E-commerce in China

UnknownIn China, e-commerce is currently booming not only in the first-tier cities (Beijing, Shanghai and Guangzhou) but also in its second, third and fourth-tier cities.

The drivers of e-commerce development are, among others:

  • its convenience (i.e. the possibility to do online shopping at home or (often) at the office);

  • easy access to a wide range of products;
  • home (or office) delivery, and
  • competitive prices.

However, on-line buyers are concerned about:

  • the reliability of the vendors, although the introduction of on-line payment through an escrow arrangement has partially addressed this concern. (The payment for the goods goes to an escrow account and is released to the vendor only after a certain number of days following the delivery of the goods);
  • the authenticity and the quality of the products, whether they are luxury goods, food or electronic products.

Among the “giants” of the Chinese e-commerce, there are, for instance: Taobao.com (Consumer to Consumer “C2C”) and Tmall.com (Business to Consumer “B2C”) from the Alibaba Group, 360buy.com (jd.com), and yihaodian.com. The Chinese subsidiary of a western “giant” of the e-commerce business, Amazon.cn, so far has only around 3% of the on-line Chinese market.

Which companies can engage in e-commerce in China?

In China, in order to sell products on-line, it is necessary to register a company whose business scope includes “retail” (零售) or “online sales” (网上销售) or both.

Regarding the administrative requirements and approvals, there is a substantial difference between:

  • a company selling its own products on-line (“own” being understood as only related to the ownership of the products not to their actual manufacture); and
  • a company providing, for a consideration, an on-line platform where third parties can open their virtual stores for the sale of their products. This is, for instance, the case of Tmall (www.tmall.com) and of 360buy.com.

Company selling its own products online

To sell its own products on-line, an investor may establish a company whose business scope includes:

  • “retail”, or
  • “online sales” only.

Retail and online sales

A company whose business scope contains “retail” can also do online sales as the legal definition of retail also includes “online sales”. Some notable examples are Zara and Uniqlo. Both sell their products in their stores, and online, on their official websites: www.zara.cn and www.uniqlo.cn

When the company business scope contains “retail”, the company needs to have a physical store or a showroom where it can promote and sell its products.

The opening of one or more physical stores is very important to support an e-commerce business because the customers:

  • have the chance to enjoy a “touch and feel” experience when selecting the products, and
  • obtain assurances on the reliability of the seller and its availability in case of problems with the products.

Online sales only

The investor might not be willing to open a physical store because of all the costs involved. In this case, the company’s business scope has expressly to cover “online sales”. The establishment of the company has to be approved by an authority at a higher level than that of the authority competent to approve the establishment of a retail company. The department of the Minister of Commerce at the provincial level has the authority to approve such project. Otherwise, for municipal cities such as Beijing, Shanghai, Tianjin and Chongqing, the local department of the Ministry of Commerce at the municipal level is the relevant authority.

ICP registration (ICP备案)

The company website for the online business needs to be registered with the local department of the Minister of Industry and Information Technology (MIIT). The website server has to be located in China.

Establishment of an online platform for the sale of third party products

The creation of a platform for the online sale of third party products is much more complex. The Chinese legislator defines these kinds of services as “value-added telecoms services” (VATS).

A company providing VATS is subject to, among others, the following restrictions:

  • foreign investors cannot hold more than 50% of the company’s equity. Therefore, foreign investors have to establish the company with a local partner.
  • MIIT is in charge of approving the specific project and issuing the VATS license. On this matter, Amazon China (www.amazon.cn) is a rare example of a sino-foreign joint-venture that has obtained the VATS license.

Because of the difficulties that foreign investors have in order to obtain the VATS licence for the sale of third-party products, some foreign investors have entered into arrangements with local domestic companies to obtain the VATS licence through them. These are the so-called “variable interest entities” (VIE) whereby a foreign company obtains control of a domestic company through contractual arrangements rather than equity holding. The authorities may challenge a VIE because a VIE tends to circumvent statutory restrictions. Therefore, the authorities may order that any contractual agreement between the foreign investor and the domestic company be terminated and the entire transaction be unwound.

Marketing strategy for online sales

In terms of marketing strategy for online sales, probably the best approach is the adoption of both an on-line model and an off-line model for the product promotion and sale.

The implementation of this marketing strategy could be done through:

  • the company’s website;
  • one or more stores or showrooms (in this case, to open the stores, the company’s business scope needs to cover “retail”);
  • a “virtual” store on Tmall.com or 360buy.com or other online platforms;
  • blogs on local social networks, such as weibo.com and WeChat, in order to promote the products;
  • participation in “online communities” where the potential customers exchange opinions on the products sold online. It is actually common to find some online buyers “surfing” these “online communities” for information and suggestions.

Adidas is an example of a company adopting a marketing strategy based on a multi-channel approach:

  • off-line: with an important network of stores managed directly or through franchisees;
  • on-line: through the company website (adidas.cn) and also a virtual store on the on-line platform of Tmall.com.

Conclusions

For a foreign company willing to sell its products online in China, the choice is between setting up a retail company (where a physical shop is also required) or setting up a company whose business scope expressly covers “online sales” only (where no physical shop is needed). In both cases, the company can be a wholly foreign-owned enterprise (WFOE).


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