Success and Growing Pains in China’s E-commerce Era

September 2, 2015

Owen Haacke

China’s e-commerce market is expected to be larger than the combined e-commerce markets of the United States, Britain, Japan, Germany, and France by the year 2020. As consumers embrace online shopping as the primary way to purchase everything from luxury cosmetics to groceries and children’s toys, Chinese companies are rushing to sell through their own websites, T-Mall, and assorted e-commerce channels. For US companies, the online sales market in China presents a number of opportunities to expand their business and sales. However, with regulation of China’s e-commerce trailing far behind the rapid pace of growth, foreign companies have reason to be concerned about a number of issues related to online sales in China, such as choosing the right e-commerce platform, ensuring compliance with government policies, and protecting intellectual property.

A widening sales portal

While the rest of the world raced to make full use of online sales channels in the early 2000s, China had few Internet users and even fewer online businesses in 2000. Things have changed rapidly in the past decade. In 2010, foreign companies were first allowed to sell their own products directly to customers online, and have been experiencing success in the market. According to a notice released by the Ministry of Industry and Information Technology (MIIT), foreign companies were permitted to invest fully in their own data and transaction processing system in 2014—meaning that a foreign company essentially can fully own its own platform to sell products online. Other e-commerce related businesses such as setting up call centers to provide customer support can also be fully owned by foreign companies. However, a wholly foreign-owned e-commerce business in China looking to sell other companies’ products on its own platform would need to register as a foreign-invested value added telecom enterprise; this sector is currently restricted in China’s Catalogue Guiding Foreign Investment.

Licensing has also been a challenge for companies setting up their own e-commerce platforms to sell other companies’ goods, which can currently only be done in the form of a joint venture. Getting the licensing to sell a company’s own products online can be challenging as well, as companies must obtain an operating permit from MIIT—a commercial Internet content provider (ICP) license—and then an online data processing and transaction processing services license. Recent reforms aim to simplify this process for companies selling their own products online, but companies setting up their own e-commerce platforms must still obtain a value-added telecom license, which would be possible for foreign investors in certain sectors such as data processing, but in practice can be difficult to obtain.

A progressing regulatory regime

A major concern regarding e-commerce platforms, companies note, is the lack of regulatory clarification at the central level. For now, China has no national e-commerce laws, but relies on policies from a number of different agencies—and these policies are often interpreted differently by local governments and pilots. Understanding what is and isn’t legal can be a challenge for foreign and Chinese companies alike.

With the addition of cross-border e-commerce pilots—which allow companies a direct mailing platform and are governed by a nascent regulatory platform—companies have raised concerns about regulation for these sales channels. Currently the main national regulation for China’s cross-border e-commerce platforms is the General Administration of Customs (GAC) Announcement on the Supervision of Entry/Exit Goods in Cross-Border E-Commerce. But there are concerns that this regulation will not be enforced equally by other agencies, and agencies will use their own definitions different from Customs—for example, as one USCBC member company noted, the Ministry of Transportation may adopt a different definition. Reports have indicated a possible nationwide “e-commerce law” draft may be completed this year that will adopt protocols in place among China’s major e-commerce players, such as T-Mall and Jingdong (JD.com).

Other areas lack clarity for now, but new regulations on the way may not make e-commerce any simpler to set up in China:

  • Data regulations  Companies selling their products online rely on consumer data to make key marketing decisions. Draft legislation in the works, including the Criminal Law, Cybersecurity Law, and Counterterror Law, could impose restrictions on how companies can use data collected from online customers, adding new challenges for companies setting up their own platforms or using sales data accumulated through online sales.

  • Consolidation  The Shanghai FTZ recently established a consolidated approval system in July, an effort to better manage data on products being imported, with information then shared with the GAC and other regulators for expedited approvals. However, this platform requires companies to set up the government sales tracking software that utilizes the Shanghai e-commerce platform Kuajingtong, which simultaneously reports to regulators. This platform, however, does not have the widespread audience or popularity of T-Mall or JD.com.

  • Intellectual property concerns  Companies continue to face serious IP concerns, with online sales of counterfeit products in China undermining sales of many types of goods. While companies like Alibaba have “good faith” programs intended to help companies bring down counterfeiters and IP infringers, but currently lack the capacity to handle individual inquiries from its broad customer base. Some companies have noted that consolidation of sales data through the Kuajingtong platform could be a useful resource for companies looking to track illegitimate product sales and support anti-counterfeiting efforts. However, there is no indication to date that companies have been using this information to serve as evidence in litigation.

  • Uneven practices  In March 2014, GAC starting setting up expedited cross-border platform pilots. Currently there are a nine pilot zones across China, in Ningbo, Fujian, Guangzhou, Shanghai, Shenzhen, Chongqing, Hangzhou, Zhengzhou, and Qingdao. However, companies note that duty calculation, clearance services, and general services differ—sometimes quite significantly—among jurisdictions. And other efforts to standardize and regulate e-commerce may impose new inspection requirements. For example, the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) is planning to release detailed regulations concerning the inspection of imported food and cosmetics in order to standardize cross-border e-commerce trade and procedures—a step in the right direction for further clarification on what companies can’t and can do, but potentially adding another layer of regulatory inspections.

Central government support

The central government seems committed to further opening China’s e-commerce market for foreign companies. According to a June 10 executive meeting of the State Council hosted by Premier Li Keqiang, the State Council will promote the rapid development of cross-border e-commerce by optimizing the Customs clearance process, implementing export tax rebate policies for e-commerce retail goods, and encouraging and guiding e-commerce enterprises. On June 20, the State Council published a wider initiative to push China’s e-commerce champions to expand overseas, the Opinions on Promoting the Rapid and Healthy Development of E-Commerce, noting that the main goal of developing e-commerce is supporting domestic enterprises to participate in international trade. The Opinions note that the central government will support establishing public platforms and trade service enterprises to encourage cooperation between domestic and e-commerce firms abroad.

China’s e-commerce is likely to continue to play an important part in the economy. Estimates vary, though several reports peg the country’s 2015 e-commerce sector at around $470 billion, making China the world’s largest e-commerce market. China’s Internet users and online shoppers are projected to rise steeply over the next few years, with the country’s e-commerce sales projected to reach $2 trillion by 2019. According to official statements, China aims to become a superpower in e-commerce by the end of 2020 in overseas markets by coordinating the development of import and export, business-to-business (B2B), business-to-consumer (B2C) and various business models, as well as boosting cross-border e-commerce and traditional international trade.

Best practices

Navigating the online maze requires some due diligence. US-China Business Council member companies shared some insights on how to enter China’s e-commerce sector effectively:

  • Choose the right model  As e-commerce continues to expand in China’s economy, companies should make sure they take the right approach, be it selling through platforms like T-Mall, selling directly to customers, or selling through their own website. For example, smaller companies that do not have a presence in China may benefit from participating in cross-border online sales using the M2C model (foreign supplier shipping to local e-commerce platform model), whereas larger companies with a presence in China may consider shipping products to China and selling through a variety of platforms on their own.

  • Monitor compliance issues  Given the changing regulatory environment, companies should remain diligent in tracking e-commerce regulations to ensure they are in compliance with local and central government policies and regulations. Paying close attention to the changing regulatory environment will be important for companies looking at the most suitable option for their business model.

  • Engage with regulators  To understand e-commerce policies and requirements, companies should proactively engage with local regulators such as Customs, AQSIQ, and the Administration of Industry and Commerce, along with intellectual property officials. For example, in Zhejiang province, home to the Alibaba and T-Mall platforms, local officials have actively engaged with companies through numerous platforms to discuss concerns such as intellectual property enforcement.

(Photo by StormKatt via Flickr)