date september 16, 2015 our ref. allan bjergvang manoj jayaruben
TRANSCRIPT
Date September 16, 2015
Our ref. Allan Bjergvang
Manoj Jayaruben
TC China, Guangzhou 1 of 58
This e-commerce report seeks to help Danish companies understand and engage in the
Chinese e-commerce market. The e-commerce market in China has experienced a dra-
matic development the last couple of years and continuously new information and data
come out. Statistics and numbers can sometimes be of varying quality in China. Conse-
quently The Trade Council of Denmark in China recommends that you check the latest
available data from authoritative sources. As the Chinese market is highly complex we
furthermore strongly recommend that Danish companies seek advice from professional
partners.
TC China, Guangzhou 2 of 58
Table of Contents Preface .................................................................................................................................. 1 Introduction ......................................................................................................................... 4 1. Collaboration between The Trade Council and PostNord ................................... 5
1.1 The Trade Council of Denmark ...................................................................... 5 1.2 PostNord ............................................................................................................. 5 1.3 Ule.com ................................................................................................................ 6 1.4 PostNord and TC China’s Collaboration ....................................................... 6
2. Executive Summary .................................................................................................... 7 2.1 Focus on Consumption-led Economic Growth ............................................ 7 2.2 The Rise of E-commerce .................................................................................. 7 2.3 Liberalisation of Import/Export Taxes in FTZ’s ......................................... 7 2.4 Protection of IPR Remains Essential .............................................................. 8
3. China – A Big Country ............................................................................................... 9 3.1 Population and Internet .................................................................................... 9 3.2 Tier Cities and Urbanisation ........................................................................... 10 3.3 Country Infrastructure ..................................................................................... 11 3.4 Purchasing Power in China ............................................................................. 12 3.5 GDP Growth .................................................................................................... 13 3.6 The Financial Markets: How Severe Was the Stock Market Drop in Shanghai (August 2015)? ............................................................................................. 13
4. E-commerce in China ............................................................................................... 15 4.1 The E-commerce Industry .............................................................................. 15 4.2 How E-commerce Works in China ............................................................... 20 4.3 Mobile-commerce ............................................................................................ 21 4.4 The Future of E-commerce in China ............................................................ 23
5. Logistics ...................................................................................................................... 24 5.1 From Denmark to China ................................................................................ 24 5.2 Logistics within China ..................................................................................... 25 5.3 The Importance of Warehousing and Distribution .................................... 25 5.4 E-commerce Platforms and Logistics ........................................................... 26 5.5 Third-Party Logistics – Important Issues to Consider ............................... 28 5.6 Domestic Third-Party Logistics Providers within China ........................... 28 5.7 International Third-Party Logistics Providers within China ...................... 30
6. Social Media ............................................................................................................... 31 6.1 Popularity of Social Media .............................................................................. 31 6.2 Social Commerce and the Importance of Social Media ............................. 32 6.3 Marketing through Social Media .................................................................... 33
7. Marketing .................................................................................................................... 34 7.1 Other Ways of Marketing for E-commerce ................................................. 34
7.1.1 E-commerce Platforms ............................................................................... 34 7.1.2 Offline Promotions ...................................................................................... 34
8. Consumer Rights and Return Policies in China.................................................... 35 9. Customer service ....................................................................................................... 37
9.1 Pre- and Post-Sales Services ........................................................................... 37 9.2 Who Takes Care of Customer Service? ........................................................ 37
10. Types of Payment ................................................................................................. 38 10.1 Cash on Delivery .............................................................................................. 38 10.2 Online Payment ................................................................................................ 39 10.3 Mobile Payment ................................................................................................ 39
11. Design .................................................................................................................... 42
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11.1 Homepages ........................................................................................................ 42 11.2 Mobile Websites ............................................................................................... 42 11.3 Virtual Store Design......................................................................................... 43
11.3.1 Comparison with Danish Online Stores ................................................... 43 11.3.2 The Use of Western Design ....................................................................... 43
12. Intellectual Property Rights ................................................................................ 44 12.1 Important IPR’s ................................................................................................ 44 12.2 Enforcing IPR’s ................................................................................................ 47
13. Rules and Regulations .......................................................................................... 50 13.1 Packaging and Product Declarations ............................................................. 50 13.2 E-commerce Platform Rules .......................................................................... 50
14. Fees, Taxes and Tariffs ........................................................................................ 52 14.1 Import and Export Taxes ............................................................................... 52 14.2 Free Trade Zones and Bonded Warehouses ................................................ 52 14.3 E-commerce Platform Fees ............................................................................ 53
15. Appendices ............................................................................................................ 55 Appendix A: List of Tier Cities .................................................................................. 55 Appendix B: Screenshots of Elgiganten and JD.com ............................................. 56 Appendix C: Screenshot of the “5th” Floor on JD.com’s Mall .............................. 57 Appendix D: Currency Table ..................................................................................... 58
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With an estimated population of 1.36 billion people China is the world’s most populous
country. The Danish Government is of the firm belief that Danish companies should
consider reaching out to the more than 1 billion consumers in the Chinese market. As the
Chinese consumer culture has shifted towards e-commerce, reaching out to the Chinese
consumers has become easier in many ways. Hence it is imperative for Danish companies
to understand and engage in this trend.
China has around 632 million people, who have access to the internet (June 2014) and the
number only keeps growing each year. By the end of 2015 this number is expected to
grow to over 700 million1. 500 million people already have internet on their mobiles and
the Chinese government has a goal that by 2020 1.2 billion people will be connected to
mobile internet2. In late December 2014, China Mobile had 90 million mobile users with
4G connections, just nearly a year after its initial 4G launch, making it the world’s largest
4G operator.3 As a result more people have access to faster internet on the go. In 2014
the average amount of hours per day spent on the internet from a mobile device in China
was around 2.35-3.5 hours according to A.T. Kearney and We Are Social4.
The great emphasis the Chinese government put on expanding IT infrastructure has in-
deed paid off. China’s internet users have embraced online shopping to an extent hardly
seen in any other market outside of China. Transactions related to e-commerce amounted
to 1.94 trillion U.S dollar5 in 2014 according to the Chinese government, with online re-
tailing growing 41% in 2014 alone compared to the year before6.
E-commerce therefore presents itself as a great opportunity for Danish companies to
enter the Chinese market. Although no heavy investments in psychical locations are need-
ed, other issues arise when doing e-commerce in China. For instance China has a geo-
graphical size equivalent to that of the U.S, but the logistics are far from as effective as in
the U.S., posing challenges for Danish companies. This e-commerce report aims to help
Danish companies get a better understanding of the Chinese e-commerce market.
1 www.internetlivestats.com/internet-users/china/ 2 www.china-briefing.com/news/2014/06/04/trends-chinas-e-commerce-market.html 3 www.gsma.com/newsroom/press-release/4g-networks-to-cover-more-third-of-global-pop-this-year/ 4 China’s E-commerce Market in 2014: The Logistics Challenges, A.T. Kearney and www.techinasia.com/china-web-mobile-data-start-2015/ 5 All numbers have been converted to USD using currency rates noted in Appendix D 6 china.org.cn/business/2015-01/31/content_34702685.htm
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1.1 The Trade Council of Denmark
The Trade Council of Denmark is the trade and export organisation within the Ministry
of Foreign Affairs of Denmark. Its main purpose is to strengthen Danish export abroad
by assisting Danish companies in global markets. The Trade Council has a vast network
of 250 export advisors in 90 embassies, consulates and trade offices in 64 countries
around the globe. The Trade Council’s global staff assists small, medium and large Danish
companies with all kinds of export-related tasks.
The Trade Council of Denmark in China (henceforth TC China) has offices in Beijing,
Shanghai, Guangzhou, Chongqing and Taipei while also covering Hong Kong. TC Chi-
na’s Danish commercial advisors and local Chinese staff have a unique insight to the op-
portunities and challenges facing Danish export companies in all areas of business in Chi-
na. TC China’s specialists assist companies with anything from initial fact finding and
market research to partner identification and domestic legal and tax issues.
Read more about TC China on kina.um.dk/en/the-trade-council/
1.2 PostNord
PostNord AB was created in 2009 through a merger of Danish company Post Danmark
A/S and Swedish company Posten AB. PostNord handles mail and communication ser-
vices in Denmark and Sweden, where they have well-developed distribution networks.
PostNord is especially focusing on areas within e-commerce, distribution and logistics.
PostNord has signed an agreement with China Post, which makes it possible for Danish
companies to gain easier access to the Chinese online market. The collaboration with
China Post enables market access through the e-commerce platform Ule.com, where
Chinese consumers make online purchases. There is a big demand for Danish goods in
China. Denmark is in the top ten countries for cross border shopping in China7, making
this a great opportunity for Danish companies.8
Read more about PostNord’s services on postnord.com/en/services/
7 jingdaily.com/chinas-global-e-commerce-boom-extends-to-over-100-countries/ 8 www.postnord.com/da/presse/pressemeddelelser/postnord-danmark/2014/post-danmark-giver-dansk-e-handel-adgang-til-kina/
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1.3 Ule.com
Ule.com is a joint venture between state-owned China Post and Hong Kong-based TOM
Group. The site offers a variety of products in categories such as shoes, home products,
personal care products, healthy food products, baby products and digital home appliances.
Unlike most of its competitors, who relies on third-party logistics companies, Ule.com
has access to China Post’s extensive distribution network including 52,000 postal outlets,
150,000 delivery workers, 80,000 vehicles, 433 train carriages and 18 cargo aircrafts.9
The agreement between PostNord and China Post gives Danish companies a direct ac-
cess to Ule.com and thus a possibility of getting their own first hand experiences with the
Chinese e-commerce market.
1.4 PostNord and TC China’s Collaboration
PostNord and TC China have collaborated on creating this e-commerce report, which is
aimed at Danish companies, who have an interest in the Chinese e-commerce market. In
creating this report we have sought to combine the local competencies and experiences
TC China has in providing market analysis of Chinese markets with PostNord’s logistical
competencies and market experience in China.
This report serves as a helping guide for Danish companies. By providing an extensive
overview of the Chinese e-commerce market as well as highlighting key areas of consider-
ations, we hope this guide will ease the process for Danish companies when entering the
Chinese e-commerce market.
Finally, a special thanks goes out to PostNord, who as a benefactor has made the creation
of this report possible.
9 www.scmp.com/business/companies/article/1436604/china-post-tom-e-commerce-venture-step-expansion-after-new
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2.1 Focus on Consumption-led Economic Growth
In the last few years China has initiated a shift from investment- and export-led growth to
domestic consumption-led growth. Continuous growth in real wage weakens Chinese
competitiveness in terms of export, but simultaneously increases the wealth of Chinese
people. A higher real wage leads to an increase in Chinese consumers’ purchasing power.
China is now the largest economy in the world in terms of purchasing power. China al-
ready has a huge urbanised middle class of over 480 million people, who are increasingly
consuming imported goods. This provides plenty of opportunities for foreign companies,
who are interested in entering the Chinese market.
2.2 The Rise of E-commerce
In recent years online shopping in China has experienced a huge growth as more and
more Chinese people have gained access to the internet. The central government highly
emphasises further development of internet coverage and speed. Especially mobile inter-
net such as 4G has seen great improvements in the last year. As such, e-commerce on
mobile phones (also called m-commerce) has exploded in popularity. E-commerce mar-
ketplaces, such as the C2C platform Taobao and the B2C platform Tmall has seen year-
on-year increase in number of customers and volume sold. While C2C platforms (in par-
ticular Taobao) were extremely popular a few years ago, recently there has been a shift in
popularity towards B2C platforms like Tmall, as these often are considered more trust-
worthy. On B2C platforms the retailer sets up a virtual shop and sells products directly to
end customers. Imported goods account for an increasingly large share of goods sold.
2.3 Liberalisation of Import/Export Taxes in FTZ’s
While still having fairly complex tax rules for imported products, China is increasingly
experimenting with less restricted free market solutions. Free Trade Zones (FTZ) have
sprung up in Shanghai, Tianjin, Fujian and Guangdong. When importing through FTZ’s
foreign companies have several advantages over importing through other places in main-
land China. Export companies can save money on consumption tax and import duties,
while deferring VAT until the products leave the FTZ. Furthermore, when importing via
FTZ’s companies can often refrain from registering their product. In general China is
expected to further liberalise their economy in key areas and make it more market-based.
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2.4 Protection of IPR Remains Essential
Despite having very strict IP laws, implementation and enforcement of these laws are still
rather lax in China and violations are commonplace. As a consequence IPR protection
should remain a top priority for foreign companies when doing business in China. While
the international Nice Classification does technically cover China, it is additionally neces-
sary to do proper IP registration through the Chinese system. Familiarity with Chinese IP
laws and knowledge of its weak points can greatly reduce the risk of infringement of IPR.
If an infringement takes places there are several unofficial and official channels for en-
forcing IPR rights, such as through official administrative agencies or the Chinese courts.
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China has seen a massive transformation through more than three decades of investment
in infrastructure, modernisation and urbanisation, which has greatly increased the wealth
of the Chinese people. China is now more focused on developing a consumption-led
economy. To facilitate this change the Chinese government has invested heavily in ex-
panding internet coverage and speed throughout China, which helps stimulate the growth
of e-commerce – especially on mobile devices. In turn the rapid development of e-
commerce creates new opportunities for foreign firms, who now have an easier access to
Chinese consumers. In addition to the development of internet infrastructure and speed,
the success of e-commerce in China has been dependent on an increasing level of wealth
and urbanisation along with a fast development in infrastructure throughout China.
3.1 Population and Internet
China is an enormous country on multiple parameters. The total area of China is 9.6 mil-
lion square meters making it the 4th largest country in the world and roughly the same size
as the U.S. However,
population-wise China is
far bigger than the U.S.
The population of China
is 1.36 billion making it
more than 4 times great-
er than the U.S.’s popu-
lation of 319 million.
With such a huge popu-
lation dispersed over
such a large area of land,
it is no surprise that China’s population is both geographically and demographically het-
erogeneous. Even though roughly 92% of all Chinese identifies as belonging to the domi-
nant Han Chinese ethnic group there are still great differences in mentality and lifestyle
between people from the north and the south, the city and the countryside as well as the
coastal regions and the rest of China10.
According to figure 2.1.1 almost half of all Chinese people had access to the internet by
2014. In the 4-year period from June 2010 to June 2014 the number of internet users in
10 www.cia.gov/library/publications/the-world-factbook/geos/ch.html
Source: Graph reproduced from 34th
Statistical Survey on Internet Development in China, July 2014
Figure 2.1.1
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China grew from 420 million people (constituting 31.8% of all people in China) to 632
million people (46.9%). This growth is a result of a dedicated effort to improve both fixed
and mobile internet through large investments in infrastructure.
From 2015-17 China plans to further invest 193 billion USD in network infrastructure. In
2015 alone planned investment will reach 69 billion USD. This will most likely significant-
ly increase internet speed and coverage in both urban and rural areas as well as lead to a
growth in mobile 4G usage. According to the South China Morning Post the amount of
4G users in China will likely reach 300 million by the end of 2015.11
3.2 Tier Cities and Urbanisation
The cities of China are divided into different tiers. The concept is acknowledged by the
Chinese state administration and the business community in China. However an official
definition of the concept does not exist.
Over the years, different interest groups started to group the cities of China into different
tiers – with the largest and most developed cities being classified as Tier 1. Even though
the government of China and its institutions do not have an official description of what
makes a city fall into a specific tier category – they have also been using the tier system to
classify different cities. In consensus with different news media and groups, most pre-
dominantly the Wall Street Journal, cities are grouped in tiers after criteria like disposable
income of the citizens, GDP, population size and overall infrastructural development of
the city.
Tier 1 cities have received most attention both from the central government and foreign
firms. Tier 1 cities have the largest urban population (10 million or more) and the highest
GDP per capita – in short, this is where the richest and the largest concentration of mid-
dle class consumers live. Furthermore, Tier 1 cities have well developed infrastructure and
industries, typically both traditional and more advanced types of industries. According to
McKinsey12 and the Wall Street Journal13 there are only four Tier 1 cities in China: Beijing,
Shanghai, Guangzhou and Shenzhen – all cities located in the coastal regions of China.
Most Tier 2 cities are provincial capitals (with a few prominent exceptions such as
Chongqing and Tianjin, which are municipalities) with well-developed infrastructure and
11 www.scmp.com/tech/e-commerce/article/1804667/china-spend-us193-billion-boosting-internet-speeds-push-service-led 12 China’s e-tail revolution: Online shopping as a catalyst for growth, McKinsey Global Institute, March 2013 13 blogs.wsj.com/chinarealtime/2014/04/16/what-makes-a-tier-2-city-in-china-count-the-starbucks/
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several million inhabitants. Examples include inland cities such as Kunming and Chengdu
as well as coastal cities such as Xiamen and Zhuhai. These are cities, which are growing
fast while retaining a huge economic growth potential. Tier 3 cities typically have smaller
income levels and infrastructure is less developed, but they still have millions of inhabit-
ants. Tier 4 cities are prefecture-level and county-level cities. The infrastructure is even
less developed and the income per capita is lower than Tier 3, however, these cities are
still quite populous (with populations exceeding one million people). The presence of
physical foreign stores is still quite limited in Tier 3 and 4 cities
However, this lack of foreign presence should not discourage companies from entering
Tier 2, 3 or even 4 cities In fact many of these cities have a large amount of potential con-
sumers, who at the time being do not have convenient access to foreign brand stores. It’s
typically only Tier 1 and the largest Tier 2 cities, which have enjoyed the attention of for-
eign companies through psychical stores and as a result there is a large unfulfilled demand
for foreign products outside top-tier cities. E-commerce offer Chinese consumers in low-
er-tier cities a better access to foreign brands.
Appendix A contains a table showing the Tier 1, 2, 3 and 4 cities of China
3.3 Country Infrastructure
China is about the same size as the United States14, but has a much less developed infra-
structure across the country. Though China has invested large amounts of capital in de-
veloping the country, there is still a long way to go before China reaches the infrastruc-
ture level of most Western countries. The most developed parts of China in terms of in-
frastructure etc. include the PRD (Hong Kong, Shenzhen and Guangzhou), eastern
coastal cities (e.g. Shanghai and Hangzhou) and Beijing. Here transportation and logistics
is quite convenient, but in many other regions in China infrastructure is still under-
developed. This is especially the case in rural inland areas. The Chinese central govern-
ment plans to further develop these areas, but this is an on-going process, which will take
many years to finish. As many less cosmopolitan Tier 2, 3 and 4 cities are located in less
developed areas, this is an important issue to consider in regards to the logistics of doing
e-commerce in China. These issues will be further analysed and elaborated upon in the
chapter Logistics.
14 www.cia.gov/library/publications/the-world-factbook/geos/ch.html
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The first decade after Deng Xiaoping’s Southern Tour in 1992 that ushered in a new era
of prosperity in China the main beneficiaries of China’s rapid economic growth was the
coastal provinces and cities. However, during Hu Jintao’s time in office from 2003 to
2013 the central government decidedly focused its attention on the poorer, underdevel-
oped central and western regions of China. As a result major Tier 2 cities like Chongqing
and Chengdu developed rapidly. New and better infrastructure and better access to inter-
net provides Danish companies with better opportunities to do e-commerce in these are-
as.
3.4 Purchasing Power in China
In October 2014 China surpassed the U.S. to become the largest economy in the world in
terms of purchasing power, according to the International Monetary Fund (IMF)15. Pur-
chasing Power Parity – unlike GDP – accounts for differences in cost of living. The im-
plications for companies who are already doing business in China or are thinking about
entering China are huge. There is already a very large middle class in China, who are used
to buying imported brand goods and it’s still growing rapidly. McKinsey reported that by
2012 68% of all urban households (which in 2014 account for 52% of the population) in
China belong to the middle class (defined as having a yearly income between 9,000 and
34,000 RMB) – up from 4% in 2000. Already now China has an urban middleclass of over
480 million people16. That number is only going to continue to rise and McKinsey pro-
jects that by 2022 more than three fourths of all urban consumers will belong to the mid-
dle class17. Due to an increasing level of urbanization the middle class will likely account
for 45% of the total population in 202218.
The Chinese middle class turn to Western goods for higher quality and authenticity. In
fact China is projected to spend 245 billion USD on imported goods by the end of 2015.
Many of these will be bought through e-commerce platforms. Currently 26% of all online
Chinese consumers buy imported goods online.19
Luxury Goods
Chinese people account for about one third of all luxury items sold in the world today
and despite recent a recent anti-corruption campaign the consumption level remains large.
15 www.ibtimes.com/china-economy-surpasses-us-purchasing-power-americans-dont-need-worry-1701804 16 This number is based on an urbanisation rate of 52% and a middle class size of 68% in urban areas 17 www.mckinsey.com/insights/consumer_and_retail/winning_the_battle_for_chinas_new_middle_class 18 www.mckinseychina.com/preparing-for-chinas-middle-class-challenge-part-1/ 19 www.pfsweb.com/blog/despite-market-uncertainty-chinese-imports-rise-via-ecommerce/
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A lot of these luxury items are sold online at big discounts via channels known as daigou
(which means buying on behalf of). Taobao also has a daigou section on their website:
d.taobao.com. Bain estimates that up to 30% of all luxury goods bought in China are
bought via this channel. However, many fakes are likewise sold through this channel.20
3.5 GDP Growth
China’s growth in 2015 will be around 6.8% according to the latest report from IMF,
down from 7.4% in 201421. However, it’s only natural that China’s economic growth ex-
periences a slowdown as the economy grows larger and larger. In fact IMF argues that
China is moving towards a more sustainable growth, where underlying problems are ad-
dressed and the source of growth is gradually transformed.
China has made a series of policy and monetary adjustments in various areas, which are
aimed at further opening up the Chinese economy and make it more market-based. Cur-
rency exchange rate is one such area: the once greatly undervalued RMB has seen contin-
uous appreciation compared to the USD and the Euro22. The RMB is getting closer to
what many economists consider its real value and China is expected to move towards a
floating exchange rate soon. The strengthening of the RMB essentially makes it cheaper
for Chinese people to import foreign goods (and consequently more expensive for EU
and the US to import Chinese goods). Chinese people are made comparatively richer due
to exchange rate adjustments, which further fuels consumption of foreign goods in China.
3.6 The Financial Markets: How Severe Was the Stock Market Drop in Shanghai (August 2015)?
Note: Originally we did not intent to include a section about the stock market, but due to recent well-
publicised developments in Shanghai, we have decided that it is in order to briefly demystify the situation.
Although widely publicised in Western and Chinese media (and to some extent sensation-
alised), the recent stock market correction on Monday 24th 2015 (already dubbed Black
Monday), where the Shanghai Composite Index (SHCOMP) dropped 8.5%, is not seen as
a challenge to China’s continued growth by the IMF23. The Economist argues that the
drop was in fact not particularly spectacular compared to 4-5% drops in FTSE 100 in
London, S&P 500 in New York and Nikkei 225 in Tokyo. Because SHCOMP is a lot
20 www.economist.com/news/special-report/21635763-tastes-are-changing-appetites-remain-keen-beyond-bling 21 www.imf.org/external/pubs/ft/survey/so/2015/CAR081415B.htm 22 Despite recent depreciation of the RMB in August 2015 the long term trend is clear: appreciation in the last few years has increased Chinese consumers’ buying power significantly. 23 www.imf.org/external/pubs/ft/survey/so/2015/CAR081415B.htm
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more volatile than the longer established indexes in London, New York and Tokyo bigger
drops are to be expected24. Furthermore The Telegraph argues that the cumulative drop
of the FTSE 100 of 12.6% from a peak in April 27th 2015 to August 27th 2015 is a more
serious stock market crash. The SHCOMP drop happened more suddenly and conse-
quently attracted a lot more attention.25
Regardless of the magnitude of the drop and future possible drops it is important to re-
member that the relative size of the stock market is small in China (approximately one
third of GDP in terms of tradeable value) compared to most developed nations, where
the number is around 100%. Therefore the impact of a stock market crash would be a
relatively smaller hit to the Chinese economy compared to most Western economies.
What really matters in China is the property market. 26 While the property market has
been very volatile in the past, it is stabilising – especially in the larger cities.
24 www.economist.com/blogs/freeexchange/2015/08/chinas-stockmarket-0 25 www.telegraph.co.uk/finance/personalfinance/investing/shares/11830632/Forget-Black-Monday-the-real-stock-market-crash-exposed.html 26 www.economist.com/news/briefing/21662581-stockmarket-turmoil-china-need-not-spell-economic-doom-it-does-raise-questions-far
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According to the central government’s 12th five year plan China will make a shift from
mainly export-oriented growth to consumption-led growth. China has invested a lot of
capital in network infrastructure and is actively promoting technological development. As
a result more and more Chinese gain access to the internet. Online shopping and the rap-
id development of e-commerce have had a spectacular impact on the Chinese consumers
buying behaviour. This development is projected to have an even bigger impact over the
next few years.
4.1 The E-commerce Industry
Online shopping has changed the rules of the game within retail in China – probably even
more so than Amazon did in the U.S. The largest share of online shopping in China is
still within Customer-to-Customer (C2C) sales, but Business-to-Customer (B2C) sales
have increasingly taken larger and larger shares from C2C.27 The most popular way of
shopping online is through a Chinese e-commerce platform, but also cross-border shop-
ping – i.e. Chinese consumers buying directly from e-commerce platforms and e-retailers
outside of China – is on the rise 28
The Alibaba Group is by far the largest and most famous e-commerce company in China.
In 1999 the company launched their Business-to-Business (B2B) platform Alibaba.com,
later followed by their C2C platform Taobao, which has developed to be a clear market
leader in online C2C sales with a 95% market share. Since then Alibaba has expanded
operations by launching the B2C e-commerce platform Taobao Mall (more famously
known as Tmall), which is currently the market leader in Chinese e-commerce B2C mar-
kets. Some of their main competitors include JD.com, Dangdang and Yihaodian.
Tmall
Tmall was launched in 2008 and is headquartered in the city Hangzhou near Shanghai.
Tmall is listed on the New York Stock Exchange through Alibaba Group and had a mar-
ket share of 58.6% in the Chinese B2C e-commerce market in Q1 2015. While Tmall has
a convincing lead over its main competitor JD.com, which had a 22.8% market share,
27 insideretail.asia/2013/11/01/chinas-b2c-e-commerce-to-overhaul-c2c/ 28 www.ibtimes.com/chinas-cross-border-e-commerce-rise-ten-fold-5-years-taste-imported-food-grows-1963993
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Alibaba Group do not effectively have a monopoly in the B2C market like it has in the
B2B and C2C markets. This makes it more important to consider alternatives to Tmall.29
Tmall is purely an online marketplace. Companies set up a virtual store on Tmall’s web-
site and then sell directly to end-users. There is a wide range of products available on
Tmall – everything from Nike to Pandora. Many different sectors are included, such as
e.g. the food sector. Tmall had revenues of 81.4 billion USD in 2014, almost doubling its
revenues from 41.8 billion USD in 201330. There are over 70,000 Chinese and Interna-
tional branded virtual storefronts on Tmall.com and Tmall had over 100 million regis-
tered users in 2013.31 By the time of writing Tmall was the 8th most visited website in
China.32
Jingdong (JD.com)
Headquartered in Beijing, JD.com is the second largest e-commerce platform in China. In
Q3 2014 the company had a market share of 22.8%.33 The company was founded in 2004
by Richard Qiangdong Liu and is listed on the US technology stock index, NASDAQ34.
The company has mainly derived its sales from direct online sales, but opened an online
marketplace in 2010 where both domestic and foreign brands are present with virtual
stores. The marketplace has grown its sales and is now closing in on direct online sales.
The platform initially focused on electronics but has since broadened its product catego-
ries to include a wide range of products. In the end of 2013, JD.com had 25.7 million
SKU’s (Stock Keeping Unit).35 A supermarket was added to the e-commerce platform in
2013 containing a variety of food and beverage products. This includes imported foreign
food products, some of which are unavailable to the majority of Chinese consumers
through physical stores36. In order to satisfy an increasingly large consumer demand for
authentic foreign food products in China JD.com will launch a French Mall on their plat-
form in 2015 containing imported French products. JD.com further plans to increase the
range of foreign products and has already started negotiations with a number of other
countries. 37 38
29 www.wsj.com/articles/alibaba-feels-heat-from-new-rivals-1439758165 30 www.alibabagroup.com/en/ir/Alibaba_Financials_and_Metrics_Eng.pdf 31 www.forbes.com/sites/joshsteimle/2015/01/26/a-beginners-guide-to-alibaba-group/ 32 www.alexa.com/topsites/countries/CN 33 www.wsj.com/articles/alibaba-feels-heat-from-new-rivals-1439758165?cb=logged0.8851285792394266 34 www.bloomberg.com/news/articles/2014-05-22/jd-com-founder-liu-s-wealth-surges-to-6-1-billion-on-ipo 35 ir.jd.com/phoenix.zhtml?c=253315&p=irol-homeProfile 36 www.techinasia.com/jingdong-supermarket-sells-food/ 37 ir.jd.com/phoenix.zhtml?c=253315&p=irol-newsArticle&id=2013305
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In 2013 the company had 323.3 million orders and 47.4 million active customers. In 2014
these numbers more than doubled to 689 million orders and 96.6 million active custom-
ers. The company had sales amounting to 41.9 billion USD, comprising of 25.7 billion
USD from e-retailing and 16.3 billion USD from the marketplace. Net revenues for 2014
were 18.5 billion USD. 39
Dangdang
Dangdang was formed in 1999 and originally started as an online book store. It has been
listed on NYSE since 2010 and has it’s headquarter in Beijing. In 2014, the company had
a 1.3% share of the Chinese e-commerce market.40 The company was originally an online
retailer, but has since opened a marketplace for third-party retailers. The company has
over 14,000 retailers selling through its e-commerce platform and their goal is to trans-
form their platform into an online shopping mall aimed at mid-level and high-end con-
sumers41. Dangdang is still heavily focused on books – some calling it the Amazon of
China, but through its marketplace the company sells products within beauty, home and
baby merchandise, clothing, audio, visuals and leather wares etc. 42 In all these product
categories combined Dangdang had a total of over 6.5 million SKU’s in 2014.43 In 2015 a
strategic partnership was formed with Yihaodian (Yhd.com), which is one of China’s
leading food and beverage e-retailers. 44 Now Dangdang can sell books and other prod-
ucts on Yihaodian, while Yihaodian has opened a supermarket on Dangdang’s online
marketplace. 45
Dangdang had an average of 4.0 million daily unique visitors and almost 200,000 orders
are delivered every day. In 2014 Dangdang had more traffic through its mobile app than
from desktop users. In 2013, Dangdang had net revenues at approximately 1 billion USD
and 20.9 million active customers. 46 In Q3 2014 Dangdang had 9.6 million active custom-
ers.47
38 JD has already launched Japanese, Korean and Australian/NZ malls. By the summer 2015 a US/Canadian mall is to be launched. 39 JD Fourth Quarter and Full Year 2014 results 40 www.statista.com/statistics/323115/market-share-of-b2c-online-retailers-in-china/ 41 ir.dangdang.com/phoenix.zhtml?c=241200&p=irol-newsArticle&ID=1906259 42 finance.yahoo.com/q/pr?s=DANG 43 ir.dangdang.com/phoenix.zhtml?c=241200&p=irol-homeprofile 44 ir.dangdang.com/phoenix.zhtml?c=241200&p=irol-newsArticle&ID=1906259 45 media.corporate-ir.net/media_files/IROL/24/241200/EcommerceChinaDangdangIncAR2013.pdf and Dangdang third quarter financial report 2014 46 media.corporate-ir.net/media_files/IROL/24/241200/EcommerceChinaDangdangIncAR2013.pdf 47 DANG 2014 Q4 and FY Results, http://ir.dangdang.com/phoenix.zhtml?c=241200&p=irol-reportsAnnual
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Suning
Suning, which is headquartered in Nanjing near Shanghai, is the largest home appliance
retailer in China. Originally Suning only had physical stores, but the company has ven-
tured into e-commerce and has gained a 3% market share in 2015 in China.48 Their prod-
uct categories now include home appliances, electronics, communication and office
equipment. Suning still have a strong physical presence in China through their physical
shops, but their online sales will likely become more important in the future.49 The online
revenue for Sunning in the first half of 2014 was 1.3 billion USD50. As of August 2015
Alibaba has a 20% stake in Suning.51
VIP.com (Vipshop)
Vipshop was founded in 2008 and is currently listed on the NYSE. The e-commerce
company is headquartered in the southern city of Guangzhou and had a market share of
approximately 3% of the Chinese e-commerce market in 2015.52 The company is an e-
commerce platform focusing on accessories, clothing and fashion, cosmetics. The com-
pany runs an outlet flash sales strategy – i.e. specialising in time-limited special offers on
multiple different brands. Vipshop has over 13,300 brands for sale on their e-commerce
platform including both discount and luxury brands53. For cheaper products these flash
sales usually have a duration of 4-6 days while for luxury products they typically run up to
12 days54. The platform is targeting people, who have a high level of education and are
living in the cities – consequently these consumers make up most of Vipshop’s customer
base55. The company was a first-mover in the online flash sales market and therefore
holds a leading market position within daily offers.
Women accounts for 90% of all sales on Vipshop56. For the year 2014, Vipshop had rev-
enues of 3.77 billion USD, compared to 2013 where the total revenues were around 1.7
billion USD. The number of active customers rose as well going from 9.4 million in 2013
to 23.6 million in 2014 while total orders increased from 49.2 million to 107.3 million.57
48 www.scmp.com/lists/article/1780220/top-5-business-consumer-e-commerce-platforms-china 49 www.scmp.com/lists/article/1780220/top-5-business-consumer-e-commerce-platforms-china 50 www.chinadaily.com.cn/business/2014-08/01/content_18231027.htm 51 www.nytimes.com/2015/08/11/business/dealbook/alibaba-buys-into-chinese-electronics-retailer.html?_r=0 52 www.scmp.com/lists/article/1780220/top-5-business-consumer-e-commerce-platforms-china 53 media.corporate-ir.net/media_files/IROL/25/250900/VIPS_4Q14_Post_Earnings_Presentation_February_2015b.pdf 54 www.forbes.com/sites/hengshao/2013/11/26/meet-vipshop-the-highest-valued-chinese-e-commerce-stock/ 55 ir.vip.com/phoenix.zhtml?c=250900&p=irol-ourservices 56 www.bloomberg.com/news/articles/2014-12-18/jd-com-climbs-as-gap-deal-bolsters-shift-in-sales-model 57 ir.vip.com/phoenix.zhtml?c=250900&p=irol-newsArticle&ID=2016983
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Yihaodian (Yhd.com)
Yihaodian (Chinese meaning: The number 1 store) is the largest online supermarket in China.
They had a market share of 1.4% in the Chinese e-commerce market in 2014.58 Headquar-
tered in Shanghai, the company was formed in 2008 and is now majority-owned by Wal-
Mart Stores Inc. The e-commerce retailer originally focused on selling groceries and other
food products and it remains one of the largest online retailers of food products.
Yihaodian has formed strategic partnerships with agricultural organisations and trade
commissions from other countries to increase the availability of foreign imported food
products on their platform59. The food is sold through their online supermarket. The
company has also ventured into other product categories such as baby products, beauty
products, clothing, electronics, home appliances etc. A strategic partnership with the e-
commerce platform Dangdang was signed in 2015, allowing Yihaodian to open a super-
market on Dangdang’s online marketplace in return for letting Dangdang sell their prod-
ucts in Yihaodian’s supermarket. In some urban areas, the company has images of grocery
shelves on walls and surfaces in public places, where consumers can use their mobile to
scan the codes on the images and subsequently get their groceries delivered at home60. In
the end of 2013, revenues reached 1.91 billion USD and 40% of all imported dairy prod-
ucts in China were sold by Yihaodian61. Yihaodian has 100 million registered consumers
and 8 million products.62 It is believed by the authors of this report that the revenue for
Yihaodian has risen for 2014 due to their significant market share and the general increase
in sales within the Chinese e-commerce market.
Womai.com
Womai.com is a B2C e-commerce platform majority-owned by State-owned COFCO,
which is one of the largest suppliers of agriproducts and foodstuff in China. Womai’s
main focus is on food and their goal is to become the largest and safest online shopping
platform. Womai sells a wide range of food products including both domestic and im-
ported products. Furthermore they have kitchen-related products. According to Womai,
their customers are housewives, young people and white-collar people.63
58 www.statista.com/statistics/323115/market-share-of-b2c-online-retailers-in-china/ 59 usa.chinadaily.com.cn/epaper/2013-10/24/content_17055809.htm 60 www.crunchbase.com/organization/yihaodian 61 www.chinadaily.com.cn/business/2014-01/20/content_17247076.htm 62 www.vcpost.com/articles/80519/20150724/walmart-takes-full-ownership-e-commerce-site-yihaodian-china.htm 63 www.cofco.com/en/about/20662.html
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4.2 How E-commerce Works in China
In China online sales are quickly taking away large amounts of market shares from offline
retailers. Large physical stores like GOME and Suning are therefore trying to establish
themselves on the online market. However, they do so with limited success, as the e-
commerce market is already dominated by pure e-commerce companies.
E-commerce in China differs from e-commerce in most Western countries in several key
areas. Chinese consumers are often quite sceptical when shopping online. Consumer pro-
tection in China tends to be weaker than in the West and this negatively influences con-
sumer confidence. Chinese consumers are inclined to be less trusting in areas such as CSR,
brand quality and brand originality. Hence B2C platforms are often perceived as more
trustworthy due to the fact that it is a professional retailer or the brand owner himself,
who is responsible for the selling process. Consequently B2C is gaining popularity over
the C2C and it is becoming the preferred method. There are two types of B2C platforms:
direct sales and marketplaces. The marketplace type has emerged as the dominant form of
the two.
An e-commerce platform with direct sales is basically a type of online retailer. The e-
commerce platform buys products from a producer or distributor and then sells them to
consumers. Typically this gives online retailers higher costs as they have to cover logistics
costs such as warehousing, distribution and other costs arising e.g. such as the cost of
offering customer service.
An e-commerce platform designed as a marketplace is fundamentally different from a
direct sales platform. In a marketplace brand owners and franchisers are in charge of op-
erating a virtual store on the platform. The e-commerce platform does not buy the goods
from the companies itself. Rather it merely acts as an intermediary between companies
and consumers.
Most Chinese e-commerce platforms have more or less adapted the marketplace-style
platform popularized by Alibaba Group’s Tmall. However, some of the major e-
commerce companies have chosen a different route. JD.com simultaneously runs a direct
sales platform and an online marketplace, while some traditional retailers like GOME and
Suning are establishing online retail stores in addition to their physical stores. Tmall and
JD.com have international versions of their marketplaces as well (Tmall Global and
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JD.com Global) to increase the trustworthiness of the products they sell. These market-
places do not have any domestic brand stores on them64.
Furthermore, cross-border e-commerce has gained popularity amongst the Chinese con-
sumers, especially when it comes to products for infants and children, where product
quality and reliability are particularly important features. Due to a large number of smaller
or larger scandals involving products for infants and children – some involving serious
health risks – many Chinese consumers have lost faith in the Chinese state administra-
tion’s ability to secure a safe food and nutritional environment.
4.3 Mobile-commerce
The amount of people using internet through their mobile phones has spiked in recent
years. China’s largest
telecommunication
company China Mo-
bile has made a great
effort to further im-
prove mobile internet
coverage and quickly
expand 4G mobile
internet networks
throughout the coun-
try. This has created a
whole new culture on
how to use the internet.
China has made significant investments to provide the urban population with fast and
reliable internet. In developing a country-wide telecommunications network infrastructure
China has chosen a different path than most Western countries. Instead of first establish-
ing reliable fixed broadband lines throughout the country before moving on to mobile
internet, China has chosen to put more emphasis on developing fast mobile internet.
Considering the fact that the number of people using mobile devices in China reached
over 1 billion in 201465 (over 500 million of whom used mobile internet in 2014) many
64 ir.jd.com/phoenix.zhtml?c=253315&p=irol-newsArticle&id=2035115 and about.tmall.com/tmallglobal?spm=3.7128713.0.0.tnJLlM#place 65 www.wantchinatimes.com/news-subclass-cnt.aspx?id=20150126000003&cid=1202
Figure 3.3.1
0.00%
50.00%
100.00%
0
200
400
600
800
Mill
ion
s
Mobile internet users in China
Mobile internet users
Internet users
Proportion of mobile internet users to total internet users
Source: Graph reproduced from 34th
Statistical Survey on Internet Development in China, July 2014
TC China, Guangzhou 22 of 58
analysts believe that the Chinese government has chosen wisely to accelerate the tele-
communications development by mostly relying on mobile development. Many domestic
smartphone producers offer affordable smartphones to the Chinese consumers, which
enable a large amount of urban internet users to be online on the go as well as increasing
the number of people going online in rural areas66 67. Furthermore, figure 3.3.1 shows that
the proportion of mobile internet users to total internet users is now above 80%. In fact
Chinese users spent between 2.35-3.5 hours daily on the internet from the mobile.
The increasing use of mobile internet has had a clear influence on the e-commerce busi-
ness. E-commerce used through mobile phones (also called m-commerce) is dramatically
on the rise and is expected to further increase until a saturation point is reached68.
In terms of transaction value m-commerce already accounts for approximately one third
of all e-commerce in China. In 2014 the total transaction value for mobile shopping in
China was 151 billion USD while the total transaction value for online shopping was 457
billion USD. 69 In China the rapid development of m-commerce has been supported by
the same factors as e-commerce, which will be explored later in the report including social
media, online payment and ease-of-use design of websites and shops. On China’s biggest
shopping day of the year November 11th 2014 (also known as Singles Day) Alibaba alone
had total sales of 9.3 billion USD across its online sales platform – 42% of which came
from mobile devices70.
A survey by KMPG further hinted that using smartphones for online shopping is on the
rise. 70% of the respondents said that they use their desktop every day for things related
to online shopping (actual purchases and research) while 60% said they use their
smartphones for same purposes every day.71 The survey indicates that mobile e-commerce
is catching up to online shopping on desktop computers. Numbers from We Are Social
further substantiates this trend. In Q 2014 37% of the population bought something
online via a PC while the number was 27% for mobile, so even though online shopping
via computers is still the more popular choice, m-commerce is quickly catching up.72 Of-
66 www.ibtimes.com/china-smartphone-market-outlook-2014-apple-aapl-compatible-4g-network-increasing-rural-penetration 67 www.bbc.com/news/technology-18900778 68 JD.com’s international department expects mobile to grow to 60% of number of orders – up from 20.9% by end Q3, 2014. 69 www.chinainternetwatch.com/12323/mobile-shopping-market-2014/ 70 techcrunch.com/2014/11/10/alibaba-makes-strong-start-to-singles-day-shopping-bonanza-with-2b-of-goods-sold-in-first-hour/ 71 China’s Connected Consumers, KMPG 2014 72 www.techinasia.com/china-web-mobile-data-start-2015/
TC China, Guangzhou 23 of 58
ficial numbers from China Internet Network Information Center show that the total
number of Chinese consumers, who shopped online in June 2014 were 332 million, up
from 301 million the year before. However, in the same period number of consumers
shopping online via mobile phones grew from 144 million to 205 million.73
With the development in technology, the potential for e-commerce is huge. The main
disadvantages of using smartphones for e-commerce like small screens, bad mobile inter-
faces and network problems are gradually disappearing. The government is continuously
investing to make both broadband and mobile internet better. In addition to faster mobile
internet and smartphone affordability, the general development in mobile technology
makes it easier for consumers to shop from the phone.
4.4 The Future of E-commerce in China
B2C e-commerce sales totalled 426 billion USD in 2014 and it is projected to grow to 1
trillion USD in 201874. B2C is gradually overtaking the C2C market and more Chinese are
gaining access to the internet. This creates a larger Chinese e-commerce market, which
offers Danish companies a possibility to expand their business. A.T. Kearney argues that
as sellers in C2C platforms gain more and more experience, they will slowly start moving
into the B2C e-commerce market with virtual stores.
In 2014 the B2B sales reached 1.6 trillion USD75. This is a good indication of the huge
potential B2B e-commerce has in China. It has been projected that China has the poten-
tial of reaching 2.1 trillion USD in B2B sales in 2020 – while the global B2B market could
be 6.7 trillion USD76.
Cross-border e-commerce is another area within Chinese e-commerce that seems to have
a bright future. B2C cross-border sales are expected to grow to 245 billion USD by 202077.
Consumer demand for foreign products is also increasing. Consumers in Tier 3 and 4
cities and in rural areas in China have not enjoyed easy access to foreign products in the
past. However, with e-commerce booming hundreds of millions of consumers now have
an easier way to buy foreign products.
73 34th Statistical Survey on Internet Development in China, July 2014 74 www.emarketer.com/Article/Alibaba-Group-Sites-Dominate-Ecommerce-China/1011791 75 www.internetretailer.com/2015/04/13/b2b-e-commerce-sales-reach-16-trillion-china-2014 76 www.internetretailer.com/2015/02/05/global-b2b-online-sales-are-projected-grow-67-trillion 77 www.alizila.com/report-cross-border-e-commerce-reach-1-trillion-2020-charts
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5.1 From Denmark to China
Whether a Danish company wants to do direct online sales from its website or use an e-
commerce platform, the company has to ship its products to China. If the products are
fully produced or assembled in Denmark it is very important to get them fast and safe to
China. Once in China it might also be necessary to stock the products in warehouses be-
fore further distributing them.
Large freight or postal companies offer some of the most viable solutions for transport-
ing products to China. Using sea transport is a relatively low cost solution, but due to the
long distance from Denmark to China it is a very slow way of transporting goods. How-
ever, if the Danish company knows that there is a sufficiently large online demand for the
product, then sending large quantities of the product could be beneficial as long as the
seller has sorted out warehousing in China. Air transport or other quicker, yet costlier
methods of transporting goods might offer more viable solutions when it comes to ex-
press orders or products with short shelf life.
Needless to say a lot of different shipping solutions exist. Which one is the best solution
in a given case depends on factors such as demand, volume, time and the shelf-life of the
product. Since the consumer will not see the product hands-on before purchasing it, it is
extremely important to secure that the product does not incur any form of damage to
itself or the packaging on the way to China – especially because of the return policies in
online sales. See chapter on Customer rights and return policy.
Large foreign brands and Chinese e-commerce platforms might have special deals with
certain shipping companies. For a Danish company, whether small or large, the most
viable options could be to either use the e-commerce platform’s shipping partner if such
partnership exist or use a larger third-party company, who has experience in providing
logistics from Denmark to China
International logistics companies like DHL and FedEx have many years of experience in
providing air shipping solutions from one country to another. Other solutions include
large domestic and international postal companies. PostNord, the parent company of
Post Danmark, offers easy and reliable solutions for Danish companies to transport their
products from Denmark to China. PostNord has a business partnership with EMS (Ex-
TC China, Guangzhou 25 of 58
press Mail Service), which is owned by China Post. This means PostNord and EMS take
care of the logistics from Denmark to China as well as offering domestic logistics solu-
tions within China.
5.2 Logistics within China
Due to the sheer size of the country it is of vital importance for Danish companies to
carefully consider how to handle logistics within China. In which way and how fast
should the products reach customers? Reaching the large share of the population that
lives outside the big and well-developed Tier 1 and 2 cities in a timely manner might pose
a challenge to companies. As a result Danish companies that want to sell their products
either directly or through a popular e-commerce platform to Chinese consumers will need
to consider two important logistical issues – warehousing and distribution.
5.3 The Importance of Warehousing and Distribution
When a customer orders a product online, a company could decide to have this product
in stock in China – either in a Free Trade Zone or in a mainland warehouse. One consid-
eration is how to stock the product in China78; another consideration is how to deliver the
product to the customer as fast and safe as possible.
Instead of shipping each product individually from Denmark to the end user in China,
another option is to ship products in bulk and store them in warehouses, if demand is
sufficiently large. How-
ever, warehousing (and
safe express delivery)
can be problematic in
inland and western re-
gions of China, which
are much less devel-
oped than the coastal
region. Many ware-
houses are just now in
the process of getting modernised, but might still require more manual labour, which
makes sorting packages and other tasks more time consuming. In many cities certain
types of lorries are not allowed to enter urban areas or are bound by other restrictions. To
78 This is assuming that the Danish company is not delivering from warehouses outside of China.
Source: Private photo; Manoj Jayaruben
Figure 4.3.1: Three-wheeled delivery motorbike from Yihaodian
TC China, Guangzhou 26 of 58
meet the customers’ expectations of fast and safe delivery of products, logistics compa-
nies and e-commerce companies with in-house logistics use smaller vehicles that can go
through the city fast. Examples of this are smaller vans or motorbike deliveries. Figure
4.3.1 shows a three-wheeled motorbike combined with a hanger from Yihaodian. Deliv-
ery vehicles like these are commonly used to distribute goods fast in larger cities, where
roads can be very congested.
In China there has been a lack of high-quality logistics providers, but this is now changing.
The rise of e-commerce has given the express-delivery business a huge boost and as a
result many domestic logistics companies have grown large. They have invested substan-
tial amounts of capital in upgrading and modernising their businesses, as well as expand-
ing coverage. Among other things they have invested in their warehousing capabilities
and vehicle fleet in order to accommodate the booming e-commerce market and the in-
crease in consumer demand for quality.
Choosing the wrong logistics company can have severe consequences. If the product is
damaged en route, if the delivery is too slow or there is a no return policy service available,
it can reflect poorly on the Danish company. Depending on which e-commerce platform
a company chooses, which segment of customers it targets and/or which parts of China it
wants to cover, different logistics solutions are available.
Important note: Different custom rules exist for exported products depending on whether
they are stored in bonded warehouses in Free Trade Zones or elsewhere in mainland
China. See Chapter about Fee’s, Tariffs and Taxes for more information on this.
5.4 E-commerce Platforms and Logistics
Some of the largest Chinese e-commerce companies have built up their own in-house
logistics or ventured into partnerships with logistics companies. In-house logistics enables
the e-commerce company to use their own teams giving them a better control over ware-
housing and/or delivery systems. By doing so, they can deliver in a way that satisfy their
own business model and the customers’ requirements.
The second largest e-commerce platform, JD.com has its own in-house logistics. In 2013,
JD.com processed 320 million orders using their 97 warehouses residing in 39 different
cities and seven distribution centres. In 2014 JD.com had over 1.8 million square meters
TC China, Guangzhou 27 of 58
of warehousing79. This enables JD.com to provide fast deliveries and cover a large geo-
graphical area while ensuring control over the important distribution system.
In 2013 Alibaba partnered up with eight other companies including five leading logistics
companies (YTO Express, SF Express, ZTO Express, Yunda and Shentong Express80) to
create a new open express logistics network called China Smart Logistics Network (CSN81)
– an open platform logistic companies can connect to. The joint-venture company behind
the network is named Cainiao. The purpose of Cainiao is to have a network capable of
24-hour express delivery anywhere in China. CSN is supposed to be fully completed with-
in 8-10 years from 2013 and support daily online sales of 4.8 billion USD while covering
the whole of mainland China.82 Apart from establishing and expanding the warehouses
and distribution systems of logistic companies, as of 2015 Cainiao has also established
three fresh food distribution centres in Beijing, Guangzhou and Shanghai. This makes it
possible to deliver fresh food to these metropolises within 24 hours.
According to the founder and CEO of JD.com Qingdong Liu it is a goal for JD.com to
cover 100,000 villages with e-commerce by 2015 with 100,000 rural e-commerce ambas-
sadors83. Alibaba has similar plans for the next few years84. This will also mean that e-
commerce companies with their own in-house logistics will be able to deliver products
from all over the world to more desolate and rural areas.
Not all e-commerce platforms have the capability or size to have their own in-house lo-
gistics department and therefore have outsourced logistics to third-party logistics compa-
nies. If a Danish company decides to make use of a third-party logistics provider either
through an e-commerce platform or a provider chosen by the company itself, it is im-
portant to consider if the service level of the provider is high enough. Historically service
levels of logistics providers in China have been somewhat lower than the norm in the
West.
79 China’s E-commerce Market in 2014: The Logistics Challenges, A.T. Kearney 80 english.caixin.com/2013-06-06/100538230.html 81 technode.com/2013/05/28/alibaba-officially-launches-the-csn-logistics-program/ 82 technode.com/2013/01/25/alibaba-to-build-logistics-infrastructure-to-enable-same-day-delivery-on-every-corner-of-china/ 83 www.globaltimes.cn/content/907219.shtml 84 china.org.cn/business/2015-01/31/content_34702685.htm
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5.5 Third-Party Logistics – Important Issues to Consider
Different e-commerce platforms might have different requirements in terms of delivery
time, product availability and cash on delivery (COD). As a result it is necessary to evalu-
ate whether or not a third party logistics provider will be able to meet these requirements.
Additionally customers might have their own requirements and expectations such as
door-to-door deliveries or express deliveries, which should also be taken into considera-
tion when choosing a third party logistics provider. Despite the magnitude and complexi-
ty of China, a few companies with large country-wide networks do exist. However, these
companies might only provide basic services in rural and low-tier cities. Local companies
with smaller networks can then provide extensive services in terms of warehousing
and/or distribution.
For nationwide logistics providers COD is often not possible in rural areas and lower-tier
cities – or it might only be available on a weekly basis. This involves an element of risk
for the seller, who has to wait longer to receive the payment. Another important consid-
eration is that some of the large network logistics companies rely on franchising in certain
areas instead of being privately held. In their 2014 report A. T. Kearney wrote that only
about 20-40% of large logistics companies were completely privately owned and generally
relied on the state-owned postal services to make deliveries in rural areas – though it is
believed by the authors that due to the general economic development and especially the
boom in e-commerce the number of completely privately owned large logistics firms are
higher now.
That being said, large high quality logistics companies, who can provide more than basic
services do exist, though their costs are usually higher. High costs have been a main rea-
son for the lack of logistics companies with country wide networks and extra services.
However, the boom of e-commerce has enabled these logistics companies to grow whilst
also upgrading their services.
5.6 Domestic Third-Party Logistics Providers within China
The largest logistics provider in terms of network coverage is the state-owned China
Postal Express & Logistics (CPEL), which was set up in 2010 by China Post and provin-
cial postal companies. CPEL possesses both the Express Mail Service (EMS) brand and
the China Post Logistics (CNPL) brand. EMS is the international express postal service
offered by postal operators of countries, who are in the Universal Postal Union (UPU).
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UPU has 192 member countries (including both Denmark and China)85, covering more
than 45,000 locations worldwide86. CPEL offers a range of integrated domestic logistics
services through CNPL: they offer everything from standard to value-added services and
delivery services including COD.87
Several large private logistics companies are actively competing with CPEL:
Shunfeng Express (SF Express) has service centres in over 12,000 locations covering
all regions of China as well as in Australia, the U.S and across Asia. The company
employs over 340,000 people and operates a fleet of over 16,000 vehicles and 19
planes. SF Express offers value-added services like next-day delivery to most con-
sumers in mainland China. 88 In addition to cooperating with Alibaba through
Cainiao, where SF Express owns a 1% stake89, the two companies are also com-
peting with each other. SF Express has recently set up an alternative smart logis-
tics network with among others STO Express, ZTO Express and Yunda called
Fengchao Network Technology.90
Shanghai Yuantong Express (YTO Express) offers express services (i.e. next-day de-
liveries) and covers most of China. YTO Express operates over 20,000 delivery
vehicles.91
Shentong Express (STO Express) employs more than 200,000 people and operates
over 20,000 vehicles.92
ZTO Express employs 160,000 people and covers 18,000 out of China’s 40,000
counties with over 40,000 delivery vehicles in its operation.93
Another two large private logistics companies in China are Best Express (over
100,000 employees)94 and Yunda (around 90,000 employees)95.
Kerry Logistics is a semi-domestic logistics company based in Hong Kong. Kerry
Logistics covers most regions of China and handles both domestic and interna-
tional logistics. The company is strong in integrated logistics and has a vast distri-
85 www.upu.int/en/the-upu/member-countries.html 86 China’s E-commerce Market in 2014: The Logistics Challenges, A.T. Kearney 87 www.ems.com.cn/aboutus/e_gong_si_jian_jie.html 88 www.sf-express.com/us/en/ 89 english.caixin.com/2013-06-06/100538230.html 90 www.wantchinatimes.com/news-subclass-cnt.aspx?id=20150624000090&cid=1102 91 www.yto.net.cn/en/aboutus3.html 92 www.sto.cn/about.asp 93 www.zto.cn/CompanyIntroduce/CompanyDevelopment/ 94 www.htky365.com/home/About 95 www.yundaex.com/yundalicheng.html
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bution network in greater China. The company employs over 20,000 people
worldwide and has 4 million square metres96 of warehouse space in Asia.97
Logistics providers with smaller networks or with specialised skills can also be considered.
These providers can often provide an extra range of distribution or warehousing services
like COD or evening deliveries, but only within one or a few provinces. Companies with
smaller networks are usually situated around the biggest cities or the wealthiest regions in
China.
5.7 International Third-Party Logistics Providers within China
International companies like FedEx, UPS, TNT and DHL are all present in the Chinese
market. They offer a broad range of services and have a reputation for being consistent
and reliable. However, they only cover certain areas of China and have smaller networks
compared to the leading domestic firms.
One reason for the limited coverage of international logistics companies is that they do
not operate on equal terms with domestic companies. They have to acquire licences for
domestic deliveries, which often only enables them to service few specific large cities and
in specific ways – for example only ground transport. Often it takes a long time for inter-
national logistics firms to get their licenses expanded for domestic deliveries and some
claim that local authorities are favouring domestic companies in giving out licenses98. Air
transport to and from China via international airports is in general not an issue for inter-
national logistics companies, but it can be difficult for them to obtain licences for domes-
tic air transport.
Consequently the domestic logistics providers are dominating the market for deliveries in
China and have done so for quite a few years. In 2013, the 10 largest domestic logistics
companies had 87% of the express delivery market in China. Among these were EMS, SF
Express, STO Express, YTO Express, ZTO Express and Yunda99.
96 Equivalent to 43 million square feet 97 www.kerrylogistics.com/eng/main/index.jsp 98 www.bloomberg.com/bw/articles/2014-03-06/in-china-fedex-and-ups-wait-for-regulators-to-renew-permits 99 China’s Express Sector Development Report 2014, Deloitte
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Another important factor Danish companies need to consider when going into the Chi-
nese e-commerce market is the influence of social media. Social media is more closely
integrated into online shopping in China than in most other countries. The Chinese e-
consumers use social media to obtain information relating to the brands, services and
quality of goods that are being sold online.
6.1 Popularity of Social Media
Global social media sites like Facebook and Twitter have been blocked for years in China
by the Great Chinese Firewall. This has given rise to domestic social media platforms, which
in the beginning were mere copies of popular global social media platforms like Facebook,
Twitter and WhatsApp. In recent years local social media sites have seen a lot of innova-
tion. They have added a wide range of functions, whilst also focusing on mobile capability
to satisfy the demands of the Chinese consumers. In Tier 1-3 cities 95% of all internet
users are connected to a social media platform100. Currently two of the biggest social me-
dia platforms are Tencent’s WeChat and Sino’s Weibo. Both are frequently used by con-
sumers when doing online shopping. As such social commerce should be taken into con-
sideration when doing e-commerce in China.
WeChat is more or less only used on mobile devices101. It started out as an instant-
messaging and photo-sharing app, but has since added functions like personal blogs, pub-
lic accounts, location-sharing and an online wallet. The online wallet in WeChat gives the
user the option of paying for online shopping directly through the app. In 2014 the
WeChat app had 500 million monthly active users102. This number grew to nearly 550
million monthly active users in Q1 2015103. WeChat is a more private social media plat-
form, as only your contacts – i.e. friends, family or co-workers – can see your posts and
detailed profile. In many ways WeChat resembles WhatsApp, especially when it comes to
the various chat functions, such as the ability to record voice messages and location shar-
ing. There are also certain similarities with Facebook. Similar to Facebook, WeChat users
are able to post comments, photos, events etc. on their wall, which their WeChat friends
can like or comment on.
100 KPMG China 360 – Social media in China: Local innovation connecting people, April 2013 101 Although it is possible to access WeChat on a desktop computer via a browser, you are required to have the mobile app on your phone to be able to login. 102 www.techinasia.com/wechat-500-million-active-users-q4-2014/ 103 www.techinasia.com/wechat-549-million-active-users-q1-2015/
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Sina’s Weibo is the most popular microblog platform in China with 212 million active
monthly users. Unlike WeChat it is popular on both computers and mobile devices104. In
addition to being used to keep in touch with friends and keep updated about what hap-
pens in their lives, the microblogging format enables companies and celebrities to broad-
cast short messages to a large number of people at the same time. Initially Weibo closely
resembled Twitter, but as with other social media platforms in China features that are
uniquely Chinese are continuously added. Weibo is not just about microblogging anymore.
In fact 86% of all users on Weibo use the app to shop online as well and lately Weibo has
integrated itself closer to e-commerce enabling online payment and allowing e-commerce
platforms to sell directly on Weibo105.
One of the fundamental differences between WeChat and Weibo is that while users can
search through the posts in Weibo through tags, searching through posts is not possible
on WeChat – not even on public accounts. Another important difference is that Weibo at
its core is a microblog, meaning that everyone who has a profile on Weibo can see your
posts, unlike WeChat where it is only people in your network who can see your posts. In
order to access public profiles made by company brands on WeChat, the user need to
first subscribe to the public profile.
Internet censorship in China is rather strict, which is something that affects Weibo too.
Quite often posts that are deemed controversial get deleted.
6.2 Social Commerce and the Importance of Social Media
Social media in China is more closely integrated with e-commerce than is usually the case
in the West. It serves as a direct link between the company/brand and the consumer. For
example, Chinese consumers use company social media accounts to gather more infor-
mation about products. Many companies also conduct customer service through social
media apps like WeChat, due to the ease of communicating anywhere or anytime.
In China consumers rely on social media for word of mouth advice. Shopping online
means the consumers do not necessarily have the same opportunities to see and feel the
product. This is especially the case for Danish companies who are not present in physical
stores in China. In Denmark a site like trustpilot.dk exists, where consumers can give and
read reviews on online retailers and products bought online. In China social media often
104 www.techinasia.com/weibo-212-million-active-users/ 105 www.chinainternetwatch.com/7751/reasons-why-china-internet-users-buy-on-weibo/
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serve the same function: consumers can see customer reviews or hear the opinions of
friends and family on certain products. Furthermore microblogging sites like Weibo have
Key Opinion Leaders (KOL’s). KOL’s include fashion bloggers, celebrities like actors and
musicians etc. These KOL’s have millions of active followers, who look to them for ad-
vice and comments on current trends. On WeChat it is also possible to subscribe to the
public profiles of KOL’s. E-commerce platforms like Tmall.com and JD.com let con-
sumers post comments and pictures of purchases directly on the product page through
their social media account together with an integrated rating system.
6.3 Marketing through Social Media
One way for Danish companies to establish or strengthen their brand in China is to cre-
ate accounts on suitable social media platforms. To further enhance brand visibility of the
product and increase outreach to consumers, one strategy is to hire KOL’s to promote
the product through their social media accounts. KOL’s can furthermore promote com-
petitions and/or do combined communication via their own and a company’s social me-
dia account.
To increase company reputation and brand recognition, it’s important to consider brand
building as well as seeking to increase the level of influence in relevant markets. Brand
stories are an option, as Chinese people in general seem to have a strong affinity for get-
ting to know the story behind a company or product. Other methods of building brand
awareness include hiring celebrities to advertise the product or use social media to pro-
vide tips and tricks on how to use the product. A Danish clothing company might pro-
vide style tips and talk about the latest fashion trends in Scandinavia.
A long-term strategy for brand building using social media is to reinforce sales and fully
embrace social e-commerce. One way of achieving this is by linking the company’s social
media account directly to the e-commerce platform. By integrating these, customers can
leave reviews and feedback directly on the social media account through an e-commerce
platform. Other examples could include WeChat coupons, daily deals advertised and di-
rect links to customer service through the social media.
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Social media marketing accounts for a large part of online sales marketing in China – as
seen in the chapter on Social Media. In this section we explore more traditional marketing
tools for e-commerce.
7.1 Other Ways of Marketing for E-commerce
7.1.1 E-commerce Platforms
It is often possible to advertise directly on an e-commerce platform by doing product
promotions or by highlighting products on the front page of the platform. Promotions
include special deals or offering limited editions of certain products.
7.1.2 Offline Promotions
The Chinese market has a high level of complexity and a large number of advertising
channels exist – both online and offline. As in the West, radio and television commercials
provide a way to reach a large number of consumers. Other traditional options include
magazines and newspapers. However, as in the West, Chinese consumers are increasingly
using mobile devices to read their daily news. Another option in the larger cities in China
is to advertise on the metro systems. Millions of people use the metro every day. It is pos-
sible to get a huge amount of exposure by advertising in metro stations and in the metros
themselves. Furthermore most metro trains in China have small TV-screens that show
commercials to commuters.
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As the e-commerce markets have gained more popularity over the last couple of years, it
is increasingly important from a government perspective that Chinese consumers are pro-
tected by law when buying things online. Consumers have become more and more de-
manding in terms of quality of the product, delivery, service etc. Consumers in China are
protected by the Consumer Rights Protection Law of the People’s Republic of China (a
revised version of the law went into effect on March 2014). When making online pur-
chases, consumers can complain and obtain a refund if the quality of the product does
not live up to the advertised standard. The online retailer will then be held liable. If the
consumer and the retailer cannot reach an agreement, the consumer can complain directly
to the administrative authorities or file a case with the Chinese courts. This is the path set
out for customers seeking protection of their rights.
According to article 25: if business operators sell goods by network, TV, telephone, or
mail order, consumers are allowed to return the goods within seven days of receipt. The
consumer does not need any specifying reason, and the full price will be refunded. A few
goods are not included in this article: customized, fresh and perishable goods, software
downloads and delivery of newspaper and periodicals. The returned goods must be in
good condition. Business operators must return the price paid by the consumer within
seven days from receiving the returned goods107. The shipping expenses for returned
goods will be covered by the consumer, however if there exists an agreement between the
two parties pertaining to who should cover the return costs, such an agreement will pre-
vail.
It is also possible for online retailers to provide better conditions for the consumers, for
instance more favourable policies regarding return rules – e.g. longer return timeframes,
free shipping, warranty etc. But as mentioned above by default online consumers will
have the opportunity to return the product within seven days of purchase to the online
retailer, at the consumer’s own expense.
Article 24 is quite similar to article 25, however it includes traditional retailers. The con-
sumers can still return the goods within seven days of receipt. When the goods or services
provided by the business operators do not meet the quality requirements, consumers are
106 This chapter has been written with knowledge from the law texts in Chinese and Chinalawinsigt.com. For help with translation of Chinese law texts regarding e-commerce please contact TC China 107 www.law-lib.com/law/law_view.asp?id=433990
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entitled to return the goods in accordance with national provisions or the agreement be-
tween the parties. Obviously the consumer can also request that the business operators
fulfil their obligations towards the consumers such as exchange the product or carry out
any necessary repairs. However, in this case the business operator must in some circum-
stances bear the transportation expenses.
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One noticeable difference between a physical store and an online shop is the interaction
between employees and customers. The face-to-face service that an employee provides at
a psychical located store cannot simply be replicated online. This does not mean customer
service is less important online. Chinese e-commerce companies such as Alibaba have
realized the importance of providing satisfactory online customer service. They employ
over 25,000 people to service the customers’ needs108.
9.1 Pre- and Post-Sales Services
The main ways of serving online consumers are through live chat and phone customer
service, with live chat being the most dominant. Many Chinese consumers do not com-
municate well in English and as such foreign companies should provide customer service
in Chinese. It has become standard practice among famous brands and the largest e-
commerce platforms to provide live chat both during and after business hours.109 This is
important as unsatisfied customers are more likely to give negative reviews on social me-
dia or blame the e-commerce platforms as well for any perceived unsatisfactory services.
Chatting with potential customers through social media (for example on new products) is
often a form of pre-sales service. Live chat on the other hand often serves as both a pre-
and post-sales service.
9.2 Who Takes Care of Customer Service?
Some of the largest Chinese e-commerce platforms have their own in-house customer
service teams that companies can engage with. However, Danish companies selling
through these platforms cannot completely forget about customer service. For instance
the company (or a third party) should provide pre-sales customer service to consumers,
who are interacting with the social media account of the company or asking direct ques-
tions on the company website. If the company is planning to sell online directly from
Denmark, it is important to find a third-party company, who can help with customer ser-
vice in Chinese.
108 www.forbes.com/sites/walterloeb/2014/04/11/10-reasons-why-alibaba-is-a-worldwide-leader-in-e-commerce/ 109 venturebeat.com/2014/07/20/why-tmall-is-the-smartest-route-into-chinas-ecommerce-market/
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Method of payment is another important issue in Chinese e-commerce. The Chinese con-
sumer can pay for their product in various ways like cash payment, online and mobile
payment, bank transfer etc. Most China-experienced business people evaluate a Chinese
consumer’s level of trust as quite low, both when it comes to the authorities and compa-
nies. Many Chinese consumers do not trust domestic companies to deliver a high quality
product. Foreign companies might experience having their products copied (poorly) by
domestic companies, who then sells them on e-commerce platforms. When counterfeit
products of bad quality are sold online it creates distrust for the consumers. It is therefore
extra important for foreign companies to earn the trust of customers by delivering a
product of high quality and authenticity whilst also fighting copycats potentially damaging
the brand image.
Compared to shopping in physical stores, it can be more difficult for consumers to do
pre-purchase evaluations of products when shopping online. Customer reviews on e-
commerce platforms and social media sites combined with policies favouring the con-
sumer (such as a seven days no questions asked-return policy) help create trust in the prod-
ucts sold and the retailers selling the product. It provides an incentive for retailers to de-
liver products that have an acceptable price/quality ratio. If this is not the case the com-
pany will receive bad reviews, which in turn deters other consumers. This is good news
for Danish companies as the system itself creates a basic level of trust.
10.1 Cash on Delivery
When B2C e-commerce emerged in China the predominant way of paying for products
was Cash on Delivery (COD). As the name indicates the consumer pays for the product
when it is delivered, rather than when it is ordered. One advantage of COD is that per
definition there will actually be a delivery of the product prior to payment. One reason
COD has been quite popular in China is due to a high level of perceived trust from Chi-
nese consumers. 110
From an online retailers point of view COD has some disadvantages. If an e-commerce
company do not have its own logistics department or a strategic partnership with a logis-
tics provider, the retailers might have to rely on third-party logistics providers. When
dealing with third-party providers there are elements of uncertainty and risk involved. The
110 observerintelligence.com/building-trust-with-chinese-consumers-via-cash-on-delivery/
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extra link in the supply chain could make the distribution process less effective, more
expensive and less reliable, due to lack of proper scheduling on when the cash is actually
received by the company. Because of the restrictions and disadvantages of COD, elec-
tronic payment (and especially mobile payment) has gained popularity.
10.2 Online Payment
While COD is still used by millions of people in China, electronic payment methods are
now preferred by most consumers. Electronic payment refers to paperless monetary
transactions, such as online and mobile payment. As online payment processes have be-
come less time consuming and user friendliness has increased, more and more people
have embraced electronic payment methods and are now quite familiar with these.
Online payment methods include paying directly on an e-commerce platform with a cred-
it or debit card or making online banking transfers. However credit card penetration in
China is still very low compared to the West. Furthermore many Chinese consumers are
not willing to provide personal banking details online. Despite of these limitations the
amount of online payment users in China was still 304 million (not including mobile
payment) in 2014 and has been steady growing from 52 million in 2008111.
Another form of online payment is the credit method offered by some credit companies
or e-commerce platforms by themselves. JD.com gives its customers credit lines up to
15,000 RMB (2,416 USD). They can then choose to pay the amount borrowed back with-
in 30 days or instead pay monthly rates at 3-12 months.112
10.3 Mobile Payment113
Due to the distrust in providing sensitive banking information online, alternatives to tra-
ditional forms of online payment have sprung up. In 2004 Alibaba developed an online
payment system called Alipay for their C2C e-commerce platform Taobao. The goal was
to make online shopping on Taobao safer, easier and more trustworthy. There had been
many cases of counterfeit products being exchanged between customers that created
problems of trust – how could you know whether the product you bought was genuine or
a counterfeit copy? Alipay solved this trust issue quite elegantly by introducing escrow
functionality. Essentially the merchant and the customer each have an Alipay account.
111 www.statista.com/topics/1211/online-payment-in-china/ 112 technode.com/2014/02/13/online-retailer-jd-com-to-launch-consumer-credit-line/ 113 Mobile payment is also online payment, but has gained its huge popularity following the increase of m-commerce – therefore authors believe that mobile payment deserved its own sub-section.
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Once the purchase has been made and the product has been delivered to the customer,
he or she has to either accept or reject the purchase. Until the customer has accepted the
purchase the merchant does not receive payment on their Alipay account. If the product
quality is not as advertised or there are other problems with the product, the customer
can choose to reject the purchase. This system favours the customer and helps build up a
higher level of trust in the e-commerce platform.
Alipay is the standard way of paying on Taobao and Tmall and is highly integrated into
their mobile apps. Many other e-commerce platforms have integrated Alipay or similar
third party payment solutions, where the money transaction is debited from the custom-
ers online pay account only after they confirm the purchase. This creates a safety net for
all online consumers.
Many social media platforms have integrated with e-commerce platforms and conse-
quently offer online third party payment options. For instance WeChat has developed its
own third party payment option called WeChat Wallet, which has continuously gained
popularity.
The two most popular payment apps Alipay and WeChat Wallet have many functions in
their respective mobile payment
systems, as seen in figure 10.2.1.
They both work in a similar way: a
customer adds the desired products
to the shopping card of an e-
commerce platform and chooses
the mobile pay function. A QR
code is then created, which the
customer must scan with the pre-
ferred payment app. Once the QR
code has been scanned, the money
will be withdrawn from the cus-
tomer’s Alipay account or WeChat Wallet. Alipay works both on desktop computers and
on mobile devices, whereas WeChat Wallet is only available on mobile devices through
the WeChat app.
Figure 10.2.1: The Alipay mobile app and WeChat Wallet
Source: Private photo; Manoj Jayaruben
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Mobile payment is already used extensively in China and is projected to further increase in
popularity. It is estimated that in 2015 the total number of mobile pay users will be 660
million while in 2017 the number could grow to 745 million114.
114 www.statista.com/topics/1211/online-payment-in-china/
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When entering the Chinese e-commerce market it is important to consider the design of
the website and virtual store. Chinese ways of designing webpages can be quite different
from Western ways. If appropriate a Danish company can choose to mix Western design
with Chinese design – for instance by combining Western design with Chinese search
methodology or page design (i.e. long pages with a lot of information on the front page).
However in many cases it might be wise to stick to Western design to enhance the for-
eignness of the product.
11.1 Homepages
Any Danish company entering China should have a Chinese version of their website, due
to the fact that many Chinese do not have competencies in English beyond a basic level.
Fundamentally Chinese websites used to be designed quite differently from Western web-
sites. Flash was very widely used and a wealth of information was placed on the front
page itself. As there are countless Chinese characters, having them directly on a keyboard
is not an option. This made it a bit more cumbersome to search on Chinese websites. As
a result, a lot of information was given directly on the front page along with links to dif-
ferent sections on the website. This type of website design is very suitable for desktop
computers, but less so for mobile devices.
11.2 Mobile Websites
The fact that Chinese people are increasingly accessing the internet from mobile devices
creates a fundamental change to the way Chinese websites are designed. Large amounts of
information do not suit smaller mobile screens well and using Flash is becoming a less
and less attractive option for the mobile websites. Summarising – in the West, mobile
websites can often be seen as an extension of the desktop websites, but in China – with
issues concerning Flash on mobile sites and the different search possibilities on a touch
screen vis-a-vis a “normal” computer screen (see next paragraph) – they are seen as two
separate things. Thus some Chinese companies might even skip desktop versions of their
websites. One reason for this trend is the rise of social media applications, like WeChat,
which have its own in-app mobile browser. As mentioned more and more people go
online through their mobile, not their computer – and often through the in-app browser
in WeChat. Another reason for the popularity of mobile internet (and m-commerce) is
that it is easier to use Chinese characters on a mobile device like smartphones, as the
touch function enables the Chinese user to draw the Chinese character instead of pains-
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takingly typing it. This essentially makes searching for information and products on mo-
bile websites much easier than previously on desktops.
11.3 Virtual Store Design
11.3.1 Comparison with Danish Online Stores
E-commerce platforms have gone through a mobile transformation as internet users in-
creasingly go online from mobile devices. Being user-friendly is a top priority and many
Western and Chinese e-commerce websites are designed in similar ways (as seen in Ap-
pendix B, where the website of Danish home appliances retailer Elgiganten is compared to
JD.com). However please be aware that most mobile users in China will be accessing
JD.com via the JD app.
JD.com’s front page is quite long compared to Elgiganten’s. The reason for this is that
JD.com’s front page shows some products from both the mall-styled online store as well
as its direct e-tail store. This means that when the user scrolls down the front page, prod-
uct offers from different “floors of the mall”, which houses different product categories
and brands can be seen (also see Appendix C).
11.3.2 The Use of Western Design
Companies should consider the signal they want to send to Chinese consumers, when
they design their virtual stores. Western products are often perceived to be of higher qual-
ity than domestic products. Companies can benefit from this and create a sense of brand
trust by following Western design traditions. There has been much distrust towards do-
mestic Chinese products following scandals like the infant milk formula scandal a few
years ago. When Western companies sell their products through a virtual store or a web-
site with Chinese design, it can potentially create distrust among the Chinese consumer.
115
115 www.chinadigitalreview.com/taobao-to-20-million-web-design-for-the-chinese-consumer/
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How to secure IPR is one of the most important tasks any Danish company must consid-
er before entering the Chinese market. Since China joined the World Trade Organisation
in 2001, it has created rules and regulations set to protect companies from IPR-related
infringement issues - both internationally and domestically. Even though IP laws in China
are quite strict, there are often problems with enforcing the laws. International firms fre-
quently experience problems regarding IPR-infringement. Chinese competitors might
make copies of a product or make use of the brand name in Chinese. A Danish company
wanting to enter the Chinese e-commerce market should be just as careful and prepared
as any company entering the Chinese market. Domestic companies or even people on
C2C platforms could potentially infringe a Danish company’s rights.
12.1 Important IPR’s
Securing Intellectual Property Rights should be a top priority for Danish companies –
especially if the product is successfully introduced to the Chinese consumers. Copying
and misuse of brand names could mean loss of profit, damage to brand and reputation
and loss of business.
In the following section, information will be given on relevant Intellectual Property
Rights in China together with the relevant state agencies handling the different IPR’s.
Trademarks
When entering the Chinese e-commerce market it is important to secure the company’s
trademark in China. Trademarks are logos and signs consisting of letters, numbers, pic-
tures etc.
A Danish company should register its trademark before entering the Chinese market and
make sure that the trademark has not already been registered. The China Trademark Of-
fice (CTMO) has an online database where all registered trademarks are listed and where
search for existing trademarks can be done. In China trademarks are registered on a first-
to-file basis. This means that whoever registers a trademark first – whether it is an organi-
sation or a private person – usually gets the trademark. With the first-to-file system, issues
do occur where domestic organisations or people register the trademark of foreign inter-
national brands to take advantage of the companies who own the trademark. This is
called bad faith-registrations as they effectually block the rightful owner’s rights in China.
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Well-known brands enjoy better protection against bad faith-registrations as these are
harder to trademark.
Danish companies can take pre-emptive measures to protect themselves against bad-faith
registrations and other trademark infringements. It is advisable to always register the
trademark before going into the Chinese e-commerce market and make sure that prod-
ucts are trademarked before the products are sold online or even presented to Chinese
consumers. One important thing to note is that trademarks, which are not used within 3
years of being registered in China, can be revoked116.
The Nice Classification (also known as the International Classification of Goods and Ser-
vices) divides goods and services into 45 product classes. In China these are further divid-
ed into sub-classes. When entering the Chinese e-commerce market, it is advisable to do
trademark registration in all of the sub-classes of the relevant product class even if the
product only slightly fit some of these sub-classes. When registering a trademark in a
product class, up to 10 sub-classes are free of charge, however, anything beyond 10 sub-
classes the company will have to pay for. Paying for extra sub-classes could be a good
idea. The Danish ventilation company Novenco experienced problems when an employee
from a former supplier registered the trademark Beijing Novenco Ventilation Company.
By not registering all sub-classes (however irrelevant they seemed at the time) Novenco
was exposed to the risk of bad faith registration. As a result Novenco has had to take the
issue up with CTMO117. Such a case can take several months to settle. It is important to
bear in mind the risk of trademark revoke not used within 3 years affects trademarked
sub-classes as well.
If a Danish company encounters a bad faith-registration, one of the most viable methods
to get the trademark back is simply by buying it back. It is important to get the transac-
tion approved by the State Administration of Industry and Commerce, which is the min-
istry that CTMO resides under.
Even if a trademark has been registered internationally through the World Intellectual
Property Office, it is still necessary to register the trademark in China118. The National
Registration System under the CTMO requires that the registration is done in Chinese. A
good solution for Danish companies without base in China is to use a Chinese trademark
116 kina.um.dk/en/~/media/Kina/Trade%20Council/IPR%20Guidelines.pdf 117 borsen.dk/nyheder/avisen/artikel/11/105650/artikel.html 118 www.chinalawblog.com/2014/04/the-trouble-with-madrid-system-trademarks.html
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agent. When registering in China, it is essential to register the trademark in both Latin and
Chinese characters. There are three main methods Danish companies can use to translate
their Danish/International trademark into Chinese119:
Direct translation
Phonetic translation
Combination of direct and phonetic translation
The direct translation method implies translating the literal meaning of the trademark into
Chinese. One example of this is Apple, who simply chose the Chinese name for an ‘apple’,
which is ‘Ping Guo’ (苹果). The drawback of the direct translation method is that the
Chinese name might bear little or no resemblance to the original name. Phonetic transla-
tion involves translating the trademark into Chinese in such a way that the pronunciation
of the Chinese trademark closely resembles the original pronunciation. One prominent
example is Audi, who chose the Chinese name ‘Ao Di’ (奥迪). One pitfall when doing
phonetic translations of the name is that the chosen Chinese characters might have un-
foreseen negative connotations for Chinese speakers of different dialects. The last meth-
od is a combination of direct and phonetic translations. This is the best method, but it
can be difficult to achieve. A classic case of a company, who was very successful in
choosing a Chinese name, is that of Coca-Cola, who selected the Chinese name ‘Ke Kou
Ke Le’ (可口可乐). The Chinese pronunciation is not only similar to the English pro-
nunciation, but the meaning (which roughly translates into “to permit the mouth to be able to
rejoice120”) creates a positive image in the minds of Chinese consumers.
Ralph Lauren serves as a tale of caution for what can happen, when a company neglects
to translate their trademark into Chinese. Due to the lack of a Chinese name Chinese
consumers started referring to Ralph Lauren as ‘San Jiao Ma’ (三脚马), which means
‘three-legged horse’. While this did not create a legal problem, Ralph Lauren did lose con-
trol over how their brand was marketed in China. It is also highly advisable that website
domains are registered in China, as there is always a risk of someone else doing a bad
faith-registration online as well.
119 www.youripinsider.eu/ways-three-legged-horse-brand-china/ 120 www.troutmansanders.com/11-19-2008/
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Design Patents
In addition to a registering a trademark it might be advisable to register a design patent as
well – especially if the product has specific visual features that are identifiable with the
brand and company and are part of a unique selling point to consumers. A design patent
does not protect the company from having product functionality copied – i.e. a design
patent does not prevent other companies from producing products with similar functions
– it merely protects the product from being copied visually.
According to the Danish Patent and Trademark Office, a company can be assigned a de-
sign patent provided the desired design have not been used by others outside of China or
have not been used in China before. A design patent lasts for 10 years.
Copyrights
Copyright is another IPR-related issue to consider. Copyrights are mostly used to protect
original work, mainly including creative works like books, paintings and compositions etc.
Several forms of designs including architectural, industrial or graphic design can also be
copyrighted. Copyrights can be a useful addition to trademarks and design patens when
protecting IPR.
The basis for copyrighting work in China is the same as in Denmark and Europe, the
work must be both original and others should be able to replicate it. As soon as a piece of
work is created it is copyrighted – also when it is created outside of China, e.g. in Den-
mark. As a result it is not strictly necessary to register a copyright in China. However, it is
still advisable to do so at the Copyright Protection Centre of China (CPCC). This makes
it easier to enforce the copyright in China.
12.2 Enforcing IPR’s
There are a few ways to enforce your intellectual property rights in China:
Private negotiation
Official administrative agencies
Legal system
Customs
When experiencing infringement of IPR (e.g. bad faith-registration) one way to deal with
it is to meet with the infringer and buy the IPR from them. This can save time, but at the
TC China, Guangzhou 48 of 58
same time it can be expensive and it might not deter the infringer or other people from
doing it again. The advantage of this is that everything is settled outside the courts and
the company will not have to spend money and time on proving their case. If an agree-
ment is reached through private negotiation it is very important to get the IPR-transfer
formally registered. A more official way of dealing with infringement of IPR is through
administrative agencies. Going through agencies is a cheap and fast solution compared to
taking the case to court. They are usually highly effective when it comes to IPR infringe-
ments. For trademarks-related issues contact the State Administration for Industry and
Commerce (SAIC), for copyright-related issues contact the National Copyright Admin-
istration of China (NCAC) and for patent-related issues contact the State Intellectual
Property Office of the P.R.C (SIPO)121. They have the right to seize and destroy items
infringing copyrights, and fine offenders. However, they cannot award money for damage
done to rightful owner.
The legal system offers another solution in dealing with IPR infringement. A company
can take the matter in own hands and go to civil court. However, this can take a long time
and often evidence presented have to be notarised. Another option is to attempt to bring
criminal procedures again the infringer. After reporting the IPR infringement to the po-
lice or another law enforcement agency, official administrative agencies decide whether or
not to bring the criminal case to court. It is also possible to file a criminal lawsuit directly
at the court, but in severe cases it’s better to go through aforementioned agencies, as
these can gather evidence a Danish company might not be able to obtain even with pri-
vate investigators. Infringers can be sentenced to pay damages for the infringement and
might even receive jail time.
Finally a Danish company can use Chinese customs when protecting IPR. Even if the
company only sells products online in China, there’s still a risk that products might get
copied by a domestic firm and exported to other countries. There’s also the risk that an
infringer would copy the product and get it imported to China. It is advisable that a Dan-
ish company register their IPR with the General Administration of Customs in China
(GACC)122. In China the customs checks both imports and exports for IPR’s registered
products in their database. The Chinese customs can fine IPR infringers and confiscate
and destroy infringing products. Occasionally they might bring criminal charges against
the infringer – depending on the severity of the case. 121 www.wipo.int/directory/en/urls.jsp 122 english.customs.gov.cn/
TC China, Guangzhou 49 of 58
It is imperative to consider all relevant aspects of IPR protection before launching prod-
ucts on the Chinese e-commerce market. It is advisable to get professional help when
securing IPR right. They can do trademark scans and help register different types of Intel-
lectual Property Rights.
For more information see the article “Intellectual Property Rights in China” written by
the Danish Patent and Trademark Office in collaboration with TC China: ki-
na.um.dk/en/~/media/Kina/Trade%20Council/IPR%20Guidelines.pdf
The China IPR SME Helpdesk co-funded by the European Union offer more extensive
and technical knowledge: china-iprhelpdesk.eu/
TC China, Guangzhou 50 of 58
Due to the complexity of rules and regulations in China it is difficult for Danish compa-
nies to get an overview of all of them. Some rules might seem less relevant from a West-
ern perspective, while others are very similar to Danish rules. In the following sub sec-
tions, some of the most important rules and regulations that could affect Danish compa-
nies in the Chinese e-commerce market are highlighted. When in doubt it is highly advis-
able to obtain professional help.
13.1 Packaging and Product Declarations
When going into the Chinese e-commerce market, product packaging and declarations
have to be taken into consideration. Some general rules apply to packaging: The packag-
ing should be recyclable and degradable. Furthermore it can’t be hazardous or dangerous
in any way. It is encouraged that the packaging is environment-friendly and preferably
made of recycled material.123
Transporting products to China requires Danish companies to think about transport
packaging. Depending on how the product is transported, different rules concerning
packaging exist. Another factor to keep in mind when packaging products is the transpor-
tation method. Shipping the product from Denmark to China through air, sea or via land
might require different methods of packaging. Product descriptions, declarations and
labels must include a Chinese version. The origin of the product should be stated along
with the name and address of the distributer in China, e.g. an e-commerce platform. De-
pending on the type of products, different rules exist for declarations and labelling. One
example is food products, where date of production, expiry date, net weight and list of
ingredients must be written directly on the label.
13.2 E-commerce Platform Rules
In addition to official rules and regulations Danish companies should also understand and
follow the guidelines and rules outlined by the e-commerce platforms. Usually these are
written in the business conditions and for the largest e-commerce platforms like Tmall
and JD.com, English versions exist.
E-commerce platforms have rules pertaining to different fees that need to be paid. If
these are not paid on time, the e-commerce platform will typically issue warnings or im-
123 en.santandertrade.com/international-shipments/china/packaging-and-standards
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pose fines on the company. In a worst case scenario the company will be barred from
selling on the e-commerce platform and lose its store, either temporarily or permanently.
In order to protect the integrity and reputation of the e-commerce platform, retailers usu-
ally have to fulfil certain obligations regarding return policies or customer service. In the
long run these rules work in favour of the retailers, since they enhance the level of trust
consumers have in the platform and the retailers.
If the rules that an e-commerce platform imposes seems doubtful, acquire professional
help.
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14.1 Import and Export Taxes
China has a complex system of import and export taxes that affect Danish export com-
panies. In general Danish companies need to be familiar with:124:
Value-added tax for imported products
Consumption tax for imported products
Customs duties
These duties and taxes differ depending on what product is being imported into China. If
in doubt on where to obtain relevant information regarding duty and tax rules pertaining
to a particular type of product, it is possible to get professional help – for example by
contacting TC China or a law firm specialising in export to China.
14.2 Free Trade Zones and Bonded Warehouses
China has liberalised certain import/export tax rules in several so called Free Trade
Zones (FTZ). An FTZ is a special zone within China designated to make it easier for
both domestic and foreign firms to handle imported goods. FTZ’s are modelled after
Hong Kong and other business friendly, low-tax areas. There are fewer restrictions put on
companies operating inside FTZ’s than in the rest of mainland China. The first FTZ was
launched in Shanghai in 2013 and comprised of 29 square kilometres along the coast –
including trade ports and one airport125. Since then, three new FTZ’s have been launched
in 2015 in the provinces Guangdong and Fujian and the municipality Tianjin126.
Free Trade Zones makes exporting to China easier for foreign companies. Danish export
companies can save money on various tariffs, such as consumption tax and import duties
when shipping the products to one of the FTZ’s. This is facilitated by the use so-called of
bonded warehouses. There is another great advantage: in many cases companies do not
have to register the product, when exporting to FTZ’s.
Goods stored in bonded warehouses in FTZ’s do not have to go through the same cus-
tom clearance processes and are not subject to the same VAT and tariffs rules as other
foreign goods exported to China127. Essentially this means that a Danish company can
124 www.china-briefing.com/news/2013/03/11/import-export-taxes-and-duties-in-china.html 125 www.scmp.com/business/economy/article/1319475/shanghai-free-trade-zone-proving-ground-wider-reforms 126 www.wsj.com/articles/china-to-set-more-free-trade-zones-1427199186 127 english.customs.gov.cn/Statics/68759031-4290-41a5-9cae-511fb27839ec.html
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defer VAT on goods stored in a bonded warehouse until they are shipped to a customer.
When a Danish company ships a container with goods to China with the purpose of sell-
ing it on an online e-commerce platform like JD.com the products can be stored in
JD.com’s bonded warehouse in a Free Trade Zone without having to go through customs
clearance. Only once a customer has placed an order for the product will the VAT have
to be paid. This means that only when the goods are transported out of the Free Trade
Zone do they have to go through customs clearance. 128 It should be noted that products
imported and exported to China are exempted from custom duties, if the value of goods
is below 50 RMB (8 USD) – regardless of whether it is in a Free Trade Zone or not129.
There might be other advantages to Danish companies when using FTZ’s depending on
the specific product category. This is worth checking on a case-by-case basis.
Free Trade Zones brings another advantage for foreign companies. In China there are
restrictions on which sectors foreign companies can create wholly-owned subsidiaries in.
Some sectors are completely blocked from any foreign company while in others sectors
foreign companies are only allowed to hold a percentage of shares in a domestic Chinese
subsidiary. As such a Chinese partner is often required when setting up subsidiaries in
China.
If a Danish company wants to open its own e-commerce platform in China, it is now
allowed to own 100% of the company behind the platform, where the old limit was 55%
in Shanghai Free Trade zones and 50% outside the Free Trade Zones.130
14.3 E-commerce Platform Fees
It is important to remember that entering the Chinese e-commerce market through an e-
commerce platform also involves costs directly tied to the platform. Different e-
commerce platforms might have different fees that companies have to pay, but some fees
are quite general. A Danish company looking to get involved with a potential e-commerce
partner should therefore always make sure to have information on the possible fees that
need to be paid.
Typically a company entering an e-commerce platform needs to pay some kind of deposit,
which is refunded, when the partnership ends. But it is not uncommon that the e-
commerce platform invokes the right to deduct certain expenses from the deposit, if a
128 www.parcelfromchina.com/warehouse/bondedwarehouse/ 129 en.sunlawyers.com/CN/Law_Order/Show_10_1.html 130 www.china-briefing.com/news/2015/01/23/signs-liberalization-e-commerce-shanghai-free-trade-zone.html
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company fails to meet its obligations to a customer or does not pay fees required by the
platform.
Each e-commerce platform has its own levels of fees and also depending on which prod-
uct category – Dangdang e.g. has annual fees ranging from 6,000 RMB (966 USD) to
30,000 RMB (4,831 USD)131. The online supermarket e-commerce platform Yihaodian
has a quality inspection fee for the first brand a company wants to sell on the platform,
while following brands cost 50 RMB (8 USD) per brand. The monthly platform rent for a
store on Yihaodian’s marketplace is 740 RMB (119 USD).
As mentioned, the type and amount of fees will differ from one e-commerce platform to
another and it is therefore of great importance that Danish companies carefully carry out
analyses regarding the types of fees as well as levels.
131 outlets.dangdang.com/merchants_open xue.yhd.com/showlist/index/zhiyin/ZFBB.html?tp=4.94952.m1343797.0.9.KuBiIAs-10-CUvyh
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Appendix A: List of Tier Cities
Source: McKinsey Insights China Database
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Appendix B: Screenshots of Elgiganten and JD.com
Source: Elgiganten.dk
Source: JD.com
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Appendix C: Screenshot of the “5th” Floor on JD.com’s Mall
Source: JD.com
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Appendix D: Currency Table
Units per CNY 31/12/2013 31/12/2014 01/08/2015
American Dollar 0.165 0.161 0.161
Danish Krone 0.895 0.991 1.094
Source: xe.com