Cross-border e-commerce (CBEC) has become an important channel for foreign brands to sell to Chinese consumers, allowing consumer goods companies outside China to sell directly to Chinese consumers with minimal regulatory interference. Government policy has supported the rapid growth of CBEC while cracking down on unofficial channels.
The Pre-CBEC World
During the late 2000’s, Chinese consumers began going online in large numbers to buy products directly from overseas companies due to two main reasons:
1) internet access had expanded rapidly over the previous decade and was still relatively unrestricted in China
2) a high-profile scandal in 2008 involving tainted infant formula seemed to confirm already-widespread doubts about the safety and quality of all manner of domestically produced products. This strongly reinforced a preference for foreign alternatives. However, these were often not available locally or were subject to high import duties.
Many foreign brands, meanwhile, were deterred from entering the Chinese market by restrictive customs and tax regulations.
Many Chinese consumers seeking to buy from overseas online were held back by a lack of foreign language skills, an inability to pay with foreign bank cards and the often slow loading time of foreign websites.
The DaigouChannel
This created a niche for traders called ‘daigou’ (meaning ‘to buy on behalf’). Daigou are typically Chinese living abroad who buy products from overseas retail outlets and send them back to buyers in China at a mark-up. They sell through personal networks and advertise through social media, such as WeChat.
Reliable data on daigou trade do not exist, since it is not official. But estimates suggest that by 2016 Chinese consumers were buying at least $6 billion of goods from abroad through daigou, with perhaps another $15 billion bought online from abroad through other channels (such as a company’s own international website).
For a number of years, the Chinese government has been promoting domestic consumption as an engine for economic growth, but daigou presented a problem in that most of the value from their activities is generated outside China and the products they sell are not subject to import duties and other taxes.
CBEC Policy Innovation
In 2012, the government set up five pilot cross-border e-commerce zones to test new policies to allow foreign companies to sell directly to Chinese consumers. The number of CBEC pilot zones was increased in 2015 and 2018. Currently there are 35 such zones, covering most major urban conurbations.
The basic principle of cross-border e-commerce is that goods bought through these channels are treated as personal items and, therefore, not treated to the same pre-market registrations and checks as products imported through general trade. Lower tax rates meant that there is a financial incentive for consumers to buy products through this channel.
Although tax and duty rates on this authorised cross-border e-commerce are significantly lower than for ordinary imports, the government still collects more revenue than through daigou trade and can also collect corporation tax from the online platforms and logistics companies facilitating the trade.
In addition to promoting the cross-border e-commerce system, the government has also made it considerably harder for daigou to operate profitably by enforcing much stricter customs checks on personal parcels coming into China (just ask anyone who has tried to send samples to China) and putting a quota on the value of goods that an individual can purchase through cross-border e-commerce. Hefty fines can be levied for exceeding these limits and there is a possibility of criminal charges.
The major cross-border e-commerce policies are as follows:
· There is a ‘positive list’ of around 1,300 products eligible for this channel.
· Products must be registered, but there are no pre-market clearance checks.
· For most products (with 0% consumption tax), the integrated tax is 9.1%.
· For products subject to consumption tax (luxury items), the integrated tax is 23.05%.
· There are limits of RMB 5,000 (approx. $700) per transaction and RMB 26,000 (approx. $3650) per person per year.
Companies can store goods overseas and send them to consumers through airmail when orders are made via one of the cross-border e-commerce zones, or store them in Hong Kong or a cross-border e-commerce zone inside mainland China. Products kept in the zones are stored in bonded warehouses, so the products only clear customs upon and taxes are only applied when the products leave the zone, rather than on arrival in China.
Brands’ response
Cross-border e-commerce is especially welcome for brands in sectors with restrictive regulations in China. For example, overseas organic brands would not have their organic certification recognised in China, but they are allowed to promote themselves as organic through the cross-border e-commerce channel. Cruelty Free cosmetics brands can also be sold through CBEC without animal testing being performed, as would be the case if they were imported through general trade
Cross-border e-commerce opens up the Chinese consumer market to many more brands, some of which Chinese consumers can only find on cross-border e-commerce platforms.
Consumers’ response
The cross-border e-commerce system has been successful and the amount of goods bought through this channel has increased from $840 million in 2013 to $26.5 billion in 2019.
The fact that consumers can use local platforms to shop in their own language and use local payment methods to find goods otherwise not available, or available at a more expensive price, has encouraged many consumers to use this channel.
The Future
Sales of products imported through cross-border e-commerce will become an increasingly large proportion of China’s online retail sales. After several years of policy experimentation, the channel is now firmly established and no major policy overhauls are expected in the near future.
However, although this route to market has many benefits and can be considered as a part of any brand’s market entry strategy, it is most appropriate for brands who could not otherwise access the market due to regulatory issues and big ticket items where the price difference on buying through CBEC is much greater.
This is because the annual limit on purchases through CBEC (equivalent to $3650) is too low to justify doing regular grocery shopping through this channel. Also, in a country where same day delivery is common on e-commerce orders in big cities, waiting at least 48 hours for your products to clear customs and arrive at your door is not an attractive prospect.
ADN works with Chinese buyers within our network that either specialise or have capabilities in cross-border e-commerce. If you’re considering this market entry channel, get in touch and we can talk you through whether it’s right for you and how to go about it.