China leads the world in e-commerce. More than 40% of the world’s e-commerce transactions take place in China. Local Chinese tech champions such as Alibaba, Tencent and JD dominate a rapidly growing e-commerce landscape. Chinese consumers are mobile savvy, so much so that even older generations are comfortable with mobile commerce and purchasing online to offline (O2O) services. In addition, Chinese consumers are comfortable using trusted digital payment methods, making e-commerce platforms popular and accessible to all age groups.
Foreign companies want to setup an e-commerce business in China generally have 2 options, regardless which online platform they are going to choose. The traditional option requires foreign companies to setup physical presences in China; and the other option allows companies to sell products from their home countries without having China presence, but this option come with certain limitations.
In this article, we want to compare and explain to our audiences the pros and cons of each option, and the procedures and costs might be involved.
E-commerce business with a presence in China
Foreign companies want to sell products in China would normally setup a Chinese subsidiary under the business scope of trading company, and to apply for an import & export license. Once the Chinese company is setup, the company will have RMB currency settlement accounts.
The Chinese subsidiary is a fully functional entity, it can hire employees, enter into contracts with businesses in China, buy and sell products online and offline. Certainly, there are compliance and tax obligations the Chinese subsidiary needs to fulfill. (Please read our other articles to learn more about tax and compliance requirements in China).
Before selling to retail customers, the Chinese subsidiary needs to have a storage place to keep inventory. If products are shipped from a foreign country, these foreign products will be put through customs clearance, paid taxes and tariffs, and finally put on Chinese labels ready for the market.
Being a legal entity in China, the Chinese subsidiary can sell products both online and offline through distributors or their own physical stores. The company might also choose to setup its own website.
Our discussion only focuses on the most popular e-commerce method, which is to sell products on major online platforms such as Taobao, Tmall, JD. These platforms control about 70% of the market share in China.
Tmall is China’s largest online marketplace dedicated to domestic and international branded merchandise, owned by Alibaba Group. As of now, Tmall has over 400 million buyers, over 70,000 merchants, and boasts over 100,000 brands. As the largest B2C retail platform in Asia they enable businesses to sell directly to millions of customers throughout China. As an open platform marketplace, Tmall provides the infrastructure to host storefront and unfiltered access to hundreds of millions of shoppers. A storefront is much like operating your own B2C eCommerce website.
With the Chinese subsidiary, a foreign investor can easily sign up an account and open a virtual store with Tmall by signing business agreement with them. The foreign investor needs to also have an Alipay account, the digital payment process platform uses for online transactions. After registration process is completed, the company is eligible to create the online store. It is advisable to plan the product offering beforehand, along with the preferred product categories, price model and customer service.
Online platforms like Tmall charge various commission and fee from potential companies. Depends on the type of virtual store, the setup fee ranges from USD 5,000 to USD 25,000. An annual maintenance fee will come after ranging from USD 4,000 to USD 8,000. On each transaction, Tmall charges a commission ranging between 1% and 5% depends on the category of the products sold. Tmall also promises to all customers a maximum shipping process period of 72 hours, and to return products within 7 days.
E-commerce in China without a presence
Following the success of traditional online platform in China, Tmall and JD launched their global services in 2013 and 2015. Tmall global allows international brands and retailers to sell directly to Chinese consumers without having a physical presence in China. Products can be shipped directly from the home country to the hands of the Chinese customer.
Foreign companies are eligible to participate on Tmall Global. The company must have a retail or trading license in the country of origin, and either own the brand or be an authorized distributor. It must be:
- A registered corporate entity outside of mainland China;
- Possess retail and trade qualifications overseas;
- Be the brand owner or authorized agency or possess the purchase voucher;
- Possess the relevant stock certificates.
Tmall global attracts foreign companies with established products and stable operations in the global market. Popular companies are those with at least USD $10M in sales, and good reputation in the industry.
Companies work with Tmall global can have products stored in the home country. Upon receipt of a confirmed sale, the goods will be sent directly to China by consolidated shipment or express mail delivery, and distributed through Tmall bonded warehouses. These bonded warehouses are warehousing facilities dedicated to storing overseas goods. They allow sellers to send their products to China without being subjected to commercial import duties or quality control measures too early. Companies can also receive payments in foreign currencies through Alipay platform.
The standard delivery time for goods on Tmall global is 5-9 days. Customers will be given a Chinese address for possible product returns. Businesses on Tmall global also hire Chinese speakers as sales and after sales representatives. To fully comply with PRC laws, all products need to be ready for the market with proper labels in Chinese.
Limitations of Tmall global
For investors not yet fully prepared for setting up a company in China, Tmall global and other international sites might be the best choice to sell to China’s lucrative market.
However, there are some limitations on the global sites compare to the traditional E-commerce business setup in China. All of these might cause hesitation in buyers leading to lower sales
- Does not offer the 7 days return policy to customers
- Taxes and tariffs only applied after a sale is complete
- Longer delivery time, goods sent directly from outside of the country
- Higher setup fee, annual maintenance fee and commission
- Buy in foreign currency, possible exchange loss
Popular online platforms offer companies great ways to start e-commerce business in China with or without physical presence. The company needs to have dedicated e-commerce strategy with online promotion plan and logistics method to support the business model. The company also should prepare to recruit internal and external staff to handle orders made in Chinese language on the e-marketplace.