After years of tepid growth, sales at several Australian vitamins, minerals, and supplements companies suddenly shot up by 20, 30, or even 40% in 2015. For those who know what happened that in China in late 2014 the source of this growth probably isn’t a big mystery: Regulators expanded a tax exemption to cross-border e-commerce.
The resulting growth in trade has been dramatic, and for firms who have long eyed the big Chinese market but are too small to invest in finding a distribution partner or building a physical presence on their own, the boom of 2015 has delivered a revelation: They, too, can access the mainland market.
E-commerce has of course been big in China for years, and in 2014 online retail sales totaled nearly US$430 billion, accounting for roughly 10% of all retail sales. (The same figures for the United States were US$300 billion and 6.4%, respectively.) Until recently, however, this activity was nearly all domestic – i.e., goods produced in or already shipped to China being sold to Chinese consumers.
That makes perfect sense in light of the retail explosion of recent years: China has more than 300,000 pharmacies, more than 2,000 mid-to-high end department stores, and supermarket catchment areas in urban areas are even smaller compared with the United States because of smaller formats and the lack of parking (and, until recently, widespread car ownership). Within this rapidly-developing retail landscape, however, some factors are driving consumers to prefer foreign products, whether bought once in China or ordered from abroad.
Driving demand
Food scandals are well-known and heavily publicized, from the baby-killing melamine-laced formula scandal of 2008 to the discovery this year of decades-old “vampire” meat. In September, fake rice made from tiny pieces of rolled-up paper was even uncovered in Guangdong. In light of such underhanded tactics, it is understandable that consumers might perceive foreign brands as safer and of higher quality.
Price pressures pushing up consumer prices is another key issue. Commercial rents, especially in first-tier cities such as Shanghai and Beijing, rival those in developed nations. At the end of 2014, rents in Beijing’s Wangfujing averaged $480 per square foot per year vs. $360 for Singapore’s Orchard Road. Wages, while still lower compared to western economies, are also rising quickly.
Finally, Chinese consumers are becoming more sophisticated and better able to differentiate between local brands trying to pass themselves off as foreign and the real thing. With travel increasing and the transparency in commerce that the internet can bring, tastes in products are becoming more global.
Historic developments
By as early as 2005, a Chinese consumer could order an album on Amazon and wait a few weeks for it to arrive—though naturally taxes and shipping often added to the price of the CD itself. But it wasn’t until the fourth quarter of 2014 that cross-border e-commerce really exploded. The impetus was the application of a previously obscure piece of the tax code to cross-border e-commerce, implemented in a number of pilot cities.
The personal effects tax originally targeted Chinese travelers who had emigrated abroad and were bringing back gifts – such as small appliances – for relatives. Small items were exempt, but the tax was set at 10% for nearly everything else. In late 2014, though, the government proclaimed that this personal effects tax also applied to cross-border e-commerce in certain pilot areas. The effect was dramatic, as can be seen in the price differentials illustrated below.
Obviously some costs, such as freight and insurance, are incurred whether selling through physical stores or cross-border e-commerce. However, the price differential can be observed in following key areas, demonstrated with VMS products as an example:
The nuts and bolts
Business models for cross-border e-commerce can be viewed across two main dimensions: Whether the site serves as a platform that aggregates multiple sellers or sells its own products, and whether delivery to the consumer is made from the source country or from a bonded warehouse.
Each model has its own quirks (see graphic below), and it is not yet clear whether there is an obvious winner. It is likely that multiple models will co-exist –for example, a self-run, bonded import model could work for goods with the highest turnover (such as diapers and infant formula), while direct shipment models might better suit the long tail of less-frequently ordered items.
In terms of product flow, though, the bonded import model has the clear advantage in terms of speed. Consumers can receive product within days – sometimes only one or two – rather than weeks.
With both models the seller can choose how much to take on internally, and how much to either outsource or hand over to a partner. Hundreds of cross-border e-commerce companies have already sprung up in China, providing services that run the gamut from simple customs clearance all the way to a full consignment model.
Local interests
While e-commerce, including the cross-border variety, is here to stay, the advantages that it has over traditional imports may not last forever, depending on the product category. In June of 2015, for example, China’s government lowered import duties on skin care products, which harmonized online and offline prices to an extent. In 2016, import duties on additional products including handbags and suitcases are also slated to be slashed.
Regulatory vacuums will likely be filled step-by-step as well. For example, vitamin potency levels are regulated for products registered and sold in China, but currently these rules are not applied for cross-border e-commerce imports. Local players are crying foul, and regulators will no doubt feel pressured to act.
For now, though, cross-border e-commerce is helping to level the playing field by allowing smaller-scale companies to profitably access the vast China market while providing a huge boon in the form of savings and product diversity to Chinese consumers as well. Chalk one up for the little guys on both sides of the border.
