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How to Start an E-commerce business in China (2022 Official Guide) 

How to Start an E-commerce business in China

Table of Contents

The Chinese online market is by far the largest in the world, its volume is about double of the one in the United States of America. E-commerce business in china is impressive given that in the past decade China accounted for only 1% of the volume worldwide, while now it’s ranking in the first position, with a share above 40% of the global market. The expansion of this market grew parallel with the evolution of the consumer habits, which nowadays use smartphones or computers to buy all kinds of goods and services.

The value of payments from mobile phones in China is at least ten times higher than in the United States of America (according to a study of the World Economic Forum). The use of the internet is also very high, with about 1 billion internet users registered in 2020. This number is expected to grow even more reaching about 75% of the local population (within 2024) and bringing the revenue volume of the e-commerce market to about 15 trillion USD. 

The Chinese e-commerce market is growing steadily (In 2018, e-commerce sales accounted for more than one quarter of retail sales in China) it is advanced and certainly full of opportunities for foreign companies, even if the competition is very intense, mostly related to the difficulty of entry and positioning of the foreign operators (especially in the segment of platforms).

Several local e-commerce companies have reached massive sizes, becoming real centres of interest (and power), and starting expansion also abroad in search of new markets, especially in other Asian countries. Moreover, Chinese products’ aggressive price and competitiveness it’s a major factor. Chinese companies are extremely reactive to their competitors and are able to find inspiration (or even copy) from other products in order to create their own version of it and sell it cheaper. However, there is still a wide room for growth, particularly in the specialized channels. 

The COVID 19 epidemic has not only accelerated even further the digitization of these already well-established channels, but also forced those traditionally less involved into a rapid conversion and adjustment. In order to stand out in this industry, companies will have to be creative, create unique products, be competitive in terms of price and quality, and most importantly, create brand awareness.  

Western brands in particular, will have to take advantage of the foreign brand factor with higher quality products. Moreover, analyzing the Chinese market, future competitors and finding the right partners can be the key to success. 

Given the utmost importance achieved by this sector, the need to regulate the phenomenon has also grown exponentially, which for a long time was almost totally lacking organic legislation. The online sales business was not subjected to any particular requirement, as well as no particular duties or responsibilities for its operators. As a matter of fact, the first reforms focused exactly on obligations for those (operators or platforms) who carry out these activities, identifying a standard in the performance of the activities themselves, the quality of the service and goods, the control of inbound and outbound flows of goods, the reduction of illegal and counterfeit merchandise sales, and subjecting operators to tax burdens equal to those who trade offline. 

China e-commerce growth

Starting your e-commerce business in China

Conducting market research is without a doubt the first step every company needs to undertake before planning any operation within the target market. It is important to understand many factors as the: 

  • product/service appealing; 
  • competition analysis; 
  • brand, product or service awareness;  
  • consumer behaviour; 
  • Target audience. 

Just to name a few.  

It is even more important to conduct this preliminary study in the Chinese market as the product and services that have been successful in the western market, might not have the same result in the Chinese one. Chinese consumers have different needs, values and context (historical, social and political), different consumer behaviour and purchase journey. For instance, Chinese consumers tend to buy products recommended or reviewed by the KOL they follow on social media, and the actual purchase decision is made online rather than in an offline shop. They like to receive their products at home, try them out and eventually send them back or change them. In order to be successful, it is very important to verify your plan with your target market. 

E-commerce and cross-border E-commerce in China 

As defined by the E-commerce Law (ECL), the term e-commerce means “any activity of selling goods and providing services via the Internet and other networks and information systems”, explicitly excluding the application in terms of “products and financial services, provision of audio-visual information services, publications and other cultural products circulated via the Internet and other information systems”. 

Cross-border e-commerce is differentiated by the cross-border element and this term in particular indicates the online sales activity in favour of Chinese consumers, by foreign traders not established with a legal entity within the Chinese territory. Also in this case there are obligations for those who carry out this activity, provided by Chinese legislation, different and less stringent. According to Chinese law, cross-border e-commerce includes direct sales channels and those that require storage in a bonded warehouse with different tax regimes.

All major Chinese e-commerce platforms have in fact a ‘global’ or ‘international’ division to allow international sellers to use the platform without having to have a Chinese company set up. 

This obviously also has a more limited market than with a Chinese entity and direct presence. For most companies, cross-border e-commerce is a ground for testing the market, with a lower risk entry route that gradually helps to build the business. 

This can either be done through a bonded warehouse in a free trade zone – which requires a partner (Third-Party Service Provider) to manage the logistics, platform and customer service, but greatly improves the consumer experience and delivery time – or by shipping directly to the consumer from overseas via postal channels. This takes longer to deliver and requires the buyer to deal with paying duties on arrival but reduces stock management issues and risk for the vendor. 

Companies without trademark registration also find themselves rejected from mostly all the platforms, partly to stop counterfeiters.  

cross-border e-commerce inn China

Definition of E-commerce Operators 

The ECL provides a general definition, including different categories of entities.  

The E-commerce Operators, according to the law, are all those subjects “natural persons, legal entities and entities without legal personality, which carry out the sale of goods or supply of services through the internet or other computer networks including platform operators and business operators who carry out sales activities through their own websites or other network services “. 

The e-commerce platform operators are then specifically identified, intended as those legal entities or other entities that provide a digital space, where the buyer and seller are put in contact or carry out e-commerce transactions, that are actually settled in such space, or even only when the transaction is settled separately but the contact is made through the platform. 

Obligations for the E-commerce Operators in China 

Operators are required to operate in possession of the relative Business License. The law also provides for further obligations where operators necessarily: 

  1. must fulfil tax obligations, possibly enjoying the related benefits, where required by law.  

Issue a regular invoice (including the digital one); 

  1. are obliged to obtain administrative licenses, if required by law, to carry out the specific activity and depending on the goods sold and services provided; 
  2. must comply with certain duties regarding the times and methods of deliveries; 
  3. must comply with the laws and administrative provisions on the protection of user data when they are collected and used (the same law explicitly refers to the Cybersecurity Law which regulates the matter in detail). 

This regulatory regime concerns activities carried out within the territory of the People’s Republic of China. For individuals identified by the law, whether they are resident individuals, or companies governed by Chinese law, the application of the ECL is unquestionable. However, given the particular nature of the space in which online transactions take place, there are cases in which it is less easy to determine whether or not the above requirements apply to certain subjects operating from abroad and not established. The ECL does not clarify on this point, limiting itself to specifying that the activities carried out within the territory are regulated by it. In any case, the regulations and the jurisprudence state that they are considered activities carried out within the territory of the People’s Republic when: 

  1. the platform from which purchases are made (in some cases, even just orders) is a web page that can be associated with a Chinese domestic domain; 
  2. the transactions are concluded within the domestic borders, or in websites with a local domain, or through the use of domestic electronic payment systems; 
  3. the operator has its own warehouse, warehouse or other structure within the domestic borders and from which deliveries are made systematically. 

In the cases described above, the operator is required to comply with domestic legislation and fulfil the related obligations. It is emphasized on this point that failure to comply with obligations can lead to serious consequences. For example, operating without having obtained the Business License can lead to the seizure of illicit profits and penalties. The second consequence is also foreseen in the event of failure to declare taxes. 

The ICP License 

ICP stands for Internet Content Provider (ICP). As China maintains strict control over websites, games, apps, and e-commerce within its borders, any “internet content provider” must first register for licenses with the Chinese Ministry of Industry and Information Technology (MIIT) to be able to post information and/or do business online. There are two ICP licenses to acquire first: 

  • ICP Beian – The standard ICP license required to host a website in China.   
  • ICP Commercial – Gives its holder the legal ability to accept payments online, but it generally applies to online stores that sell services or physical goods. 

Under the spirit of the law, this would include both websites with online shopping carts and also people who are selling through stores in online marketplaces. It is important to understand that foreign companies that don’t have a Chinese entity are not eligible to receive or ICP License. It is not enough to have a representative office in China, a registered Chinese company with a business license is required. 

Having a local company can provide the freedom to conduct operations in China, but it requires compliance with various regulations. E-commerce retailers are required to obtain a business license, which is only possible by setting up a Wholly Foreign Owned Entity (WFOE).  

Intellectual Property Protection 

Intellectual Property 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 adopting several new laws and regulations to tackle the phenomena and guarantee a safer business environment. Worthy of mention are the recently established specialized Intellectual Property Courts (since 2014) in the major cities of Shanghai, Beijing, Guangzhou, Suzhou, Nanjing, Wuhan and Chengdu. 

In recent years, there have been many victories for foreign companies in Chinese courts, without a doubt a marked change from the past. Although there has been a sizable improvement, businesses selling to China through e-commerce should take stringent measures to protect their brands, especially for e-commerce companies lacking a strong physical presence in China. Chinese consumers 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. 

One effective way to protect intellectual property in China is to register it with the Chinese government, international registrations are not always recognized. To receive protection from the Chinese government, the company must file a trademark in China. If the company begins doing business in China before registering their trademark with the Chinese government, someone else can register the trademark in the country. This can ultimately result in the company having to pay the registered trademark owner for using their own trademark. 

Most important E-commerce platforms in China 

How to sell online in China

Following a quick overview of the main e-commerce platforms in China. The list is not exhaustive, it should also be noted that there are also many sector-specific realities worthy of consideration. Also, the access requirements may vary depending on the platform. Furthermore, the different platforms operate on different levels (domestic and cross-border commerce) and in some cases it is possible to operate as a seller only if in possession of certain requirements (i.e., Business License) or alternatively, to authorize a third-party specialized company or local distributor.The main e-commerce operator in China is undoubtedly Alibaba, which controls the largest share of the market with its two platforms Taobao and Tmall. 

Taobao 

Taobao.com, the most popular online shopping site in China, is a consumer to consumer (C2C) e-commerce platform that allows individuals, retailers and wholesalers to present and sell any type of product directly to buyers, via the free opening of your “online store” on the platform. 

Founded in 2003 by the Alibaba Group, Taobao follows a similar model to its American counterpart eBay, where goods can be sold for a fixed price, negotiated, or at auction.  

One of the keys to Taobao’s success and which has led it to be a leader in this market, is certainly the free registration for its users and the introduction by Alibaba of its in-house online payment method Alipay, currently one of the two most used in China.  

With the technological evolution of the Chinese market that has led to the gradual decline of bank and cash payments, the introduction of an electronic wallet where it is possible to deposit one’s money and be able to use it for any type of transaction, has certainly represented a decisive factor in the enormous growth of Taobao (and especially Alibaba). 

Tmall 

Launched in 2008 by Alibaba Group as Taobao Mall (Tmall), the platform is one of the leaders in the B2C online market in China and allows local and international brands to sell their products directly to the final consumer. Unlike its big brother Taobao, Tmall is a marketplace with more stringent rules. To set up an online store on the platform, it is necessary to prove the authenticity of the product and its ownership or authorization for sale (there are, however, cases of counterfeiting). This rule in particular gives more confidence and assurance to the Chinese consumer who buys on Tmall, having greater certainty of the authenticity of the product, its origin and quality. 

JD.com 

Founded in 1998 JD com is the largest online B2C retailer in China, the second most visited Chinese marketplace and one of Taobao and Tmall’s biggest competitors. JD belongs to the Jingdong group, the second largest Chinese e-commerce company, with a very significant market share (estimated around 25%). As of 2021, JD.com has over 470 million active customers. 

JD differs mainly from Taobao for its harsh intellectual property protection policies aimed at ensuring the sale of only authentic products on the platform, excluding imitations. This is the model which led Alibaba to the creation of Tmall. In order to compete with Alibaba, JD has also formed several strategic partnerships, for example with Tencent, the Chinese technology giant that owns Wechat (Chinese messaging and online payment service), currently an investor in the JD group. 

JD mainly offers two sales models.  

In the direct sales model (JD Direct Sales), JD buys products from brands and suppliers to resell them directly to Chinese consumers on Jd.com. The direct sales model that JD offers, guarantees its users a fast and efficient experience, in line with the increasingly high standards required, thanks to its own logistics system that ensures fast deliveries (most of them within 24h). Its logistics network extends throughout all the Chinese territory, including rural and more remote areas. 

The other model, more similar to that of Tmall, JD Marketplace allows companies to sell products directly to customers through their online shop on the JD website and its mobile channels. A Chinese business license is required in order to sell through JD or through a local agent. Authorized sellers can benefit from JD’s logistics infrastructure, marketing, customer care, financing and other value-added services. 

Xiaohongshu 

Xiaohongshu is one of the trendiest social media platforms at the moment. Also known as “Red”, Xiaohongshu possesses one of the most popular social media commerce applications on the Chinese landscape. Its peculiarity is to integrate the world of social media with e-commerce thanks to the RED Mall section. This means that users can enjoy a social experience and at the same time buy products without ever changing App.

In fact, Xiaohongshu was born with the idea of purchasing products, especially premium, from international brands. Users capture them in photos and comment on their quality together. The application therefore helps users discover new products, travel blogs, lifestyle stories by sharing reviews and recommendations. The difference from a normal marketplace is that users do not log in to look for a product they already have in mind but enter out of curiosity. The user decides to proceed with the purchase only after having begun to scroll through the App just to kill time and having been captured by a content that has been presented to him/her.

Within the app, anyone can interact with its contents, even without registering. The posts that appear on the homepage are shown based on user preferences, requested in advance when the App is first opened. 

A common trend on this App is the live streams within the platform, during which KOLs or channels with a large following present, use and review products that the user can buy even during the live broadcast. This system is also used in many other platforms.

Of particular interest is the data that shows that the vast majority of registered users (over 200 million in all) are women born after 1990. This data for sure it is relevant to understand which kind of product would be ideal to push in such a platform and to easily spot the target audience. 

Most important cross-border E-commerce platforms in China 

As already mentioned, cross-border platforms represent a way into the Chinese market without having a direct presence. While there are certainly some advantages, on the other hand, it is also necessary to evaluate the different size of the user base, the need to use one or more intermediaries, as well as the different logistics issues and difficulties to engage the customers. The choice of a particular model must be evaluated case-by-case, possibly by contacting industry experts and companies specialized in e-commerce in the Chinese market. 

Tmall Global 

Tmall Global, part of Alibaba Group, is currently the largest cross-border e- commerce platform in China, hosting around 26,000 brands, covering more than 80 countries and has around 800,000 users in China, Hong Kong, Macao and Taiwan.  

The services offered include logistics solutions to simplify international shipments as well as different services and options for direct marketing in China. One of the greatest advantages for retailers is the ability to ship their goods in advance to authorized bonded warehouses allowing for faster customs clearance and delivery in case of orders. Among the various sales methods, Tmall Global provides the possibility to open an official virtual Flagship Store. 

JD Worldwide 

JD Worldwide was launched in 2015 by JD.com to compete with Alibaba in the booming market of cross-border e-commerce. Since its launch, JD Worldwide has attracted nearly 20,000 brands from 100 countries. Similar to Tmall Global’s model, JD Worldwide offers market access to foreign brands and retailers looking to reach Chinese consumers, without the need for a direct presence within the territory. In addition, the platform offers a range of services to support resellers, including access to the logistics network created through partnerships with international logistics companies such as DHL, Australia Post and its own national logistics network, Haitun Worldwide.

In a certain way comparable to Amazon’s Vendor and Seller models, JD Worldwide offers two sales models. Reseller model where JD Worldwide buys inventory from overseas companies and resells to Chinese consumers at a markup, and Platform model, where JD Worldwide hosts a foreign brand store on its platform allowing it to engage directly with Chinese consumers. 

Conclusions 

The possibilities offered by the Chinese online market are truly enormous and must be taken into primary consideration by companies that decide to approach the market, regardless of whether they intend to set up their own company in China or operate through local partners and distributors.