$14.3 Billion in 2017, China Pushes Globalization with Cross-Border E-Commerce

China Customs recently announced that in 2017, the cross-border e-commerce industry in China grew 80.6% year-over-year to reach US$14.3 billion in turnover. This is the third consecutive year that the industry grew at an annual rate of over 50%. And yet, there is still a lot of opportunity for growth – in 2017, general e-commerce in China grew 28% YoY to reach a colossal US$868.5 billion in turnover. While general e-commerce growth is slowing down as most of China has already gone digital, cross-border e-commerce is still seeing rapid growth as the Chinese middle class continues to grow and their demand for premium-quality overseas goods continues to grow in tandem. This is a trend that we’ve only started to see in the past few years.

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What is Cross-Border E-Commerce?

To put it simply, cross-border e-commerce is the online purchase of goods from abroad, typically from merchants that operate in different countries, different jurisdictions, and even different languages. For the China market, international retailers and merchants can sell and ship products directly to Chinese consumers through a variety of different avenues, usually through special customs clearance channels in which the taxes and policies are more favorable than that of traditional trade channels. They can also store goods in bonded warehouses from which they can be dispatched to customers in a shorter time frame and still benefit from the preferential tariffs. For China cross-border e-commerce, the most popular industries tend to be cosmetics, luxury goods, food & beverage, and health supplements, with most products originating from developed markets such as Western Europe, the United States, Australia & New Zealand, Japan, and South Korea.

Why Cross-Border E-Commerce?

From an American consumer’s point of view, an example of cross-border e-commerce would be that of someone purchasing cheap, no-name Chinese goods directly from suppliers on cross-border e-commerce platforms such as Wish and Aliexpress. In this case, the main motivation of the consumer would be to bypass the distributors and retailers in the middle, and to buy cheap goods directly from Chinese suppliers that you would normally find at a B2B trade show. In this case, the main motivation is the price. Consumers are willing to wait a long time for goods to be shipped from China because they’re cheap, even though there is the possibility that the goods could be fake or of poor quality, as there isn’t a distributor or retailer in the middle that can verify the authenticity of the products.

Business models like Aliexpress work well in emerging markets like the former USSR countries because they lack quality and branded goods, and shipping there is relatively slow to begin with. In the US, consumers can buy almost any quality, branded product they want on Amazon with two-day shipping, so the likes of Aliexpress, Wish, LightInTheBox, etc. are less likely to appeal to the mass American consumer. However, in a country like, say, Kazakhstan in which quality retail brands are few and far between and shipping by post can be extremely slow anyways, consumers might be willing to wait 3-4 weeks for a pair of jeans shipped directly from suppliers in China. In this case, suppliers may ship via post or ePacket, which is a shipping partnership between different countries’ post offices that allows lightweight e-commerce packages to be shipped at ultra-low rates. This is why you can buy products off of Aliexpress and only pay $0-2 for 3-4 week shipping from China, whereas shipping via DHL/FedEx/UPS can cost over $30 dollars per parcel.

From the Chinese consumer’s point of view, the motivation to buy via cross-border e-commerce is completely different. Chinese consumers now have access to most kinds of goods through local e-commerce platforms such as Tmall and JD.com. For cross-border purchases, however, the main motivation is for middle-class Chinese consumers to procure high-quality products that normally wouldn’t be found in mainland China. Price is indeed one factor, as cross-border e-commerce goods sold through B2C direct shipping customs clearance channels are taxed at just 11.9%. This is significantly lower than buying goods that have passed through traditional trade channels and prices are lower than traditional imported goods that have been marked up by distributors and offline retailers.But for China cross-border e-commerce, the search for premium, quality goods is the main motivation, not low prices.

These days, popular cross-border e-commerce goods may include milk powder from Australia, health supplements from the US, or luxury goods imported from France. While the quality of Chinese-made goods has improved significantly over the last several years, past scandals such as the 2008 melamine milk powder scandal still resonate with Chinese middle-class consumers and there is still a general suspicion of Chinese manufacturers who may find all sorts of different ways to cut corners. In the world of e-commerce, consumers are even warier of fraud because there’s no way to see the product before they receive it. This is why Chinese e-commerce marketplaces are more brand-focused and have more tools for retail brands to build trust with and connect with their customers. For cross-border e-commerce, many Chinese consumers buy overseas products because they know that they are produced by well-known brands whose products have undergone rigorous testing and inspections. The slower delivery times associated with cross-border e-commerce are bearable because this way consumers know that the products shipped directly from overseas to their door are less likely to have been tampered with by a middleman in a Chinese warehouse. In fact, there have been many cases of Chinese companies fraudulently passing off their goods as foreign goods so that they can mark them up significantly. Gaining the trust of the consumer is one key factor that international brands must keep in mind when selling directly to the consumer through cross-border e-commerce.

How Supported is Cross-Border E-Commerce (China)?

The Chinese government is paying more and more attention to cross-border e-commerce, having introduced many preferential policies to support the industry’s growth. One program is the B2C direct shipping program, in which selected gateways throughout the country can accept select cross-border e-commerce goods from overseas merchants, with expedited inspection and customs clearance processes. Under this scenario, goods are subject to a preferential tariff that is equivalent to 70% of a traditional VAT + consumption tax. In most cases, this means a low tax of 11.9%. Some of the prerequisites are that the merchant must have a registered China entity and be able to accept Chinese payment methods. The merchant must also pre-register their SKUs with China Customs in advance. The benefit is that the goods will be cleared by customs much more quickly than normal clearance channels – sometimes as fast as 4-5 hours. Under the B2C direct shipping program, the customer’s order information, payment information, and shipment air waybill number are synced with China Customs’ systems to help facilitate the clearance process.

Cities and municipalities across China are also setting up special cross-border e-commerce zones with preferential policies; such examples include Hangzhou, Zhengzhou, and the Qianhai New District in Shenzhen. Within these zones, international merchants and cross-border e-commerce platforms alike may be able to sell cross-border e-commerce goods directly to consumers in an offline retail setting. Netease Kaola and Tmall Global have already begun testing out offline bonded retail stores in Hangzhou, in which customers can walk in and buy cross-border e-commerce goods directly off the shelf in a bonded transaction, while only paying the requisite cross-border e-commerce taxes and tariffs. The stores likely have the same protected status as a bonded warehouse in a special economic zone, and customs clearance processes may be carried out in advance or even at the point of sale. While it remains unclear how these new experiments will turn out, it is a positive sign that different municipalities are taking efforts to support the cross-border e-commerce industry in China.

（This is an opinion piece by the author, which does not reflect Pandaily’s official stance on the matter. The original article has been edited for republication. If you wish to publish an article through Pandaily, email [email protected]）