Is China’s e-retail loophole narrowing?
shanghai — 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 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. 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 harmonise the rules for commercial imports and cross-border e-commerce, there is an advantage you give to companies overseas,” said Chan WaiChan, a retail partner at consultancy Oliver Wyman in Hong Kong. Companies that have invested in a bricks-and-mortar presence in
If you do not harmonise the rules for commercial imports and cross-border e-commerce, there is an advantage you give to companies overseas
Chan Wai-Chan, Retail partner at Oliver Wyman
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, Costco Wholesale, Aldi Stores and Body Shop International 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 per cent of the total ecommerce 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 cross-border channel is projected to grow 43 per cent in 2018, with goods valued at 758 billion yuan, according to McKinsey and iResearch. The entire e-commerce market is projected to be 6.5 trillion yuan in 2018. 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 formalised 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 and JD. com — behind it. And that may create difficulty for the government as it seeks to “clarify” the rules by next January.
“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. — Bloomberg