Commentary
Online sales in China continue to grow at a remarkable rate. Chinese nationals that have holidayed, studied, and shared social media experiences with friends about New Zealand have a growing affinity towards premium Kiwi produce. New Zealand companies can access this increasingly affluent and international Chinese consumer via different channels, including B2C cross-border. The B2C cross-border business model selected will lead to different investment considerations and profit outcomes.The article below explores this point in more detail.
Market Profile
China online shopping is enjoying an impressive year-on-year growth rate of in excess of 20% as China’s internet population surges over 650 million, most of whom access the internet via mobile phones. The total market size for online retail is expected to exceed RMB 1 trillion by 2019.Consumers are using social networks such as WeChat to discover products, make purchases, and more importantly, share their experiences.
Online shopping now comprises approximately 10% of total retail sales of consumer goods and B2C operators are rapidly broadening commodity categories. For example, products to feature heavily in future online sales will include fresh food, automobiles, furniture, and pharmaceuticals.Online sales lower-tier cities will also going to feature increasingly in the future as household income rises, domestic logistics solutions advance, and after-sales service is improved.Consumption of services, not just goods, is gathering momentum with online travel purchasing also on the rise.
B2C Platforms and Sales Categories
Tmall (including Taobao) and JD dominate the market and are far ahead of other players. Foreign standalone participant platforms such as Amazon.com enjoy less that 2% market share. B2C operators offer different but sometimes similar solutions in terms of supply-chain logistics, marketing, online branding, translation, cyber security, and “localization”.
Rank B2C Operator Market Share
1st Tmall.com (Alibaba / Taobao) 58%
2nd JD.com 19%
3rd Suning.com 4%
4th Others 19%
Market segmentation of online retail sales by product category is shaped as follows:
Rank Product Category Market Share
1st Apparel, Footwear & Accessories 29%
2nd Consumer Electronics 19%
3rd Household Care & Furnishings 16%
4th Books & Entertainment 9%
5th Beauty & Personal Care 6%
6th Others 21%
Customs and CIQ Exemptions
Terms of sale with the customer are typically quoted delivery-duty paid (DDP). Eliminating customs duty cost and/or VAT in the supply-chain is a paramount in order to offset the higher costs for logistics, B2C operator commission, and the like.
China Customs grants a Personal Parcel Exemption (PPE) for individual articles mailed from abroad where the import duties payable are less than RMB 50 (NZD 11). This equates to a product value of approximately RMB 400 (NZD 89). The PPE rule should prevail unless the article falls into the list of “20 commodities prohibited from duty exemption”.
In principle, PPE qualifying articles are also exempt from complying with related Commodity, Inspection and Quarantine (CIQ) requirements that uphold consumer health and safety. At a practical level this should equate to no CIQ inspection, testing and labelling requirements, although this is not always guaranteed. New Zealand producers should note that producers from countries that do not enjoy a Free Trade Agreement with China are using this PPE and CIQ exempt approach to launch product in the market.
Customs and CIQ Intervention
Assuming no PPE is available due to the product value and/or more than one article being shipped together, a more complex customs duty and CIQ equation arises.
For example, if the customs value of the individual article triggers a duty liability, a company with import/export rights will need to be used to clear the goods through Customs/CIQ on the consumer’s behalf, which gives rise to additional cost and longer lead times. Customs will use an “assessed value” approach and one of four ranks of customs duty rate (“parcel tax”) will apply i.e. 10%, 20%, 30% and 50%, depending on the category of the imported article. For example, seafood, honey, and fruits are subject to 10% parcels tax, whereas skincare products are subject to a 50% parcels tax.
The “parcel tax” will apply if there is one article and the customs value is above 1000 RMB (NZD 222). The “parcel tax” also applies if there are several articles in the parcel but the total value is under 1000. If the “parcel tax” does not apply and the goods are to be imported under a “General Trade” model, the FTA may be used to negate the customs duty, but import VAT of 17% will still be levied. A Statement of Origin may be used where the total duty-paid value of the goods determined by China Customs is less than USD 1000.
Whilst Customs are concerned about revenue collection, CIQ remain focused on upholding consumer health and safety. The AQSIQ published the <Announcement on Furthering its Quality Supervision and Boosting International e-Commerce Development> on 14 May 2015 which aims to facilitate B2C cross border e-commerce. One important aspect to the Announcement is the "negative list". Products excluded from the “negative list” will be exempt from the mandatory testing that would otherwise apply if the product was imported under General Trade. Monitoring implementation of this “negative list’ is important, including the correlation to the HS Code and description of the product.
B2C Operators
Distinguishing ones product from the thousands of sites and similar products existing on TMall/Alibaba is a growing challenge. Fortunately, the landscape of B2C operators is fast changing with new players focusing on specific entry points into China and product categories. Examples include Kuajingtong (kjt.com) which is newly established in the China (Shanghai) Pilot Free Trade Zone and Yihaodian (yhd.com), which primarily focuses on imported food and beverage produce only.
Kuajingtong plan to sell imported popular household products like diapers and milk powder in China to tap the growing market for premium foreign products. Export from New Zealand of an FCL 40ft/20ft via ocean freight or larger airfreight consignments for bonded delivery and temporarily storage in the SFPTZ is feasible. The exporter would retain title to the inventory stored in the SPFTZ. The forward-deployed inventory can then be depleted as individual articles as B2C cross-border online sales take place. Domestic B2C operators, such as Kuajingtong, have official support from the relevant Municipal Government as well as the in-charge Customs and CIQ and they all offer a one-stop supply chain solution covering warehousing, customs clearance, inspection and quarantine, last mile delivery, and cross-border payment.
Summary
E-commerce is set for a sustained period of growth as the Central Government endeavors to rebalance the economy through increased consumption. This trend is linked closely to mobile internet penetration rates and the demand for premium and safe imported product. Several open questions remain however, such as the handling of product returns. A New Zealand exporter would still face complications when a customer wants to return defective or unwanted goods. Incorporating Alipay, an escrow based payment system which allows a consumer to verify that they are satisfied with goods before releasing the payment, is also worth keeping in mind. Ensuring online security and controlling data analytics as essential intellectual property is also paramount.
By Damon Paling
PricewaterhouseCoopers, Shanghai
Partner, Customs & International Trade
Damon has 17 years’ experience in Asia advising companies on customs, trade and related supply-chain and logistics matters, the last 11 years of which have been spent in Shanghai, China.
Jun 27, 2015