Over a period of 18 months, during six extended business trips to China I got a very positive vibe from all the parties I had been interacting with; from small, medium and large merchants, solution providers in the ecommerce arena, marketplaces, Free Trade Zones, research and media agencies, to consultancy agencies, government officials, embassies and chambers of commerce. There is a strong need to learn, understand and exchange knowledge, and a willingness to explore different ways of collaboration in order to move forward and build long-term relationships. This article is a summary of what I have learned about the ecommerce landscape in China and how SMEs should prepare their strategic entrance into this market.
During my visits I was invited to speak at different cross-border ecommerce conferences; actually, I will have an opening keynote at the 4th cross-border ecommerce conference in Shanghai, December 2-3 and hope to see you there! It is a bilingual (Chinese / English) conference covering both import (1st day) and export (2nd day) and I recommend it to anyone interested in exploring business opportunities in China. You can expect 500+ high-level participants, 250+ eCommerce industry big players, 100+ brands/retailers. Check the program PDF of the event and here are my remarks and insights from the past editions of the cross-border ecommerce conferences.
The rise of cross-border ecommerce in CHINA
Today, cross-border ecommerce is a significant contributing factor for the total global ecommerce value, driven mostly by the ‘Big Three’; China, the US, and the UK. In 2013, the opening of China’s Free Trade Zones (FTZ), changed the entire dynamic of cross-border purchasing in China, allowing international companies to sell directly to Chinese consumers at reduced costs, with favorable trading conditions and most importantly, entirely legitimately.
Merchants are beginning to accept the challenge of expanding into the East, and tackling the emerging markets. Less deterred by cultural differences than in previous years, more authentic localization efforts are being made, and a deeper understanding of the market is aiding cross-border ecommerce growth. Most significantly, Western merchants comprehend the huge power of the marketplace model in China. Joining them rather than competing with them – as Amazon attempted to do, unsuccessfully – is the only way to win business in this market. In March, Amazon opened a store on rival Alibaba Group Holdings’ Tmall platform, a website for verified brands like Nike, Apple and P&G to sell to Chinese shoppers.
Chinese people like to buy quality products directly abroad > ‘haitao’ (CBE). Buying directly abroad is also much cheaper (luxury high import taxes 60 – 70%). Most popular products are baby food, skincare and cosmetics. Actually only around 10 million real tourists will go abroad, and over 90 million will be shoppers in the guise of tourists. The most popular way of buying imported goods remains personal overseas trips, apparently for tourism but firmly revolving around the task of securing desired products that the Chinese are not able to find on the domestic shelves.
Five ways how Chinese buy overseas products:
1. Tourism, buy it themselves when traveling abroad or via acquaintances;
2. Daigou, a ‘risky’ channel of commerce in which a Chinese person overseas purchases commodity, includes luxury goods and groceries, for a customer in mainland China;
3. Haitao, the phenomenon of scouring the global websites to buy the products that the consumers want. International e-commerce websites like Amazon now allow the Chinese to directly purchase from their international site and have the products shipped to China.
4 .Directly via online web shop abroad but most of them do not ship directly to China.
5. Purchase via foreign retailer on a Chinese B2C web shop. Since spring 2014 interesting for foreign retailers due to initiatives as cross-border portal Tmall Global, JD.com, and DHGate. As a foreign retailer you are not obligated to have your company registered in China.
Retailers in the East have perfected a method of seamless consumerism, having been a mobile-first region for many years. China has an all-in ecommerce business model, with Alibaba covering the entire chain; web presence, checkout, processing, fulfillment, logistics, returns. The consumer is entirely unaware of the mechanics behind the scenes because the strings are all being pulled by one ‘puppet master’.
In the US and Europe, merchants face bigger challenges to streamline their customer journey and create and omnichannel experience similar to the Chinese one. Much like their Asian counterparts, consumers expect seamless domestic and cross-border shopping. But a disjointed landscape of channels, platforms, marketplaces, payment methods, Payment Service Providers (PSPs) and acquirers, all operating on dated systems, means facilitating this experience is incredibly complex.
So, why would a SME pick China?
Key insights indicate that China is an advantageous choice for cross-border expansion for Western merchants, instead of other established Western markets, for different reasons such as:
1. Use of credit cards
2. Trust in Western products (most online are women)
3. Lack of competition – online merchants are unprepared to tackle the complexities of the East; language and culture is a deterrent, as well as logistical barriers and perceived legislative roadblocks.
4. Government backing – Recent government initiatives such as the Shanghai Free Trade Zone (FTZ) are actively seeking foreign ecommerce players to enter the Chinese market. The pilot cities take care of website localization and import complexities, all with a focus on exceptional Chinese customer service. Topped by a lot of tax benefits, they even allow other currencies than RMB and, recently, foreign companies are allowed to establish in the FTZ as well.
Moreover, despite the slowdown in its economy, the Chinese retail sector has registered significant growth. With the rising middle class population, increasing disposable income, retailers expanding into tier III and IV cities and the growth of online, demand and access is growing fast. Chinese consumer spending is projected to rise from USD 2.03 trillion in 2010 to USD 6.18 trillion annually in 2020. In 2014, Singles day tripled the Cyber Monday numbers and almost doubled its own score compares to previous year, to over 9 billion dollars revenue on one single day. This year, Singles Day reached $1 billion in the first eight minutes and $5 billion in 90 minutes. At the end, Alibaba’s Singles Day sales went on to a record-breaking $14.3 billion.
However, GDP growth to fall from 7.4% last year to 6.5% next, halting after that around the 6% mark. Read more about it here Chinese Economy; Speed bump or Crash?
Key Success Factors for SMEs
1. In China, having your own branded website will simply not convert sales. It is essential to plug in to the marketplace platforms to reach customers and make sales.
Marketplaces – By the end of December 2014, China’s online retail transactions has reached about CNY 13 trillion, combining B2C, C2C, and B2B. In the B2C sector, the two biggest players are Tmall Global and JD. Tmall and Taobao together accounted for CNY 1.48 trillion in the first 9 months of 2014 and JD.com made CNY 174.4 billion in the same amount of time. After the legendary IPO of Alibaba September 2014, this giant raised 22 billion USD, they are well known worldwide. Taobao (c2c), Tmall Global (import), AliExpress (export) and Alibaba.com they are the market leaders in C2C, B2C and B2B. They offer logistics, social media, banking, cloud computing, and payments. An eco-system of a variety of companies that support and amplify each other.
Unlike Amazon who owns distribution centers, sells products directly, and even manufacturers its own brands of consumer electronics, Alibaba does not store or ship products. It serves purely as a platform for buyers to connect to sellers. The result of which is lower revenue, but far higher profit margins; full service for merchants to try QCity in Hangzhou!
2. Driving trust and exposure through social media such as WeChat is a must, as it generates communication around your brand with significant impact on your conversion rates.
Social Media Reviews – In the West, of every 100 people, one person creates genuine content, nine people retweet, comment, and curate the content, and 90 people are just spectators.
3. In China, 30 people are genuine content creators, 50 people are curators, and only 20 people are passive spectators. Moreover, over 70 percent of Chinese Internet users post online ratings and reviews for the benefit of their peers; less than 20 percent do so in the US. In China, merchants should consider the customer service team a key part of the sales conversion activities, while in Western ecommerce it seems like an administrative cost to be minimized. If your customer services do not respond immediately in China, the consumer is lost!
Customer Service – WeChat basically meets customers’ all daily use by providing an omnichannel solution, customers don’t need to download several different Apps on their phone, instead, by clicking on WeChat they can access all they need. The success of WeChat lies in the great user experience that they have provided to the customers, and so setting high expectations for the Western merchants who would like to do business in China. Those entering the market are not always sensitive to Chinese cultural nuances; merchants are frequently applying aggressive Western business tactics, generating a fear of colonization and creating roadblocks to success.
General success factors for SMEs
1. Marketing & Communication
China is an ecommerce market dominated by the Alibaba group, a collection of ecommerce businesses and shopping cart platforms, including Taobao, Tmall, AliExpress, as well as an online payment service – Alipay. The company’s websites account for 80 percent of all online commerce in China. From a corporate communication and marketing point of view consumers’ expectations are very high! Having a good understanding of how things work in China (e.g. WeChat), is key for any Western company who tries to setup a business in China and need to talk to over 468 million active users.
In the West we are used to search engines, however in China Google SEO, Facebook, Twitter, YouTube, are all are blocked. Baidu was also blocked by Alibaba indexing since 2008. Therefore, in China, one should build his social communication on platforms such as WeChat, Sina Weibo, Baidu and Youku (recently acquired by Alibaba).
WeChat was introduced by Tencent Group into the market as a social app, just like WhatsApp was in the West. Due to the great support of Tencent and its huge user base of QQ, same as MSN and Skype, WeChat experienced explosive growth in last few years. Instead of position WeChat simply as communication app, Tencent strategically integrated different function into WeChat and built an omnichannel for users. Currently, WeChat provides payment services (through WeChat wallet or bank account connected to WeChat), pay phone credits, pay house use of electronic, water and gas, order taxi, pay credit card, book flight, train or movie tickets, play the lottery, financial product, loyalty programs, and directly purchase on marketplaces such as JD, Meilishuo (fashion), and Dianping (Groupon app).
2. Payment landscape
Alipay dominates the payment landscape, holding almost 50 percent share of the market. Other service providers in China include AsiaPay, BPH, PayEase and ChinaPay. Similarly to China’s multifaceted approach to social media, payment platforms in China are often part of an end-to-end service. Unlike the West, they are rarely independent businesses offering solely a payments service. Payment processing is simply a commodity for businesses operating in the entire ecommerce chain. SF Express (logistics) partnering with E-Bay (western C2C marketplace) and Tenpay (payments) integrated to an omnichannel experience.
So, although the West is lagging behind Asia for seamless shopping, the landscape is improving. More and more payment providers are coming forward with one-stop, invisible, and integrated solutions. Finding a partner such as Payvision and its recently launched payment platform Acapture, that extends their platform to cross-border payments, mobile optimization, instore and online payments, alternative and credit card payment processing, allows a merchant to offer a truly omnichannel experience.
How can we support SMEs’ successful entrance into China?
Cross-Border Ecommerce Community (CBEC)
Engaging in a local partnership is one of the most successful ways to enter the Chinese market, as it gives space for local knowledge and business cultural sensitivity. In 2016, merchants are able connect to our dedicated CBEC platform, boost their overseas expansion and make use of our match-making features to find the right partners for each business category, country and industry of interest.
CBEC together with one of its partners Payvision, has broken new ground in cross-border ecommerce education. Now in its third year, their global survey was really the biggest of its kind and has become World’s Largest Survey of Cross-Border E-Commerce open to businesses. They could successfully track and measure what is motivating and hindering the industry, advise on overcoming the barriers and identify opportunities. The aim is to educate the entire market from West to East, and facilitate a more profitable, meaningful cross-border exchange for merchants, PSPs and consumers.
In 2014, over 600 US and EU merchants said the three main barriers to enter the Chinese market are: legislation, culture/language and logistics. This perception is not accurate, because either the Chinese may not know how to promote and make it clear to the Western world, or the other way around. CBEC builds ‘bridges’ on every continent among merchants and solution providers. This is why many Chinese A-brands want to partner with us.
The Chinese government now facilitates favorable economic trade conditions for international merchants. Traditional trade means complex taxation and customs clearance, discouraging issues for Western merchants in the past. With the recent government initiatives these barriers are completely resolved.
Other Facts & Figures
– As of June 2014, according to the Shanghai Statistics Bureau, close to 10,000 businesses had registered within the FTZ of which 1,245 foreign companies.
– Online retail requires high-skilled labor to be fully successful, and it is predicted that by 2020 there will be a gap as large as 23 million skilled workers in this industry.
– Of the 618 million Internet users in China, a mobile device is the primary vehicle to the web for 500 million. That’s over 80 percent of Internet users.
– With only 14 percent of the Chinese population currently buying online, China is exceptional not only for the value it has driven today, but the potential it holds for tomorrow.
– The total number of Chinese cross-border online shoppers rose 30% to reach 18 million in 2014, 78% of which are mobile shoppers, with an estimated trade value of more than 100 billion Yuan (approximately USD 16.3 billion) of online foreign products. (China Internet Watch)
– Staggering 35.9 million online cross-border shoppers are expected by 2018 – more than half of surveyed in China indicated that they would like to order products from abroad in the future. (Nielsen)
– US currently the main destination of orders received from China (84%) and will continue to do so in the future. (Nielsen)
– China is an increasingly popular cross-border ecommerce destination across the world. It is the second (39%) in the USA after the UK (49%); the second (48%) in Brazil after US (79%); the second (23%) in UK after US (70%); the fourth (17%) in Germany and the third in Australia.
Read also infographics Payvision.