There are many aspects to consider when selling online in China. Whether you want to work through a third-party provider to manage your sales in the Chinese market or develop your own local presence, you first need a good grasp of the Chinese e-commerce landscape.
Recently I answered a question by a member of Club China, a global online business community of frequent travelers focused on doing business in or with China. The question was about which platform, between Tmall or Taobao, would be more suitable for online sales in China, and what factors would be needed to succeed. In this article I will address that question and also introduce the new Tmall Global platform.
Foremost, I cannot stress enough the importance of registering your brands locally in China. This has several advantages; (1) your brand will be protected within China (also for shipment abroad) and (2) you will be able to sell your products on Tmall.
The two largest platforms: Tmall and Taobao
China’s online e-commerce landscape looks fundamentally different from what we are used to in most other countries. A few key players dominate the e-commerce market in China, in contrary to the many smaller ecommerce platforms we are accustomed to in for instance the US and The Netherlands. The Alibaba Group, owned by Jack Ma, holds the largest local online e-commerce platforms, namely Tmall (B2C) and Taobao (C2C). Although more and more smaller e-commerce platforms are popping up, these new platforms merely own a small percentage of the online market and are risky to invest in due to their often short-lived nature. However, some e-commerce platforms such as YHD.com and JD.com are steadily gaining more market share.
Taobao and Tmall together own about 80% of the total e-commerce market in China and receive 100,000,000+ daily visitors a day.
To clarify the difference between the two, Taobao is an online marketplace where anyone can sell their products, both consumers and businesses. In contrast to Taobao, on sister-website Tmall only local businesses that are also license-holders or brand-owners of that specific product are permitted to sell their products. Hence, in order to sell on Tmall you will have to own a local company (WFOE), get into a JV with a domestic company or work with a third-party provider that has a local presence. In addition, you need to be able to show that you have the legal rights to sell the respective products.
Taobao is mainly cost-driven and as a result you will compete with thousands of local small businesses and consumers on price. Tmall on the other hand is more brand-driven and a popular gateway for foreign companies to enter the Chinese e-commerce market. Both carry very different price tags. Tmall is relatively expensive and will require a considerably higher initial investment than when opting to sell on Taobao. It is therefore important to first understand who you are targeting, what your long-term goals are and how important branding is for your products.
Working with an intermediary
You can avoid going through the lengthy procedures of setting up a WFOE (wholly foreign owned enterprise) and developing your own Tmall presence by hiring an intermediary company to assist you in your online sales. However, that naturally brings along risks and you will therefore have to decide how important IP rights are to your business. You will also have less control over your business in China. On the other hand, setting up a WFOE and developing your Tmall operations will require a long-term commitment and consequently sufficient resources.
Just like anywhere else in the world, in order to protect your own interests, make sure to conduct proper due diligence on the party you will be working with and write up a solid contract. You can arrange a local law office to assist you in this. Normally you will receive the contract both in English and in simplified Chinese. Note that the Chinese contract always prevails over the English contract in case disputes occur. Ensuring that you complete proper due diligence can make the difference between a third-party relationships that adds value to your company and having to tackle expensive, time-consuming problems due to the actions a third party might take on your behalf.
In addition, you will have to consider how your partners will position your products in the market, how your products will be warehoused, how to handle logistical issues and return-policies and how you will pay your partners e.g. in percentage of revenues or using a fixed monthly/yearly fee.
Here are some initial questions for you to consider:
- What type of return policy will you use?
- Where will you warehouse your products and what are the costs involved?
- How will you arrange logistics?
- Which margins will you give to distributors?
- What discounts are your distributors allowed to provide?
- What if you want to exit your Chinese operations?
- How will you position your products in the market?
- Who will register your brand name in China and what will be the Chinese name?
Selling online to Chinese consumers
When attending a conference in Shanghai I came across the VP of YHD.com, one of China’s largest e-commerce platforms. Having worked with Ebay China in the past, he once again stressed not to underestimate Chinese consumers; they are not afraid to share reviews about your products, are less susceptible to making impulsive purchases and will perform a thorough background check of your brand before making a purchasing decision.
“Chinese consumers are the most impatient in the world. Whenever they order a product, they expect it to be delivered yesterday”, says the VP of YHD.
A new player: Tmall Global
Although speed of delivery is important, there is an exception to this rule. Chinese consumers tend to be more patient when products are not easily available. Hence, when buying goods from abroad they are willing to wait considerably longer for the products to arrive.
The Alibaba Group probably knew this when they developed Tmall Global a year ago. Tmall Global (www.tmall.hk) is a solution that enables companies based beyond China’s borders to directly advertise and sell to millions of Chinese consumers. Because overseas companies without China business licenses are eligible to apply to Tmall Global, it offers an interesting alternative to companies wanting to give the Chinese online market a try.
When I spoke to a manager at Tmall Global, he said that although the platform is still in its early phases and has yet to gain brand recognition, they are investing considerable resources into creating more brand awareness for their new portal. With few companies currently on the new platform, he pointed out companies are now offered a chance of stepping in early and leveraging Tmall’s own advertising efforts to market their brands.
Would you therefore still need a third-party provider to help you with sales in China? The easy answer is yes. Tmall requires companies to provide a China-based product return arrangement and Chinese-language customer service support.
Moreover, if you want to gain success and brand awareness in China, you will need to invest sufficient resources in your operations abroad. Better yet, if you have the resources, develop your own local presence. When competing in an environment with over a half a billion Internet users, managing your marketing, promotion and customer service is crucial to your success. One of the most common mistakes of foreign companies in China is committing insufficient resources to their operations. And with minimal effort, you cannot expect to succeed.
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