2014 Online Shopping Spree in China

2014 Online Shopping Spree in China Erin Shier Intern, Alberta Hong Kong Office 6/30/2014

Contents Editor s Note... 3 The E-commerce Opportunity... 3 Consumer Behavior... 4 Understanding the Boom... 4 Why do Chinese consumers shop online?... 5 Who Shops Online?... 6 What is Bought Online?... 7 Single s Day... 8 Designing Your Business Model to Enter the Market... 9 (1)Your own website outside of China... 9 (2) Your own website inside of China... 9 (3) Using a third party platform that is outside of China such as EBay... 9 (4) Using a third-party platform that is in China... 10 China s 3rd Party E-commerce Platforms... 10 Business to-consumer and Consumer to-consumer Platforms... 10 The King of China s E-commerce: Alibaba Group... 11 Other Market Players... 13 Things to Think About... 15 Logistics... 15 Marketing... 17 Government Policies... 18 Intellectual Property... 18 Price Sensitivity... 18 Customer Service... 19 Revisiting the E-commerce Opportunity... 19 Appendix: Setting Up Shop on Tmall... 20 Standard Tmall Account... 21 Tmall Global... 22 2

Editor s Note To better understand the online shopping market in China and its potential, Ms Erin Shier, intern for Alberta Hong Kong Office, has initiated a study in the spring of 2014. Findings and insights are compiled into this report, for inspirational reading. The E-commerce Opportunity It is undeniable that E-commerce is booming in China. The industry is currently worth USD 286 billion 1 and is quickly accelerating at a rate of 32 percent average annual growth, with an estimation of annual sales reaching USD 539 billion by 2015. 2 Single s Day (the biggest commercial day of the year in China, celebrated with large discounts on E-commerce platforms) generated USD 5.7 billion in sales in the single day alone in 2013. 3 The growing proportion of E- commerce shoppers is one of the largest aspects fueling this rapid growth in sales. In 2013, China s online shopping population reached 302 million 4, a penetration rate of 49% of China s entire Internet population with the numbers continuing to grow. Boston Consulting Group estimates that the E-commerce population will grow by an estimated 30 million (around the size of Canada s population) for the next two years. 5 With these numbers it is not surprising that China is on pace in becoming the world s largest E-commerce market, predicted to move out of its second place position 6 and overtake the U.S this year. 7 It is no longer a question of if you should be selling online in China, but rather why are you not already, and how do you begin. E-tailing is a huge opportunity to reach a wide range of the Chinese market and possessing an online sales platform is becoming imperative in order to reach the Chinese consumer. Online platforms are growing at three times the rate of brick and mortar stores, 8 with this channel dominance being demonstrated by the fact that in 2010, Taobao (China s leading E-commerce platform) sold more than China s top five brick and mortar retailers combined. 9 E-commerce currently possesses 5-6 percent of the 1 Jourdan, Adma. Surviving Chairman Ma: Life in the shadow of China s Alibaba. Reuters. November, 2013. Accessed February, 2014. http://www.reuters.com/article/2013/11/26/us china ecommerce idusbre9ap17h20131126 2 He, Wei. China Set to Overtake the U.S in E commerce. China Daily USA. August, 2013. Accessed March, 2014. http://usa.chinadaily.com.cn/business/2013 08/28/content_16927926.htm 3 Ritacca, Roberta., and Stanley, Thomas. E commerce in China: Driving a new consumer culture. KPMG. January 2014. Accessed February, 2014. http://www.kpmg.com/cn/en/issuesandinsights/articlespublications/newsletters/china 360/Documents/China 360 Issue15 201401 E commerce in China.pdf 4 Hong, Kaylene. China s Internet Population hit 618 million at the end of 2013, with 81% connecting via mobile, The Next Web. January 16, 2014. Accessed February, 2014 http://thenextweb.com/asia/2014/01/16/chinas internet populationnumbered 618m end 2013 81 connecting via mobile/#!whosa 5 Michael, David., Netteshiem, Christoph., Zhou, Yvonne. China s Digital Generations 3.0: The Online Empire, Boston Consulting Group. April, 2012. Accessed February 2014. http://www.bcg.com.cn/en/files/publications/reports_pdf/bcg_china_digital_generations_3.0_eng_apr_2012.pdf 6 E commerce in China Shopping for one, shopping for millions. Maxxelli Consulting. November 1, 2013. Accessed February 2014. http://www.maxxelli consulting.com/e commerce in china shopping for ones shopping for millions/ 7 He, 2013 8 Dai, Jessica., Hoffmann, Serge., and Lannes, Bruno. China e commerce: Heading toward RMB 1.5 trillion. Bain & Company. 2012. Accessed February 2014. http://www.bain.com/images/bain_brief_china_e commerce.pdf 9 Michael, et al., 2012 3

nation s entire retail sales, 10 and is estimated to grow to 7.5 percent by 2015, 11 with University students and young professionals already allocating 12% of their total spending to online sites. 12 With Chinese consumers spending more and more time shopping and researching goods online, they are beginning to associate a lack of web presence with a lack of credibility. Without an e- commerce presence companies will risk being obsolete to their consumers and missing out on what is close to becoming the world s largest e-commerce market. Consumer Behavior Understanding the Boom So what exactly has been causing this rapid boom of E-commerce in China? Firstly, China not only has a huge E-commerce population, but it also has the world s largest 13 and growing Internet population at a recorded 618 million users at the end of 2013. 14 This large size is due to incredibly high levels of broadband and Smartphone penetration. In 2013, China had over 500 million people connecting to the Internet through mobile devices 15 and is the country with the largest number of mobile- E-commerce transactions. 16 The fact that the Chinese Government is also spending billions on the improvement of broadband infrastructure for faster Internet speed does not hurt either. 17 These factors have all contributed towards making China a wired society. Another important factor helping with the boom is the development of secure online payment systems, with 85% of all shoppers now using these online payment options to make their E-commerce purchases. 18 This use of online payment systems largely began with Alibaba Group s creation of Alipay, an escrow third-party payment system that has become the most common payment system in China s E-commerce industry. 19 The payment system works by moving funds from the buyer to the third-party once goods are purchased online, but not transferring the funds to the seller until the buyer has received the goods and has confirmed with Alipay that all the goods are in order. Its creation largely solved the issue of trust that Chinese consumers had with online payments. Rising incomes and the rapid growth of the middle class in China are other motivators of online commerce. China s middle class is expected to rise from 200 million to 800 million in the next 20 years, 20 resulting in 600 million more people with a larger share of discretionary income. This growth can be demonstrated by the fact that consumption grew at 30% last year. 21 10 Alibaba s Tmall Courts Western Brands With How To Guide, Ad Age. October, 2013. Accessed February, 2014. http://adage.com/article/global news/alibaba s tmall courts western brands guide/244877/ 11 Ritacca, and Stanley, 2014 12 Michael, et al., 2012 13 Koehler, Kristina. Selling Online in China. Webinar, Klako Group, February 19, 2014. 14 Hong, 2014 15 Hong, 2014 16 Ritacca and Stanley, 2014 17 Michael, et al.,2012 18 Hoffmann, Serge., and Lannes, Bruno. China s e commerce prize, Bain & Company. August, 2013. Accessed March, 2014. http://www.bain.com/publications/articles/chinas e commerce prize.aspx 19 Michael, et al., 2012 20 Indvik, Lauren. Ecommerce in China: How the World s Biggest Market Buys Online, Mashable. May, 2012. Accessed March, 2013. http://mashable.com/2012/05/20/ecommerce china/ 21 E commerce is taking over China How to make it work for you, CanCham and KPMG Presented Seminar. April, 2014. 4

Another important facilitator behind the boom of E-commerce has been social media. Companies are using these interfaces to build brand awareness and to interact with consumers on a more intimate level. An influential social media presence can have a great affect on conversion rates. 22 Consumers are also using these platforms to seek out product advice and knowledge about retailers credibility, reliability, and service, all which have a large impact of consumer purchasing decisions. 23 Chinese consumers are largely influenced by their friends, Word Of Mouth and social media personalities rather than celebrities or official sources when it comes to product decisions. The Chinese are more active users of social media with 40% of China s online shoppers reading and writing online reviews about products. 24 A survey completed by KMPG showed that 91% of all Chinese Internet users are on social media sites, compared to only 67% in the United States. 25 By being on these sites, companies can quickly react to negative reviews that could be damaging to their brand image, as well as communicating with customers where they are increasingly spending more of their time. Developing an integrated social media and E- commerce presence is becoming a crucial element of any E-commerce strategy in China. Why do Chinese consumers shop online? Another way to understanding the E-commerce boom is to understand what motivates Chinese consumers to shop online. (1) Price Despite rising incomes, Chinese consumers are still very pragmatic shoppers, motivated strongly by price. When they shop they look for high quality products at low prices. Online retailers cater to this behavior by offering lower prices than traditional brick-and-mortar stores. 26 Online platforms also allow for an ease of price comparison. Chinese consumers are big bargain hunters and will compare prices from a number places before settling on a purchase. 27 (2) Convenience Convenience is a second strong motivator for Chinese consumers. Before continuing on, it will be important for understanding to explain tiered cities within China. China s cities are often classified in tiers based on their population and economic level, though the classification is often quite vague. Beijing, Shanghai, Shenzhen and Guangzhou are considered tier one cities, where as an example of a second tier city would be Chengdu. Many retailers have not largely expanded to areas outside of China s tier one cities creating convenient access to only a small portion of China s population. E-commerce provides an opportunity for many Chinese consumers in lower tiered cities to access a wide variety of goods that they previously would not have been able to. Due to this factor, lower tiered cities, such as 4 th tier, have become a major segment of the E-commerce market. Despite lower disposable income, people in these cities are spending similar amounts online as their counterparts in higher tiered cities, 28 adding up to 22 Ching, Chan So., and Lam Teresa. Ten Highlights of China s Commercial Sector 2014: What the Experts Say, Fung Business Intelligence Centre and the Expert Committee of the China General Chamber of Commerce. 2014 23 Ching, Chan So., and Lam Teresa., 2014 24 Ritacca and Stanley, 2014 25 Ching and Lam., 2014 26 Maxxelli Consulting, 2013 27 Hoffman and Lannes, 2013 28 Ritacca and Stanley, 2014 5

around 27% of their individual disposable incomes. 29 Another convenience factor is the fact that standard delivery times are also much shorter in China than in Western countries, taking an average of 1-2 days compared to 5-7 days. 30 The rise of smartphone penetration in China has also been a strong driver behind the convenience of online shopping. The Chinese are big users of mobile devices. Consumers are increasingly accessing the internet and completing transactions on mobile devices rather than on desktops. They love the ability to shop anywhere and at anytime that mobile devices preset them with. The convenience that e-commerce provides also demonstrates why this distribution path has been nowhere near as successful in Hong Kong, in fact sitting below the average of developed countries. 31 Hong Kong is a small area with an incredible density of retail outlets. As a result, consumers in Hong Kong do not have to travel far to access a wide variety of products including many foreign goods. Brick-and-mortar stores already offer Hong Kong consumers with a high level of convenience. They are not as driven to e-commerce sites. (3) Wide Range of Products Lastly, online platforms also provide a much wider selection of products than found in traditional retailers, especially in regards to access to foreign brands. 32 Who Shops Online? Success in selling online in China cannot be achieved through a one-size-fits-all marketing strategy. E-commerce consumers in China are very diverse due to a widespread acceptance of purchasing products online 33. As a result, businesses must understand consumers unique behaviors in order to succeed. One way to segment the market is based on age, income, and lifestyle, which was done by Boston Consulting Group (2012) in their article China s Digital Generation 3.0: The Online Empire. All consumer segments, besides teenagers, are spending at least 1.6 hours a week shopping online. 34 Young users (age 18-35) are spending the most of time on E-commerce, but it is the young professional segment (age 26-35, white collared workers in urban centres), who are the most desirable group, spending the most about of money. Around 40% of all E-commerce transactions are in fashion and accessories, and are purchased by female, young professionals. 35 While university students (aged 19-25) do not have the same levels of disposable incomes, they are still an important segment, allocating 12% of their spending to online purchases. Similar research completed by iresearch Consulting Group (2013) on Tmall s (the largest business-to-consumer e-commerce site in China) customer base largely backs the research done by Boston Consulting Group. Based on the provided graph it can be noted that Tmall s largest consumer segment, at 37%, are ages 25 to 31, while the next largest group, at 26%, are ages 18 to 25. 29 Koehler, 2014. 30 Maxxelli Consulting. 2013 31 Hong Kong Social Media Fast Facts, Digital Jungle. August, 2012 Accessed February 2014. http://www.slideshare.net/digitaljungle/hong kong social media internet facts 32 Maxxelli Consulting. 2013 33 Michael, et al.,2012 34 Michael, et al.,2012 35 Ritacca and Stanley, 2014 6

Another method to segment China s E-commerce consumer market is by geographical region. It is often said that China s market should be looked at as a continent instead of a country due to the mass regional differences. This regional diversification is appearing in E- commerce usage as well. The top 10 E-commerce markets are largely in coastal province with tier-1 cities achieving the highest rate of transactions. 36 Consumers in tier-1 cities are more frequently purchasing high-end or luxury goods, such as fashion items and vacations, whereas consumers in lowered tiered cites are mostly concerned about price and overall value of their online purchases. 37 Despite the high level of transactions in tier 1 cities it is important not to blindside other potential segments. As mentioned previously, 4 th tier cities are an often forgotten, but very important segment. Even though people in these areas often have lower disposable incomes, they are spending similar amounts as counterparts in tier 2 and 3 cities 38, around 27% of their individual disposable incomes. 39 With 40% of global growth expected to happen in these cities, they are an important opportunity that should be not passed over when heading straight for tier-1 cities. 40 Rural areas seem not to be a major segment for online shopping, most likely due to poor logistics in these areas, lower possession of bank cards, and more difficult access to the Internet. It will be interesting to see that due to the incredibly high penetration rates of smartphones in China and the growing amount of online shopping done via mobile phones, if smartphones will be the main driver of the rural sector s growth in e-commerce use. As companies enter the E-commerce market in China they will need to understand who is online, who they are they are trying to sell to, and the digital behaviors of their targeted consumer segments. As the digital world moves very fast, companies will have to keep on top of how segments and behaviors are changing. What is Bought Online? Almost everything is bought online in China from consumer retail goods to medical products to food; however, the share of E-tailing purchases is not even across all product groups. The market is largely skewed towards the purchases of clothing, accessories, shoes, and cosmetics, 36 Hoffman and Lannes, 2013 37 Ritacca and Stanley, 2014 38 Ritacca and Stanley, 2014 39 Koehler, 2014. 40 Koehler, 2014. Source: iresearch 7

with these product categories making up around 40% of all E-commerce transactions. 41 Another product category with large e-tailing market share is the consumer electronics market. 42 While these product categories currently dominate online sales, other segments are seen to carry promising growth potential. One example would be online groceries, a fast growing category that has the potential to become quite large due to Chinese consumers health concerns over the safety of their own country s food supplies. Unfortunately, the complex supply chains that come with the grocery segment present a number of logistics challenges and have been the main reason behind its slower E-commerce growth. 43 Not only has E-commerce fueled Chinese consumers overall consumerism, it has also fueled their obsession with foreign products. The purchasing of foreign products online reached RMB70 billion (USD 11.49 billion) in 2013 44 and with the amounts doubling every year. 45 This obsession has been fueled by safety and authenticity concerns of products (just like in the grocery segment), and has triggered massive online purchasing of products such as baby milk powder, cosmetics and skincare, maternal products, and foreign-branded luxury goods. About 10% of all infant formula and 7% of all cosmetics and skincare products purchased by Chinese consumers are from overseas. 46 Another reason driving the demand for foreign goods is the increasing wealth of the Chinese. Greater affluence in China is associated with a higher preference for foreign brands. This high demand for foreign goods presents huge opportunities for foreign companies looking to sell to the Chinese market. Companies should keep in mind though, that just because almost everything is sold online and just because there is mass demand for foreign products, does not mean that if you put your products online that they are necessarily going to sell. Companies still have to do their market research and have an effective marketing scheme, just like in any other sales situation. Single s Day Single s Day, on November 11 th (or 11, 11), deserves a special mention due to this day s largest and unprecedented E-commerce sales in China. In 2013, over USD 5.7 billion 47 was generated in this one day alone. Single s Day seems to be for self purchases, rather than gifts for others; an interesting emulation of Valentine s Day. While the day was first started by Alibaba Group (China s E-commerce giant), consumers are now lured by incredible promotions on many of the China s E-commerce platforms. With price being the number one motivator of Chinese online consumers, it is no wonder that such amazing deals cause such a stir-up. 41 Ritacca and Stanley, 2014 42 Hoffman and Lannes, 2013 43 Hoffman and Lannes, 2013 44 Lee, Emma. Alibaba Launched Tmall International, an E commerce Site for Overseas Products, Tech Node. February 2014. Accessed March, 2014. http://technode.com/2014/02/24/alibaba launched tmall international an e commerce site foroverseas products/ 45 Hoffman and Lannes, 2013 46 Hoffman and Lannes, 2013 47 Ritacca, Roberta., and Stanley, Thomas. E commerce in China: Driving a new consumer culture. KPMG. January 2014. Accessed February, 2014. http://www.kpmg.com/cn/en/issuesandinsights/articlespublications/newsletters/china 360/Documents/China 360 Issue15 201401 E commerce in China.pdf 8

Designing Your Business Model to Enter the Market In her webinar, Selling Online in China, Koehler (2014) defined four different business models that foreign companies could use in order to enter the E-commerce market in China. These four methods are: building your own website outside of China, building your own website inside of China, using a third-party platform outside of China, and lastly, using a third-party platform inside China. (1)Your own website outside of China This method is considered the easiest of the four methods. But as in many scenarios, the easiest path often delivers the least return. A website is very easy to setup outside China and does not require applying for an ICP (Internet Content Provider) license. An ICP license is required to host a website inside of China. It is possible for your website to include Chinese language and be integrated with popular Chinese third-party payment systems, such as Alipay. Without an ICP license, your website could be blocked by the Chinese government and you will have no control over removing this blockade. A website hosted outside of China without a physical presence there will create issues in regards to logistics and after sales services, which are important considerations for Chinese consumers when deciding whom to purchase from online. (2) Your own website inside of China This scenario assumes that you have your own office in China, are partnering with a local company, or are hiring an agent in order to operate the website in China. Having a physical presence in China will greatly aid in issues associated with delivery and after sale services. However, as mentioned previously, if you are operating the website yourself, you will need to apply for an ICP license. To get a license, one must establish a legal entity in China. There are two ICP licenses that are offered, a commercial ICP license and a noncommercial license. The commercial ICP license is for companies that are selling other peoples goods. This type of license is not granted to foreigners. Instead, license will only be granted if the foreign company is in a joint venture with a Chinese company with the local company holding at least 50% control. The non-commercial license is available for companies that are selling their own goods and is offered to foreign companies. A large deterrent of using this type of platform is that individual sites do not receive as much attention from Chinese consumers. Consumers are instead driven to third-party virtual market platforms. (3) Using a third party platform that is outside of China such as EBay This model is the least recommended by Koehler out of the four options she proposes. This is due to the fact that Chinese consumers are not attracted to these websites and largely do not know of their presence. As a result, consumers will not use these sites and you will not receive strong sales. 9

(4) Using a third party platform that is in China Koehler considers this the best business model to choose, especially for foreign companies making their first entrance into retailing in China. This is due to the ability of third-party companies to help avoid many of the complications of selling online in China. Using a third-party platform allows you to avoid the requirement of obtaining an ICP license, 48 and now at least with Tmall Global, avoid even having to register your company in China. Virtual marketplaces, which are the format of many top third-party platforms, dominate the E-commerce market in China, with almost 90% of online retailing occurring on these spaces. 49 Consumers know about these sites and are generating mass amounts of traffic to them. Besides offering companies ease of access to a large and ready market, these sites will also help with other elements of the sales process. They often provide a communications platform and offer assistance in regards to deliveries and after sales services, whether it is part of their company or offered through partnerships with other companies. Other consultancies for E-commerce in China strongly recommend this business approach as well. [Western companies] should take advantage of these highly flexible and popular local E-commerce platforms, which will allow companies to generate more market exposure and possibly more sales revenue, (Maxwell Consulting, 2013). Unfortunately, the best approach does come with a price. Many third-party platforms charge a range of fees, which can be quite expensive especially with some of the top sites like Tmall. You are also in charge of your own marketing; simply placing your products on the site will not ensure that they sell. There will most likely be people already selling similar products as yours online so you will have to be creative and differentiate you product. There are many consultancy companies and agencies that can assist you with marketing on China s third-party E-commerce platforms. China s 3rd Party E-commerce Platforms Business to Consumer and Consumer to Consumer Platforms Consumer-to-consumer (C2C) online platforms are currently where 70% of China s e- commerce is occurring. 50 This type of platform is where anyone, regardless if they are a certified store or not, can sell new or used goods to other consumers, such as the transactions on ebay s platform. 48 Ritacca and Stanley, 2014 49 Maxxelli Consulting. 2013 50 Maxxelli Consulting. 2013 10

This market leadership is changing though, with increasing interest in business-toconsumer (B2C) platforms, due to consumer trust built around verification of suppliers, quality certification, and security of online payment. Business-to-consumer platforms are where certified businesses are selling to consumers, like shopping in your local shopping mall. C2C platforms have long had issues with fake-goods and B2C platforms are offering consumers a way around this, a place where they can trust the goods they are receiving and the vendors they are interacting with. In 2012, the B2C E-commerce market in China contracted a business of USD 107.48 billion, and is estimated to grow to USD 372.73 billion by 2015. 51 From 2009 to 2012, B2C markets experienced a compounded annual growth of 160% compared to only 65% in C2C markets. 52 This trend shows that Chinese consumers are partaking in a flight to quality that B2C platforms are offering. The King of China s E commerce: Alibaba Group Alibaba Group is the undisputed leader in regards to China s E-commerce industry, dominating the landscape through its two main platforms; Taobao (C2C) and Tmall (B2C). 53 [In] December 2012, Taobao (including Tmall and Taobao.com) reached 1 trillion RMB (=USD 160 Billion) making it the largest e-commerce marketplace operator in the world, (Bysoft, 2014). On Singles Day 2011, it took only 8 minutes for the two platforms to generate RMB 100 million (around USD 16 million). 54 These sites are striving hard for development. With growth at 60% last year, 55 it is even estimated that by 2016, Alibaba may even surpass Wal-Mart as the largest retail network in the world. 56 Alibaba has clearly demonstrated itself as an incredibly successful company, but what specifically has aided to its platforms success? One major attribute to their success was the creation of Alipay, an escrow third-party payment system that has become the most common payment system in China s E-commerce industry. 57 Its creation largely solved the issue of trust with online payments and has been a major reason behind the rapid growth of entire E-commerce industry in China. Alipay has gained over 600 million registered accounts worldwide. In 2012, the e- payment system was processing over 11 million transactions per day, 58 and is the market leader in third-party party systems holding roughly around 49% of the market. 59 PayPal, on the other 51 Millward, Steven. By 2016, China Will Have 423 Million E commerce Shoppers Spending $457 Billion [Inforgraphic], Tech In Asia. February 2013. Accessed February 2014. http://www.techinasia.com/china ecommerce shoppers in 2016/ 52 Hoffman and Lannes, 2013 53 Michael, et al., 2012 54 A Record Single day Turnover of 3.36 Billion Yuan Taobao Mall, China Internet Watch. November 15, 2011. Accessed March, 2014 http://www.chinainternetwatch.com/1297/taobao mall 111111/ 55 CanCham and KPMG Presented Seminar, 2014. 56 Ritacca and Stanley, 2014 57 Michael, et al., 2012 58 China E Commerce, Them Pro. January, 2012. Accessed February, 2014. http://www.slideshare.net/thempro/chinaecommerce 2011 59 Them Pro 2012 11

hand, is relatively unknown in China. Another factor that has made Alibaba s E-commerce platforms so successful is the customer rating system that is offered for rating the store vendors on each platform. Chinese are heavy users of product review due to a mistrust of official endorsement and is how Chinese consumers judge the quality and the authenticity of the goods on E-commerce platforms. 60 Taobao Taobao is considered Alibaba s consumer-to-consumer platform. Unlike many other C2C platforms, many of the goods sold on the platform are new, not second hand. First hand goods hold 96% of overall sales. 61 It is more of a marketplace where anyone can set up shop regardless of being a registered company or not. Many sellers are suppliers who have not had luck with traditional retail channels or distributors with excess inventory. Taobao is the undisputed market leader holding 80% of China s online C2C market, 62 possessing 500 million registered consumer accounts, and 800 million product listings. Taobao is the easiest way in China to become a store owner and access millions of customers. Unfortunately, it is relatively sealed off to foreigners. To open a Taobao store, one must possess a Hukou ID, or be endorsed by a local guarantor. A Hukou ID is a household registration for Chinese Nationals in China. As well, a Chinese bank account is required to open a Taobao store. 63 Despite this there are still some options for foreigners wanting to set up shop on Taobao including partnering with a local company or hiring an agent to open up the store on your behalf. Tmall, Alibaba s B2C platform, is much more accessible to foreign companies, and with the growing trends favoring B2C platforms, it is the recommended route to take between the two. Tmall Tmall is Alibaba Group s business-to-consumer E-commerce platform, which acts as a virtual mall with branded storefronts offering a wide range of consumer products. 64 Unlike Taobao, only professional branded or licensed companies can operate as a merchant on Tmall. The on-line platform was so created for companies to sell quality, branded goods to the entire Greater China market 65. Tmall has been greatly effective in dealing with the issues of authenticity and counterfeit goods often found on consumer-to-consumer business model. As a result, it has developed a strong reputation for credibility. 66 This reassurances of quality goods 60 Michael, et al., 2012 61 Hoffman and Lannes, 2013 62 Ritacca and Stanley, 2014 63 Buying and Selling on Taobao, Tofflerann. October, 2009. Accessed February 2014. http://tofflerann.com/2009/10/04/buying and selling on taobao/ 64 Ritacca and Stanley, 2014 65 Reaching China s consumers with T Mall, Redant. Accessed February 2014. https://www.redant.com/articles/reachingchinas consumers with tmall/ 66 How to be Successful on Tmall Chinese B2C ecommerce Strategies, Digital Jungle. September, 2013. Accessed February, 2014. http://www.slideshare.net/digitaljungle/how to be successful on tmallcom 12

has translated into high levels of consumer trust and has been a major reason behind the platform s overall success 67. Tmall has become Asia s largest B2C platform in regards to revenue 68 and holds over 50% share of the China s online B2C market. 69 The site possesses huge amounts of traffic (being visited by over 40 million unique visitors every day), 70 has more than 70 000 Chinese and international brands, and more than 50 000 unique stores. 71 Tmall is now more open to and interested in attracting foreign brands than ever with the recent development of Tmall Global, a subsidiary, international platform opened on February 19, 2014 under the domain www.tmall.hk. 72 The site is hosted in Hong Kong, but very accessible to Mainlanders and easily linked with the main Tmall store. 73 Tmall Global allows foreign companies to open up virtual storefronts on the site and sell directly to Chinese online consumers without having to become a legal entity in China, presenting a huge opportunity to foreign companies. Mo Daiqing, an analyst with the Hangzhou-based China E-commerce Research Center, said that is was surging demand by Chinese online shoppers to buy cheaper and better goods outside China that prompted Alibaba's decision to set up the new site, (Meng, 2014.) Some big name foreign companies that are already operating on Tmall include: UNIQLO, Gap, Nike, and Unilever. 74 Tmall Global presents itself as a fantastic opportunity for foreign companies to sell to Chinese consumers due to its overall ease of access and the large consumer traffic volumes it attracts. Other Market Players While it is hard to believe that China s E-commerce market could be dominated by one company, the incredibly fierce competition that exists in the market will most likely led to a consolidation of the market, dominated by one or two E-commerce giants alongside numerous niche specialty stores. 75 Those unable to compete head-on with Alibaba will be forced to find a niche segment or risk being run out of the industry entirely. JD.Com After Tmall, which holds 50.7% of China s business-to-consumer e-tailing market share, 76 the next biggest contender is JD.com, also known as Jingdong and previously called 360Buy.com. 77 67 How does TMall present an International Brand to China? Bolei Digital. October 2013. Accessed February, 2014. http://www.boleidigital.com/download/tmall_brand_to_china.pdf 68 Digital Jungle, 2013 69 Millward, Steven. China s e commerce market to hit $71 billion in sales in Q2 ; these are the top 10 e stores, Tech In Asia. August, 2013. Accessed February, 2014. http://www.techinasia.com/china ecommerce market share stats q2 2013/ 70 Digital Jungle, 2013 71 Bolei Digital, 2013 72 Meng, Jing. Alibaba site offers channel to foreign products, China Daily USA. February 20, 2014. Accessed February, 2014. http://usa.chinadaily.com.cn/epaper/2014 02/20/content_17294571.htm 73 CBBC Guide to E commerce in China, China Britain Business Council. http://www.cbbc.org/guide/sme_zone/sme_documents/cbbc_ecommerce 74 Company Overview Alibaba Group. Accessed February 2014. http://news.alibaba.com/specials/aboutalibaba/aligroup/index.html 75 Jourdan, Adma. Surviving Chairman Ma: Life in the shadow of China s Alibaba. Reuters. November, 2013. Accessed February, 2014. http://www.reuters.com/article/2013/11/26/us china ecommerce idusbre9ap17h20131126 76 Jourdan, 2013 13

JD.com is the company that is considered the most similar to Tmall due to its broad range of products. While the company does offer a wide range of products its main focus is on electronics. The company currently holds the title of 3C (computer, communications, and consumer electronics) E-commerce sales leader in China, 78 with 85% of their revenues coming from consumer electronics. 79 JD.com holds around 15% of the B2C market, 80 and with 35.8 million customer accounts, 82 warehouses and the ability to process up to 30 million orders a day, 81 it is cited as a company to look out for. 82 This statement is even truer with the recent acquisition of 15% of the company by Asia s Internet giant, Tencent, in March 2014. 83 This substantial backing could result in some interesting competition in the future between JD.com and Alibaba. B2C Market Players A look at the quarterly market share of China B2C e-commerce sites illustrates the vitality of market, as well fierce competition among the players. Graph on the right is from the second business quarter of 2013. Change in market share has occurred as of January 2014. Tmall s share has risen from 50.7% to 51%. JD.com still holds its second place position but dropped from 17.1% down to roughly 15% 84. As of the end of November 2013, Suning, a specialist in electronics has suffered a drop from 5.0% down to 3%. Amazon is down 2.2% to 1.7% and Gome dropped from 1.9% down to 0.4%. 85 77 Millward, 2014 78 Ritacca and Stanley, 2014 79 Jackson, Eric. JD.com Isn t The Next Amazon of China, It s the Next Dangdang of China. Forbes. February 2014. Accessed February, 2014. http://www.forbes.com/sites/ericjackson/2014/02/04/jd com isnt the next amazon of china its the nextdangdang of china/2/ 80 Ritacca and Stanley, 2014 81 Hughes, Anthony., and Lau, Fiona. JD.com out to steal Alibaba s thunder, IFR Asia. February, 2014. Accessed February, 2014. http://www.ifrasia.com/jdcom out to steal alibaba%e2%80%99s thunder/21130853.article 82 Michael, et al., 2012 83 Perez, Bien., and Sophie, Yu. Tencent JD.com alliance intensifies e commerce challenge to Alibaba, China Business. March, 2014. Accessed April, 2014. http://www.scmp.com/business/china business/article/1445058/tencent jdcom allianceintensifies e commerce challenge 84 Ritacca and Stanley, 2014 85 Jourdan, 2013 14

Things to Think About Logistics In regards to success in China s E-commerce industry, the infrastructure and the market readiness may be there, but it is logistics that provide the real difficulty. Due to the challenges that present themselves, it is recommended that companies hire an agency or partner with a local company in order to get help in this area and to have someone on the ground in order to oversee the process, especially in regards to customs and warehousing. One such company is called Export Now, a U.S. service company that will take care of the entire process for you, from site set-up, to logistics, to marketing, to the running of the online business, and more. As a partner with Alibaba, they can set up and run a store for your company on Taobao, Tmall or Tmall Global, bypassing the need for your company to be registered in China or even set foot in China entirely. This is a simple way to avoid the complex logistically barriers of opening and running an E-commerce site in China. However a complete service package, as quoted by Export Now, will roughly cost USD50,000 plus 20% of every transaction. Shipment to China International shipping prices can be costly and is an important expenditure to consider. Customs Despite having joined the WTO in 2001, China still has numerous trade barriers, restrictions and regulations, aside from taxes and duties placed on goods that are being imported. 86 When added up, importation taxes can be a costly expenditure that companies will need to think about and factor into their budget. Importing to China generally involves three types of taxes: (1) Value Added Tax (VAT) -17 % or 13% for some goods -The VAT will be paid upon importation, but can be used to deduct the VAT paid when the goods are sold. (2)Consumption tax -Only some goods are subject to this tax including luxury products, renewable petroleum products, and high-energy consumption products like motorcycles (3) Customs duties -Currently collected on 8,238 different items according to the current year s Customs Tariff Implementation Plan. Duties are collected on an ad valorem or quantity basis. 86 Zhang, Shirley. Import Export Taxes and Duties in China, China Briefing. March, 2013. Accessed March, 2014. http://www.china briefing.com/news/2013/03/11/import export taxes and duties in china.html 15

How Import Duties are Determined Since Canada is a member of the WTO, its imports receive China s Most- Favored-Nation (MFN) Duty Rate. There are some exceptions to this rule however including the Tariff Rate Quota Duty Rates and Temporary Duty Rates. Under the Tariff Rate Quota scheme, lowered tariff rates are given to products that meet China s quota for that product, and under the Temporary Duty scheme, China will often lower tariff rates for a select group of goods to boost these products level of importation. Companies will also have to make sure that their products fit all custom requirements for importations. One such requirement is the China Compulsory Certification (CCC or 3C), which applies to 23 product categories that can have an impact on health and safety. Electronic goods are one such product category that falls under this requirement.. Factory audit is a part of the certification and the whole certification process can take up to a few months to a few years to complete. 87 It is important that companies are aware of all product requirements and certifications before attempting importation. Warehouses There are numerous areas to set up warehouses in China and your location will be influenced on where your market is and where your goods will enter the country. Two common locations for warehouse are in Shenzhen (to access the south of China), and the Shanghai area (to capture the north and eastern parts of China). Delivery routes are very efficient in China so even having just one warehouse location you would still be able to effectively reach other areas of China. Warehouse location and numbers will also depend greatly on what type of product you are selling. For non perishable goods the location of warehouses is not such a big issue and you may be fine using one location to access the entire market. Perishable goods, such as meat, present a different issue however. Even though there are efficient delivery routes across China, your product would not last a 2 day delivery time from Shenzhen up to northern China. It is advisable to use warehouses in more locations for perishable goods. A meticulous examination of the supply chain is mandatory. Delivery Many third-party E-commerce platforms outsource their delivery services to express companies and will have you choose one or a number of these companies to handle your deliveries. Considering the success of such E-commerce platforms, the delivery companies that they work with should most likely be suitable. It should be noted though, that many Chinese logistics companies are still in the early stages of development and are often plagued with issues of inadequate capacity, late deliveries, poor customer service, and damaged or lost items. Regional companies are often considered more reliable than larger companies and are able to provide extra services such as warehousing, cash-on-delivery, and customized delivery. 88 Tmall s deliver partners are able to offer value-added services beyond straight delivery. There are some western logistics companies in China such as FedEx, but often these companies are unable to compete effectively in China. Koehler (2014), in her webinar with Klako Group, 87 Distribution in China, Fung Business Intelligence Centre. August 2013. 88 Koehler, 2014 16

recommends using a combination of logistics companies based on their strengths and physical checking out the companies before agreeing to any contracts. You will want to see exactly where your goods will be stored and how they will be transported. Returns As of March 15, 2014, under amendments to China s Consumer Protection Law, Chinese consumers are now legally able to return any goods within seven days without reason as long as the products are in good condition. There are some exceptions to this law in regards to custom-made products and perishable goods. 89 This move is hailed by many as a big step forward for consumer protection in China. Unfortunately, this freedom of return could easily be abused, posing a challenge to foreign sellers not equipped with after-sales and customer service. Currently, with statistics from the 2013 Single s Day, 15-20% of goods purchased were returned, 90 and with the new law making returns more accessible, it is uncertain how these numbers will grow. It is advised that companies should anticipate and prepare for a high level of product returns when entering the Chinese online market. Marketing Marketing on China s third-party E-commerce platforms will be drastically different from home platforms. Understanding these differences will be crucial to the success of your sales. As mentioned previously, despite the mass amounts of consumer traffic to these sites, your products are not going to sell simply by putting them online. Firstly, in order to achieve success your must understand how the ranking process works in regards to search inquiries on the third-party platform of your choice and how to employ effective search engine optimization. Another important issue is that since there are so many products being offered on these sites there will most likely be products similar or identical to your own. The only way to stand out is through differentiation and understanding what gives your brand an advantage over local brands. 91 Often Chinese consumers are attracted to foreign companies due to a perceived reliability and authenticity of their products. Foreign companies should work with these perceptions and amplify these ideas in order to attract consumers. 92 Unfortunately, while Tmall is a good sales platform, it is not great for creating strong brand identity. 93 Foreign companies should strongly consider integrating their sales approach with social media, 94 which as mention previously, is a major driver behind E-commerce growth. It is the preference of Chinese consumers to consider the comments and recommendations from friends and social media personalities. A social media presence is becoming a crucial element of any E-commerce strategy. Another option, or integration strategy element, is having a China webpage to introduce your brand. 95 89 Ap, Tiffany., and Chiu, Joanna. China Tightens watch on e commerce sector, South China Morning Post. January 2014, Accessed March, 2014. http://www.scmp.com/business/china business/article/1414590/china tightens watch growing ecommerce sector 90 CanCham and KPMG Presented Seminar, 2014. 91 Digital Jungle, 2013 92 Digital Jungle, 2013 93 Bolei Digital, 2013 94 Ritacca and Stanley, 2014 95 Bolei Digital, 2013 17

Government Policies Foreign companies entering China are always at risk at the changing rules and regulations of the government. Without rhyme or reason, bureaucratic policies can change overnight that could affect the entire success of your business operations in China. The movements of these policies are incredibly difficult to forecast and can often be quite inconsistent. Currently the E-commerce industry is quite open and free of policies; however, this is largely due to the rules and regulations lagging behind. The E-commerce industry has grown so quickly that the government has not been able to catch up. There is no guessing on how the regulation will evolve. One fair assumption however is that the amount of sales being generated from online E-tailing platforms will draw the interest of the revenue office. A close watch and understanding of the government policies is very important before market entry. Intellectual Property Unfortunately, intellectual property rights have long been a problem in China. Counterfeiting is a prevalent issue in China due to the ineffective enforcement of piracy laws as well as an overall disregard for the respect of intellectual property. Foreign companies risk having their products easily imitated by local producers. Companies should conduct research in this area in order to gain a broader understanding, to ensure that their patent/logo is registered in China. Registration in China is on a first come basis. E-commerce in China has been fairly unregulated since its development, and fast becomes a breeding ground for vendors of counterfeit goods. This is especially prevalent on Alibaba s consumer-to consumer site, Taobao. The Chinese Government has recently stepped up its enforcement however, inspecting sites and deleting over 7.14 million illegal-listed items in 2012. 96 Tmall, Alibaba s business-to-consumer site, was set up largely to meet consumers demands for high quality and branded items, and free from counterfeit items. Price Sensitivity Chinese consumers are very pragmatic and can be very price sensitive. They want high quality products for low cost. In regards to effective pricing, you will need to understand what the competitive rate is. If you chose to price your product more expensively, you must communicate to consumers why they should be willing to pay this higher cost. 97 Chinese consumers will not buy a more expensive product without sufficient reason, because they can always get it cheaper somewhere else. 96 Devonshire Ellis, Chris., Livermore, Adam., Vetorettis, Alberta., Zhang, Sabrina., E Commerce in China, Asia Briefing. July 2013. Accessed March, 2014. http://www.asiabriefing.com/store/book/e commerce in china 416 97 Koehler, 2014 18

Customer Service Most third-party E-commerce platforms offer an instant messaging platform for communication between buyers and sellers, such as Ali Wangwang on Alibaba sites. Chinese consumers expect fast and reliable customer service (they expect to hear back within an hour), and they prefer talking to customer representatives on instant message over communicating on telephone or email. You will either have to have someone in your company that can speak and write in Chinese or outsource this service. In either method, you must offer consistently reliable service. Revisiting the E-commerce Opportunity China s large and growing e-commerce market should be a serious consideration of any company looking to sell in China. With the market currently worth around USD 286 billion, 98 with predictions of reaching USD 539 billion in the next two years, as well as access to 302 million consumers, 99 online is the place to be in China. Third-party E-commerce platforms, such as Tmall, are making it increasingly easier for foreign companies to join in on the boom, allowing companies to sell without the hassle of registering their businesses in China. But, just because the market is right and ready, does not imply the companies should setup shop this instant. Just as in other sales situations preparation is key. Companies must understand who is online, the online behaviors of their targeted segment, how they are going to differentiate their product and create brand awareness, if they will hire an agency for assistance, which logistics companies they will partner with, among numerous other elements. There is no doubt that building a successful online operation takes a lot of hard work, but the breath of opportunities that lie in China s E-commerce market are undeniable and can be well worth the effort for those who succeed. 98 Jourdan, 2013 99 Hong, 2014 19

Appendix: Setting Up Shop on Tmall There are two main ways that foreign companies can join Tmall: (1) Companies that have a Chinese business license, or someone setting up the site on their behalf (such as a local partner or agency), can apply to Tmall.com. (2) Companies without a Chinese business license, but with a business license from overseas can apply on Tmall Global Necessary Requirements for both Platforms Advangent (2013), a Chinese E-commerce consultancy, has done a good job clearly outlining the necessary requirements, applying to either Tmall site, needed to open up a store front. On either site, your store front and your customer service must be in Chinese. As a result, it is recommended that companies without Chinese language knowledge receive assistance from an agency or local partner for set-up and design, and as well, for handling customer service. A communications platform is provided by Tmall for both sites and is a live chat system called Ali Wang Wang. This is then main method of communication used between buyers and sellers, and you will need someone consistently available to communicate with customers on this system. Another requirement, regardless of where production is occurring, goods must be shipped within 72 hours of the order being placed. As well, all deliveries must have a return location offered within China, and companies must take returns within seven days of the original delivery without reason given. Store Format There are three main store formats that can be opened on either Tmall site 100 : a flagship store, an authorized store, and a specialty store. In all formats, merchants who are not the brand owners must present authorization documents allowing them to open up the specific store front on Tmall.com, or Tmall Global, and to sell the branded products. Costs Tmall s online guide for foreign users offers an in-depth look at the costs involved in setting up a store on both Tmall and Tmall Global. 101 Generally the fee structures are relatively the same for both platforms with only a few differences. The fees charged by Tmall and Tmall Global in order to open up and operate a store on their platforms can be separated into three categories: a deposit, a technical services fee, and sales commission. 102 During the setup of your online store you will have to sign the Tmall Service Agreement, which states that you agree not to distribute fake products. Upon signing this agreement, you will have to pay a deposit that will be used to reimburse customers if you do choose to sell fake goods. The deposit will range from RMB 50 000 RMB 150 000 (USD 8000 USD 24 000), depending on which site you are using and the specific store format you chose. Upon setting up the store, you will be faced with on-going fees including the technical service fee, which is an annual fees around RMB 30 000-60 000 (USD 4.8 thousand - 9.7 thousand) depending on the product category. For cosmetics, food products, health care product, and home appliance vendors, the fee is around USD 5000, 100 About, Tmall. Accessed March, 2014. http://about.tmall.com/ 101 Tmall. Accessed March, 2014 102 Redant, 2014 20

and for furniture, apparel, shoes, bags, and jewelry vendors, the fee is around USD 10 000. 103 This fee can be earned back if your store reaches a certain sales level. A second on-going cost that Tmall charges to store owners, on both sites, is a sales commission fee. For every transaction that you make, Tmall will take a percentage of sales based on the categories of products that are sold. Both sites have an additional fee as well. On Tmall it is the form of a Customer Loyalty Program where an additional 0.5% is deducted per transaction and is used to give customers future promotions, and on Tmall Global, there is a 1% service fee charged by Alipay for each transaction. Those are all the on-going fees that both sites charge, but as mentioned previously, you can hire agencies or consultancy groups to assist you with your website, customer service, marketing strategy, etc. These will be ongoing expenses depending on the specific agreement that is settled upon. Delivery Tmall provides delivery through partnerships with third-party providers. In May 2012, Tmall signed a deal with nine of China s major express companies to handle its deliveries. Some of these express companies include Shentong Express, Yuan Tong Express, Yunda Express and Zhong Tong Express. 104 These couriers offer customized and value-added services beyond straight delivery. You will be able to select which company or companies you will want to handle your deliveries. Kholer (2014) recommends using a variety of delivery companies because often companies will have certain stronger regional expertise. Standard Tmall Account Opening up a standard Tmall Account is a good option for companies who already have business operations in China or have goods that are outside the product categories of Tmall Global. Tmall Global focuses on only a few specific product categories at the moment, which present challenges to suppliers of other product categories. The site does plan to expand its product focus, but it is not clear when this will happen. These product categories that Tmall Global focuses on will be discussed later on in this paper. Necessary Requirements Tmall requires all companies to have a Chinese business license in order to open up a store front, but there are some options around this. Foreign companies can secure a local partner, or a local agent through a licensing agreement, to set up the site on their behalf. There are a number of documents, concerning all of the above business models that are necessary in set up a Tmall store. All of the documents are organized in the following table. 103 Ebrun. TMall Issues Requirements for International Merchant, Marbridge Consulting. September, 2013. Accessed February, 2014. http://www.marbridgeconsulting.com/marbridgedaily/archive/article/69445/tmall_issues_requirements_for_international_me rchants 104 Tmall partners with nine Chinese couriers for better delivery, Want China Times. May, 2012. Accessed March 2014. http://www.wantchinatimes.com/news subclass cnt.aspx?id=20120530000080&cid=1202 21

Source: About.tmall.com Store Format As mentioned previously, a merchant can open up three main types of stores on Tmall: a flagship store, an authorized store and a specialty store. There are some special conditions that apply specifically to Tmall s main platform: a marketplace style flagship store must require special approval from Tmall.com, an authorized store is free to sell products from one brand, but selling products from multiple brands requires special approval, and lastly, in regards to specialty stores, vendors are allowed to sell a number of brands within one specific product category, but must get approval to sell more product categories. More information can be found at: http://about.tmall.com/tmall/opening_a_store Payment Vendors are required to possess a local Chinese bank account and have a Chinese Alipay Corporate Account. Tmall Global As mentioned previously, a Tmall Global store allows foreign business to avoid having to register their company in China, as well as avoid the hassle of having to open up a Chinese bank account or gain an ICP license that would be required for the company to operate their own website in China. 22

Necessary Requirements While Tmall Global offers much greater ease to foreign companies seeking to sell to China s E-commerce market there are still some necessary requirements that must be met in order to secure a storefront on the party s platform. While foreign companies may no longer need to be registered in China, they still must be registered in their country of origin. As well, the merchant opening up the storefront must have brand ownership or be authorized to sell the brand. The table below lists the required documents for setting up a Tmall Global store. Another requirement is that products sold on the site should not be produced in China and/or should be produced with the intent of being sold outside of China (in regards to foreign sales requirements). Source: About.tmall.com 23

Other Factors The following factors are not necessary requirements, but will influence the ability of a company to secure a store front on Tmall Global. Tmall International is focusing on merchants selling childcare, health, clothing, shoes, and bags for its launch, but other product categories will be added in due course. With huge concerns over food safety in China, a selection of imported food items could be popular, (Millward, 2013). Currently the site carries some snack food, but not largely beyond that. Lastly, retailers who are preferred will also be the brand owners, have been in operation for at least two years, and have over $20 million in annual return. 105 Store Format Since Tmall Global is run out of Hong Kong, products in flagship stores (including marketplaces) and authorized stores must have appropriate Hong Kong trademark registrations. In regards to marketplace flagship stores, merchants may freely run this type of platform without special approval, but a Hong Kong Class 35 trademark is required in order to do so. Lastly, a specialty store must have evidence of product sources and product invoices. Tmall Global allows specialty store to sell up to two product categories. Payment As previously mentioned, foreign companies do not need to set up a Chinese bank account in order to operate on Tmall Global. The third-party payment platform Alipay is used on Tmall, and an overseas Alipay account can be opened. The process will involve a partner settlement bank for currency exchange into your own national currency. 106 More information can be found on at: http://about.tmall.com/tmallglobal/opening_a_store 105 Fu, Rocky. Taobao/Tmall Launch Guide for International Merchants, Incitez. December, 2013. Accessed February 2014. http://www.slideshare.net/rockyfu/ciw taobaotmallguideforbeginnersv1 106 Fu 2014 24