E-commerce in China: Understanding How It Works
August 3, 2022
E-commerce in China

E-commerce in China

Share:

Copied

With a market twice the size than that of the US, the Chinese e-commerce presents a world of opportunity for those who wish to enter it. While a decade ago, China accounted only for 1% of online sales volume worldwide, the country made strides in the online space and exponentially grew its online market presence to now take the lead with a 40% market share.

If you plan to create an online business and tap into the huge potential the Chinese market offers, knowing how e-commerce works in China and how to start one is essential. Below we explore the requirements, how to apply, and some tips on getting started in this guide.

For all you need to know about doing business in China, download “The Complete Guide to Doing Business in China” for FREE. 

Starting Your E-commerce Business in China

The Chinese e-commerce market continues to advance and is now offering more opportunities for foreign companies wanting to start their online business. Although the competition is intense and it is undoubtedly challenging to enter and establish a position in the market, companies still take the risk because of big profit opportunities.

If you are interested in starting an e-commerce business in China, you should conduct thorough research and gain a comprehensive understanding of the following things first:

  • Consumer behavior
  • Target audience
  • Competition analysis
  • Brand awareness
  • Product/service interest

Conducting preliminary studies on the needs of the Chinese market is vital since the local preferences for products and services may be vastly different from their foreign counterparts. Historical, political, and social contexts play a huge role in consumer behavior and the purchase journey. For instance, Chinese buyers like to buy products, receive them on their doorsteps, try them out, and then send them back for a refund or change item.

 

The E-commerce Market in China

In 2020, the digital economy of China contributed to more than 38% of the country’s GDP. In the same year, around a quarter of the physical goods in the country were sold online, exceeding the global average of 18%. In the following year, more than half of the global e-commerce retail sales were done in China, surpassing the combined total of both the EU and the US.

These numbers are not that surprising, considering that the number of online shoppers in China, which has been drastically increasing from just 34 million in 2006 to 466 million after more than 10 years. According to statistics, the digital buyer penetration in China has reached almost 57% in 2021. Additionally, the B2C e-commerce sales in China are expected to surpass USD 1 trillion, with the majority of the gross merchandise volume (GMV) taking place in TMall.

The direction the market is moving in is clear, there is great opportunity for e-commerce players in China. With the advantages that the government is giving to foreign investors, more international entities are showing interest in becoming e-commerce operators in China.

 

What is an e-commerce Operator?

According to the ECL, e-commerce operators in China are legal entities that carry out the supply of services or sales of goods over the internet. These entities have a digital space or platform where buyers and sellers carry out e-commerce transactions.

 

Requirements and Obligations of e-commerce Operators in China

Under the law, e-commerce operators should have a relative business license. Additionally, operators need to do the following:

  1. Meet the relevant tax obligations;
  2. Be able to issue an invoice, including a digital copy;
  3. Obtain administrative licenses required to carry out specific activities or sell certain goods and services;
  4. Comply with duties on delivery times and methods;
  5. Comply with laws and provisions made to protect user data when they are collected and used on the platform.

These regulations apply to all those operating within the country’s territory. However, there can be ambiguous instances wherein it is not straightforward which regulations apply, especially in cases of entities operating from abroad. For these cases, the government applies the following criteria to activities performed by e-commerce operators to determine if Chinese regulations are applicable:

  1. The platform from which purchases are made is connected with a Chinese domestic domain;
  2. Transactions are concluded within domestic borders, on websites with a local domain, or through domestic electronic payment systems;
  3. The operator has a warehouse or a similar structure within domestic borders from which deliveries are made.

Failure to comply with domestic legislation and obligations can lead to serious consequences. For instance, operating without a business license can result in the seizure of profits and penalties being imposed.

 

Applying for an Internet Content Provider License

An Internet Content Provider (ICP) license is needed to operate an e-commerce business. China maintains strict control over e-commerce and internet-related activities within its borders, that is why they are requiring online businesses to register with the Chinese Ministry of Industry and Information Technology (MIIT).

There are two types of ICP licenses that operators should apply for:

  • ICP Beian – this is the standard ICP license needed for hosting a local website
  • ICP Commercial – this allows operators to legally accept payments online for services or physical goods

Foreign companies that do not have a legal entity in China are not eligible to get an ICP license. A representative office will not suffice in this case. Foreign entities should have a registered and licensed Chinese company to apply for ICP licenses.

For foreign operators, having a local company lets you do business in China in exchange for compliance with numerous regulations. For foreign e-commerce retailers, their local entities should be set up as Wholly Foreign-Owned Entity (WFOE) aside from getting a business license.

 

Localizing Your Products and Service for the Chinese Market

Before starting an e-commerce business, you need to consider website localization. You should align your products and services with the local cultural factors that define how consumers engage with a brand. The language, payment methods, product sizing, marketing strategy, and brand imagery should fit the local culture.

China is a huge market, so tackling it with a regional approach is smart and practical. Different regions have different needs and expectations, and this can help new entrants focus on specific market segments rather than tackle the general market with generic messaging. The e-commerce space is highly competitive and local players can put you at a disadvantage if you fail to meet the needs of local audiences with your brand strategy.

Additionally, China has a unique regulatory environment that you should be aware of. Bureaucratic processes for obtaining permits and licenses, what goods can be sold or not, and how intellectual property rights are considered might differ from region to region, so you should always stay updated with any changes that may occur.

 

The Most Popular Online Marketplaces and E-commerce Platforms in China

Here are the top online platforms that e-commerce businesses use in China to sell goods online:

1. Taobao

It is the biggest online marketplace in China and is a direct local competitor of eBay. It introduced Alipay for online transactions, making it easier for people to buy and sell goods online.

2. Pinduoduo

While the platform is relatively new to the e-commerce field, it exponentially grew in the past years and became one of the most trusted websites next to Alibaba and JD.

Pinduoduo is known for its countless e-commerce innovations like the C2M business model, team purchases, and social commerce programs. It is also the biggest online marketplace for agricultural produce, making it easier for Chinese farmers to sell directly to urban consumers.

3. JD

JD used to be a computer equipment seller before it shifted into an online business model. Today, they are the biggest online e-commerce platform in China for electronic appliances, computers, and new technologies.

4. TMall/TMall Global

TMall is one of the most popular sites in China and is preferred by locals because of its security against fraudulent goods. While TMall sells local products, Tmall Global is dedicated to foreign brands.

5. Xiaohongshu (Little Red Book)

Xiaohongshu started as a review community where people can share their comments and feedback on restaurants, travel, events, and shopping. Later on, it evolved into an e-commerce platform focused on fashion, beauty, and lifestyle products. It is a mobile app-based platform so it conveniently targets the majority of online shoppers that use their phones for transactions.

6. Suning

Suning first started as a domestic appliance store before going online and offering all sorts of everyday items from books to baby care products. It has a strong logistical system and employs automated robots for its warehousing tasks.

Choose a platform that specializes in products that you sell. For instance, Xiaohongshu is the best destination for beauty, fashion, and lifestyle products. On the other hand, JD would be the better choice if your focus is on computer parts and electronic products.

 

Which Cross-Border e-commerce Platforms Can Operate in China?

Cross-border e-commerce platforms in China allow international companies to penetrate the Chinese market and sell their products. Sellers on the platform benefit from reduced duty fees, and they can do this even without a Chinese business license.

The Chinese government is encouraging more international sellers to enter the market through favorable policies that accelerate the growth of cross-border e-commerce websites. Increasing pilot zones, cutting tariffs and taxes, and expanding the retail import lists are some of the steps that the government has taken to spur the growth of international online commerce.

The following websites are the leading cross-border platforms that locals trust for purchasing international goods:

  • TMall Global
  • Kaola
  • JD Worldwide
  • VIP International
  • Suning International
  • Xiaomi Youpin Global
  • YMatou

 

Where to Host Your e-commerce Website

To start your e-commerce business, you need a website hosting provider. Although it is easy to choose a host, their performance and location are important when launching your website in China.

If you decide to host your website outside the country, your site will need to go through the “Great Firewall of China”, so expect that it will load slower. While this option has its advantages like not having to deal with complex legal procedures, users will have a poorer experience because of slow load times.

The best choice is to find a hosting provider within China to benefit from faster loading times and an enhanced user experience. But in exchange, you have to get an ICP license to proceed.

 

Importance of Logistics and Customer Support

The scarcity of high-quality logistics providers in China is a problem for e-commerce platforms. It has failed to catch up with the explosive growth of online businesses in the country, and this has resulted in late deliveries, damaged or lost parcels, slow COD processes, and poor return procedures. Special services like payment installations and product try-on are also unavailable to some logistics providers because of the added complexity of the said options.

To solve the issues with logistics, e-commerce operators build their internal networks, outsource to third-party providers, or form partnerships with logistics firms. These options are for those with enough capital, but for small e-commerce players, the major online platforms like Taobao have their own fleet that can help in the logistics of your business.

Customer service is also important because it helps keep customers and cultivate a loyal following. Loyal customers will then help you acquire new customers through word-of-mouth and positive comments, both of which are effectively cheaper and more effective than any marketing effort.

 

Integrating Payment Systems Into Your e-commerce Website

Once you have set up your e-commerce website, the next thing to do is to integrate an online payment system.

Digital wallet payments are the leading option for consumers, with credit cards ranking second. In China, AliPay, China UnionPay, and WeChat Pay are the most popular payment methods for e-commerce businesses, followed by 99Bill, YeePay, Payease, and ChinaPnR.

WeChatPay enables customers to purchase directly from the WeChat platform, making transactions convenient. And because payment is easy, customers usually buy on impulse straight from the WeChat mobile app.

The major e-commerce platforms already have integrated online payment systems on their websites. This is the most convenient option for starting e-commerce operators. But if you want to make your own e-commerce website, you have to take the following steps to integrate an online payment system into your platform:

  1. Establish a Chinese entity for your business.
  2. Open an account with a Chinese bank and apply for a developer account with your preferred payment systems like WeChat Pay or AliPay.
  3. Once your account has been approved, apply for an ID from AliPay or WeChat Pay.
  4. Use the provided SDKs to integrate the system into the backend and front-end of your e-commerce platform.

 

Conclusion

Establishing an e-commerce business in China can be complex with all the regulations, licenses, and cultural factors to consider. To make things easier, you may want to get help from a professional that knows the ins and outs of registering your business in China as an e-commerce operator. If so, feel free to contact us and we will be glad to guide you.

Disclaimer: all articles and its related content are the property of Moore Stephens Consulting Company Limited and may not be reproduced either in part or in full without prior consent.
E-commerce in China

Share:

Copied

Stay up-to-date with relevant business matters in China

Subscribe for the MS Advisory newsletter!