E-Commerce in China - EAS

E-Commerce in China - EAS

Implementing Partners E-Commerce in China Tallinn – 15 June, 2017 A project financed by the European Union Get Ready for China! The EU SME Centre i...

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Implementing Partners

E-Commerce in China Tallinn – 15 June, 2017 A project financed by the European Union

Get Ready for China! The EU SME Centre is an EU Commission funded project which helps EU SMEs prepare to do business in China by providing them with a range of information, advice, training and support services. The Centre is implemented by a consortium of six partners and was established in October 2010. It successfully completed its first phase in July 2014 and has now entered its second phase which will run until July 2018.

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E-commerce in China Table of Content

Preamble. Estonia to China in numbers

Is it good or bad? Some perspective needed. E.g. Spain/Estonia ratio GDP 50 but ratio exports 25 Source ITC

E-commerce in China Table of Content

10 steps to access China’s FMCG market

E-commerce in China Table of Content China in Numbers

China E-commerce

Modes of Online Selling

Setting-up a Shop

The Chinese Consumer

E-commerce in China China in Numbers

China in Numbers China GDP 1978-2015 (billions US$) 12000

11008

• 2015: GDP reaches 11 trillion USD.

10000

8000

• 2011: China becomes the second largest economy in the world.

6000

• 1981-2009: 81% of China’s population freed from poverty (1.25 US$ daily threshold).

4000

2000 1339 150 0

data source World Development Indicators, March 2017, World Bank

China in Numbers Per Capita GDP and Household Consumption Expenditures, 1978-2015 60000

49,992 50000

• Purchasing power of Chinese households is 92 times higher than the pre-reform era’s. • Consumption expenditures increased by 76-fold along the last three decades.

40000

30000

15,712

20000

• In Tier 1 cities, average income has by far surpassed the US$5000 per capita threshold. • Urban Middle Class has been growing fast (2/3 of total urban population in 2012, only 4% in 2000).

10000

0

• HNWIs more than doubled in the period 2008-2012. Per Capita GDP

Household Consumption Expenditure data sources NBS , 2016. McKinsey

China in Numbers Population, Total (millions)

Population Growth (annual %) 1371

1400

1,6

1,4

1…

1200

1,2 956

1000

1,0 800 0,8 600

0,6

0,5

400 0,4 200 0,2

0 1978 1985 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

0,0 1976

1981

1986

1991

1996

2001

2006

2011

2016

data source World Development Indicators, March 2017, World Bank

China in Numbers Internet users Total Internet Users-Top 5 countries 2016 800 000 000 721 434 547 700 000 000 600 000 000 500 000 000

462 124 989

400 000 000 286 942 362

300 000 000 200 000 000

139 111 185

115 111 595

100 000 000 0 China

India

China

USA

India

USA

Brazil

Brazil

Japan

Japan

data sources Internet Live Stats

China in Numbers Internet penetration Internet Penetration as % of Total Population-2016 100%

91,1%

88,5%

90% 80%

66,4%

70% 60%

52,2%

50% 40%

34,8%

30% 20% 10% 0% China

India

China

USA

India

USA

Brazil

Brazil

Japan

Japan

data sources Internet Live Stats

China in Numbers China Internet and Mobile Internet Users 2010-2016 (million) 800

721 688

700

648 617

600

564 513

500

695

620

557 500

457 420

400

356

303 300 200 100 0

2010

2011

2012

2013

Mobile Internet Users

2014

2015

2016

Internet Users data sources China Internet Network Information Center

E-commerce in China An introduction

E-commerce in China Market Size and trends China E-commerce GMV 2012-2019e 12 51,3%

59,4% 46,8%

36,8% 23,9%

10

50% 19,1%

15,6%

13,1% 0%

8

7,3 6,5 -50%

5,6

6 4,7

-100%

3,8

4 2,8 2

1,9

-150%

1,2

0

-200% 2012

2013

2014

2015 GMV (tn CNY)

2016e

2017e

2018e

2019e

% Growth

data source iResearch, 2017

E-commerce in China Structure by GMV 100,0% 90,0%

44,7%

42,4%

52,1%

55,3%

57,6%

2015

2016e

2017e

80,0% 70,0%

65,4%

59,6%

54,9%

47,9%

40,8%

39,6%

60,0% 50,0%

40,0% 30,0% 20,0%

34,6%

40,4%

45,1%

59,2%

60,4%

10,0% 0,0% 2012

2013

2014

B2C

2018e

2019e

C2C

data source iResearch, 2017

E-commerce in China B2B market size and trends China B2B E-commerce GMV 2012-2019e 60 50%

50

9,4%

16,8%

7,0%

17,1%

16,7%

16,2%

15,8% 0%

40

37,1 32

30

-50%

27,5 23,6 18,8

20 14,7

20,2

-100%

16,1

10

-150%

0

-200% 2012

2013

2014

2015 GMV (bn CNY)

2016e

2017e

2018e

2019e

% Growth

data source iResearch, 2017

E-commerce in China B2B major players

27,0% Alibaba Global Resources

JQW DHGate 48,0%

Made-in-China

1,0%

Toocle

1,0% 1,0% 3,0%

Hc360

Mysteel 5,0%

GMC Others

5,0%

5,0% 6,0%

data source iResearch, 2017

E-commerce in China B2C market size and trends China B2C E-commerce GMV 2012-2019e 84,8%

10

100% 64,5%

9

56,7% 31,2%

8

24,1%

50% 19,2%

14,5%

7

0%

6 5

4,4 3,8

4

3,2

-100%

2,6

3 2,0

2 1

-50%

-150%

1,3 0,4

0,8

0

-200% 2012

2013

2014

2015 GMV (tn CNY)

2016e

2017e

2018e

2019e

% Growth

data source iResearch, 2017

E-commerce in China B2C major players 0,7% 0,8% 1,2%

0,5%

6,7%

1,1%

Tmall

3,5%

JD.com

Suning.com

4,3%

Vip.com Gome.com.cn Yihaodian.com 56,6% 24,7%

Amazon.cn Dangdang.com Jumei.com Others

data source iResearch, 2017

E-commerce in China C2C Market Size and trends China C2C E-commerce GMV 2012-2016 10,0 44,2%

9,0

35,7%

50% 18,4%

8,0

15,4%

13,0%

11,6%

9,0% 0%

7,0 6,0

-50%

5,0 4,0 3,0 2,0 1,0

0,8

1,1

1,5

1,8

2,4

2,1

2,7

2,9

-100%

-150%

0,0

-200% 2012

2013

2014

2015 GMV (tn CNY)

2016e

2017e

2018e

2019e

% Growth

data source iResearch, 2017

E-commerce in China C2C major players 9,0%

0,7% Taobao Paipai

Eachnet

90,3%

data source iResearch, 2011

E-commerce in China How to sell your products

E-commerce in China Modes of On-line Selling

E-commerce in China Sales models

E-commerce Platform Domestic Direct Sales E-commerce Model E-commerce Platform Cross-border

From Europe Direct Sales From a Bonded Warehouse

data source EU SME Centre, 2017

E-commerce in China Domestic sales model: E-retailers

data source EU SME Centre, 2017

E-commerce in China Retailers on E-commerce Platforms



Not specialized;



Offer a wide range of products (apparel, electronics, cosmetics & healthcare, mom products, etc.);



Target all kinds of consumers;



Count with a loyal base of customers, attracting more traffic to their websites;



User experience relies on the vendor.

data source EU SME Centre, 2017

E-commerce in China Vertical B2C E-retailers



Focus in specific sectors (fruit, wine, etc.);



Target high end customers;



High presence of foreign products;



Focus on high quality products;



Effective and complete logistics systems;



Local coverage and not very well known platforms.

data source EU SME Centre, 2017

E-commerce in China Integrative B2C E-retailers



F&B is not their only focus, but it represents an important part of the sales;



Target middle and high end customers;



Effective and complete logistics systems;



Powerful parent companies with extensive experience in their industry. Powerful control over suppliers;



Very well-known platforms with high presence of foreign products.

data source EU SME Centre, 2017

E-commerce in China Platform selection Retailers on E-commerce platforms

Vertical B2C F&B E-retailers

Integrated B2C F&B E-retailers

PROS

+ Large customers base

+ Large customers base

+ Sector specific

+ Sector specific

+ Sector specific

+ Wider reach

+ Offers MKT integration

+ Developed Logistics

+ Control over suppliers and logistics

+ Control over suppliers and logistics

+ Most used and trusted

+ Manage Logistics

+ Focus on Quality + Powerful companies invested

+ Possibility to sell Cross Border

- Company has to be established in China and meet legal requirements

- Company has to be established in China and meet legal requirements

CONS

- Not specialised in your product

- Not specialised in your product

- Reach less territories - Not well known platforms

- Many requirements - Does not manage MKT

- Has to be interested on your product

E-commerce in China Direct sales

(The Zara example)

- ICP certification - Marketplaces enjoy large traffic

- Costs

+ More flexible than a marketplace + Personalised consumer experience

data source EU SME Centre, 2017

E-commerce in China Direct sales Share of On-line Sales in China: Marketplaces Vs Independent Merchant 100% 90% 80% 70%

50

60%

80

88

89

93

93

92

93

90

12

11

7

7

8

7

10

2005

2006

2007

2008

2009

2010

2011

50% 40% 30% 20%

50

20

10% 0%

2003

2004

Independent Merchants

Marketplace

data source EU SME Centre, 2017

E-commerce in China Direct sales: two-pronged approach Independent Website Serves the company need to create brand awareness, to build even closer ties with its own consumers and advise them on future product release

Shop in the Marketplace To benefit from existing consumer base and capture part of its high transaction volume.

data source EU SME Centre,2017

E-commerce in China Cross-border e-commerce CBEC Retail Sales (2014-2020e, billion USD) 180

157,7

160

144,2 129,1

140

110,7

120 100

85,8

80

57,1

60 40

30,1

20 0 2014

2015

2016

2017e

2018e

2019e

2020e

CBEC Retail Sales (2014-2020e, billion USD)

data source Consulate-General of the Kingdom of the Netherlands in Shanghai, 2017

E-commerce in China Cross-border e-commerce CBEC Customers (2014-2020e, million) 350 300

271,9 248,9

250

220,9 181,2

200 150 100

291,8

128 74,6

50 0 2014

2015

2016

2017e

2018e

2019e

2020e

CBEC Customers (2014-2020e, million)

data source Consulate-General of the Kingdom of the Netherlands in Shanghai, 2017

E-commerce in China Cross-border e-commerce

data source Oliver Wyman, 2016

E-commerce in China Cross-border e-commerce

data source Oliver Wyman, 2016.

E-commerce in China Selling directly via CBEC bonded warehouse

data source EU SME Centre, 2017

E-commerce in China Selling directly via CBEC bonded warehouse

data source EU SME Centre, 2017

E-commerce in China Setting-up a Shop

E-commerce in China Main Platforms China Main E-retailers

• Established in 2008;

• Established in 2004;

• Established in 2013;

• Established in 2015;

• Belongs to the Alibaba Group;

• Started as optical store;

• Belongs to the Alibaba Group;

• Operated by JD.com;

• The platform is exclusively dedicated to official brand stores, with about 70,000 brands featured in 50,000 shops;

• Second largest E-retailers in China (B2C);

• No Chinese business license needed to open a shop.

• More than 2500 merchants feature on the platform;

• Adopts the shop-in-shop model; • Clothing, household items, and accessories account for the majority of sales.

• Recently acquired Yihaodian (2016).

• 7.8 million SKUs (mother and baby acre, nutrition and healthcare, personal care and cosmetics, etc. etc.)

E-commerce in China Pick your platform

data source EU SME Centre, 2017

E-commerce in China

• The seller is allowed to sell products from one brand or from multiple brands only if they belong to the same entity

Specialty Shop

 The seller is the trademark owner or possesses exclusive authorisation from the brand owner.

Authorised Store

Flagship Store

Choose your shop

 The seller is allowed to sell products of two or more brands that belong to the same product category.

data source EU SME Centre, 2017

E-commerce in China Requirements

• • • • • • • •

Business licence Tax Registration Certificate Code Organisation certificate Bank Accounts Permits Legal representative ID Alipay authorisation letter (for Tmall) Trademark Registration Licences, depending on the type of product

 Furthermore, Tmall requires that the company be registered in China for more than a year, with registered capital of more than CNY 1 million.  Additional requirements might apply for some product categories (e.g. F&B).

data source EU SME Centre, 2017

E-commerce in China

Variable Cost

Annual Fixed Cost

Refundable One time Fixed cost

Costs (F&B)

Security Deposit

Annual Platform Fee Commission Fee Operation Agent Commission

Flagship+authorized: with TM 50,000 RMB without 100,000 RMB Specialty: With TM 150,000 RMB Without 100,000

25,000 US$ (161,000 RMB)

50,000 RMB

50,000 RMB

30,000 RMB

5,000 US$ (32,000 RMB)

6,000 RMB

9,600 RMB

2%

2-5%

3%

4%

10%

Platform Payment Cost

2-3%*

Platform Mandatory Promotion fee

0.5%

(*) In the case of Tmall Global, it is necessary to pay 1% extra, due to the cross-border transaction.

data source EU SME Centre,2017.

E-commerce in China Timing

Entry Preparation · Determine compatibility and resource requirements · Assess prerequisites · Determine needs from third party service providers (TPs) · Create logistics plan · Prepare necessary documents · Reserve technical resources · Begin API integration · Complete negotiations and sign contracts with TPs

Store Application

Store Development

Pre Launch

· Sign Tmall.com/Alipay agreement · Open Alipay compatible bank account

· Plan product offering (SKUs) · Plan product categories · Plan pricing model · Establish customer service team · Build store page with products · Build product detail pages · Develop and execute API integration

· Develop new opening plan · Develop promotion plan · Upload store pages to Tmall.com · API integration online

Launch

4-8 weeks

data source EU SME Centre, 2017

E-commerce in China Shop examples

data source EU SME Centre, 2017

E-commerce in China The Chinese consumer

The Chinese Consumer(s)

data sources McKinsey, 2016

Consumer Confidence

data sources McKinsey, 2016

Consumption as growth driver

Final consumption expenditure contribution share to GDP growth at the end of 2015:

59.9% (48.8% in 2014)

data source China National Bureau of Statistics, 2016

New Consumption Trends Brand Loyalty

Premium

Int’l Travel

Products

Chinese Consumer

Away from basic consumption

Tech Savvy

Family Focus

Healthy Living

data sources EU SME Centre, McKinsey, Economist Intelligence Unit

Shift in Consumption Patterns Increasing brand loyalty

data sources McKinsey, 2016

Shift in Consumption Patterns Towards premium products

data sources McKinsey, 2016

Shift in Consumption Patterns Away from basic consumption

data sources McKinsey, 2016

Shift in Consumption Patterns Healthy lifestyle

data sources McKinsey, 2016

Shift in Consumption Patterns Family focus

data sources McKinsey, 2016

Shift in Consumption Patterns New technologies

data sources McKinsey, Economist Intelligence Unit

Shift in Consumption Patterns International travels

data sources McKinsey, Economist Intelligence Un

Reach the Chinese consumers • Know “your” customers: different areas, different age, different gender, different income levels, different tastes; • Be creative and innovative: know the local social media landscape. Digital Marketing; • Introducing the “Millennials”: more than 400 mln, ultraconnected, one-child, grew up during economic opening and reforms, extremely social, multi-facets.

E-commerce in China Table of Content

GENERAL TRADE

CROSS-BORDER TRADE

What you need to know

General Trade REQUIREMENTS There’s a legal entity in China that imports the product The legal entity pays to Customs, lands the product in China Duties and taxes are paid before the product is sold by the importer

Duties and Taxes are paid over CIF price

Product can be sold either off-line or online

WHAT IT MEANS? Find an importer and/or distributor, lengthy process, only apt for large quantities Payment upfront. Lengthy procedure. Frequent hassles at Customs Chinese importers averse to obsolete inventories. Don’t want the risk of poor product performance. Only want first brands Intermediaries add high margins in each step of the supply chain up to consumer, thus leading to high price tag on shelf General Trade responds better to B2B than to B2C

General Trade DUTIES & TAXES Over CIF price Total

ITR + CTR + VATR + (ITR x VATR) (1 – CTR) ITR Customs Duty CTR Consumption Tax VATR Value added Tax

Example: 1 bottle of wine. CIF = €10, Total Tax is 48.2%, landed = 10+4.82 CIF

€10

ITR 14% CTR 10% VATR 17%

 Landed €14.82 0.14+0.1+0.17+(0.14x0.17)= 0.482 (1-0.1)

General Trade Bottom line Chinese Importers • Even only one simple 20' FCL container means a financial effort of a minimum of tens of thousand euros of working capital idle and blocked during several months of transit and sales cycle • Importers tend not to order goods unless they are certain they can rotate quickly the products, behaving more like brokers than like market developers • Afraid of a working capital shortage, and expiry dates of products, they are reluctant to develop the market to the dismay of EU suppliers thus searching always for famous brands EU Exporters • They believe the product has a correct price in origin. They can't grasp the enormous price increase from CIF to the tag price on the shelf • Do perceive the negotiations with importers as exhausting, and always spinning around price • Lack of trust on the goodwill of Chinese importers to really develop the market • Feeling of those Chinese importers will jump quickly over the next big thing in terms of margins, forgetting the current category they are working on • Setting up a company in China is far beyond the resources of an average EU SME, which, however, can have a good product for China

The good news The combination of • • • •

Free Trade Zones Cross-Border E-Commerce Importers in China becoming much more professional A more knowledgeable, savvy, discerning, curious, Chinese consumer

Boosts the demand of more variety, wider assortment, across most of the categories Time PREMIUM LUXURY QUALITY PRICE

CHEAP MASS MARKET

Cross-Border Trade REQUIREMENTS

WHAT IT MEANS?

There’s a legal entity in China that imports the product to a bonded warehouse at the Free Trade Zone

Logistics operators and Chinese importers at FTZs know well import procedures and regulations. Verification in advance, speeding up the process, reducing time lapses. Officers from Quality and Inspection (AQSIQ) at hand

The legal entity goes through Customs procedures only when there is an online order from a netizen

Importers now want a wider assortment. However still want high rotation products to lower operation costs

Duties and taxes are paid when the item is purchased by a netizen

Chinese importers at FTZs don't have the burden of Customs taxes and duties

Duties and Taxes are paid over the shelf retail price by the netizen

Competition is introduced, wider assortment, a clearer pricing scheme

Product can be sold on-line only Taxes and Duties are different than on General Trade Max value of each purchase ~ EUR 250

All is B2C Beware, this does not mean necessarily a cheaper product on shelf

Cross-Border Trade DUTIES & TAXES Over SHELF price Total ITR + CTR + VATR + (ITR x VATR) (1 – CTR) ITR 0% Customs Duty CTR 70% of Consumption Tax for General Trade VATR 11.9% 70% of Value added Tax for General Trade

Example: 1 bottle of wine. Price online shelf = 333 RMB paid by netizen of which taxes and duties are 20.3% ITR 0% CTR 7% (70% of 10%) VATR 11.9% (70% of 17%)

0+0.07+0.119= 0.203 (1-0.1)

GENERAL TRADE CIF Price Sales Price

CROSS-BORDER TRADE

10€ = 75 RMB 333 RMB

333 RMB

Taxes Paid by Importer

36.15 RMB

0 RMB

Taxes Paid by Netizen

0 RMB

67.6 RMB (0.20x333)

Gross Margin Importer

221 RMB

190 RMB

(333 – 75 – 36.15)

(333 – 75 -67.6)

Taxes depend on CIF price Taxes independent of shelf price

Taxes depend on shelf price Taxes independent of CIF price

The true price tag, as is perceived now by a more savvy Chinese consumer should be much lower, and importers know it GENERAL TRADE CIF Price Sales Price

CROSS-BORDER TRADE

10€ = 75 RMB 180 RMB

180 RMB

Taxes Paid by Importer

36.15 RMB

0 RMB

Taxes Paid by Netizen

0 RMB

36 RMB (0.20x180)

Gross Margin Importer

69 RMB

69 RMB

(180 – 75 – 36.15)

(180 – 75 -36)

Taxes depend on CIF price

Taxes independent of shelf price

Taxes depend on shelf price

Taxes independent of CIF price

Forces of the market in place, a trial of economic reforms As a rule of thumb, General Trade yields more gross margin when SHELF PRICE > 2.4xCIF PRICE

Cross-Border Trade Does it open an opportunity for my business? It facilitates the entry to Chinese market, mitigating some of the difficulties, such as • • • • • • • • • • • • •

Finding partners, importers/distributors, of General Trade Dealing more smoothly with Customs and regulations Knowing pre-emptively if product is approved by Customs Testing the waters, to scale up later on Having an exit strategy, scaling down if needed Entering the market through progressive steps Having logistics China-wide Dealing with returns Managing complaints Getting paid in EURO in your country of origin Dissociating trade from promotion and brand image, you can control the latter two Avoid to set up a company and its hassles and costs Adapting to a fast changing market

Cross-Border Trade It has its downside too • Cross-Border E-Commerce is still considered a pilot. It is only B2C • Balance strong government planning with the free market is not easy, results can be different from what was intended (e.g. corn tariff; e.g. massive changes on categories permitted on April 2016) • Large online platforms, non favourable payment terms (e.g. JD, 60 days T/T) • In a data-driven world, the consumer's information rests on the Chinese side • List of authorized products that can be traded via cross-border can be changed by government • Chinese importers enlarge assortments, but do little to promote individual items, hoping for some of the SKUs in assortment explode as a success by itself • Low rotation annihilates interest of importers, they’ll do little to fix it

Cross-Border Trade The list of products than can be traded via Cross-Border E-Commerce

Source: EU SME Centre (CBEC list, English)

www.eusmecentre.org.cn

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