China is the world’s largest ecommerce market and as such represents a huge opportunity. It is also amongst the most complex and hardest countries to do business in.
In this extract from China eCommerce Cross-Border Briefing, Ben Morgan Pivot ecommerce summarises the ecommerce landscape, platforms and commercials of the region.
DOWNLOAD: The eCommerce in China Briefing
The China ecommerce opportunity
First, let’s understand what the China opportunity means.
The following data shows estimated ecommerce transactions for 2016 and so puts the global opportunity into perspective. These very large numbers are of limited meaning to UK exporters, however what they do explain is why there remains such interest in this market and why so many UK companies have China on their short to medium term plans for international expansion.
China is the biggest ecommerce market in the world but that doesn’t mean it’s easy to trade there. Even some of the UK’s most successful online retailers like ASOS and Wiggle have had to adapt their business models, invest considerable sums in the early phases and then be patient for any returns.
How big is the opportunity for UK retailers?
Second of all let’s put China into perspective for UK based exporters and understand its relative importance to the UK as a trading partner.
The USA and China are the only economies outside of the EU who feature in the UK’s top ten trading partners. Our shared language, well established trading routes and deep diplomatic ties with the USA translates into it being by far our largest commercial partner.
In terms of exports of goods (not services) in 2015, China ranked as the 6th largest trading partner for the UK accounting for £12Bn of trade in goods after the USA and our closer EU based partners.
China is the largest ecommerce market in the world but with its language and cultural differences, complexities regarding regulation, customs, Intellectual Property and its sheer distance means that typically UK companies will only look to this market once after having had success in the EU and USA first. China is a market for the experienced exporter.
The China ecommerce landscape
The Chinese ecommerce market differs from the UK ecommerce market in many key ways.Here are three areas which will impact your china strategy:
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Marketplaces account for approximately 90% of ecommerce transactions
The multi-category marketplaces that dominate the Chinese B2C ecommerce landscape are Tmall (Alibaba’s B2C platform) and JD.com accounting for approximately 55% and 25% market share respectively.
Chinese shoppers use ecommerce platforms like Tmall and JD because they place trust in them to deliver the goods, payments are secure with all of the different payment methods that consumers look for and they know that any disputes will be followed up by the platform. Delivery is tracked and sellers are made to adhere to timelines in order to maintain their accounts and finally because they know the service levels are good and the feedback from other buyers is well trusted.
2. The ‘’great firewall’’ of China means your UK hosted website cannot be viewed
In 2007 the ‘great firewall’ was raised which locked out western companies like Twitter, MSN and Google because a ‘black list’ was imposed by the state authorities. The effect was to provide a boost to domestic Chinese internet companies like the ecommerce company Alibaba, Search engine Baidu and social media company Tencent who were shielded from overseas competitors. Effectively this was a ‘black list’ approach to block china from western content but under Article 37 of the newly proposed rules any domains not registered with authorities on the ‘white list’ will be blocked by default.
In order to host a website that people in China can view it must be hosted on a server within mainland China or HK. In addition, under draft regulations that are currently under consultation, your domain will need to be approved by local authorities and put on a ‘white list’ (regulations still unclear at time of writing – June 2016).
3. The big three publishers Alibaba, Tencent and Baidu dominate the ecommerce environment
The big 3 publishers comprising Alibaba, Tencent and Baidu operate entire eco-systems that are highly competitive to each other all the way through the purchase funnel from search, social media, transactional ecommerce and payments.
Understanding the different elements within these competing eco-systems will help to guide UK exporters in their approach especially when it comes to engaging the Chinese consumer and understanding the platforms that can be used to market their goods and services.
The ‘big three’ in brief
If we were to make a very crude comparison of the ‘big three’ Chinese publishers to western companies that we’re familiar with then it might look something like this:
• Alibaba is like Amazon, eBay, Twitter, Facebook (through Weibo investment) and PayPal combined and now sells more that Walmart (even though it’s not a retailer)
• Tencent is like Facebook, Amazon (through JD.com Investment), WhatsApp, Spotify, Uber, Candy Crush and PayPal combined
• Baidu is like Google and PayPal combined
The ‘big three’ are all listed companies on either the New York Stock Exchange (NYSE) or NASDAQ and so detailed financial information and company plans are freely available on a quarterly basis in line with the necessary SEC filing requirements.
Source: Alibaba, Tencent and Baidu financial statements, 2015
Alibaba
The company was started by Jack Ma in 1998 initially as a B2B platform connecting worldwide buyers with Chinese manufacturers but has since grown into an entire eco-system of ecommerce platforms, social media, payments and recently even buying up TV content for the UK Rugby Premier league.
Alibaba recorded gross sales across its numerous platforms of $394 Bn in 2015. Results for the first quarter of 2016 have since meant Alibaba has overtaken Walmart to ‘’become the largest retail economy in the world” at the end of its fiscal year on March 31, “as measured by gross merchandise volume (GMV) on its China retail marketplaces.’’ (Alibaba statement)
Incredibly Alibaba operates entirely on a 3rd party marketplace model and so no stock is ever held by the company. All sales are made by its 3rd party merchants who trade within the Alibaba eco-system.
Its major ecommerce business units are TaoBao – similar to eBay which is a C2C platform. Tmall is the B2C platform and Tmall Global (tmall.hk), which only launched in 2014, is the B2C platform registered in HK which allows non-Chinese companies to operate a store and access the Chinese market in a less onerous way. An approach which has been taken by many recognised UK companies including Waitrose, Mountain Warehouse, Unilever, Superdry, Neal’s Yard Remedies and many others. Further detail on the commercials involved will be discussed later in sections 5 and 6.
Alibaba.com remains the B2B staple with over 1m people registered, primarily Chinese manufacturers who are registered as the sellers and they look to generate orders from buyers spread throughout the world. However, there is an increasing focus on attracting manufacturers from the UK to register as a way of engaging the 38k registered buyers from all around the world who use the platform to source B2B goods. Alipay is the largest mobile payment system in China that operates on an escrow basis which means the funds are only released to the seller once the buyer has taken delivery.
In a indication of the competitive market, Alibaba does not open up its product catalogue to the leading search engine Baidu – thus encouraging consumers to stay within the Alibaba eco-system and start the purchase journey directly in Tmall or TaoBao as opposed to the search engine route.
Alibaba is like Amazon, eBay, Twitter, Facebook and PayPal combined
Tencent
The leading social media company in China which has a broad service offering from the top of the purchase funnel all the way through to its strategic ecommerce partner JD.com (Tencent owns 15% of JD.com) and its wholly owned ecommerce site 51buy.
QQ is the leading mobile and desktop based internet portal which is the 2nd most visited website in China with over 1Bn visits (SimilarWeb, May 2016). This portal is then linked into the full eco-system of Tencent’s other offerings including gaming, TV content, music streaming and other subscription services it describes as Value Added Services (VAS).
WeChat is similar to WhatsApp in the UK and is one of the biggest assets in the Tencent portfolio. It has 697m monthly active users and can be linked your bank account to enable mobile payments as over 200m people have done. As mentioned JD is the strategic ecommerce partner for Tencent and consumers can log directly into their JD account through the WeChat app and its estimated that this purchase route accounts for approximately 60% of all JD sales.
WeChat is similar to WhatsApp in the UK and is one of the biggest assets in the Tencent portfolio
Baidu
The literal meaning is “hundreds of times”, represents a persistent search for the ideal is the leading search engine in China.
Baidu’s operating model is similar to Googles suite of services including Product Listing Ad’s (PLA), Pay Per Click (PPC) advertising, Banners and Analytics. 99% of its revenue is derived from online marketing and ad services.
Focusing primarily on its home market Baidu has over 80% of the search market in China and in Dec 2015 had 657m MAU’s generating a 2015 revenue of $10.2Bn. While it does have a full suite of products social, ecommerce and payments, search is where its strength lies and where 99% of its revenue is derived.
Baidu is like Google and PayPal combined
Direct Purchase vs Marketplace
There are two distinct business models for Chinese ecommerce; Direct Purchase and Marketplace.
The following two tables explains the relative market shares of the various platforms by Gross Merchandise Value (GMV).
Direct Purchase
Direct Purchase is where a platform buys your stock either directly from the brand or through a wholesaler, agent or other intermediary. The market share for this particular business model is shown below. Crucially Alibaba does not use this business model and so does not appear. All the goods sold on Alibaba platforms are owned by the 3rd party merchants who use the platform.
Marketplace
The marketplace model used exclusively by Alibaba but JD also offer a marketplace which accounts for a significant portion of its trading volume. As you can see below, Tmall is the by far the largest channel but JD has been closing the gap steadily thanks to its investment in owned logistics infrastructure and also the strategic partnership with Tencent on social media.
DOWNLOAD: The ecommerce in China briefing
Chinese ecommerce platforms explained
TMall / Tmall Global
Tmall is the largest ecommerce channel in B2C ecommerce in China with 55% market share and so is an obvious place to start for many UK businesses. However, the complexities of actually trading should not be underestimated nor should the costs involved both fixed ($25k deposit, $10k platform fee, $15k Trading Partner set-up fee) and variable (1 – 5% platform fee, 1% Alipay fee, 10-15% Trading Partner fee).
This platform has high financial barriers to entry for a company but Tmall is very much a volume business and so it’s the very large brands and retailers that typically are the ones to make the investment, commit to marketing and get their products into China using this platform.
Sellers operate within the Alibaba eco-system and have to build everything from scratch. Setting up a Tmall store is like building your website again from scratch which is one of the reasons why there is so much cost and time involved. In addition hiring a Trading Partner (TP), which is mandatory for sellers, is like a hiring an out-source team in China and will typically cover the following functions: Customer Service, Online Store design and build, Marketing and listing optimization, logistics, payments, data management, working directly with the platform. This is another key reason why the costs are high and the decision is critical to get right.
Tmall
JD Worldwide
JD is growing at a quicker rate (GMV grew 43% YoY in Q1 2016 to $20Bn) than Tmall and even though it operates in the same sector it has a different business model. Whereas Alibaba is an eco-system employing some 30k staff JD is a fully owned ecommerce and logistics business employing over 105k staff and with a logistic network encompassing 213 warehouses in over 50 cities.
There are several factors which are unique to JD and aside from the owned logistics capability which is the largest in the country, the strategic tie-up with Tencent is another. The ubiquity of social media platforms like WeChat mean that JD operates within the Tencent purchase and consideration funnel with a large proportion of sales being completed directly through the WeChat app and payment gateway.
JD and Tmall compete with each other but as a merchant it’s possible to operate on both platforms using the same Trading Partner and so incremental costs to grow sales channels are that much lower once you’ve established a working operation with your TP.
JD.com
VIP.com and their UK operation
VIP.com is a major player in the B2B ecommerce sector with 2015 revenues of over $6Bn and is listed on the New York Stock Exchange. The site works differently to the marketplaces of Tmall and JD in that listing are promoted for a short period, typically 2-4 days, and are not searchable on a continuing basis. This fleeting opportunity gives customers a big incentive to buy. In Europe a flash-sale site is associated with very large discounts on clearance stock but whilst VIP.com shares the time limited feature it is not based solely on discounting. Many companies use it as a promotional tool for in-season stock and as a way to grow their brands into the Chinese market with a platform that has over 170m registered users.
The time limited sales model imposes difficulties for UK merchants because expectations from Chinese customers are so high in terms of delivery times. The model is adaptable by VIP.com but typically stock will need to have cleared customs in China before a sale can be initiated. This is achieved by VIP.com either buying the stock and taking the risk of moving it into China or the brand can allocate consignment stock, ship to China and fulfil orders received.
The platform has set up international buying teams, including one in London, to form these long term relationships with European brand owners
VIP.com
Amazon.cn and its ‘global store’
Many UK companies use amazon.co.uk to sell their goods but, at present, those same merchants cannot sell on amazon.cn unless they have a Chinese legal entity. For many third-party sellers on Amazon.com however Chinese customers are able to see these products available via amazon.cn and can purchase and check-out out using the Chinese language site, pay in RMB and receive the goods from the States in 2-4 days.
Outside of the marketplace model UK Amazon operates as a seller itself in China and for this it sources product in the wholesale market; either locally from China, HK or alternatively from the EU and US.
Amazon first invested in China in 2004 with the acquisition of locally based online retailer Joyo.com to launch Amazon.cn. UK companies should see Amazon as a familiar face in China and they’ve been steadily building up their presence since their initial investment and despite Tmall and JD it’s still a significant business with a higher average order value than most platforms (due to higher % of western imported products) and is becoming a natural choice for consumers to use to shop for Western brands. Higher value and high turnover products tend to do the best.
Amazon China
Commercial models for entering China
If you are thinking about taking the plunge, there are a number of approaches you can take, each requiring a different level of investment. The following are options open to UK companies who seek to enter the Chinese ecommerce market, in ascending order of start-up investment:
1. Daigou trade
Investment: Zero
Just by selling your products in the UK market you may see them appear in China, most likely sold on Alibaba’s TaoBao site by local sellers. This is known as the ‘Daigou trade’; a grey market of genuine goods sold through unauthorised channels which can be invaluable market research for a brand showing which products are most in demand locally.
When this happens even though ultimately sales are being made somewhere it’s a source of frustration and consternation as pricing strategies are undermined, the brand is not controlled, customer service is not properly offered and there is a general lack of knowledge about what is going on.
2. Partnership with other stores
Investment: Low
Selling through someone else’s cross-border marketplace store, like the Royal Mail Tmall store, which reduces the risk and set-up costs involved but brings another company into the value chain. Retailers such as Waitrose, Clarks and Brompton bikes have all taken advantage of this low risk way to test the Chinese market.
3. Find a local distributor
Investment: Low
Selling wholesale to an ecommerce platform (e.g. JD, VIP or Amazon but not Alibaba who do not act as a retailer). However, marketplaces will typically only buy product that is physically in China that has cleared customs and so brands / retailers must therefore either take on the cost and risk of getting product in country or sell to an intermediary specialising in this type of transaction that has the working capital required.
The other crucial consideration is that marketplaces have access to an incredible level of data and market intelligence in order to make their purchasing decisions and they will only buy what they are absolutely sure they can sell, typically focusing on quite a narrow range of core product. Marketplaces are unlikely to come forward with wholesale orders until a brand has already tested and proven the marketplace model and taken the stock risk themselves.
4. Sell yourself through Tmall and JD marketplaces
Investment: Medium / High (Set-up costs alone start from £20k)
In order to start to sell yourself through a marketplace you need to appoint a Trading Partner (TP) that would work for you directly managing your online store as a full service outsourced operation.
The two major ecommerce channels; Tmall Global and JD Worldwide are outlined below in terms of costs involved. You must use a TP to trade on them but the same TP can then be used to fulfil multiple routes to market.
Source: (Tmall and JD, 2016)
5. Setting up a Wholly Foreign Owned Entity (WFOE – A Chinese legal entity)
Investment: High
Establishing a Chinese legal entity will allow you to sell through Tmall.com and JD.com using the traditional methods of importation.
This is commonly a stepping stone for companies who’ve achieved initial success through the cross border model and is the next level in terms of both investment and localisation of offering. A WFOE will typically take 6 – 9 months to set-up and you must meet the following criteria:
• Chinese office and Chinese employees
• Quarterly reporting cycle
• High tax (company income tax 25%, business tax 5%, VAT 17%, Withholding tax 5%)
• Onerous reporting with local bureau – varies by location
A rough guide to import duties and customs
Expert advice should be sought for your particular products and categorisation for the different levels of consumption tax but as a general outline the following table may be used as a guide to help build a business model:
Source: Circular on Tax Policy for Cross-Border E-commerce Retail Imports (E-commerce Tax Circular)
Top tips for China ecommerce
China presents both a large opportunities and significant challenges for UK-based retailers.
Here are some key principles to consider when trading in China:
• Your local partner is crucial. Whether you go marketplace model or wholesale. UK companies will need a Trading Partner (TP) to trade on a marketplace who will taking responsibility for store design and build, customer service, logistics, returns, marketing. Alternatively, for wholesale business marketplaces will only purchase goods which have cleared customs into China and so an importer / distributor will be needed to achieve this.
• Marketing is a necessity. The size of the market does not mean sales are inevitable and it’s such a crowded, competitive market that companies will need to invest heavily over a sustained period to see results. Any move into China typically have a 2 to 3 year timeframe needed to break even and sufficient internal resources would need to be allocated to achieve this.
• China regulatory complexity – the ‘Positive’ list. On April 8th 2016 the Chinese authorities released new legislation covering cross border ecommerce which came into force almost immediately. These new rule changes were not well anticipated and were subject to clarifications shortly afterwards with a new approach being taken that only goods specified on a ‘positive list’ were permitted for cross border ecommerce. There were in fact 2 positive lists released and then soon after a moratorium was imposed so that the new new regulations will not now be enforced until May 2017 this giving companies time to adjust.
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