How to Start a Business in China’s E-commerce
This is a comprehensive guide on how to start a business in China’s E-Commerce market for foreign brands.
- A New Era for China’s E-Commerce
- Benefits of China’s New E-commerce 2019 Regulations
- Models to Start a Business in China’s E-commerce
- China’s E-commerce Platforms Comparison
A Guide for Foreign Brands
After 5 years of explosive growth, the e-commerce market in China continues its trajectory into 2019. China’s middle class is booming. Pockets full of disposable income, latest iPhone model in hand, and ready to purchase on a variety of shopping apps, the potential is large. In fact, last year, e-commerce sales accounted for 23.8 percent of retail sales in China; this year that number is set to grow another 10%.
For foreign companies, e-commerce is a relatively easy and risk-free way to enter such a massive market. In fact, nearly half of the world’s e-commerce sales occurred in China alone.
(World Economic Forum)
Interestingly, as of 2017, 95% of online purchases were from smartphones. Chinese consumers are eager to buy foreign products, which presents an astounding opportunity. In 2018, according to the China e-commerce Research Centre, Cross Border E-commerce (CBEC) in China accounted for 9 Trillion RMB (1.33 Trillion USD. The customer base buying online is also well-educated, 90% hold college degrees.
A New Era for China’s E-Commerce
With this increase in e-commerce activity, consumer complaints and speculations of unfair competition have risen. It is only natural that the Chinese government has taken notice. Starting January 1st of 2019, a new set of rules now governs the e-commerce market. For a foreign company seeking to start a business in China, it is crucial to closely examine the fast-changing landscape.
However, the new regulations introduced by the government this year are important to consider, as many of them are relevant to Cross Border e-commerce (CBEC).
Tax-free cross-border purchases
There is an increase in the tax-free amount for cross-border purchases. For a single transaction, the limit is now 5,000 RMB and in a year the new limit is 26,000 RMB. Purchases within these limits will not be charged import tariffs, and additionally, import value-added tax and consumption tax will only be collected at 70% of the usual rate.
Prohibition of Daigou
Buying a product outside of China for cheaper than it could be domestically, then bringing it back to China and reselling it, is now illegal. This is known as Daigou, and is extremely common, with an estimated 50% of Chinese luxury spending being through Daigou (luxurysociety.com). Recently, there have been cases of the government actively cracking down on it, which is good news for foreign businesses looking to sell their products within the Chinese market.
New regulatory systems
There will be a new regulatory system implemented to deal with customs clearance, taxation, inspection and quarantine, and payment methods.
Non-traditional shopping channels such as WeChat and social media must comply with new regulations.
Consumer rights enforcement
Domestically-based websites must offer stronger protection for consumer rights.
Intellectual Property (IP) Protection
IP theft, including counterfeits and brand-stealing, has been rampant in China for many years. It is a huge problem and one that the Chinese government is taking seriously. Lately, there have been many victories for foreign companies like New Balance, Lego, and Under Armor in Chinese courts, a marked change from the past. Although there has been a sizeable improvement, businesses selling to China through CBEC should take stringent measures to protect their brands, especially for e-commerce companies lacking a strong physical presence in China.
Chinese customers are extremely brand-conscious. If a company is not careful and its brand is replicated, it can turn Chinese people wholly off because the brand will seem inferior. Consumer products such as beverages and cosmetics are particularly vulnerable because customers are very attuned to safety and reliability.
Chinese Business License Requirement
E-commerce platforms must protect IP rights and respond to a report of violations quickly. Companies that fail to respond will be penalized significantly. Additionally, all retailers on e-commerce sites will be required to obtain a business license through the State Administration for Industry and Commerce to further protect intellectual property. To be clear, as of January 1st of 2019, all foreign companies starting a business on an E-commerce platform in China must have a Chinese business license.
NOTE: The only way to acquire a business license in China is by setting up a Wholly Foreign Owned Entity (WFOE).
These new regulations are quite broad, applying to platforms and micro-businesses as well.
With the new rules now in place, in order to protect intellectual property on an e-commerce marketplace, there must be a legal entity in place. FDI China has strong experience helping foreign companies establish a business in Mainland China, and can help your brand register a company (WFOE) in China.
Methods of Protection
The number one way is registering the intellectual property with the Chinese government.
Although a company or WFOE may have registered a trademark in their original country, that doesn’t mean it is protected in China. The Chinese government will only protect companies who file trademarks first in China, regardless of the use or intent to use. If a foreign company / WFOE fails to register their trademark within China before they start doing business in the country, opportunists may register the trademark before the company can and then charge them for it when they finally do arrive. Major American companies have faced this challenge. To avoid trademark squatting, it is recommended that a company should register a trademark far in advance within China market entry, even if the company doesn’t plan to expand to the Chinese market in the new future.
An e-commerce company selling on a third-party platform should also work with the platform to stamp out counterfeiters. For example, Alibaba has a system to handle IP complaints, called Aliprotect.
Benefits of China’s New E-commerce Regulations
The new rules may be complex, but they also have many benefits, specifically:
- More products are open to cross-border e-commerce in China, including luxury items under 5,000 RMB, such as high-end fashion and cosmetics that appeal to cross-border purchasers;
- The cross-border tax rebate has increased from 15 to 37. There’s also more legal protection that goes along with this increase;
- The number of item categories for cross-border purchases has increased by 63;
- 1,585 import items have received a tariff (in Chinese);
Increases in Business Protection
The government is actively trying to increase cross-border e-commerce by expediting processes for things such as custom registration and goods examination. Also, unfair competition will become more regulated, so that market participants with greater advantage can’t abuse their power. Business will also gain more intellectual property rights.
Increases in Consumer Protection
One such rule requires merchants to clearly disclose clauses or bundles placed on sales. Fake review on items will also be banned. Fake review on items will also be banned.
Stricter Regulations for Platforms
If an e-commerce platform sells fake goods on its platform, it can be held legally responsible. Platforms must complete due diligence to make sure the products sold on them comply with the new regulations.
Models to Start a Business in China’s E-Commerce
A company that wants to enter China’s market has several strategies available to it.
The first is through a company’s standalone website and system outside of China. There’re two clear benefits to this: it’s cheap and convenient. However, there is a very big downfall. Simply put, the chance of a Chinese customer choosing to go on a foreign website versus a Chinese one is low. This immediately puts its success at risk.
Online Mall Store
Another e-commerce strategy is selling through a CBEC online mall store (B2C). These are websites such as Tmall, JD Worldwide, and Suning Global, that act as a virtual mall for thousands of different businesses. High user traffic and convenient sales support for customers are two benefits to this method. On the downside, there is high competition with other stores and high investment costs for doing business on the site.
As a third option, for a foreign company looking to sell their goods electronically through an intermediary (B2C2C), three main types of marketplaces exist. Let’s look at them from the perspective of a company who wants their goods sold.
- Hypermarket – A procurement manager for the hypermarket will buy the foreign brand, store it in the hypermarket’s warehouses, then sell it on their own platform. They often focus on a certain category of products, like beer or handbags;
- Vertical specialty – This is like a hypermarket, except these platforms focus on niche consumer demographics, product categories, or regions;
- Flash sale – If a foreign company is interested in testing out the new market, this is a great option. Limited quantities of products at discounted prices can be sold for a short period of time;
All three provide lower risk and requirements as the marketplace takes the burden of storage and distribution. The marketplace is also already familiar with consumer demands. The downfalls are
- Limited product categories;
- Lack of branding control;
- The products must be sold at a wholesale price to the distributor;
The fourth, new method of CBEC is through the ubiquitous WeChat Application. It is uniquely positionedas a social media, messaging, payment, and just about everything app which makes it increasingly appealing for online companies. If a company wants to go this route, there are additional legal requirements that must be met. Also, there will be no organic traffic, so the company must market aggressively.
China’s E-commerce Platforms Comparison
This graphic provides a comparison of the different types of platforms.
These four different options all have their positives and negatives, but the best-fit platform for a company should be based on several different considerations, including what type of product is being sold, the capital available to the company, the market development plan, and the regulations and operations on the platform the company is using.
These are exciting times for e-commerce in China! Although there are now new regulations in place, they are not necessarily a bad thing for the industry. The market will continue to grow at a rapid pace, and there is now more clarity as to how foreign firms can take advantage of the e-commerce market in China.
Perhaps the most notable new rule is that all e-commerce firms in China must now have a business license, which requires a WFOE setup in China to obtain. Becoming a legal entity is something FDI China specializes in and can walk your company through the process seamlessly.