In contrast to many definitions, Cyril Drouin and Christine Wang of Saatchi & Saatchi say the term cross-border e-commerce (CBEC) applies to any brand selling in China with its origins in another country. It is important to understand that cross-border isn’t just about bringing products in through bonded warehouses or Hong Kong, they say, it’s about translating your brand to fit the Chinese market.
Defining cross-border e-commerce
A brand can operate on Tmall, JD, YHD, or any other platform, have their Chinese business licence, and still be cross-border due to the amount of cross-border brand management that has to be dealt with. From product mix to spokespeople and the tactics you employ, if you’re adapting to the Chinese digital sphere, you’re doing CBEC – even if you don’t have an official marketplace presence. But, if that is the case, you are probably losing out on sales already.
Why do companies choose to be cross-border?
On a product level, particularly when it comes to food, the ability to sell without having to go through China Inspection and Quarantine (CIQ) is incentive enough for most companies to jump on the cross-border train. It enables companies to get to market almost instantly, avoiding the regulatory and financial hassles of traditional importation. Speed to market can have a large impact, if only in terms of avoiding the costs associated with Tmall’s requirement for establishing and operating an office for two full years.
However, taxation rates for common cross-border products were greatly modified in April, 2016. Up until that point taxation of such goods had been lenient – a CCTV report claimed that—through the use of personal parcels—the Chinese Government had been paid taxes of less than CNY 1 billion on sales that actually amounted to trillions of RMB.
Under new laws, certain consumer goods and luxury goods will be subject to higher taxes, and the ‘personal parcel’ and other loopholes have since been closed. There is now also a spending limit in place of CNY 2,000 per single purchase and up to CNY 20,000 annually.
Taking milk powder as an example, for purchases of CNY 500 or less, tax is now 11.9 per cent, up from zero per cent; the tax rate for purchases over CNY 500 has increased from 10 per cent t
o 11.9 per cent, which should eliminate the previous consumer preference for buying in quantities that total less than CNY 500 in order to avoid tax. Instead, it is expected that average order quantities will increase now that the tax rate is level across purchase points. It can also be anticipated that in order to combat the CNY 20,000 limit, greater numbers of ‘consumers’ will emerge – a sharp rise in the number of dummy accounts could be witnessed, causing a pretty serious headache for customer relationship management.
Despite these changes in taxation policy, though, the cost of cross-border e-commerce is still not on a par with traditional imports. Importing a product, say milk, priced at CNY 100 via traditional channels results in CNY 32 in taxes – 15 per cent import tariff and 17 per cent VAT. Under the e-commerce model, the same product is liable to just CNY 11.9 tax – 70 per cent of the 17 per cent VAT and zero per cent import tariff.
In short, taxes are higher but there are greater incentives for consumers to make larger cross-border purchases until they reach the limit. This is essential to remember, particularly for businesses planning their 11.11 or 12.12 campaigns.
So, that’s it. You’re ready, right?
Well, yes and no…
There are still barriers in China, regardless of how a brand chooses to enter the market. Those related to CBEC are present at every step of the consumer journey.
Although Tmall Global results will be prioritised in Taobao searches and will also show up on Tmall searches, when it comes down to it, the numbers don’t lie: only 36 per cent of consumers in 2015 purchased goods from cross-border websites; only four per cent purchased cross-border exclusively (China Internet Watch). Consumers don’t just need to be aware of your brand’s availability in e-commerce marketplaces, they also need to be aware of why buying it there is their best choice. The following should be considered:
How can you generate and maintain awareness effectively, efficiently and for the right price?
Purely online brands will need to take marketplace advertising spending into account and completely overhaul how they approach social media to suit WeChat, while brands with an offline presence can see cross-border as a chance to vary their product mix, offer exclusives and test new products in the market.
The numbers don’t lie, but they also don’t show the whole picture. They fail to take into account the sellers who purchase products overseas, import them and then sell them on via grey market channels. This system is known as ‘daigou’ in Chinese, meaning ‘to buy on behalf of’. Daigou purchases are often luxury goods as consumers can avoid the large import tariffs that China places on such products, but they pose a challenge to non-luxury brands too. For example, a lot of demand for daigou services have been generated by consumers who are scared of buying unsafe domestic products, particularly food products.
Daigou sellers can often afford to undercut market prices. Official brand outlets can get away with charging slightly more by contesting the authenticity and quality of products sold on the grey market, but they then run the risk of pricing themselves out of the market altogether.
Daigou sellers need not be the enemy, though. They can become taobaoke instead – official resellers who earn a commission from the brand. The higher the commission, the higher the incentive for them to market your brand above the others they sell. This system allows you to filter and choose the sellers you want and to set their commission directly.
There are two options available to get your international products to Chinese consumers:
Direct Shipping from overseas or Hong Kong
This is by far the easiest option for brands, but it also has the biggest downside – longer delivery times. In a country where next-day shipping is the norm, this just won’t fly. If time hurdles can be overcome, though, with the new tax rates there is a chance that direct shipping could be less expensive for certain purchases, giving this option some advantages over bonded warehousing.
Bonded warehouses are the hot new way of conducting logistics. Once you apply and are accepted, the customs clearance process and the fulfilment are carried out by one team at the same time. It gets international goods to consumers at a lightning-fast pace. However, as of the 8th April tax code updates, total order prices may increase, which may prompt consumers to consider direct shipping as a more viable alternative, despite increased waiting times.
Cross-border e-commerce is growing and not expected to slow, but that doesn’t make it a shortcut to millions in China sales. The market has become more sophisticated in a short space of time and the government has caught up to shipping methods, closing the old loopholes once used by many to increase their margins. Consumers, constantly inundated with messages of foreign quality, history and craftsmanship, are becoming more selective about the brands they use and loyalty is rare in an era of growing market saturation. A unique value proposition adapted to the e-commerce channel in China is the only thing that will give you a real competitive advantage in the market. The best way to do cross-border e-commerce is straightforward: don’t cut corners.