Top 10 predictions for China cross-border e-commerce in 2019

Editor’s note: A version of this article originally appeared on Azoya Consulting’s website. 

It has been a great year for the cross-border e-commerce industry in China. It’s clear that the cross-border e-commerce industry in China is becoming more and more complex. Brands and retailers will have to choose an appropriate market entry model, and be more targeted in their marketing efforts. This means narrowing down what kinds of customers they want to reach, as well as what kind of brand image they want to convey to them.

However, the government’s support for the cross-border e-commerce industry remains strong and policies are likely to be further relaxed. All in all, we remain positive on the outlook for the industry and think that 2019 will be a year in which many new opportunities will arise. Brands and retailers who remain flexible and open-minded will be best positioned to succeed.

That being said, the competition is heating up and brands and retailers are finding it increasingly difficult to differentiate themselves in a crowded market.

Here is Azoya Consulting’s Top 10 predictions for the industry in 2019:

1. Chinese government will continue to lower tariffs and restrictions on cross-border e-commerce

What’s going on: China is expanding the scope for cross-border e-commerce because cross-border e-commerce (CBEC) can be better tracked and taxed, when compared to gray-market daigou purchases. It also makes it easier to protect consumers from fake/shoddy goods. The recent limits on CBEC purchases have been expanded to RMB 5,000 (around $75) per transaction and RMB 26,000 per year, up from RMB 2,000 and RMB 20,000, respectively. In November, taxes on inbound postal shipments for the top two tax brackets were reduced to 25% and 50% from 30% and 60%, respectively.

Implications: Expect the government to relax more restrictions on the industry and expand its scope.

2. The ‘consumption upgrade’ trend in China will continue to power cross-border e-commerce growth

What’s going on: Despite concerns over the slowing economy, young professionals in Tier 1-2 cities will continue to spend on higher-quality imported products, specifically those that can enhance one’s health and aesthetics. AliResearch showed that average spending on Tmall Global was more than RMB 550 for Tier 1 cities, up from RMB 400 in 2014. Cosmetics and skin care take up almost 40% of total sales on Tmall Global, up from less than 25% in 2014, according to figures from consultancy Deloitte. Similarly, Hong Kong Trade Development Council (HKTDC) also expects the health food market in China to grow to RMB 300 billion by 2021 from RMB 237.6 billion in 2017.

Implications: Demand for cross-border e-commerce imports will remain strong. Brands marketing healthy, natural products will continue to be in demand.

Source: Azoya Consulting

3. Niche-focused categories will continue to emerge as Chinese consumers become more sophisticated 

What’s going on: In the past, Chinese consumers have flocked to the same well-known brands that everyone else buys. Now, as consumers become more sophisticated they are beginning to consider long-tail products that do a better job of catering to a specific need or function. Examples include Chinese women adding more steps and products to their makeup routines, and more niche sub-categories such as probiotics emerging within the health & nutrition category.

Implications: It might be more beneficial for foreign brands to start focusing on smaller niches where there may be less competition.

4. New and creative marketing tactics will continue to emerge

What’s going on: To differentiate oneself in a competitive market, brands have to come up with unique ways to connect with customers and build their loyalty. Brands are mixing e-commerce with games, live streaming, short videos, and more to stand out from the crowd. Some recent examples include L’Oreal livestreaming Chinese influencers at the Cannes Film Festival on its WeChat mini-program, and Dior designing a Tetris game to promote its lipstick products.

Implications: Brands should think more carefully about how to make themselves stand out from competitors.

5. Daigou will split into two groups and some will exit the market completely

What’s going on: China’s new e-commerce law is forcing individual sellers on WeChat and Taobao to obtain business licenses and file tax returns. This includes daigou agents using personal accounts to sell online. Other smaller daigou may forego selling and become micro-influencers, helping larger daigou organizations market products on WeChat, getting a commission in the process. Many daigou may exit the market completely.

Implications: All in all, expect the quality of daigou agents to improve, the supply of goods to shrink, and more consumers to purchase from official cross-border e-commerce channels.

6. More retailers may leave large marketplaces like Tmall Global and consider other alternatives

What’s going on: Large e-commerce platforms such as Tmall Global, JD Worldwide, and Netease Kaola are procuring their own inventory directly from brands, and stocking them in bonded warehouses closer to China. This means that Tmall Global can provide lower prices, faster logistics, and stronger customer experience. Third-party retailers selling the same brands on these platforms will find it difficult to compete on price and logistics and may launch their own independent websites instead. Macy’s is one retailer that has left the China market after closing down its Tmall store and official China website.

Source: Tmall Global official website

Implications: Expect more retailers to leave Tmall Global, JD Worldwide, etc.,  and launch their own platforms.

7. Customers’ expectations for faster shipping times will become higher and higher

What’s going on: The large cross-border e-commerce platforms are purchasing more inventory directly and stocking them in bonded warehouses in China and Hong Kong. JD.com has pledged to purchase RMB 100 billion in imported goods, and Kaola announced its plans to spend three billion Euros on European goods last year. Because they are stocking more inventory in warehouses closer to China, shipping times are being reduced drastically, raising customer expectations.

Implications: There will be more pressure on other brands and retailers to ship packages quickly. Those with clear, predictable demand should stock more inventory in Hong Kong or Chinese free trade zones to keep up.

8. Smaller e-commerce platforms will continue to fall into Alibaba’s and JD’s orbit

What’s going on: E-commerce is becoming more competitive as Alibaba and JD can provide lower prices, wider product selections, and faster shipping when compared to smaller competitors.
Smaller players are partnering with Alibaba and JD because they have stronger operational capabilities (logistics). Alibaba and JD are partnering with smaller platforms because they are niche-focused and do a better job at marketing to certain audiences. Examples include Little Red Book (Xiaohongshu) contributing product reviews to Taobao and Farfetch partnering with JD.com.

Implications: Expect Alibaba and JD.com to make more investments in the e-commerce space as growth slows and they look for additional channels to drive traffic.

9. Marketplace platforms such as Tmall Global, JD Worldwide, and Netease Kaola will set up more offline cross-border e-commerce stores

What’s going on: Offline retail is good for driving brand awareness amongst potential customers who may not normally purchase cross-border e-commerce products. JD’s latest experience center in Chongqing is one offline cross-border e-commerce store that’s opened in recent months. Customers can browse and test out products at the store, and the products are shipped from bonded warehouses within the same day.

Implications: Expect more of these stores to open up as the big players seek to expand their reach. However, these stores are likely to be limited to well-known brands, as opposed to emerging ones.

10. Cross-border WeChat shops built on mini-programs will grow in popularity

What’s going on: For small brands, WeChat stores are a cost-effective way to build a China e-commerce presence without paying large upfront fees for marketplace platforms or setting up an official Chinese website. For big brands, they can be used for different functions such as launching limited collections, livestreaming makeup tutorials, or designing creative games.

Source: Gucci WeChat mini-program

Implications: Smaller brands based overseas will enter the China e-commerce market through WeChat mini-programs, though traffic will still be hard to drive. Expect bigger brands to design more creative marketing campaigns and mini-programs to differentiate themselves from the pack.