China’s Ecommerce: Choosing the right third party

By Dezan Shira & Associates

With Ecommerce exploding across China, businesses from around the world are flocking to the fray. According to a study by Accenture and AliResearch, China is expected to become the largest cross-border B2C market in the world by 2020, with more than 200 million shoppers purchasing $245 billion worth of imported goods online.

Access to this tremendous market is complicated by the need to choose a third-party agency that offers international companies that don’t have a physical presence in China access to Chinese Ecommerce platforms, also known as a Tmall Partner or Trusted Partner (TP).

To create a presence on Tmall Global, the cross-border version of China’s largest B2C online marketplace, companies must be invited by Tmall or have a TP lobby for an application. Because of this limitation, and the rapid proliferation of China’s ecommerce market, a myriad of TPs have recently emerged recently to capitalize on this lucrative business.

Many organizations offer an array of services and expertise, but most lack extensive track records, which makes selecting a TP anything but easy. When expanding into China’s dynamic Ecommerce market, choosing a trustworthy TP is essential to connect with discerning Chinese consumers and avoid squandering resources.

What is TP Certification?

E-commerce giant Alibaba’s Tmall Global launched in 2013 to offer Chinese customers access to foreign brands that do not have a physical presence in China. The attractiveness of foreign brands for Chinese consumers lies in product trustworthiness and quality. Tmall Global established its invitation and TP application system to filter out counterfeiters and disreputable companies to ensure quality control and consumer confidence.

Tmall and other ecommerce platforms, such as Jingdong, certify TPs if they meet certain conditions. Certification depends on the platform’s individual standards, not an official government designation. To qualify, TPs must have cross-border ecommerce and logistics experience, a multilingual staff, and an ERP system and IT interface integration capability. Additional qualifications include established international offices and the capacity for overseas business development, as well as owning cross-border warehousing. While the process ensures a certain degree of utility and reduces the number of fly-by-night agencies, certification alone is no guarantee of quality or trustworthiness.

How to Choose a TP

Before choosing a TP, investors should have a clear market-entry strategy. A company’s size, reputation, industry, region of origin, and long term strategy need to be examined before making the move to the Chinese ecommerce market.

It is important to choose a TP with extensive experience in the investor’s industry, as it should have an understanding of the regulations governing particular types of products. For example, a TP specializing in cosmetics should have knowledge of the rules concerning government certification of such products, while one in food products would have experience in storing and distributing perishable goods.

Similarly, TPs active in particular regions should have in depth knowledge of the regulations, supply chains, and business cultures of specific countries, and provide unique language skills and support systems. An effective way to identify a trustworthy TP is through recommendations from other companies in a common industry or region. Further, because Tmall Global and other platforms only accept companies that meet size and financing requirements, it is often practical for smaller companies from the same industry and region— such as Australian dairy farmers—to band together and share a marketplace space.

Scope of Services

Many TPs offer include business strategy development, industry and competitor intelligence, digital marketing, sales promotion, and brick-and-mortar establishment services. These options can be helpful for businesses in need of additional services, as they offer integrated assistance through a single point of contact with experience in China. However, it is important to keep in mind that, while TPs may offer a wide range of services, many have limited experience in these fields and are often not qualified to answer inquiries in specialized areas, such as law and taxation.

Costs and Presence

An investor expanding into China must budget the extensive costs of entering a new market. Alibaba promotes Tmall Global as a “fast track into China,” and many companies see ecommerce as a way to test drive products in a market before committing to a physical presence. However, investors often underestimate the costs of establishing an ecommerce storefront, such as the costs associated with engaging a TP. In many cases, companies are entirely unaware of the need to enlist a TP.

TPs generally charge sales commission in addition to quarterly service fees as incentive to provide effective service. Engaging a TP can cost RMB 1 million (US $154,000) per year, and can be several times that amount depending on the kinds of services provided and the amount of commission charged. TP rates vary depending on size, reputation, services, and unique expertise. The costs of each ecommerce platform are additional. For instance, Tmall Global requires a $25,000 security deposit, a $5,000 annual fee, and a 0.5 to 5 percent commission. And success is not guaranteed: the Wall Street Journal reported  that about 70 percent of stores on Tmall Global have “almost no volume.”

To limit the high cost of cross-border ecommerce, investors can choose TPs that support alternative platforms to ease into the market. In addition to premium flagship stores, where a brand directly sells its own products, many TPs support authorized and specialty stores. The authorized store model involves a brand selling products directly to a TP, which then resells the goods on its own storefront or through another authorized reseller. Jingdong offers a direct sales model where it buys inventory from a brand and resells the products. A specialty store is a more informal option, which uses C2C platforms such as Taobao and WeChat to resell products. Engaging TPs with the infrastructure to provide these alternative models allows businesses to experiment with China’s ecommerce market before committing to a full-fledged investment.

Key Takeaways

Selecting a TP is a challenging task for foreign investors jumping into China’s Ecommerce market. Before entering the market, investors should have a clear understanding of how a TP can complement their existing infrastructure and capabilities. Ideally, investors should not rely on TPs to form their Ecommerce strategy, but enlist a TP that fits into their pre-existing design.

This article was first published on China Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.For inquiries, please email us at [email protected].