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World Business

  Home > World Business

China's $60 Billion E-Commerce Loophole Set To Narrow

Photographer: VCG/VCG via Getty Images


 May 19th, 2017  |  09:31 AM  |   768 views



Nature’s Way wanted to sell its dietary supplements in China, but came up against a multimillion dollar barrier.


Health supplements must undergo a registration and approval process in China that would cost the Wisconsin-based company about $100,000 per product, said James Konkle, director of international operations. With 37 products earmarked for the Chinese market, Nature’s Way would have paid $3.7 million before making its first vitamin sale. That was three years ago, and the Schwabe North America Inc. unit instead opted for an alternative route to China’s 134 billion yuan ($19 billion) vitamins and supplements market.


Known as cross-border e-commerce, the booming backdoor avenue allows Chinese consumers to buy overseas-manufactured goods online and effectively circumvent the regulatory issues that have stymied access to consumer products from cosmetics to Cognac. Faced with pressure from conventional retailers at home, and the loss of tax revenue, the government is now looking at overhauling the legal loophole.



“If you do not harmonize the rules for commercial imports and cross-border e-commerce, there is an advantage you give to companies overseas,” said Chan Wai-Chan, a retail partner at consultancy Oliver Wyman in Hong Kong. Companies that have invested in a bricks-and-mortar presence in China feel as though they’re being usurped by businesses that haven’t gone through the same expense of setting up shop, he said.


Wal-Mart Stores Inc., Costco Wholesale Corp., Aldi Stores Ltd. and Body Shop International Plc are among companies sharing in the $60 billion of sales that make up the alternative channel, and their merchandise — some of which aren’t approved for sale in shops in China — can be delivered from bonded warehouses in designated zones to consumers in as quickly as a day.


Cross-border e-commerce may triple to 15 percent of the total e-commerce market within five years if it’s not curbed by new regulations, said Xia Chenan, an Internet and digital practice analyst with McKinsey & Co. in Shanghai.


The business is so popular that new Chinese words have emerged to describe it: “haitao,” which means to buy imported items from online sites, and “daigou,” which means to have a buyer physically in a foreign country purchase items on your behalf.


While the vast grey market was formalized in early 2015 by Chinese leaders as a way to stimulate domestic consumption, there’s now a consumer groundswell — as well as online retail behemoths like Alibaba Group Holding Ltd. and JD.com Inc. — behind it. And that may create difficulty for the government as it seeks to “clarify” the rules by next January.


‘Plowing Through’


“They opened a gap and everyone started plowing through it,’’ Oliver Wyman’s Chan said. “They’ve taken the genie out of the bottle, and now they can’t put it back in.’’


One reason for the popularity is that it’s enabled consumers to buy foreign-manufactured infant milk formula, health supplements and other products from categories whose safety and integrity have been challenged by a series of food scandals the past decade. It’s also given Chinese consumers greater choice, including the ability to buy exotic produce, such as chia seeds and acai berries.


Goods sold through the route are also not subject to the myriad taxes that are levied on that same item sold through traditional channels within China, effectively allowing brands to arbitrage against themselves.


The government proposed three changes in April last year: a marginal tax increase, limits on the volume of purchases to ensure transactions are for personal use only, and a list of permissible, or “positive,” foreign products that could be bought online.


“It was growing so fast, penetrating so many different sectors and disrupting much of business in China,” said Matthew Crabbe, Mintel International Group Ltd.’s director of Asia-Pacific research. “They don’t want it to be a source of unfair competition for local retailers.”


In categories like health supplement and cosmetics, where domestic makers have been protected from foreign competitors thanks to the strict commercial import rules, the channel has wreaked havoc. Local cosmetics company Shanghai Jahwa United Co.’s Shanghai-traded shares fell about 40 percent since the cross-border e-commerce channel was formalized in early 2015, along with a drop in earnings.


The last of the government’s three-point proposal was what rankled some consumers most because it effectively signaled reliance on the government’s approved list for accepting or prohibiting foreign merchandise bought online. In other words, no more chia seeds and acai berries for the foreseeable future.


The reaction was chaotic and intense, with reports of abandoned suitcases littering airports and products abruptly pulled from online listings.


‘Knee-Jerk Reaction’


“It was kind of a knee-jerk reaction from the government: ‘Sorry if you are not on the approved product list, you are not able to sell,’” said Ron Wardle, the chief executive officer in China of ExportNow, which helps foreign brands navigate cross-border e-commerce. “They got so much international media attention from this and said, ‘Wow this is bigger than what we thought.’”


In the aftermath, the government withdrew the list a few weeks after it was announced and has been working with online retailers to come up with a more tractable solution. The next iteration of the “positive list” is slated to be released early next year.



“It should come out with plenty of time so everyone has time to adapt,” Wardle said. “If not, then customers, brands and the platforms like Tmall, JD.com -- could all be potentially impacted.”


Even the specter of a clampdown has hurt companies whose sales have been buoyed by the alternative path to the immense Chinese market. Shares of Australian vitamins-maker Blackmores Ltd. and baby formula manufacturer Bellamy Australia Ltd. have slumped since the second half of last year amid concern that sales to China won’t be sustained.


The growth of JD.com’s cross-border portal JD Worldwide “has consistently exceeded that of the overall site, and we expect that to continue for the foreseeable future,” said Josh Gartner, vice president of corporate affairs.


Alibaba Invitation


Alibaba is hosting an inaugural conference in Michigan in June to encourage cross-border sales for American small businesses. Chairman Jack Ma issued an open invitation, saying that “the demand for cross-border products is tremendous and we expect that to continue regardless of potential regulatory adjustments.”


Ma’s optimism is comforting for smaller companies like Nature’s Way, which is fully reliant on cross-border e-commerce to reach the world’s largest consumer market.


“There’s so much money to be made all around, and too much to lose all around, for anybody in the government to shut it down,’’ said Konkle, whose website in China got about 20,000 page views in April, two months after starting. “We don’t have a contingency plan. All of our eggs are in one basket.”



courtesy of BBC NEWS

by Bloomberg News


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