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Reaching the Chinese consumer: e-commerce sales models for China

FOCUS: The Chinese e-commerce retail market is the largest in the world, and is continuing to grow. This opens up enormous opportunities for foreign retailers and brands keen to reach Chinese consumers. 28 Sep 2015

In the past selling to China from overseas was a challenging process, particularly for small and medium-sized businesses. Traditional sales models meant each transaction was slow and margins were low. The birth of the internet and e-commerce has changed that, rebuilding the trade chain and allowing direct contact between companies and wholesalers, retails and consumers.

In June, China's Ministry of Industry and Information Technology announced that it was lifting restrictions on foreign businesses participating in e-commerce and fully owning e-commerce companies in China. However, hurdles still remain for importers.

Goods delivered by mail or courier often face problems with customs clearance, and with exchange rates and tax. In an attempt to solve these problems, the Chinese General Administration of Customs set up 20 pilot cities to operate on different business models, to study the impact of regulations and how things can be improved.

The cities were chosen for their suitability as logistics centres and ports. Eight cities are allowed to test both the bonded import and direct purchase import models, while the other cities are only allowed to test the direct purchase import model.

Under bonded import, products arrive in bulk at the city and have to obtain a China Inspection and Quarantine (CIQ) certificate on arrival. They are stored in a warehouse in the city's Free Trade Zone until ordered by a customer, and delivered by domestic carrier.

Under direct purchase, goods are only received in the city after they have been ordered, and they do not need CIQ certification. In this pilot, only 'daily commodity' products can use the direct importation model, including food, clothes, computers and telephones. They must be sold to individuals rather than businesses, and the purchase order must be made through the approved website. Unlike bonded import products, no Chinese labelling is required.

The research showed that the bonded import model allows faster delivery times within China, more convenient after-sales services and returns, and confidence that quality has already been checked by the customs authorities. 

On the other hand, a wider variety of products can be offered under the direct purchase import model, if more slowly due to delivery times. 

In both cases, imported products have to be for personal use, and so can only be ordered in reasonable quantities.

Both models are popular with consumers, with buyers choosing which to use depending on what they are ordering.

Reaching customers

The removal of restrictions on foreign businesses owning e-commerce companies in China will open up opportunities for companies confident enough to enter the market in this way. However, another option is to use an existing Chinese platform to reach consumers.

Alibaba, for example, offers a platform called T-mall Global which allows overseas suppliers without physical operations in China to sell directly to Chinese consumers. Buyers pay using Alipay and receive their orders through either a bonded import model or direct purchase.

JD, one of China's largest direct sales companies, also launched an international platform, JD Worldwide, in April to allow foreign producers and sellers to reach Chinese consumers.

Many of the pilot cities also offer their own platforms, supported by the local government. Each has its own rules on ownership and aspects such as aftersales service, but all offer a straightforward way to reach a large number of potential customers.

Policy consistency remains an issue for suppliers, along with the differences in tax and inspection standards between traditional trade and cross border e-commerce. However, e-commerce is a topic with high priority on the Chinese government's policy agenda. China's e-commerce revolution is just beginning and the government is expected to continue to implement policies to promote its development.  

Yan Geng is a Shanghai-based lawyer at Pinsent Masons, the law firm behind Out-Law.com