Finding a new gateway into China
Richmond skin-care company uses services to save time, money
Exporting Canadian product into China is usually expensive and time consuming, but Kevin Liu recently stumbled across a new way to reach the massive and lucrative Chinese market.
Now Liu’s Canadian eye creams are selling briskly in China and “cross-border ecommerce” has become the primary focus for Adorlée Beauty, his two-year-old Vancouver-based skin-care business.
Cross-border ecommerce firms operating out of China’s free-trade zones “essentially didn’t exist five years ago,” said Ken Su, national lead for WC’s China Business Network.
The concept is the newest iteration of China’s constantly evolving special economic zones first created in the early 1980s to encourage foreign investment in manufacturing, said Jimmy Mitchell, a longtime China trade specialist and former Canadian consul in Shanghai.
Manufacturing incentives are no longer needed and a new wave of special economic zones called “free-trade zones,” started appearing five years ago to ease bringing foreign products and services into China, said Mitchell, the vice-president of AdvantageBC, a non-governmental not-for-profit that promotes B.C. as a base for conducting international business.
For example, instead of exporting directly into China, a Canadian company wholesales to a Chinese agent such as a cross-border ecom firm operating in a free-trade zone. The Chinese firm takes care of customs, duty and applicable taxes while benefiting from Chinese government incentives, and the Canadian company has easier access to the Chinese market.
The math is compelling. Had Liu exported directly, registering just one product with Chinese customs would have taken six to 12 months and cost around $1,000. He’d also have had to pay a total of 47 per cent in value-added tax, consumption tax, custom, duty and parcel tax.
Liu’s cross-border e-com partner takes care of paperwork, marketing and sales, and after Chinese government incentives Adorlée’s end customer pays only 11.9 per cent in combined taxes.
Liu himself doesn’t need to register with Chinese authorities because his products are not “in China” from a paper point of view even though his containers are physically sitting in the free trade zone, Mitchell said.
The venture hasn’t been without risk. In order to send a first, 400unit consignment shipment to China in August 2015, Liu not only risked $9,000 in product, he jeopardized making payroll and had to swallow some pride and ask his father for help with the mortgage.
It was a friend working in logistics who first informed Liu about Youkastation.com.
“It was a very surprising opportunity. At the beginning I was very suspicious,” Liu recalled. Son of a retired Chinese cosmetics distributor, Liu arrived in Canada from Harbin, China, as a 14-year-old. His first job was washing cars — 320 tire rims a day “because I was new. Good squat exercises.” He graduated to stocking supermarket shelves, and then took a job at a gas station and eventually graduated from SFU in marketing.
Liu researched Youkastation on Google. Nothing. He searched CEO Zhan Hongwei. Nothing.
But Chinese search engines yielded news stories about the cross-border ecommerce startup and investor interest. Liu used a traffic estimator to check Youkastation’s monthly visitor statistics, and checked customer reviews on Youkastation’s own site.
Liu wondered about cash flow, how Youkastation might build its customer base, and what kind of deal he’d be getting into. If the product didn’t sell, he’d bear additional shipping costs and risk stale product.
At the time, he had been targeting U.S. mass market value and drugstore chains, and had secured repeat contracts with Burlington Stores, but large chains tend to be slow with their accounts payable and his cash flow was tight. He decided to take the risk.
Just how the cross-border ecom firms operate “is not generally transparent to the provider of the product,” Su said. Details of the process are difficult to pin down. Chinese regulations are complex. The actual rates are product specific and in many compliance areas, the administration is “still evolving,” Su said.
“My guess is there are a number of operations that probably don’t necessarily follow all the rules,” he said.
They may not be doing it intentionally, but no one’s really stopped them from operating because there’s a lot of activity going on,” Su said.
“Like anything else, you’re limited in enforcement bandwidth. Traffic laws in Beijing are identical to those in Canada, it’s just that no one follows them.”
Perhaps Chinese cross-border ecommerce firms can speed paperwork by pre-purchasing SKU registrations, which can then be applied to product as needed, said Ryan Cordoni of Richway New Media Technology, a digital marketing firm that recently organized a Vancouver conference on the topic.
One thing is certain — China’s middle classes are hungry for higher quality goods and crossborder ecommerce is an easy way to reach this market, Cordoni said. Su knows half a dozen companies in Vancouver who are already distributing product via a Chinese intermediary in a free-trade zone, and he believes numbers are going to increase.
Most financial transactions are conducted through Alibaba’s Alipay (China’s version of PayPal) and WeChat rather than by banks and the Chinese government is still considering how to deal with this, Su said.
Selling in the free-trade zone gives Chinese companies greater currency choices, Mitchell said. The value of China’s “offshore” currency, CNH, and its domestic currency, CNY, are not always the same.
“If a Canadian customer is aware of the benefits that company can get, it may be able to negotiate a better price point,” Mitchell said.
In 2011, goods worth 1.7 trillion yuan were traded into and out of China, Liu said, quoting Chinese media sources. By 2015, trade value was 5.4 trillion yuan with 4.49 trillion yuan leaving China as exports and 0.9 trillion yuan entering the country from Japan, Korea, the U.S., Canada and Germany, Liu said.
The two-year old Youkastation is based in Shenzhen, China. It has a 107,639-square-foot distribution warehouse in Shenzhen’s Shekou free-trade zone, 200,000 followers on social media platform Sina Weibo, and about 300 overwhelmingly positive reviews on Baidu. com’s Zhidau forums.
Youkastation’s exclusive financial ecommerce partner, 51 RZ.com, is an ecommerce incubator and online financial platform backed by Zhejiang province, which is one of the most privatized provincial economies in China, Mitchell said.
51RZ has provided $29.5 million in funds this year and is to provide an additional $59.2 million in October.
Youkastation built a page for Adorlée products. “It’s like a brand new website for me. They didn’t charge me anything,” Liu said. “They also have a PDF presentation about my products and they sent it to me.”
Then Liu noticed new images and marketing pages for Adorlée appearing onscreen beside his personal social media conversations. “It felt like secret forces are helping me with some new marketing materials.”
He was impressed. “They put a huge ginseng (root) beside the eye cream to enhance the idea of natural ingredients,” he said. “They really tailored the product to the local market.”
At the same time, Liu is aware he’s losing control of his brand. “It’s impossible for us to communicate with the Chinese consumer directly,” Liu said.
“There’s fraud and fakes and market forces. Does he know what they are doing with his product in China?” Mitchell warned.
Liu also loses control over his pricing. If volume discounts are too high or too low, he isn’t going to know. “If he had visions of down the road taking over this market directly, he needs to understand that,” Su said.
“A lot of what exactly is legal is not entirely clear,” Su said. If your agent is not taking care of the paperwork properly, the Chinese government “could have recourse to come after you,” Su warned.
Adorlée’s sales have increased by 2,000 per cent, with almost 70 per cent of sales in China. The company is breaking even and Liu has steady cash flow since Youkastation pays him 50 per cent on order and 50 per cent on delivery.
Liu has increased his product line to 86 SKUs, or individual items, including mud masks, collagen water toner, sheet masks and makeup removal wipes. He’s creating an anti-pollution line specifically for the Chinese market. His eye creams are made in Vancouver, but he is now also sourcing product and packaging from Toronto and China.
In the U.S., Adorlée is positioned as an affordable luxury. In China, the brand is a premium product. The 150 ml hand cream retails for $37 in China but is on promotion for $21.
“I’ve no idea who they sell to, but they keep ordering. I’m still pretty happy about the partnership.”