brand name.
JD.com also has certain requirements, they’re not as restringing as Tmall but it just makes it a little bit difficult for Westerners to simply put their products on these platforms. Also, Tmall can charge quite high annual fees and also some of the commission charges on sales can be quite high. So it’s not simply a matter of just placing your products on these online platforms. In many ways a lot of these Chinese online platforms are designed for Chinese products and not that really well designed for Western products.
Right. We see that these B2C all require an established legal entity. There are some varying requirements between them but they are essentially similar. I heard about Tmall Global – what is the significance of this and how can it impact foreign companies looking to sell to Chinese consumers on the internet?
Tmall Global was set up purely because it was so difficult for Western products to go on to the Tmall platform because of the requirements I talked about. And these requirements were changing all the time. So what Tmall did was to design Tmall Global for foreign sellers and it would basically make it easier for foreign companies to place their products on to the Tmall platform. Unfortunately, what’s happening is that, again, it’s become quite difficult for foreign sellers to place their products: Tmall has now been charging quite high fees to get your products placed on Tmall Global, there is an invitation-only system, basically not anyone can join you have to be invited to join, you have to be able to demonstrate that you have a corporate entity outside of china, you have to be the brand owner or at least authorizes by the brand and you have to show that you have a proper business in the foreign country. So all these things are designed to make it a little bit difficult for particularly smaller and midsized Western players to get their products on the table and it’s also designed to weed out a lot of the fake and counterfeit goods that Tmall has been played by. What we found in Tmall Global is that it is really designed for high-end brand and for large international/multinational players.
JD Worldwide from JD.com is another good example. It was basically set up purely for Western goods to be placed onto a platform in China and the restrictions on JD Worldwide are not as restringing as Tmall Global. What we’re finding is that a lot of certainly smaller and midmarket players who want to place their goods on a Chinese e-Commerce platform are finding that JD worldwide is a little bit easier. But again, it’s still not that simple to set this up.
So a little bit of movement in liberalization, but it’s still difficult. One area that has been generating some excitement is the so-called “Pilot Schemes” in key cities that creates special conditions for the cross-border selling of goods through e-Commerce into China. Can you comment on this, Richard? And what are the different models available for investors to use this options?
Sure, and this is sort of the last option for getting products. This e-Commerce cross-border pilot program started in Shanghai a few years ago and basically what it did was: there was a state backed online portal and that basically allowed foreigners to get their goods onto this platform within this free trade zone and then Chinese consumers would come to the free trade zone online portal and purchase the goods that way. This was an attempt to make it much easier for Chinese consumers to buy Western goods and to make it also easier for Western companies to place their goods in front of Chinese consumers on these online platforms. This started in the Shanghai Free Trade Zone a few years ago and recently, over the last year, has been expanded into a number of different cities, e.g. Guangzhou, Tianjin, Chongqing, Zhengzhou, Chengdu and also Hangzhou, which is considered to be the e-Commerce capital of China because it is the home of the e-Commerce giant Alibaba. And these e-Commerce platforms are set up with the Chinese government and they have the ability to allow Western goods into their platforms in a much easier way than some of the other portals.
Excellent. Finally, we have seen that parcel tax is due to be reduced. What is the significance of this, what does it mean for the industry, Richard?
About a year ago, China was tinkering with its e-Commerce taxation policies and so forth. One of the issues is that Westerners want to import their goods into China, whether be it traditionally or on online and e-Commerce basis - there is import duty and VAT. And this makes the products much more expensive than Chinese products. In order to sort of level the plane field, if you brought your products in through one of these e-Commerce platforms in a designated sea you could attract a lower and a more advantageous right of tax. The so-called parcel tax came in about a year to promote cross-border e-Commerce and trade. That allowed quite a low right of duty, about 10% on certain goods that were imported and sold on an e-Commerce basis. What this caused though was a really distorted plane field between certain types of imported goods – and caused imbalances in imports. This led to a boom in the online sale of certain imported goods like e.g. milk powder, cosmetics, health products and certain foods. What happened when it caused a lot of problems for the entire industry, was that as of April 8th 2016 that parcel tax was eliminated and what’s been put in its place is that the government imposed import VAT in consumption duties on purchases which don’t exceed 2000 RMB (approx. 300 USD). So what they’ve done is they put back on VAT on consumption duties but they have given you a 30% discount if that purchase doesn’t exceed 2000 RMB. This again is an example another of China tinkering with their e-Commerce policy. It’s hard to know what the impact of this will be. There have been press reports that certain items will become much more expensive, and I think things like cosmetics, milk powders, health products will be impacted. We will have to wait and see as to what the long term impact will be. But what we know for certain is that this is not the end of the Chinese government’s tinkering with the policy and I’m sure we will see new policies that either encourages or attacks the e-Commerce platforms as we go along.
Well, as you said, a lot of changes in this industry but also one with a lot of opportunities. That’s unfortunately all we have the time for. Thank you for taking the time today.
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