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Top 10 Predictions for China Cross-Border E-Commerce in 2019

While 2018 was a great year for cross-border e-commerce in China, we think 2019 will take the industry to a whole new level

by Azoya Consulting

2018 has been a great year for the cross-border e-commerce industry in China.

The Chinese government's decision to lift purchase limits on cross-border e-commerce indicates a strong outlook. More opportunities will emerge for international brands and retailers looking to access the China market.

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 at Azoya Consulting, we give our top ten predictions for the industry in 2019:

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 Premier Li Keqiang announces lifting of CBEC purchase limits at State Council meeting. Source: CCTV

1. The government will continue to lower tariffs and restrictions on cross-border e-commerce companies selling to China

What's going on: China is expanding the scope for cross-border e-commerce because cross-border e-commerce 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 5,000 RMB/transaction and 26,000 RMB/year, up from 2,000 RMB and 20,000 RMB, respectively. In November, taxes on inbound postal shipments for categories B and C were reduced from 30% and 60% to 25% and 50%, respectively. Taxes for category A remain the same. Read more details about this update here.

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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 over 550 RMB for Tier 1 cities, up from 400 RMB 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 Deloitte figures[1]. Similarly, HKTDC also expects the health food market in China to grow from RMB 237.6 billion in 2017 to RMB 300 billion by 2021[2].

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

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Top five categories for Chinese cross-border e-commerce shoppers. Source: Azoya Consulting

3. Niche-focused categories will continue to emerge as Chinese consumers become more sophisticated and seek out more targeted, specialized products

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.

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Probiotics brand Culturelle has surged in popularity in recent years. Source: Tmall Global

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, livestreaming, short videos, and more to stand out from the crowd. Some recent examples include L'Oreal livestreaming Chinese influencers at the Cannes Film Festival[3] on its WeChat mini-program, and Dior designing a Tetris game to promote its lipstick products[4].

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

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L’Oreal Chinese influencers livestreaming at the Cannes Film Festival, 2018. Source: Tech China

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.

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Daigou are likely to shrink in number in 2019. Here, Chinese daigou line up in large numbers to snatch cosmetics, luxury goods, and milk powder. Source: ILuoYang.com

 

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 and brands 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[5]. This means that Tmall Global can provide lower prices, faster logistics, and a 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. 

Brands may also consider other alternatives for brand-building purposes and to sell at higher margins. After two years of operating on Tmall Global, UK-based Cambridge Satchel launched its own official China e-commerce site to sell directly to consumers.

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Cambridge Satchel's official Chinese 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/HK. 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[6][7].

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SF Express is the first courier company to deliver packages with drones in China. Source: xmlcnet.com

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/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 contributing product reviews to Taobao[8] and Farfetch partnering with JD.com[9].

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

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Netease Kaola’s offline retail store in Hangzhou. Source: Pandaily

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[10]. 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[11], or designing creative games.

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Gucci’s WeChat mini-program enables users to send perfume bottles as gifts to friends. 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.

Summary

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.



[1] “A gargantuan market with increasing openness – Chinese Imported Consumer Goods Market Report.” 31 Oct 2018. Deloitte Research, AliResearch Institute, China Chamber of International Commerce. 13 Dec 2018 <https://www2.deloitte.com/cn/en/pages/about-deloitte/articles/pr-cross-border-e-commerce-boosts-import-trade.html>

[2] “China’s Health Food Market.” 11 Dec 2018. HKTDC. 11 Dec 2018 <http://china-trade-research.hktdc.com/business-news/article/China-Consumer-Market/China-s-health-food-market/ccm/en/1/1X000000/1X002L54.htm>

[3] Pan, Yiling. “WeChat Uses Mini-Programs to Enter Livestream Shopping Arena.” 20 May 2018. Jing Daily. 11 Dec 2018 <https://jingdaily.com/wechat-livestreaming-mini-program/>

[4] Zheng, Ruonan. “How Guerlain Exemplifies the Art of Audience Engagement.” 15 Nov 2017. Jing Daily. 11 Dec 2018 <https://jingdaily.com/3-tips-from-guerlain-gamification-wechat-campaign/>

[5] Hsu, Jenny W. “Tmall Global To Open Six New Procurement Points Worldwide.” 21 Mar 2018. Alizila. 11 Dec 2018 <https://www.alizila.com/tmall-global-to-open-six-new-procurement-points-worldwide/>

[6] “JD.com To Buy RMB 100 Billion In Overseas Brands’ Products.” 5 Nov 2018. JD Corporate Blog. 11 Dec 2018 <https://jdcorporateblog.com/jd-com-to-buy-rmb-100-billion-in-overseas-brands-products/>

[7] “Netease’s Kaola plans €3b spending spree on European products.” 12 Apr 2017. SCMP. 11 Dec 2018 <https://www.scmp.com/tech/e-commerce/article/2087074/neteases-koala-plans-eu3b-spending-spree-european-products>

[8] Jao, Nicole. “Taobao is now testing new feature that includes product reviews from Xiaohongshu.” 28 Nov 2018. Technode. 11 Dec 2018 <https://technode.com/2018/11/28/taobao-is-now-testing-new-feature-that-includes-product-reviews-from-xiaohongshu/>

[9] “JD.com and Farfetch Partner to Open Ultimate Gateway for Bringing Luxury Brands to China.“ 22 Jun 2017. JD.com Investor Relations. 11 Dec 2018 <http://ir.jd.com/news-releases/news-release-details/jdcom-and-farfetch-partner-open-ultimate-gateway-bringing-luxury>

[10] “京东物流首家跨境体验中心落户重庆 现场体验可扫码下单.” 30 Nov 2018. 华龙网. 11 Dec 2018 <http://www.cq.chinanews.com/zone/2018/1130/2534.html>

[11] Pan, Yiling. “In an Industry First, Dior Beauty Debuts Livestreaming Sales on WeChat.” 16 Nov 2018. Jing Daily. 11 Dec 2018 <https://jingdaily.com/dior-livestreaming-wechat/>


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