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KEY POINTS

Chinese shoppers’ appetite for imported products continues to grow apace. We review the current state of the cross-border e-commerce market, note the factors supporting demand and look at forthcoming tax changes that will impact cross-border sales.

  • E-commerce imports into China more than doubled in 2017, according to the country’s customs authority, the General Administration of Customs.
  • Consumer packaged goods (CPG) categories such as food, baby products and beauty products consistently top the rankings of what Chinese shoppers buy from international sellers online.
  • The Chinese government has repeatedly delayed implementing tax changes that would make cross-border shopping less favorable to consumers. However, these changes, now slated for the end of 2018, could soften growth in cross-border e-commerce sales slightly in 2019.
  • Despite this potential cloud on the horizon, we see sustained opportunities for Western retailers to cater to Chinese demand for trusted brands in certain CPG categories.
  • We believe the underlying drivers of cross-border e-commerce remain solid. Chinese consumers will continue to seek out trusted brands and retailers as a guarantee of authenticity, particularly in CPG categories, and rising incomes mean that more and more Chinese consumers are being pulled into the catchment for cross-border e-commerce purchases each year.

Introduction

Millions of China’s shoppers are looking to buy international brands—and they are turning to online marketplaces to buy directly from overseas brands and retailers. Chinese demand for Western brands in everyday categories such as food and personal care products as well as durable goods such as apparel and electronics is fueling a boom in cross-border online purchases.

In this report, we review the current state of China’s cross-border e-commerce market, note the factors supporting demand and look at potential headwinds in the shape of looming tax changes.

We have converted dollar figures in this report at average 2017 exchange rates.

Two Ways to Serve Cross-Border E-Commerce Demand

We begin by noting two models that can be used to serve consumer demand for imported goods purchased online: direct mail and bonded area.

The direct-mail model sees products dispatched from overseas retailers directly to customers as they order them, as outlined below.

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The bonded-area model sees products shipped in bulk to China for storing in a bonded warehouse, from which they are dispatched as and when customers place orders. 

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E-Commerce Imports Doubled in 2017, With the Average Purchase Value of Just $20

Chinese demand for imported international brands has created a huge, high-growth market for cross-border e-commerce. 

  • China’s General Administration of Customs reported that e-commerce imports to the country grew by 116% year over in 2017 to ¥56.6 billion ($8.4 billion). This absolute figure looks low relative to estimates published by a number of research firms, and relative to the scale of total Chinese e-commerce. However, given the customs figure is based on imports of parcels for individual consumers, we assume that it excludes purchases of those orders fulfilled from bonded warehouses (the second e-commerce model discussed earlier), where goods are first imported in bulk.  
  • Assuming that this figure is calculated based on retail selling prices, it is equivalent to just less than 2% of the ¥3.1 trillion ($454 billion) Chinese online retail market, per Euromonitor International. 
  • Other sources cite much higher cross-border e-commerce sales: eMarketer, for instance, estimates China’s cross-border e-commerce market size at $115.5 billion in 2018. However, eMarketer also records lower growth than the General Administration of Customs does: eMarketer estimates the market grew by 27.6% in 2017 and forecasts a 15.3% year-over-year rise in cross-border e-commerce sales for 2018. 
  • Based on manifest data reported by the General Administration of Customs, we estimate that the average value of a China cross-border e-commerce purchase was just ¥137 ($20) in 2017. This average includes exports from China as well as imports to China. 
  • Some 24% of China’s digital shoppers will make a cross-border purchase this year, according to eMarketer’s estimates. 

Supply and Demand Boosting Cross-Border E-Commerce Sales

Growth of the cross-border e-commerce market enjoys support in a number of ways, on both the supply and demand side. 

Supply

Various government initiatives are easing the path for e-commerce firms to sell into and out of China. Cross-border e-commerce pilot zones were introduced in 2015, with a trial in Hangzhou. The model was then extended to a further 12 cities, including Shanghai, in 2016. 

In September 2017, a China State Council executive meeting chaired by Premier Li Keqiang decided to extend the country’s cross-border e-commerce pilot zones to further cities, which enjoy good infrastructure and strong trade and e-commerce development potential. 

The cross-border e-commerce pilot zones incorporate comprehensive online service platforms such as customs clearance, logistics, tax refunds, payments, fund-raising and risk-control services. Offline, the zones include industrial parks providing comprehensive supply-chain services including bonded warehouses. The zones support exports as well as imports. 

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Demand

Growing Chinese demand for imported goods is supported in the following ways: 

  • It is often cheaper for Chinese shoppers to buy Western brands from cross-border e-commerce platforms than to buy them domestically at brick-and-mortar shops. However, as we show later, some of the tax advantages of buying from overseas sellers are set to be eliminated after the end of 2018. 
  • The continuing increase in disposable incomes and living standards in China is pulling ever more consumers into the market for imported brands. 
  • Following years of concerns over counterfeit brands and the safety of some domestic products, many Chinese consumers perceive overseas brands to be of higher quality. As we note later, CPG categories such as food, baby products and beauty products are highly popular categories among cross-border e-commerce shoppers. 

The strong growth in sales of annual shopping festivals such as Alibaba’s Singles’ Day festival is a further contributing factor to the expansion of the cross-border e-commerce market. Spectacular events from major e-commerce platforms that host international sellers drive peaks in cross-border e-commerce shopping. 

  • Singles’ Day (11.11): Alibaba Group’s Singles’ Day is the most famous online shopping festival in China. Last year, the company reported selling ¥168.2 billion ($25.0 billion) worth of products on November 11, up 39% year over year. The General Administration of Customs reported processing a total of 16.2 million e-commerce orders on November 11, 2017 (this figure presumably excludes those orders that were placed on November 11 and arrived thereafter). 
  • 6:18: Following Alibaba’s lead, rival JD.com launched its 6.18 shopping festival. The 18-day event, which runs from June 1 to June 18 each year, generated sales of $17.6 billion in 2017, up “over 50%” year over year, according to the company. 
  • 8.18: Suning’s 8.18 shopping festival, held on August 18, was launched in 2014. The company did not disclose sales for last year’s event, although it did note that online sales grew by 263% and offline sales increased by 107% on the day. 
  • 12.8: Vipshop hosts its 12.8 festival on December 8.

According to cross-border e-commerce firm Azoya, demand for e-commerce imports is growing faster in lower-tier cities and regions than in their higher-tier peers. 

What Are Chinese Shoppers Buying from Other Countries?

Chinese shoppers are not just seeking aspirational names in fashion and technology from international brands; they are also looking to buy everyday items such as food and personal care products. 

Reflecting the demand for safe, trusted brands, some of the most popular categories for cross-border e-commerce purchases are those where brand authenticity and product quality are important. There is particular demand among China’s cross-border e-commerce shoppers for groceries and other CPGs, including beauty and personal care products, mother and baby items, and food and healthcare products.

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According to Azoya, the top categories bought by Chinese cross-border e-commerce shoppers in the second and third quarters of 2017 were as follows:

  • US: Mother and baby products, health and nutrition, and apparel topped the list from US retailers.
  • UK: Beauty and cosmetics, apparel and sportswear, and health and nutrition were the top categories purchased from the UK.
  • Germany: Chinese shoppers tended to buy mother and baby products, health and nutrition, and beauty and personal care the most when buying from Germany.
  • South Korea: Topping the list of products from Korea were beauty and cosmetics, apparel and personal care items. 
  • Japan: Among those buying from Japan, personal care, beauty and cosmetics, and health and nutrition were the most popular categories. 

Further underscoring the importance of CPGs to cross-border e-commerce, Hangzhou Customs reported that the most popular types of products imported into the Hangzhou cross-border e-commerce pilot zone in 2017 were milk powder, food and skincare products. 

Our conversations with industry specialists have reinforced our view of the importance of brand authenticity when Chinese shoppers are buying CPGs: shoppers turn to trusted international retailers and brands to avoid the risk of counterfeits in categories such as beauty. 

Which Platforms Are Chinese Cross-Border E-Commerce Shoppers Using?

The most popular option for buying imported goods online is Chinese websites that feature imported goods and international sellers—for example, Tmall Global. Some cross-border e-commerce shoppers buy on international marketplace sites, but this is a less popular option, as we show in the chart below. 

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A 2017 survey by Mintel also recorded a lead for domestic sites. It found that 73% of Chinese cross-border e-commerce shoppers had bought on domestic websites and 27% had bought on overseas retail websites in the preceding 12 months. 

Western Retailers Tap Demand for CPGs on Marketplace Sites

We have already seen a number of American and European grocery-focused retailers tap this demand through China’s major e-commerce platforms. Alibaba Group’s Tmall Global platform styles itself as the “gateway to China,” and it has been the first choice for many international brands and retailers looking to sell in China, including Aldi Süd and Costco. At the World Retail Congress 2018 in April, Jet Jing, President of Tmall, noted that 18,000 international brands have sold on Tmall in the past few years. 

Tmall’s major rival, JD.com, offers retailers cross-border selling through its JD Worldwide site. Walmart is one of the major US retailers that sells on the platform, following its partnership with JD.com in 2016.

Western retailers’ product offering on Tmall Global is, however, often very limited. For example, when we reviewed Aldi Süd’s offering on Tmall Global in April 2018, it was selling only 243 products, mainly in grocery categories. When we reviewed Costco’s offering on the same site in May 2018, we recorded just 25 products for sale. These exclude products offered on Tmall’s domestic site. 

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What Chinese Shoppers Look for When Choosing Where to Buy Imported Goods

When choosing where to buy imported goods online, Chinese consumers prioritize product quality and convenience of the shopping experience. According to a 2017 survey by Mintel, proof of the quality of products was cited as the top factor when choosing which site to buy from by Chinese cross-border e-commerce shoppers. The ability to use familiar payment systems and detailed product information were other prominent factors.

These kinds of factors boost the appeal of the major, established sites such as Tmall Global and JD Worldwide: sites such as these offer a Chinese-language interface, familiar payment options and a range of trusted retailers and brand names. 

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Looming Tax Changes Represent a Potential Headwind

Chinese shoppers have traditionally enjoyed beneficial tax rates on cross-border e-commerce purchases. However, the long-delayed tax changes could make buying from overseas sellers less appealing to Chinese consumers in 2019. 

Cross-border e-commerce purchases deemed to be a “reasonable quantity for personal use” are treated as personal parcels subject to a parcel tax at a rate of 10%–50%, depending on the type of goods. Moreover, the parcel tax is waived if the payable tax was lower than ¥50 ($7.42). The tariffs are usually lower than the tax rates paid when shopping domestically. 

As we show in the table below, changes announced in April 2016 were designed to replace these with generally less-favorable taxes. 

However, the implementation of these changes in cross-border e-commerce taxation has been repeatedly delayed. The most recent postponement, announced by China’s State Council in September 2017, extended the transition phase until the end of 2018, from its previously stated end of 2017. Expectations of higher import taxes may have contributed some of the growth in cross-border e-commercesales in 2017, as shoppers rushed to beat the deadline. 

Assuming there are no further delays to these tax reforms, we could see a slight headwind to growth in cross-border e-commerce sales in 2019. The counterpoint is that the new tax rates applied where customs can access electronic information on orders will still be lower than those applied to domestic retail purchases; and for imports where the customs authorities cannot access electronic order information, shoppers will continue to pay parcel taxes at roughly similar rates to those imposed currently (see the table below). 

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We show the current parcel tax rates for personal consumption items below.

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Key Takeaways

E-commerce imports to China more than doubled in 2017, according to China’s General Administration of Customs, and we expect to see sustained strong growth in cross-border online sales in the near term. 

Tax changes set to be implemented at the end of 2018 are expected to reduce the tax advantages of cross-border e-commerce to Chinese consumers. However, these shoppers will still pay value-added tax and consumption tax at rates lower than they would for domestic purchases; and where the customs authorities have no access to electronic information on the imported orders, shoppers will pay parcel taxes at rates essentialy similar to those they pay now. 

Low prices are just one factor driving shoppers to buy across borders, and we think a number of other underlying drivers will sustain growth, particularly for CPG categories. Chinese consumers are likely to continue to seek trusted brands and retailers as a guarantee of authenticity, and rising incomes mean more and more Chinese consumers are being pulled into the catchment for cross-border online purchases each year. 

We expect more brands and retailers to enter the Chinese market via cross-border e-commerce platforms, and for those already selling into China, to build out their product offerings to tap this growing demand.

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