2020 has seen a boom in e-commerce in China because of new policies and regulations that expand the reach of its cross-border e-commerce pilot program to 105 cities and regions.
International businesses focusing on market development can consider introducing their products and services in the Chinese market without the need to invest in establishing an HQ, for they can simply rely on Chinese trade agents or e-commerce platforms. Alternatively, the E-Commerce strategy is a solution for businesses to expand their market to China, or to maintain sales in China by continuing to supply their products and services with reduced or limited structures.
Sweetening the deal for many businesses in the retail sector, and meeting the criteria, those who become part of the E-Commerce Pilot are exemptions from VAT, Consumption Tax, and Enterprise Income Tax. Further, there is a proactive push by China to expand consumption and provide access to developing new regions.
Eventually, once products and services begin generating revenue, businesses should consider establishing their HQs in China in order to optimise production and services and reduce additional fees by supplying the customers directly.
Before entering China’s e-commerce sector
China’s market and culture are very complex and, therefore, demand a coherent strategy to navigate them successfully. The main cause of failure for non-Chinese businesses is a lack of market research, planning, over expectations or short-term thinking, often leading to multiple small blunders and/or a lack of oversight in their E-commerce strategy.
The rule of thumb when entering China is for businesses to carry out thorough due diligence which involves identifying trustworthy Chinese trade agents and mapping out the best way to enter the market while simultaneously protecting the business from unforeseen risks. The first step is always to register all trademarks and to review other intellectual properties from a filing and protection perspective, as China administers a “First to file” instead of a “First to use” system. Consequently, even if a business aims initially to introduce only a single product or service, it is advisable to register all its brands and products to avoid trademark squatting and malicious filings down the line.
Thereafter, businesses can take their time to develop a pragmatic E-commerce strategy for each product or service they intend to introduce in China. Plans must take into account their competition in the market, repatriation of revenues, Chinese content guidelines, and logistical matters. Only with proper planning and local awareness can businesses find success in China.
E-Commerce platforms in China
All major foreign companies operating on Chinese e-commerce platforms have local trade agents who can provide a business with space, dedicated or shared, to promote products and services in the country. Most businesses choose to collaborate with trade agents who have many years of experience promoting a varied number of products and services as well as an established customer base to offer their clients.
Given the differences between the various Chinese e-Commerce platforms, it is crucial for businesses to conduct a product search on each platform to evaluate which would be the best fit for a specific brand and product. Whichever e-commerce platform a business may choose, it is advisable to understand the need for sustained promotion of their brands given the heavy competition.
In China, WeChat is a jack-of-all-trades application whereby users can chat, call, publish articles, share their moments (as on Facebook or Instagram), purchase goods, pay bills and more. The latest trend for international businesses has been to open official accounts, with Sephora being a key example, and sell products directly via the app.
WeChat transactions are quick and the payments in RMB are sent directly to the WeChat Account Balance, from where the profits can be transferred to the bank. The best option for businesses is to register with Tencent for a WeChat Pay account, which they then connect to their official bank account. Businesses can choose the currency they would like to exchange every month and Tencent takes a 1-2% commission for a minimum withdrawal of USD 800. Registration for WeChat Pay usually takes two to four months and requires businesses to provide their business licence, financial licence, anti-money laundering agreement, and company information. If working with a trade agent, the time needed is drastically reduced and businesses can set up a WeChat Pay account in 1-2 weeks; while this option has lower cash-out amounts of USD 0 – 5000 and a better refund capability (within a month), it incurs a 2-3% commission.
Opening an account on WeChat via a trusted trade agent entails the creation of a trademark agreement and payment of fees to the trade agent who opens and maintains the account.
A business intending to register an account themselves should follow these steps: visit the WeChat Account Platform; fill in the forms for a “Service Account”; pay the annual fee of USD 99, and register for WeChat Pay. There are two types of accounts with different terms of services and features that can be availed of: a local account and an overseas account. One can open an “overseas account” with a foreign business licence and business owner credentials; it should be noted, however, that businesses will then lack many of the tools for promoting their brand. If opting to create an account for the brand itself, then it is recommended to first set up a business entity in China and then create a local account by submitting the Chinese business licence and trademark registration.
JD, Taobao, and TMall
The biggest decision for businesses will be to choose the right e-Commerce platform to market their product. JD, Taobao and TMall.
How Do They Differ From One Another?
Taobao & TMall are both parts of the Alibaba ecosystem, however, they do not compete with each other. Together, the two platforms make up more than 65% of the e-commerce market in China with TMall expanding more aggressively.
Taobao is an online market where almost every kind of product can be found and each product itself is available in a wide range of qualities and prices; overall, the platform focuses increasingly on handmade crafts and bargains. Even though most brands are registered on Taobao, they face heavy competition from similar products that are readily available for a fraction of the price.
TMall, on the other hand, is more brand-friendly, granting preferential deals if businesses approach them directly. Most of the products on TMall tend to be quality-based and offer Chinese consumers plenty of international and local top-quality brands ranging from Samsung to Huawei, or Gucci to Hugo Boss; in terms of products available for online sale in China, TMall may be compared to Amazon.
JD—or JingDong—is a subsidiary of Tencent that presents an alternative for businesses that would prefer a less hands-on approach to promoting their brand in order to focus on higher sales volumes. Initially, businesses would set up their page on TMall but themselves handle each brand page, whereas JD allows businesses not only to upload product details but also ship them in bulk to JD, who would deliver on their behalf, more on shipping below. Now, while both TMall and JD offer similar services, JD has grown popular as a locus to purchase electrical appliances and high-tech products—with plans to expand this advantage over TMall.
As a general rule, given the increased range of services offered by cross-border E-Commerce platforms, it is advisable to contact various platforms directly to see if they might offer preferential deals for products placed with them.
Registering on TMall Global and JD Worldwide
Businesses outside of China should consider registering for either TMall Global or JD Worldwide accounts as both offer the ability to access the Chinese market without issues related to the logistics of setting up a business in China and warehousing.
The only requirements are a business licence, business owner’s details, a USD bank account, and international trademark registration information. In addition, to avoid any trademark squatting problems, it is strongly recommended that every business marketing its products in China also register its trademark/s in China even when it is not a requirement.
In terms of fees, businesses should expect to pay a security deposit and an annual fee for their accounts. Security deposits for business accounts cost USD 25,000 with TMall and USD 15,000 with JD, while the amount of the annual fee for maintaining the accounts depends on the products that are being sold; on average, annual fees tend to range between USD 1,000 – 10,000.
Once the registration has been completed and the account information reviewed, the account usually takes between 1 to 2 months or longer depending on any issues or concerns, to become functional. These accounts are advantageous for businesses to introduce their products in the Chinese market to gauge the consumers’ reaction and access the Chinese market remotely. However, the business’s control over online promotion, logistics and customer service will be minimal. For businesses that place a premium on protecting their brand image, careful consideration should be given to the options of either working closely with a reputable trade agent or potentially setting up a business entity in China.
For those curious about Taobao cross-border e-commerce accounts, it should be noted that this specific platform does not offer the service. Like TMall, Taobao is part of Alibaba, however, do not compete in the same market segments, and only provides its e-commerce platform and services exclusively to companies registered in China.
The logistical route will depend on the platform that the company has registered with, the city where products are stored, and if the product is part of the free trade zone. Each of these factors mentioned will affect the final price the customers in China will have to pay and primarily affect the margins.
The most beneficial option is to register with JD Worldwide or TMall Global, allowing foreign businesses to warehouse their products in their country and then supply them to China once the order has been made. Customers have to wait longer, but they would have to pay a smaller fee if the product is registered and entering one of the E-Commerce pilot zones then the taxes on those products are minimised, resulting in more significant margins.
JD Worldwide, as mentioned previously, has the added benefit of warehousing products in bulk inside their warehouse in China. Here too if the warehouse and product qualify for the e-commerce pilot, then costs are kept at a minimum, and the customer can receive the products sooner.
It is important to note that both JD and TMall will assist with the delivery of the products from the warehouse in China to the customer’s desired address.
Lastly, if the company registers fully in China on the Chinese platform, then it can establish its warehousing in the cities that are part of the E-commerce pilot zone, while also confirming that its product fit the pilot criteria, making sure the product is ready to be delivered to the customer in China. Alternatively, foreign companies can enlist the help and warehouse of their Trade Agent.
Registering via trade agent
An overseas business seeking greater control and access to the Chinese market without establishing a business entity in China can opt to work with a trade agent or partner. The trade agent would assist in opening the account on the platform of choice and ensure delivery of the product to customers.
Trade agents need to be selected carefully, and while they don’t necessarily need to be in the E-commerce sector, a thorough background check should be conducted to avoid risk. Once the necessary background checks have been undertaken, the trade agent will need to be authorised to act as the overseas business’s agent to market its product/s in China. Other agreements will also need to be made for the declaration of entry of good, warehousing, E-commerce platform services, delivering parcels, taxation and other regulations specific to the region, city, and local government relevant to the location of the agent and his or her business activities.
Typically the documentation that will be needed during this process includes an agency agreement, the agent’s customs declaration registration certificate of import and export, an agreement with the Chinese e-commerce platform, an ICP license of the affiliated platform, and goods information as well as other documents required by the local government.
Overall, the entire process usually takes between two to six months; however, the time needed differs significantly for different regions and cities, all of which have various processing times for their required documentation. In general, working with a trade agent will greatly expand the entry of a product in the Chinese market and give more control to the business to promote the brand and offer better customer services.
Registering a business in China
Businesses that seek to retain complete control over their brand and products in China would need to establish an HQ, hire local staff, register their trademarks and create logistical routes. The entire process of setting up a business in China can take several months, but it retains maximum control over one’s brand and products, while also allowing for better customer service and disintermediation from trade agents generating larger returns.
Once a business has been established, it would then also need to register with Taobao, TMall or JD with its Chinese business licence, a Chinese bank account (connected to a WeChat and/or Alipay account), the Chinese trademark registration, and other documentation depending on its region/s of operation and product/s offered. Registration as a business entity in China generally takes less than two months and offers access to promotional tools that are available solely to Chinese businesses promoting products on those platforms.
How Acclime can help
There are plenty of options for businesses around the world that choose to enter the profitable Chinese market; however, our recommendation is for businesses to evaluate their options and take all necessary precautions. LehmanBrown can support and guide your business through every step of the way, from conducting due diligence and selecting trade agents to taking care of the repatriation of funds from China to the country of preference.
If you are unsure and would like to find out more, please contact us at email@example.com
Contact our teams for expert support and further information about entering the market and setting up a legal entity in China.