E-commerce in China
A total of 803 million Chinese consumers, or 58 per cent of the Chinese population, makes day-to-day purchases via different eCommerce channels in China. Because of its magnitude, the Chinese eCommerce industry is projected to reach 1.6 trillion USD by 2019 and expected to grow with approximately 17% per year. This places China in the number one position as the largest eCommerce market in the world. By the end of 2020, the Chinese eCommerce industry will be greater than those of the U.S., the UK, Japan, Germany and France combined.
To better understand this market, we will share with you several of the basics you would need to know about the Chinese eCommerce market.
The eCommerce market in China is dominated by Chinese behemoths Taobao, Tmall (both part of Alibaba Group) and JD.com (Jingdong). Before the current trend towards Business to Consumer (B2C) channels, the Chinese eCommerce industry was the domain of purchasing agents. These purchasing agents, or so-called “daigou“, would purchase high quantities of various (mostly) foreign and domestic products and then sell these via Consumer to Consumer (C2C) marketplaces. Taobao is the most obvious example of such a C2C marketplace and has played an important role in the development of Chinese eCommerce.
Taobao was established in 2003 as a response to its US rival eBay moving into China in the previous year. Unlike eBay, the Taobao Marketplace offered a unique opportunity to small business owners and entrepreneurs as it allows its users to list their products free of charge. The company also catered specifically to the needs of Chinese consumers by developing several unique features:
- Taobao’s online payment system (Alipay) – protected consumers against fake products and fake advertisements.
- Aliwangwang – an instant messaging tool which enables smooth communication between buyers and sellers; in order to verify product authenticity.
Tmall is the largest platform and owned by Alibaba Group. As of now, Tmall has 400 million buyers, over 50,000 merchants and boasts 70,000 brands. Different from Taobao, Tmall is a B2C platform which allows businesses to sell directly to the Chinese consumers. Since Tmall functions as an open marketplace, foreign businesses can sell their products in a similar way on Amazon.
However, unique to Tmall (and other Chinese marketplaces) is the opportunity to open a storefront. Operating a storefront is much like operating your own web shop, but then within the Tmall environment. Basically, this means that you operate your own web shop on Tmall where customers can just view products from your company.
Jingdong is China’s second largest eCommerce company, with around 24,7% market share. JD.com has gathered more than 40 million products in several categories, such as mobile phones, computer, mother and baby and numerous others. Furthermore, JD.com is known for its excellent logistics network with over 200 warehouses and more than 50,000 of its own pick-up stations.
Domestically, Jingdong operates two business models. Firstly, functions as a B2B2C company since they source products directly from brands and suppliers, after which they display these on their website. This can also be described as the Direct Sales Model. On the other hand, JD operates as a marketplace (like Tmall) where they allow third-parties to sell directly to Chinese consumers via JD’s website and mobile channels.
Many foreign companies have decided to set up their storefront, or “web shop”, on one of these channels to support the sales of their products in China. As a good example, Apple whom generally outside of China only sell via their own website and store, even has a Tmall store set up to reach the Chinese consumers.
China’s eCommerce channels generally require that any firm wanting to set up a web shop on its domestic eCommerce B2C channels to have a Chinese legal entity. These companies would have to import their products from abroad, which requires an import/export license, before they can sell via the domestic eCommerce channels.
A relatively new model which is increasingly becoming important in the last couple of years is cross-border eCommerce. Players such as Tmall Global and JD Worldwide, as well as several other smaller players in the market, provides opportunities to foreign companies to sell to Chinese companies without owning a local entity.
This means that foreign companies either send products directly to Chinese consumers after they’ve been purchased on cross-border eCommerce Channels; or they have their products stored into special bonded warehouse zones. For example, selling in cross-border eCommerce is popular for cosmetic brands and wine companies. Within China it is required that cosmetics brands, when having established a business in China and is selling domestically to have done animal testing before being allowed to sell their products. The current trend of many cosmetic brands is to avoid these type of practices; if sold via cross-border eCommerce, the company would not be required to do animal testing on its products to be allowed to sell to consumers in China.
Increasing Competitive Market for Foreign Brands
In the past, Western brands would sell mostly using their country of origin effect. However, the perception that Chinese consumers are eager to purchase foreign products solely because they are ‘Western’ is outdated. But, this assumption might still hold true for very specific product categories, such as milk and baby milk formula. In addition, building brand awareness and demand for niche products sold by foreign SMEs requires effort.
Nowadays, merely making one’s product available to Chinese consumers will not immediately translate into sales. The emergence of online shopping in combination with the huge number of domestic and foreign brands has developed a highly competitive eCommerce market.
Therefore, one must thoroughly consider the sales channels through which one might sell its products in China.
The development of the Chinese eCommerce industry has presented foreign brands with many opportunities. In order to successfully take charge of such opportunities, organizations need to deal with a set of unique challenges and devote sufficient time to develop a strategy that considers product/brand, image, budget and regulatory requirements.
As always, diligent preparation is key when developing your business in the Chinese market. If you have questions about this subject, please do not hesitate to contact us.
Disclaimer: all articles and its related content are the property of MSA Consulting Company Limited and may not be reproduced either in part or in full without prior consent.
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