Opinion: Why China’s new ecommerce law will be bad for grey market sellers

by Tech in Asia

The Chinese government recently passed a new comprehensive ecommerce law that will be implemented on January 1, 2019.

As ecommerce continues to occupy a greater share of total retail sales in China, the government has recognized that there needs to be more regulation to protect consumer rights and level the playing field.

The law specifically regulates the conduct of three groups: platform operators (Taobao, Pinduoduo, JD.com, etc.), in-platform operators (those that operate shops on platforms), and any other types of ecommerce businesses (including WeChat stores, standalone ecommerce sites, etc.). These businesses will face increased scrutiny and paperwork. For large platforms, there will be increased efforts to protect product authenticity and IP rights.

Mom-and-pop sellers on WeChat and Taobao may be forced to register and pay income taxes for the first time, putting them on a level playing field with local brick-and-mortar retail stores.

This includes gray-market daigou agents who buy international brands overseas and resell them in China, meaning they may have to raise prices or exit the market altogether. This may prove to be beneficial for cross-border ecommerce.

Here’s our take on the new law.

Implementing stricter IP protection

Ecommerce platforms will, in part, shoulder the responsibility for the sale of counterfeit items and set up systems to protect intellectual property. (Articles 41-45)

In the past, only sellers were responsible. Now, ecommerce platforms have to establish rules to protect IP rights and may be fined anywhere from 500,000 to 2 million RMB (~US$70,000 to US$300,000) for failing to respond to claims of counterfeit items.

This will put more pressure on marketplace platforms such as Taobao and Pinduoduo, who will have to employ more personnel to investigate claims of counterfeit goods and vet third-party sellers.

Monitoring reviews

Platforms have to do more to protect consumers from fake reviews. (Articles 17, 40, 59)

This includes fake reviews not only by third-party agencies but also by real customers. In some cases, customer service representatives from third-party sellers have offered 2 to 5 RMB to customers in exchange for positive reviews.

Platforms must set up straightforward, effective complaint and reporting procedures and handle complaints in a timely manner.

Leveling the playing field among competition

Ecommerce platforms will be prohibited from excluding or restricting competition and imposing unreasonable restrictions, conditions, or fees on merchants. (Articles 22, 35)

This is designed to level the playing field between smaller ecommerce players and larger platforms such as Tmall and JD.com.

As more and more merchants apply to sell on large platforms, it is natural for such platforms to raise the bar for entry. However, it remains to be seen how platforms will respond. They may face fines of 500,000 to 2 million RMB if this clause is violated.

Applying for business licenses

Individual-run online stores may have to obtain a business license to operate. (Articles 2, 10, 12, 26)

Currently on Taobao, sellers are divided into individual selling accounts and business seller accounts. The new law means that individual selling accounts on platforms such as Taobao and WeChat may have to register with the State Administration for Industry and Commerce to receive this license.

More scrutiny will be placed on them as the government strives to protect consumers from counterfeiters and fraud.

Paying taxes

Such individual-run online stores will also have to file tax returns. (Articles 11, 14, 27-28)

To enforce this clause, platforms such as Taobao and perhaps WeChat will have to verify business licenses, conduct identity checks on sellers, and submit both identification and tax information to tax authorities.

Compliance costs and additional taxes may be passed on to consumers, putting online sellers on a more even playing field with offline retail players. However, it remains to be seen how much in taxes sellers will have to pay.

Takeaways

Overall, the ecommerce law is wide-ranging. For the first time, it specifically scrutinizes smaller third-party sellers that have been historically difficult to monitor. Counterfeiting by smaller players has been difficult to stamp out because of the large numbers of merchants on platforms such as Pinduoduo and Taobao. Alibaba alone already employs roughly 2,000 people to fight fakes, but there are over 9 million sellers on Taobao.

For cross-border ecommerce players, there is a less discernible impact, as they are less likely to sell or be suspected of selling counterfeit products. What is clear is that there will be more scrutiny on daigou selling through WeChat and Taobao, who are likely to be required to register with the government and pay taxes. However, given their large numbers, it’s hard to see how platforms will be able to monitor all of them.

Given that daigou primarily profit off of the markup between overseas products and those already sold in China, their margins will become even thinner, and they may exit the business completely. For cross-border ecommerce, this is good as more daigou consumers will be inclined to purchase directly from international retailers and brands.

The implementation of the law is still a few months away, and it remains to be seen how strictly it will be enforced. Retailers and brands should expect ecommerce platforms to update their policies in the coming months. While changes aren’t likely to directly affect international brands and retailers selling through general trade or cross-border ecommerce platforms, consumers should still avoid relying on any single platform in case the rules change drastically.

Converted from Chinese yuan. Rate: US$1 = RMB 6.87.

This article was first published on the author’s company blog.