China cross-border ecommerce - challenges and opportunities

The Paypers interviews Elena Gatti, Managing Director DACH Azoya, to find out what are the main challenges and developments when doing cross-border ecommerce to China                    

Currently, China is the world’s largest ecommerce market and gradually becomes an important expansion target for international retailers. What are the main opportunities for international retailers in the country?

With 1.13 trillion US-Dollar in ecommerce sales in 2017, China is the world’s largest ecommerce market. The number, however, refers to the Chinese market and not to every Chinese that buys products from abroad. Out of its 1.3 billion citizens, an estimated 125 million Chinese consumers purchase overseas products through cross-border ecommerce, mostly people from its fast-growing middle class that was already counting 225 million in 2015. Rising income allows them to travel the world, experience trends and products from different countries and purchase them. But why only buy them on vacation? Chinese consumers want no restrictions when it comes to shopping and their strong demand for international products offers retailers from abroad strong tailwind to sell larger quantities to the Chinese market. Especially with so-called “hot items”, products that Chinese covet, international retailers should reach out to this large consumer base.

What are the most important challenges when doing cross-border ecommerce to China?

Chinese consumers have different shopping behaviour, preferences and habits. Thinking that what works well in a country will certainly work there, is a misbelief. It’s a general “mindset” that I often see in European retailers and it is one of the most often made mistakes.

As cross-border ecommerce to China has been on the rise for a few years, there are more players entering the market. Traffic generation has become more expensive than ever as everyone is fighting for consumer’s attention. While most of the online traffic is still focussed on the big marketplaces, new channels have started to split traffic into pieces which makes it more challenging to find the target group. Retailers need to consider larger budgets to reach the consumers they are looking for.

Another challenge in cross-border ecommerce to China are local laws and regulations. These can change rapidly. The most relevant regulation so far has been the ‘New Policy’. It came out in April 2016, set a positive product list, and implemented tariffs for products selling in China via cross-border ecommerce.  However, this regulation has been postponed three times and has never really been implemented.

What models do you discern for brands and retailers to sell to Chinese consumers (e.g. marketplaces, direct, offline)?

The first question should always be: “What is my strategy in China?” Is the focus only on sales and revenue, not primarily on profits and market development? Then marketplaces, e.g. TMall and JD.com, could be the right choice: around 80% of the business is done there, and they lead to a large range of consumers. The disadvantages are relatively high placement fees and enormously high product competition. TMall alone offers around one billion products from several 10,000 retailers. To get the consumer's attention, you either need a low-price strategy or additional marketing measures. In fact, only 21% overseas companies are satisfied with their brands’ performance in marketplace.

Once retailers have clarified their goals, I would suggest developing a market entry strategy and suitable channels. Three years back, the decision would have been marketplace or stand-alone web shop. The first to generate “fast” revenue growth in the marketplace’s ecosystem but with low chances to build a profile. The second to create brand awareness and a long-lasting relationship with your customers. Today, with fragmented traffic, the choice is more complicated. A certain mix of channels could be the most suitable choice for retailers.

According to a report by Azoya and Frost & Sullivan, by 2030 the Chinese middle class will expand to 75% of total population. What impact will it have on the purchasing behaviour and shopping from overseas?

In the above-mentioned report, we surveyed 1,000 cross-border shoppers to understand their preferences. The results are interesting:

   -   Cross-border shoppers come predominantly from Tier 1 and 2 cities, more affluent, as they spend over RMB 2,000 on online shopping per month.

   -   They are relatively young: 36% are between 19-29 years of age, whereas the remaining 64% were between 30- 40 years old.

   -   They are well educated, have higher salaries and are more willing to pay up for higher quality products.

Chinese are very social oriented; they share experiences and recommendations with not only family and friends but also their entire social network. In my opinion, a growing number of middle class Chinese will result in a growing demand in international goods.

An oft-cited statistic is that 48% of foreign corporations fail and withdraw from China within two years of starting operations. What are the reasons and the generally applicable lessons we can learn from these failures?

The market has become increasingly competitive over the past few years as more players enter the game field. However, cross-border ecommerce is still very young and brand loyalties from Chinese consumer are not set in stone yet. Opportunities are still there, but it is becoming more difficult for consumers to distinguish one brand from another. And there are still great issues around fake goods. 

Building trust is key to be successful but overnight success is not possible.

China is a complex market and consumer’s demands change constantly. If retailers are not willing to constantly “re-evaluate” their strategy and try new things, they will most likely fail. Slow processes and lack of an innovative mindset are two major difficulties I see. China is a fast-moving market, accompanied by digital savviness and speed, and retailers – especially with long traditions in their home countries – are often simply too slow.

Finally, one should make sure they have budget available for China. It cannot be “done as a side project”. Not enough budget or just a little test budget will bring you nowhere. Customer loyalty costs money as it does anywhere in the world. China is, after all, the biggest market in the world and getting your foot into the door should be worth some money. Once you make it in China, you can have millions of customers.