With the increase in smartphone use in China and rising disposable incomes, internet sales in China are booming. In 2018, China online transactions exceeded $1.53 trillion, representing 40% of the total global internet sales market.
However, the cross-border e-commerce (CBEC) sales channels, such as the commonly-know “daigou”, were less regulated by the Chinese government in the past. The new e-commerce law shows a clear commitment to strengthening enforcement against illicit operations, in particular, those aimed at exploiting the tax reduction benefit of the CBEC program.
Regarding this situation, all participants in the CBEC supply chain, especially the overseas sellers, will now need to avoid being subject to enforcement against illicit business activities and eliminate potential legal liabilities under the new e-commerce law. What are the main objectives of new e-commerce law and what kind of opportunities and challenges for overseas sellers were brought from the new legislation?
China is very keen to regulate the online market
CBEC is dominated by four main online retailers: Alibaba, JD Worldwide, Kaola.com and flash-sale site VIP.com. There are also personal shoppers, such as daigou, (Source: Jing Daily), who buy and sell international luxury goods into China. As the market has become so valuable, concern has grown around competition, quality issues, aftersales services, and customers’ compliance, as well as the imbalance in taxation compared with goods imported via regulated routes. Intellectual Property (IP) has also been a central issue for international trade.
China has signaled the importance of CBEC through two significant moves in January 2019. The new e-commerce Law came into effect, with a raft of changes to achieve increased regulation. And China joined 76 World Trade Organisation (WTO) members in signing a Joint Statement on e-commerce, issuing a statement (Source: China Daily) that they support the creation of e-commerce rules by WTO members.
China’s gradually improved e-commerce regulations are racing to meet demand
In 2015, Hangzhou became China’s first “CBEC Comprehensive Pilot Zone”. Intended to lead the way (Source: FBIC Group) in developing a payment, logistics, customs clearance, exchange settlement and inspection and quarantine methods. Hangzhou has since been joined by 34 more pilot cities across China.
In April 2016, government offices jointly released a “positive list” of 1293 goods that were eligible for CBEC sale, (Source: FBIC Group) replacing an earlier list that had included only things that weren’t for sale.
In practice, this represents a reduction in the number of products that can now be sold via CBEC. Some of the listed items will also need to meet additional custom and quarantine requirements in the future. While the announcements created substantial concern, implementation has repeatedly been delayed and was again pushed back at the beginning of 2019. (Source: chemlinked.com).
China’s most significant step, however, was the announcement of the e-commerce law in August 2018. It came into effect on January 1st 2019, (Source: FBIC Group); the law focuses on the practical aspects of developing e-commerce and features the following key areas of change.
1. The law clarifies the main types of businesses it governs:
• Legal persons or unincorporated organizations that provide a platform for digital business, transaction matching, information release and other services to facilitate parties in an e-commerce transaction, e.g. Alibaba’s Tmall.
• Third party merchants that sell goods or provide services on an e-commerce platform, e.g. a vendor operating a store within Taobao.
• Online sellers operating through their own websites or social media applications, e.g. WeChat shop.
Except for very few types of rare and small personal business, the new law requires all e-commerce operators to handle business registration. Where a special license is required (e.g. food or drug related), such licenses shall be obtained according to law.
2. E-commerce operators must meet their tax obligations and are now required to issue a tax invoice (fapiao). A marketplace platform has the legal obligation to report merchant identity and tax-related information to the tax authorities and shall keep transaction related information for at least three years.
3. E-commerce platforms are required to establish rules to protect IP rights and retailers must register with the State Administration for Industry and Commerce for a business licence. Non-compliant platforms now face fines of up to $300,000. E-commerce platforms must take joint responsibility with the individual stores on their shop for the sale of fake goods, where previously it had been down only to the individual merchant. Platform operators not responding to claims of fake merchandise can now be fined as much as $30 million.
4. All e-commerce operators face fair competition obligations, with those occupying dominant market positions prohibited from excluding or restricting competition.
5. The new law further fosters consumer protection by requiring the e-commerce operator to disclose accurate product/service information and to avoid engaging in misleading and deceptive practices. E-commerce platforms will also have to establish a system to post consumer comments and introduce other measures to ensure accurate information (Source: China.org.cn). Fake and incentivised reviews are banned.
6. The new law further enhances China’s regulations on privacy protection. The new e-commerce law places restrictions on abuses of consumer profiling, such as forcing consumers to “opt-out” of particular services.
Benefits and challenges faced by the overseas sellers under new e-commerce law
The new e-commerce law creates certain new benefits to strengthen the incentives to purchase through the CBEC channel. These benefits include: it indefinitely extends the waiver of the pre-importation registration requirements on specified categories of products, for example cosmetics, health food, medical device and so on. The scope of the positive lists is expanded to 63 categories and the tax policy has a 30% discount for the products imported through the CBEC channel.
Meanwhile, the new challenges imposed on overseas sellers by the new law have the following aspects. Under the new e-commerce law, the overseas seller must designate a Chinese “responsible party”, which will be held directly accountable by the Chinese authorities for consumer complaints, product recall and other product quality or safety obligations. And responsibilities on all the participants in the CBEC supply chain, including the foreign seller, as well as the platform operator and the logistics service providers were restrained by the new law. In addition, China customs and the domestic market regulators are still actively conducting a discretionary inspection and testing of the cross-border products in terms of the national standards.
One major concern is that under the new law small businesses which have fewer resources to implement the site development, training and business model adaptations are also required to be fully compliant. The new law therefore creates a higher cost of entry (Source: China.org.cn).
A wide range of CBEC sales options are flourishing in China
International companies interested in CBEC into China have a wide choice of ways to structure sales. It’s easy to think you can create a Chinese language version of your existing website and wait for orders to arrive. However, websites hosted outside China may not be accessible to Chinese customers and Chinese buyers are discerning about customer support – pre and post-sale, delivery options and the ability to pay with Chinese payment methods. The daigou approach aside, there are three main models for international businesses to reach customers (Source: Asia Briefing):
1. You can choose to sell through an online mall – a single, central platform which offers brands their own storefront but uses the mall’s checkout system. Examples are Tmall Global, JD Worldwide and Suning Global. This allows a brand to use its own identity, but consumers can pay using AliPay or WeChat Pay, and customer support is delivered directly through the mall’s messaging system.
2. The second approach also uses online malls, but the mall itself buys goods wholesale from the brand and then markets them through its own shop front. Examples are Kaola, JD Worldwide, Tmall Global and VIP.com. Consumers pay the mall, and the mall is in charge of warehousing and distribution.
3. And the third approach is to establish a brand WeChat public account and integrate the WeChat Store in the account. WeChat is primarily a social media App, but many brands join the platform to promote their brand reputation and sell products here. It is easy to access the WeChat Pay facility and the option to connect with product recommendations of WeChat followers and other users. Gucci, Louis Vuitton and Guerlain (Source: CPP Luxury), operates WeChat stores, among many other international brands.
To open a WeChat store, companies need a local business licence and an Internet Content Provider (ICP) licence, but a local third-party agent can organise that. Another advantage of a WeChat store is that, unlike the big platforms such as Tmall and JD Worldwide, there are no annual fees (Source: Food Navigator Asia) and set up costs can be lower. Normally, if the brand official website has an online shop page, it is easy to integrate it to WeChat public account. It could save the online shop construction costs and make the order management easier.
Melchers helps to create success in the China e-commerce market
CBEC is flourishing in China and offers enormous potential for international companies. However, it’s also unique, with regulatory considerations quite different from other markets.
Understanding and choosing the right channel is vital to accessing your target customer and protecting your brand’s integrity and IP. Particularly for small and medium-size businesses, partnering for the right advice is critical.
Melchers provides a complete end to end digital-execution service for Western-brands wishing to enter the China market, from establishing an e-commerce shop in key e-commerce marketplaces in China to designing and building a website and main social media platforms. Melchers has more than 150 years of international trade experience in China. Our expertise and nationwide network of offices have helped numerous brands make the leap.
Contact Melchers today for more information on taking your business into CBEC with China, firstname.lastname@example.org.