China’s e-commerce industry has resulted in significant growth during the last five years. The Chinese economy is thriving, and more than one billion consumers are ready to purchase goods and services.
In 2018, e-commerce sales accounted for more than one quarter of retail sales in China. Additionally, online sales in China accounted for nearly half of the world’s e-commerce sales.
Using the e-commerce channel allows businesses in other countries to sell directly to consumers so that they can test the market and take advantage of this massive market.
However, with the increase in e-commerce activity, there has been an increase in consumer complaints and allegations of unfair competition, so the Chinese government has implemented new e-commerce rules that govern this market in China.
Businesses hoping to emerge into this market must be aware of these rules in order to stay compliant. Below, we discuss how to implement a successful e-commerce strategy in China and the rules that you should be aware of.
Conducting Market Research
Before committing to e-commerce in China, it has to consider whether the Chinese market is ready for your product and if it will appeal to this audience.
To determine the appropriateness of your product or service, you must carefully evaluate and analyze your idea as it relates to the Chinese market. This is an integral step to complete before attempting an Asian market launch.
It is important to remember that even if you have a product or service that has been successful in the western market, it may not resonate with the Chinese market.
If you are launching a new product or service, the risk is even greater.
Chinese consumers have different needs and values than western consumers. They also have different buying behaviors. Some things to consider during this evaluation process include identifying the following:
- The needs of your customers
- Your target audience, such as the age, gender and annual income of your potential customer
- How your product addresses those needs
- The size of the market
- An absence of your product in the market
- The strength of any competing businesses
In order to be successful, it is important to verify your idea with your prospective market. The best way to complete this process is to conduct effective market research with a trusted partner like Horizons.
This may be conducted by interviewing real potential customers and listening to their reactions about the product. Focus groups may provide greater insight into the potential market, as well as identify possible problems with the product, service or idea, such as packaging or marketing strategy.
Our experts can organize these interviews and groups on your behalf. This is an important investment to make and should be factored into your overall global growth plan.
By carefully evaluating how your product or service will resonate with the Chinese market, it is more likely that you will be able to create a successful e-commerce platform in China.
Legal Requirements to Open an e-Commerce Business in China
There are a number of legal requirements that must be met before opening an e-commerce business in China. Here are a few of them.
China requires most businesses to obtain an Internet Content Provider (ICP) license before opening an e-commerce business. The Chinese Ministry of Industry and Information Technology issues the license and allows China-based websites to operate in the country.
This license is necessary to establish China-based websites for any purpose, to get hosting services in the country and to access a China Content Delivery Network.
Obtaining an ICP license may be difficult and not everyone can successfully obtain one. The type of website that you are attempting to register will play a part in whether you can successfully obtain a license.
Generally, it is easier for Chinese citizens or companies to receive approval for an ICP license than international applicants.
Additional restrictions for obtaining an ICP license include the following:
- Foreign companies without a local business license cannot apply for an ICP license
- Foreign passport holders can be the named contact for the website, but they will be contacted, so they should be able to speak Mandarin
- There are different procedures and application times that vary by the province and type of city
In some situations, it may be possible to sell merchandise in China without having an ICP license. However, business owners should be aware that if their e-commerce site is blocked by the government, this is irreversible.
Another important consideration for your e-commerce site is what type of business entity to establish in China. Not all forms of businesses can legally sell products in China.
Having a local company can provide you with the freedom to conduct operations in China, but it requires compliance with various regulations.
E-commerce retailers are required to obtain a business license, which is only possible by setting up a Wholly Foreign Owned Entity (WFOE).
Local, specialized support can assist you with this process. Horizons can help you with the company incorporation process in China and help you determine which type of entity will best serve your needs.
This help can make the process faster, increase your chance of obtaining the mandatory documents and provide you with the important peace of mind of knowing that you are in full compliance with local regulations.
Prohibition of Daigou
Daigou is the process of purchasing a product out of China for a lower price than it is available in China and then bringing it back to China to resell it.
This process is illegal in China, although it is a fairly common practice. The government has taken many strides to enforce this law.
Taxes When Making Purchases
Recent Chinese changes in the law altered the amount of tax-free purchases across the border that a person can make. For one transaction, the limit is 5,000 RMB. The annual limit is 26,000 RMB.
This change made it easier for e-commerce companies to purchase high-end fashion and cosmetics that are attractive to cross-border purchasers. These purchases are not subject to import tariffs.
Import value-added tax and consumption tax is only collected at 70% of the ordinary rate.
New Regulatory Protections
China implemented new regulatory systems to handle various aspects that affect e-commerce, including the methods that people use to pay, clearing products through customs and inspecting goods.
WeChat and other shopping channels and social media are required to comply with the new regulations.
The country is actively attempting to increase cross-border e-commerce by speeding up the custom registration and goods examination processes.
The Chinese government is also actively investigating claims of unfair competition and consumer protection complaints.
Fake reviews on items are banned. Domestically-based websites are required to offer stronger consumer rights protections.
If an e-commerce platform sells fake goods, it can face serious legal action. Platforms are responsible for the products sold on their site and are required to conduct due diligence to ensure products are authentic.
Intellectual Property Protections
For many years, China has grappled with intellectual property theft, including brand-stealing and counterfeits.
E-commerce platforms have the responsibility of protecting intellectual property rights and must respond promptly to a report accusing someone of violations.
Those companies that do not provide quick action can face significant penalties. Additionally, businesses must take action to protect their brands so that they do not lose favor with the Chinese domestic market.
One effective way to protect intellectual property in China is to register it with the Chinese government. Even if a business has a registered trademark in their company of incorporation, they may not have a protected mark in China.
To receive protection from the Chinese government, the company must file a trademark in China.
If the company begins doing business in China before registering their trademark with the Chinese government, someone else can register the trademark in the country. This can ultimately result in the company having to pay the registered trademark owner for using their mark.
Determining Where to Host the E-Commerce Business
An important decision to make when launching your e-commerce business in China is determining where you want to host your e-commerce site. The Internet is not freely accessed in China.
Foreign websites must go through the country’s censorship system, which is referred to as the “Great Firewall of China.” This makes the website slower than websites and have lower performance than those websites hosted inside the country.
This can cause the user to have a poorer experience and may cause them to choose other platforms. If you want an alternative to hosting in China to avoid the complicated procedures involved with the Chinese government, you can choose to host your site in another country. However, you do so at the risk of lower performance.
An ICP license is necessary if you host your website in China.
This creates additional steps and regulations that you must comply with. However, hosting inside the country will provide your customers with a better experience and instill more trust and confidence in customers.
Selecting the Right Sales Platform
There are several different sales platforms that you may use to start e-commerce business in China. The option you select depends largely on your target market, business type and budget.
There are advantages and disadvantages of each option. Some of your options include:
The easiest solution may be to use a standalone website outside of China. This option is affordable because you probably have your website in place. It is also convenient. You do not have to worry about complying with complex Chinese laws.
However, it is unlikely that a Chinese customer will choose to go to a foreign website instead of a Chinese one.
Additionally, due to Internet restrictions, Chinese customers may not even be able to access your site. You may have to invest more in marketing in order for Chinese customers to even be aware of your business.
Online Mall Store
Another potential option that you may choose is to sell through a CBEC online mall store. A few examples of this option are JD Worldwide, Suning Global and Tmall.
These platforms provide a type of virtual mall for many different types of businesses. Benefits of this method include organic traffic and support for sales.
However, there may be more competition with other e-commerce businesses. There may also be higher investment costs associated with using this type of site.
Intermediary in China
Another option for foreign businesses is to sell goods electronically through an intermediary. This method is preferred when a business does not want to have to manage inventory. It can pass off this responsibility and distribution to the intermediary.
This option allows the business an opportunity to take on this pathway with lower risk. Additionally, intermediaries are often more familiar with consumer demands in the local market.
However, there are potential problems with this option, including a lack of being able to control one’s own brand, only being able to sell products at a reduced wholesale price to the distributor and only having limited product categories.
A relatively new method of an e-commerce business is through the WeChat Application. This app is considered an all-around app that provides messaging, social media and payment availability.
However, as stated previously, WeChat and similar apps must meet additional legal requirements. Additionally, there is not traffic that goes directly to the e-commerce business, so the business must market its products aggressively.
Each of the options listed above have their own distinct advantages and disadvantages. You will have to consider multiple factors when choosing your platform, including the following:
- The type of product being sold
- The market development plan
- Regulations related to the platform
- The available capital
- The company’s current operations
- Distribution concerns
Whichever platform you choose, it is important to remember that you are trying to appeal to a different market, so you will need an e-commerce marketing strategy that resonates with the domestic Chinese market.
Develop a Chinese Marketing Strategy
The next step in establishing a successful e-commerce in China business is to adapt your product to the local Chinese market. There are several aspects that you will need to address to create a comprehensive plan to market your product.
Unique Selling Proposition
Before trying to sell your product, it is important for you to establish your unique selling proposition. This step involves analyzing the data you collected during market research.
This proposition should explain why a customer should buy your product and specifically from you. For example, your unique selling proposition may explain the following:
- How your product solves the customer’s problem
- How your product fills a void in the market
- How your product is superior to those already on the market
- How your product has additional features that make it more attractive
This message can help you stand apart from competitors. It is important to work closely with an agency that has ties to the local community and understands its values and principles to ensure that you create a new marketing message to the new market instead of relying on strategies that worked only in western cultures.
Branding is another important aspect of your business. While you may already have a western brand and logo, you may need to adapt these to the Chinese domestic market.
Your logo and name should appeal to local customers and the new market. It should be easy to remember and not too similar to an existing brand. Ensure that there is not a translation issue with the name or logo.
It is also important to consider what type of marketing strategy to implement. The easiest place to begin is with the content on your website. Explain your products and services in a way that addresses the needs of the local Chinese market.
Include education in your content, especially if the products may be new to this part of the world. Identify the factors that influence your new market’s buying decisions.
In some situations, what people are drawn to is an idea or lifestyle behind a product, rather than on some aggressive sales tactic. Once you have identified the message you want to convey, keep this message consistent across all of your platforms, including your website and social media channels.
You can take your marketing strategy one step further by having an active presence on WeChat, the most popular social media platform in China that has more than one billion users.
You can use the site’s app, shops and mini programs to run your marketing campaigns and other programs like news and games. Many companies have increased their popularity in China through attracting new customers and selling directly to customers on this platform.
It is important to remember the pivotal role of SEO on anything that is web-based. SEO directly affects the rankings of certain websites on search engines.
Companies may wish to establish a separate China SEO campaign to help increase their presence in China. Customers must be able to find your business when searching for a relevant product.
In China, the leading search engine is Baidu. Western companies may be familiar with SEO strategies for Google and may even be familiar with aspects of its algorithm.
However, Baidu’s results are based on different factors than Google, so it is important to understand what is important to this particular search engine.
For example, Baidu places a significant emphasis on a website’s home page, so it pays to spend more time on this page than others. Additionally, it also emphasizes new content, so it is more important to provide fresh content than extensive content.
Be Ready to Accept Payment
Now that you have most of the foundational work completed, you can set up your site to receive payments in China. For foreign businesses, an important consideration is the conversion rate. Payment information should be listed in the local currency.
It is also important to be familiar with preferred payment tools in China.
While the western world often use PayPal, AliPay and WeChatPay are popular payment methods in China, so it is important to integrate them with your e-commerce business.
WeChatPay allows customers to purchase products directly from the WeChat platform, so this makes it easier for customers to buy impulse buys straight from the app.
It is also important that e-commerce businesses in China be able to process mobile payments. In 2017, 95% of online purchases were made via smartphones.
Once your e-commerce in China is in place, it is important to track your performance to determine what is and is not working.
You can use tracking tools that are integrated with your business, or you can request that additional tools be used to your e-commerce platform by your developer. Use this information to make adjustments to your marketing strategy.
You can improve your e-commerce in China and make new marketing strategies by paying attention to the feedback that customers give you, based on their purchasing decisions and reviews.
Get Help for Your E-Commerce in China from a Reputable Agency
Beginning an e-commerce business in China requires extensive planning and market research. Additional challenges exist due to a language barrier, different market dynamics and different buying habits.
Complying with various governmental regulations in China can also be a daunting task. You may eventually wind up hiring local staff to manage inventory or assist with sales in China.
Horizons can help with all aspects of establishing a new business in China. We also offer PEO services in China so that we can take on all of the typical employer responsibilities while workers work under your supervision and control.
Horizons has local market knowledge to provide you with meaningful support and tools to help you make the process of launching into the Chinese market smoother. Contact us to learn more about our product offerings.