Cross-Border E-commerce: Is Your Brand Ready to Enter China?

A friend of mine from Vancouver Canada was so excited to hear that cross-border e-commerce is a good opportunity for foreign brands to enter the Chinese market even without setting up a local business entity in China.  

Stacey is the Chief Scientific Formulator of Planet Earth Supplements (or PES) which is a healthcare brand selling extremely good in North America and Europe. She told me that the health supplements, made with pure and natural ingredients, are planted on their own organic farms - probably the only natural supplement company in the world to develop products in such traditional way. She expressed strong confidence that natural herbal remedies should be well accepted by Chinese people.

A good product sells itself? It is widely believed that merely making one’s brand available to China’s enormous consumer base will automatically translate into sales. This perception is often based on the outdated idea that the Chinese consumers are eager to buy any products simply because they are ‘Western’.  However, due to the advent of cross-border e-commerce, a large number of foreign merchants and brands have already entered China, creating an unprecedented competitiveness and over-saturation of foreign products in the Chinese online shopping.

I discussed with Stacey about the opportunities and risks of entering China, and I think it might be help if you are thinking about a similar issue.

Growth of Cross-Border E-commerce In China

Foreign companies are often tempted when presented with the figures about China’s quickly expanding consumer population, though the growth numbers only reflect a part of the reality of taking one’s business to China.

According to a study released by eMarketer, the scale of China’s cross-border e-commerce retail sales was 110 billion USD in 2017.  By 2020, 292 million Chinese online consumers will purchase goods from abroad, with sales expected to surpass 157 billion USD.

In emerging markets, especially with a huge domestic market such as China, a vastly growing middle class with increased exposure to the internet and foreign products, which are often considered of higher quality and status, the Chinese demand for overseas goods steadily increases every year. Chinese consumers directly purchase from overseas websites or domestic online marketplaces, such as Daigou (代购）or Haitao (海淘）to purchase these foreign products that are often unavailable or excessively expensive in China.

This process of buying overseas products directly from foreign retailers and suppliers via the internet is called cross-border e-commerce (or simply CBEC).

Chinese consumers often feel that products purchased via cross-border e-commerce platforms guarantee a higher level of quality and protection against counterfeit goods, especially infant milk formula, healthcare products, cosmetic products, handbags, etc.

Consequently, cross-border e-commerce’s popularity is growing exponentially in China. There is no denying that the opportunities for foreign brands are unlimited, as long as the demand for Chinese consumers to seek genuine, high-quality international products is not stop.

Challenges Foreign Companies Face In China’s Cross-Border E-Commerce

It is impossible to talk about e-commerce in China without mentioning the two giants: Alibaba’s Taobao/Tmall and JD.com, which together dominant almost 82% market share of B2C e-commerce.  Both Tmall and JD.com have their own cross-border platforms enabling foreign businesses to sell directly to China: Tmall Global and JD Worldwide. On top of Tmall and JD, smaller & newer players such as Kaola, VIP.com, YangMaTou and XiaoHongShu are also taking on a significant share of the market. 

CBEC seems to be a relatively low cost entry strategy compared to traditional general trade methods, in terms of trial-and-error costs and shorter value chains.  In fact, selling cross-border still requires high investments, depending on which platforms you select. 

For example, Tmall Global allows foreign brands without a Chinese business entity to sell to consumers directly by opening their exclusive flagship stores. Though, since 2015 brand flagship store registration for Tmall Global is on invitation-only basis, with the following admission priorities:

• A well-known international brand without official presence in China and search volume is large in China, especially on Taobao.

• Merchants with annual turnover of at least $100,000,000 (yes, that’s 100 million USD).

• Require to work with an authorized third party service providers, called Tmall Partner or TP who will help operate your store and of course charge you management fee and take a share of your revenue.

Suggested by TP experts, you also need to invest $1 million of marketing expenses in the first year due to fierce competitions in the e-commerce platform.

Therefore, the investment of CBEC is actually not very low. 

It is recommended that foreign brands should conduct a more in-depth market research on  the general demand of their products, consumer buying behavior, brand preferences, and competitive analysis in China's e-commerce market, before investing in establishing an e-commerce presence.

Free Tools That Can Help You Analyze China Market Entry Strategy

If you don't have enough budget to hire a professional research company, or if you just want to approximate the possibility of entering China, there are some simple tools to help you with some preliminary market research. You may need to seek help from Chinese colleague or acquaintance because most of them are written in Chinese.

Back to the example of Stacey, there are three key issues that she is concerned about entering the Chinese market:

1. Are Chinese people frequently buying health products abroad through cross-border e-commerce?  Who are they?
2. Are there any existing brands doing well in the cross-border e-commerce?
3. What kind of health products are selling well in the cross-border e-commerce?

Is there any way to help Stacy get the answers above without having to hire a research agency at a high cost? In fact, there is a lot of free information available on the Internet, which is more than enough to provide a preliminary understanding of the market. I will introduce several useful and free tools to you:

Tool #1: Free Market Research Reports

Stacey has two best-selling healthcare products made in Canada.  Trace Mineral Drops is a product that helps anti-aging and improves immune function and memory, while Mood Effex is a natural mood enhancers made by an extract used for centuries in Chinese and Ayurvedic medicine.  

For the sake of simplicity, we first examine the overall cross-border landscape of Chinese “healthcare” products. Below are some of the websites that regularly publish free and paid market research reports.

• China Internet Network Information Center
• Alibaba’s news hub - Alizila 
• iResearch
• iTrustdata  
• iiMedia 
• Emarketer
• Statista

According to the recent report of iResearch, 32.9% cross-border online shoppers frequently purchase healthcare products while 33.5% of them want to buy in the future. In addition, cross-border online shoppers prefer healthcare products from Canada, US, Australia and New Zealand.  

That's a good sign for Stacey, isn't it?

Of course, not all research reports are free and you need to pay if you want to read the full report. Sometimes on LinkedIn you may also find some friends sharing paid research reports.

Tool #2: Daigou Sales 

Daigou (代购) refers to a person outside China who buys products abroad and sells in China via WeChat or B2C marketplaces like Taobao.

Daigou is a good indicator of your potential sales in China. The sales volume of daigou implies the popularity of similar products, and you can thereafter roughly estimate the potential demand or even sales forecast based on the data of the competitors. You can also obtain the following information that is useful for your go-to-market strategies:

1. Online sales volume estimation
2. Pricing strategies
3. Product offerings and selling points
4. Promotions
5. Delivery policies
6. Users’ comments

After a preliminary study of daigou sales on the major CBEC platforms, we found that both mineral drops and PES have very limited search presence and only few brands are selling in China, which means that PES products have very low brand awareness in China and Stacey thus needs to invest a huge amount of marketing expenses to build the brand and to educate the market on product benefits.

Tool #3: Baidu Index

For some niche products, such as PES’s mineral drops, low daigou sales doesn't necessarily mean that the product has no demand in China.  Instead of using mineral drops as keywords, we check the search volume of its product benefits, such as healthcare products, anti-aging and immune improvement in order to study what Chinese people are looking for recently about healthcare products.

In China, Baidu is still the dominant leader of search engines with 80% of market share, followed by Sogou with 6.63% and 360 Search 3.27% in 2018.

Baidu Index is a free tool to identify the search trends behind a keyword, brand, or industry that Chinese people are searching for.  It provides insight on the relative volume of searches for specific keywords on Baidu based on the behavioral data generated. Its results can be mined for actionable insights, such as historical search trend, seasonality of search trend, users interests & needs, search amount in regions, etc.

We input the three Chinese keywords: healthcare products, anti-aging and immune system on Baidu Index, and here are some interesting findings:

1. The search amount for these three keywords are quite stable over the year.
2. The peak seasons for healthcare products are spring (April) and summer (June to September).
3. No search peak is found on Double 11 sales period, except for anti-aging.
4. Many people are searching for healthcare products from US in September. 
5. People from Beijing, Shanghai and Hangzhou have the highest search for healthcare products (not surprised to find such a result.)
6. Most people who search for healthcare products are middle-aged and the most search are from 30-39 years old, followed by 40-49 years old. On the contrary, the search volume is relatively small for people over 50 years old.
7. The search volume for male is relatively higher whilst female care more about anti-aging.

Tool #4: WeChat Index

In addition, you can use WeChat Index to understand what Chinese people are talking about or searching for.

WeChat is described as one of the world's most powerful apps by Forbes, with over 1 billion monthly active users. Chinese users on average spend over three hours a day on WeChat versus just 20 minutes Americans spend on Facebook.

WeChat Index is a free tool integrating search and browsing behavior data on WeChat and Official Accounts to show the search trend on WeChat platform.

WeChat Index displays the trend for the past 7 days, 30 days, or up to 90 days. You can use this tool to see the trends of your brand, products, events, and etc.

Scan the QR code of this mini-program by your WeChat account. Simply inputing the keywords, you can get a chart like this:

The China Market: Opportunities and Risks

As more and more foreign companies seek business opportunities and advantages of the booming cross border e-commerce in China, those who are willing to venture into the maze of e-marketplaces tend to underestimate its complexity. Foreign brands are advised to conduct more in-depth market research before deciding to invest in establishing e-commerce in China.

Simple tools such as industry research reports, Daigou sales, Baidu index and WeChat index can help you make a preliminary study of market demand and even predict your potential sales estimates. 

All businesses have associated with risks.  It is recommended that you use the “lean startup” approach to start your business in China with as little investment as possible. If you already have friends in China, consider shipping some quantity of your products from your home country to China and try to sell them through social media, such as WeChat Official Account.

Further reading: Enter China Market by a China-accessible WeChat Official Account with Little Cost

You can also test your product’s sales by partnering with influencers, participating in local pop-up roadshows or trade shows.  Once you find that some products are selling well, you can decide to further expand your sales and start deploying cross-border e-commerce in China.

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