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Overview of the China eCommerce market

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This article provides an overview of the potential of the China eCommerce market and outlines some of the key elements that prospective cross-border retailers need to be aware of before entering it.

 

The Opportunity

 

By some measures, China now boasts the largest global economy, surpassing the US in 2014.

 

Few would deny the radical changes that have taken place in and across China over the past decade. Its exceptional growth and strategic advancement are forecasted to continue long into the future, and certainly it is a location that will continue to dominate retail headlines. Intricately connected political, socio-economic and technological developments have drastically changed the Chinese business landscape, leading to unrivalled opportunities for entrepreneurs around the world.

 

The economic turmoil in world markets around 2008 brought an end to year-on-year GDP growth rates in double figures; peaking at 14.2% in 2007. Whilst most advanced economies are now showing signs of growth once more, it isn’t the global situation affecting China’s growth rates. Domestic levels of debt, profitability of state owned enterprises and challenges on the Chinese stock markets are all affecting unemployment rates and consumer sentiment; with the merging middle classes being the worst hit. GDP growth rates are predicted to be around 6.8% in 2016 and 6.2% in 2017 according to the OECD. Although this is a slowdown, global enthusiasm for the market shouldn’t be dimmed too much; this level of growth is still the same as adding the GDP of Switzerland to the Chinese economy, every year.

 

With year-on-year retail sales growth of nearly 10.7% in 2015, a flourishing middle class with demonstrable purchasing power, rapidly expanding second- and third-tier cities and steady increases in wages and average household incomes, China should certainly be a destination on every retailer’s radar. Retailers are quickly taking notice - after the United States, China represents the European Union’s second largest trade partner and is the fastest growing market for European export. According to the latest official information, a March 2014 European Commission factsheet, EU exports to China increased by 2.9% in 2013, to reach a record € 148.1 billion; nearly doubling in the past five years.

 

It’s clearly an excellent time to enter this market: foreign products benefit from a strong brand image in China, due in part to safety scandals that have occurred in the territory over the past decades. It’s undeniable that where retailers’ expansion strategies are executed with careful preparation and research, companies are succeeding.

 

In its 2015 Business Confidence Survey, the European Chamber of Commerce in China reported that European company’s attitudes towards the Chinese market are starting to cool, with the Chinese economic slowdown, concerns about the global economy and rising costs of Chinese labour as areas of most concern. Only 58% of the businesses surveyed were optimistic about the future, down from 68% in 2014. However, for those businesses in the Consumer goods and services sector, 71% were expecting a good or substantial increase in their revenues from the Chinese market. The future continues to look bright; Chinese inbound volumes are expected to increase dramatically over the coming years.

 

With a development model focused largely on exportoriented industrialisation, China incurred a slowing growth rate as a result of the global financial crisis, leading Chinese authorities to implement a process of reform aimed at rebalancing China’s internal structure and ensuring sustainable development and more manageable growth. As a result, China has now embraced a consumption-based model of development, placing greater focus on domestic demand, services and high value-added production. These goals are in the Government’s 13th Five-Year Plan (2016-2020). With this shift of focus, opportunities for cross-border entrepreneurs are obvious and the Chinese Government is increasingly encouraging and incentivising foreign enterprise and investment.

"Online sales in 2015 reached a staggering USD 625 billion"

Online Growth

 

Levels of e-retail growth in China have been increasing dramatically since 2006, as shown by the graph below, which charts the growth of the Chinese online retail market from 2009 – 2015.

 

Online retail growth in China

Figure 1: Online retail growth in China

 

This shows the dramatic growth of the Chinese online retail market, a market that, in 2004, made up only about 0.15% of all retail, totalling RMB 4.5 billion (USD 733 mil). It’s good news for international e-retailers - online retail spending in China will continue to deliver double-digit growth, outstripping the growth of the broader market.

 

M-retail Growth

 

M-commerce has also grown dramatically in China over recent years. In 2014, m-retail registered 211.5% year-on-year growth as compared to 35.7% of PC-shopping. It is expected that the anticipated growth of m-commerce through to 2017 will be 45.7%

 

China’s marketplaces

 

China’s home-grown marketplaces occupy an impressive proportion of the Chinese eCommerce scene and are an important consideration for any prospective cross-border e-merchant. Alibaba dominates B2C and C2C eCommerce within the territory and has aspirations of surpassing Wal-Mart as the number one retail network in the world by the end of 2016.

 

Alibaba runs two main eCommerce platforms:

  • Taobao:
    Created in 2003, the Taobao marketplace is a consumer-to-consumer platform similar to eBay, where customers can post new or used goods for sale or resale. Taobao is also used as a means for merchants to sell their wares directly to consumers, and, notably, Taobao doesn’t charge commission fees on transactions. Alibaba’s Taobao is reputed to hold an 80% share of China’s C2C market.
  • Tmall:
    Formed in 2008, Tmall is a business-to-consumer platform similar to Amazon which, in 2012, accounted for around 51% of China’s B2C online sales.

 

The unique ‘mall experience’ offered enables retailers to set up their own websites within Tmall, so that they occupy virtual ‘mall space’ on the site. To display on this platform, sellers must pay a deposit, and Tmall recoups a commission on each transaction made.

 

Importantly for international sellers, a Tmall virtual shop avoids the requirement of obtaining an ICP license

 

Alibaba’s online stores together now account for roughly 80% of China’s entire e-retail market. Despite the popularity of Alibaba’s platforms, however, there is still room for competitors to gain a strong foothold. Another popular marketplace is Jingdong Mall/JD.com, formerly 360buy.com. Jingdong Mall holds around 15% of the B2C market, and is primarily focused on electronic items.

"Alibaba’s online stores together now account for roughly 80% of China’s entire e-Retail market."

Explosive Chinese eCommerce growth epitomises these impressive Chinese developments - a growth underpinned by extensive technological advances, internet and mobile penetration rates, the popularity of social media channels and the advent of third party marketplaces and payment systems. Just over ten years ago, China’s overarching success in this area would have been difficult to predict; in 2000, China’s eCommerce technology and applications were woefully behind its competitors and it had only 2.1 million internet users. Chinese payment mechanisms and physical delivery systems at this time could simply not cater to a population and territory expanse the size of China.

 

The development of these channels, and in particular the birth of home-grown third-party market platforms such as Alibaba’s Taobao and Tmall, however, have spurred on a remarkable change: China has now become the largest eCommerce market in the world, with internet users reaching over 668 million by the end of 2015 and eCommerce revenue growth from 2009-2012 hitting over 70% compounded annually.

 

In China, online sales in 2015 reached a staggering USD 625 billion. By 2020, China’s eCommerce market is anticipated to be larger than those of the US, Japan, Germany, the UK and France combined, if it hasn’t already.

 

Despite these vast opportunities, China has been heralded as a notoriously challenging market to break into, due to - amongst other things - its fragmentation, complicated business practices and bureaucracy and a frequently changing and regionally inconsistent regulatory regime. Overlapping responsibilities, delayed processing times and governmental red tape are all-too-often encountered issues. Alongside these problems, significant cultural and operational challenges persist; the Chinese language is amongst the most difficult to learn and the majority of Chinese people speak little or no English. Confucian cultural aspects also still invade the business landscape, with concepts such as ‘guanxi’ (relationships) and ‘face’ (respect) still playing an important role in modern China.

 

China is also undeniably a territory that requires strong connections on the ground, and stringent licensing and product specification requirements promise to complicate an aspiring e-retailer’s journey. Foreign retailers may need to acquire Chinese business licences before they begin trading, so prior organisation and research is essential. Product specification requirements and procedures are also complicated and time-consuming. Importantly these hurdles don’t just apply to retailers exporting goods to China - there are complications to cross-border trade even if a retailer manufactures its products within the borders.

 

That being said, launching retail operations in China is, over time, becoming easier, through there is still a long way to go. With China’s acceptance into the World Trade Organisation, China’s convoluted bureaucracy and business practices promise to improve, one example being China aligning its tariffs on specific products in accordance with WTO regulations. The World Bank in its Doing Business report has also reported that since 2005, China has made vast strides in the administration related to starting a business, obtaining credit and paying taxes.

Download China Cross-Border eCommerce Country Guide

This article provides an overview of the China eCommerce market – we have produced a full country guide covering in-depth information on multiple aspects of trading into this territory including logistics, payments, legal framework and marketing.

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Further details on this market:

Marketing strategies for the China eCommerce market

Marketing strategies for the China eCommerce market

Marketing strategies for the China eCommerce market
Popular payment methods in the China eCommerce market

Popular payment methods in the China eCommerce market

Popular payment methods in the China eCommerce market
Legal framework & regulation in the China eCommerce market

Legal framework & regulation in the China eCommerce market

Legal framework & regulation in the China eCommerce market
Logistics in the China eCommerce market

Logistics in the China eCommerce market

Logistics in the China eCommerce market
Optimising the customer experience in the China eCommerce market

Optimising the customer experience in the China eCommerce market

Optimising the customer experience in the China eCommerce market

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