E-Commerce in ChinaAN INTRODUCTION TO

E-Commerce in ChinaAN INTRODUCTION TO

TABLE OF CONTENTS

THE CANADIAN TRADE COMMISSIONER SERVICE 6

INTRODUCTION 9

ARE YOU READY FOR FOREIGN MARKETS? 11

Approaching Foreign MarketsNecessary Internal Capabilities

IS CHINA A VIABLE MARKET FOR YOU? 15

Market Situation Marketplaces

Key CustomersKey Players

HOW CAN YOU ENTER THE CHINA MARKET? 28

Traditional Market Entry Channels Domestic E-commerce Marketplaces Cross-Border E-commerce

HOW CAN YOU MANAGE LOGISTICS? 45

Import TariffsManaging Cross-Border Shipments

HOW DOES PAYMENT WORK? 51

Getting Paid If You Have A Company In ChinaGetting Paid When Engaging In Cross-Border E-commerce

HOW CAN YOU PROTECT YOUR IP? 53

Protecting Ip In China

CONCLUSIONS 56

Main Considerations For Approaching The MarketGeneral Tips For Doing Business In China

APPENDIX 59

Key DefinitionsList Of Potential E-commerce Partners Overview Of Key Categories

THE CANADIAN TRADE COMMISSIONER SERVICE

China Network

Shenyang

TianjinBeijing

Qingdao

Shanghai

Hangzhou

Xiamen

Shenzhen

Nanjing

Wuhan

Xi’an

Chengdu

Chongqing

Guangzhou

«

Embassy of Canada in China: Beijing

Consulate Generals: Shanghai, Guangzhou, Chongqing, Hong Kong

Canadian Trade Offices:Shenyang, Qingdao, Nanjing, Wuhan, Chengdu, Shenzhen, Xi’an, Xiamen, Hangzhou and Tianjin

«

Hong Kong

With a presence on the ground in more than 160 cities worldwide, the Canadian Trade Commissioner Service (TCS) promotes Canadian economic interests in global markets and can help your company navigate the complexities of international expansion. TCS offers sector-specific and general doing business in China expertise in establishing a business presence, IP protection, due diligence, financing options and other business issues.

With a network of regional offices across Canada, a network of 15 trade offices across China, colocation with provincial partners as well as collaboration with other governmental departments (OGDs), TCS provides services to help you:

How the Trade Commissioner Service Can Help

China Network E-commerce Team

The Trade Commissioner Service has a dedicated team in China focusing on e-commerce.

Consulate General of Canada in Shanghai: E-Commerce lead for the China NetworkEmbassy of Canada in ChinaConsulate General of Canada in GuangzhouConsulate General of Canada in Chongqing

Should you have e-commerce related enquiries or need more information about e-commerce in China, please visit the China e-commerce portal or contact us via: infocentrechina@international.gc.caChina e-commerce portal (www.tradecommissioner.gc.ca/china/e-commerce).

• Prepare for your entrance to international markets

Assess market potential for your company

Provide qualified contacts

Solve problems

····

@CanadaChina @CanadaChine

Canadian SME Gateway to China YouTube Channel

Doing Business in China LinkedIn Group

For Canadian SMEs interested in doing business in China, TCS encourages you to visit the Canadian SME Gateway, which provides content on:

Interviews with market expertsWebinarsOnline resources and articles

Chaîne YouTube du Portail des PME canadiennes en Chine

Compte LinkedIn Faire des affaires en Chine

Canada’s International Trade-Global Affairs Canada Facebook page

Page Facebook :Le commerce international du Canada-Affaires mondiales Canada

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For those interested in exploring cross-border e-commerce opportunities via Hong Kong or are interested in selling products in Hong Kong through e-commerce, please note that a separate guidebook on e-commerce in Hong Kong is also available. For a copy of this document and for more information about Hong Kong, please contact the Trade Commissioner Service at the Consulate General of Canada in Hong Kong and Macao at the following address: canadatrade.hkong@international.gc.ca

The TCS strongly recommends that readers obtain independent legal, financial and related forms of professional advice prior to acting upon information in this report. The TCS assumes no responsibility for any company, product or service mentioned in this report, nor for any act or omission of any business connected with such products and services.

E-commerce In Hong Kong

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INTRODUCTION

The rapid expansion of e-Commerce in China has grabbed headlines around the world and reshaped the business landscape for both foreign and domestic firms. Already the world’s largest, China’s e-commerce market has grown by 50% per year since 2011, and is expected to be worth USD$1 trillion by 2019. Canadian companies looking to export to China should consider the opportunities the country’s online commerce sector presents.

In a country where traditional channels of commerce are underdeveloped and often not very consumer friendly, e-Commerce provides customers with an abundance of choice, accessibility, easily-managed returns (not prevalent in China), and confidence in vendors at a haggle-free price point. Millions of Chinese are now purchasing authentic foreign products, including in the country’s many developing regions, which were unavailable even just a few years ago.

Canada’s high quality goods and services are in demand. Despite domestic economic challenges, Chinese consumers particularly the large and emerging middle class are spending more than ever before in online marketplaces. Cross border e-Commerce can help Canadian exporters meet the aspirations of millions of Chinese seeking premium foreign products. Issues of trust surrounding the safety of domestic products have pushed consumers to look abroad for brands with a strong heritage and a focus on safety. Demand is strongest in areas where Canada excels, such as high quality foods and supplements, natural alternatives to artificial products, cosmetics, and a host of products related to healthcare.

For the Canadian exporter, selling online in China can be as simple as shipping directly from Canada to the consumer, or via engaging one of several

3rd party service providers who can facilitate the entire logistical process, including customs, branding, marketing and payment. In what traditionally has been a difficult market for small Canadian companies to access, e-Commerce provides a relatively straight-forward path to gaining a foothold in China.

While the attraction is clear, the decision to engage in e-Commerce in China is not without its own challenges and risks. Government policies regulating the marketplace are dense, complicated and prone to changes without notice. Concerns over the protection of intellectual property are valid and must be managed appropriately. Perhaps above all others, Canadian companies must recognize that the Chinese e-Commerce market is extremely competitive. Merely getting listed on a Chinese marketplace is not a recipe for success. Successful market entry requires a well thought-out business model and the ongoing commitment of resources, both financial and management, to ensure products are branded and marketed effectively for a Chinese audience, and sold at a price that can be profitable.

This guidebook is designed to walk you through the various decision points required for entering China via e-commerce channels, and to provide you with some of the tools to begin making an informed decision regarding such a venture.

The Canadian Trade Commissioner Service (‘TCS’ www.tradecommissioner.gc.ca) with its network of resources in China, including a dedicated team focusing on e-Commerce, is available to Canadian companies interested in learning more about the topics presented in this guidebook. For specific questions, the TCS in China can be contacted at InfocentreChina@international.gc.ca.

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MarketHighlights

90%The volume of e-commerce

transactions on marketplaces

632 mCurrent numberof internet users,

a 47% penetration rate

US$ 1 TRILLION

The expected size of China’s e-commerce

market by 2019

10

ARE YOU READY FOR FOREIGN MARKETS?

Approaching Foreign Markets

Necessary Internal Capabilities

11

Approaching Foreign Markets

Approaching foreign markets can be both a costly and risky venture for Canadian companies. The competitive, business and cultural environments are potentially starkly different from a company’s home market and it may take years to see returns on investment.

Before expanding overseas into new markets, especially to an emerging market like China, management should consider the strategic importance and the company’s ability to exploit market opportunities (e.g. capabilities, resources, experience, etc.). Likely, the decision for expansions will fall into one of the four quadrants of the below Market Entry Decision Model.

There are multiple ways of approaching a foreign market. Depending on where the market is, in relation to above plane, will help to guide you in the type of approach you should pursue.

Str

ateg

ic Im

port

ance

Ability to Exploit MarketLOW HIGH

HIG

H

PHASED-IN ENTRY RAPID ENTRY

NO ENTRYOPPORTUNISTIC

ENTRY

Source: Sovereign Analysis

Multiple channel entry, selling to existing customer base,

expanding to new geographies and utilizing new channels

Entering only specific geographical markets (including

e-commerce) to assess and exploit market opportunities; later expanding to other areas

Entering locations in which a customer base already exists

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For example, if the company has a large amount of resources and the market is important, the company may decide to invest in a subsidiary in the market. If a company does not have a large amount of resources available, but the market is important, they may consider a Phased-In Entry, where the company takes incremental steps in their market approach. Firstly, by entering through e-commerce or a distribution partner, and if the market yields a positive result, investing further at a later time. Alternatively, if the market is not necessarily strategically important, but the company’s abilty to exploit the market is relatively high either through internal capabilities or through partners, they may take an Opportunitstic Entry and target any “low-hanging fruit”. Of course, companies need to also realistically analyse their ability to exploit a market and its strategic importance. If both are low, the company should consider not approaching that market.

All approaches have varying degrees of risk and returns. Even entering via e-commerce, through a Phased-In Approach, requires investment of both time and money, and has a certain level of risk as there is still a chance of failure. Regardless of the approach you take, you should address, at minimum, the following five questions:

Are your products or services suitable? If they are not, do you need to modify them? This could be as simple as modifying the packaging size.

What is the regulatory environment like? Are there any regulations, current or future, that could cause substantial hurdles? Even if approaching via e-commerce, you should be aware of any potential regulations that could impact your business.

What is the competitive situation? Being aware of competitors in the market and what they are doing can give you a competitive edge and help you avoid surprises.

Are partners needed? In new markets, going it alone is not always the best course of action and partners may be necessary. But what kind of partners? Understanding what potential partners are needed, and utilsing them, can contribute to success in the market.

Is a legal entity needed? You will need to know if and when a structure is necessary. This will largely be determined by the company’s legal entity and the market situation.

Canadian companies considering approaching new markets, even via e-commerce, need to have a certain level of commitment, both in terms of financial resources and management capabilities. Approaching and expanding into a new market is risky, and if the company is not prepared for the possibility of failure, management should reconsider the decision.

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Necessary Internal Capabilities

Internal capabilities are critical to the success of companies looking to approach new markets. There are generally four areas a company needs to look at internally before expanding into new markets:

Operational – Does the company have the ability to replicate its operations overseas, manage IP exposure, and meet potential demand requirements?

Financial – Does the company have the available funds for expansion with a threshold for risk? Even entering a market via distributors or e-commerce channels requires some form of financial investment.

Managerial – Do key individuals in the organization have experience in international expansion? If not, is the company willing to invest in aquiring managers with the necessary skills?

Emerging market experience – Do the key individuals have experience in emerging markets? Some markets are more difficult than others to enter, and targeting a more difficult market before gaining experience is risky.

Before expanding into new markets the company should first look at its internal capabilities. Does it have the experience and know-how to properly expand? Is senior management committed to the venture, not just in terms of finances but in terms of time? Is the company willing to invest in obtaining capabilities, if it is lacking any, either through hiring or training?

14

IS CHINA A VIABLE MARKET FOR YOU?Market Situation

Marketplaces

Key Customers

Key Players

15

Market Situation

China’s traditional retail channels are still predominantly regional and highly fragmented. It is extremely difficult for retail companies to scale up and develop national coverage in such a large and diverse developing country, creating the perfect environment for e-commerce to thrive.

Seemingly overnight, China has become the world’s largest e-commerce market with online retail sales growing from US $20 billion in 2008 to over US $646 billion in 2015; the market is expected to reach US 1 trillion by 2019. The chart below provides an illustration of this explosive growth.

E-commerce has given Chinese consumers access to products that just a few years ago were impossible to obtain, especially in lower tier cities where the brick and mortar retail sector is still highly underdeveloped. Furthermore, the development of the e-commerce market in China has provided both foreign and domestic retailers access to Chinese consumers on a national level at relatively low costs.

Growth has been driven by a number of factors, including:

1) Demand readiness – China’s middle class now exceeds 400 millionwith a national average income of US $12,000 per year, resultingin over 460 million online shoppers;

2) Technology infrastructure – There are more than 632 millioninternet users, with a penetration rate of nearly 47 percent. Thegovernment has also continued to invest in expanding 3G and 4Gservices, and the smartphone penetration rate is about 66 percent;

3) Support infrastructure – Logistics and delivery services haveexpanded rapidly to keep up with growing e-commerce deliveries.Service standards often include same day delivery at minimal cost.Online payment platforms such as Alipay and Wechat Pay have madeonline payments easier as has the expanded use of credit cards.

Online retail sales growing at a CAGR of 64% from 2008-2015

China’s Online Retail Sales

Source: Sovereign analysis on multiple sources; CAGR − Compound Annual Growth Rate

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Marketplaces

China’s e-commerce market is dominated by marketplaces rather than stand-alone websites. An e-commerce marketplace is a platform where products and services are provided by multiple third parties, whereas transactions are processed by the marketplace operator. Amazon is an example of a marketplace in North America. Taobao, the largest consumer-to-consumer (C2C) marketplace, and Tmall, the largest business-to-consumer (B2C) marketplace, both under Alibaba Group, dominate the overall e-commerce market accounting for about 80 percent of total transactions. Within the B2C segment, Tmall accounts for almost 60 percent of the market.

The chart below illustrates the leading B2C players in China’s e-commerce industry with their approximate market share:

Apparel and consumer electronics are the most popular product categories sold online accounting for nearly 50 percent of all sales. The chart below illustrates the key product categories for online sales.

E-commerce Category SalesApparel is the dominant product category

Tmall and JD are the two dominant B2C marketplaces

Market Share Of B2C Market Platforms (2015)

Source: Sovereign analysis based on multiple sources; Note: figures have been rounded

Source: Sovereign analysis on multiple sources including A.T. Kearney

China’s e-commerce market is extremely vibrant and can potentially provide Canadian companies with an affordable way to access China’s consumers. It is still important however, to understand the intricacies and unique dynamics of the market and the consumers shopping online.

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Key Customers

China has the world’s largest online population with more than 600 million internet users. The penetration rate however is only about 47 percent, leaving significant room for growth. The number of online shoppers has grown rapidly from 74 million in 2008, to more than 460 million in 2015, a compound annual growth rate (CAGR) of nearly 30 percent (see chart below).

Chart: Number Of Online Shoppers Growing Steadily“The number of online shoppers has grown rapidly from 74 million in 2008, to more than 460 million in 2015...”

China’s emerging middle class has money to spend. Urban disposable income levels have increased since 2008 at a compound annual growth rate (CAGR) of 11 percent, from US $2,505 in 2008 to US $4,698 in 2014.

Chart: Disposable Income, Especially Urban, Is Steadily Growing

Source: Sovereign Analysis on multiple sources

Source: Sovereign Analysis on multiple sources

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Much of the wealth is concentrated along coastal provinces and in Tier 1 cities. E-commerce is providing access to inner provinces and lower tier cities which have been underserved by traditional brick and mortar retail channels. Online shoppers in Tier 1 cities spend the most money on e-commerce, however, online shoppers in lower Tier cities (i.e. Tier 3 and Tier 4 cities1) spend a higher percentage of their disposable income shopping online. The charts below illustrates this.

In gender terms, 54 percent of online shoppers are male, while 46 percent are female. Male shoppers usually purchase electronic products such as laptops, cameras and mobile phones. Female shoppers tend to purchase apparel, cosmetics, home décor, maternity and baby products.

The majority of online shoppers are between the ages of 20 and 39 years old with incomes between RMB 1,000 to RMB 5,000 per month2.The charts below provide an age and income snapshot of China’s online shoppers:

2 | Note that this figure is the actual estimated income of the individual shopping. However, many individuals are subsidized by their parents in various ways and are able to spend most, if not more than, their income.

1 | China’s cities are divided into different tiers based on their economic and infrastructure development

Chart: Percentage Of Disposable Income Spent By Tier

Source: Sovereign Analysis on multiple sources, including CNNICNote: the above graphs indicate reported income of online shoppers. It does not include any subsidies shoppers get from their families or non-reported income.

Age Of China’s Online Shoppers Monthly Income of China’s Online Shoppers (RMB)

Consumers in lower tier cities spend a higher percentage of their disposable income online shopping

Source: McKinsey Global Institute, Sovereign analysis

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The top 10 product categories online include clothing, bags, cosmetics and groceries, as illustrated in the table below.

Category Frequency Category Frequency

1. Clothing & Accessories 75.6% 6. Cosmetics 30.6%

2. Computers / Digital Products 45.3% 7. Books & Audiovisual 25.7%

3. Household Items 45.1% 8. Appliances 22.7%

4. Virtual Products / Travel 34.9% 9. F&B Products 22.4%

5. Bags & Suitcases 32.7% 10. Stylistic Supplies 18%

Aside from the general readiness of Chinese consumers, there are a number of reasons why there is a preference to purchase goods online:

Choice – The traditional brick and mortar retail sector is significantly underdeveloped due to the country’s size and highly fragmented market. E-commerce provides consumers with significantly greater choice in terms of available products.

Convenience – Delivery services have evolved differently from more developed countries. In most cases, online purchases are delivered within one to two days for a relatively inexpensive fee.

Price – Competition online tends to be greater and the real price tends to be more transparent to consumers. Furthermore, online retailers are not likely to be paying full duties and VAT. This usually results in consumers getting a better price than they would at traditional brick and mortar stores.

Trust – When purchased on a marketplace, retailers are required to accept returns and exchanges, no questions asked, which is uncommon for small brick and mortar retails stores. Furthermore, a marketplace will usually attempt to ensure that goods sold are not counterfeit.

Note: Frequency represents how often a purchase is made in each category; frequencies of products purchased are not related to one another and only represent how often a purchaser browsing for that item will make a purchase.

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China’s e-commerce ecosystem consists of many stakeholders. In certain key areas, it differs quite significantly from the ecosystem in North America, especially in the areas of product search, delivery, and operations. A high-level ecosystem map is illustrated in the graphic below:

Ecosystem Segement Description

Examples

N. America China

• Brand Website (SEO)• APP / Mobile markets• Marketplace Platforms

Payment

Warehousing / 3PL

Domestic and International delivery

Software & Infrastructure

Integrated Partners and TP Partners

Online marketing channels such as search engine optimization, social media, and traffic optimization within domestic and cross-border marketplace platforms

Third party service providers that facilitate payments through credit card or bank account

Companies providing third party logistics services (3PL) including physical storage of goods

Express companies providing delivery service to end customer

Software tools such as ERP, CRM as well as the physical IT infrastructure to support online sales

Partners to whom brands can outsource complete or partial management and execution of their e-commerce operations

Google

Paypal

USA Fulfillment

UPSFedEx

Oracle

Digital River

TmallJD

Alipay

Cainiao

SF ExpressSinoTrans

MagentoChina

Netcloud

Kung FuCommerce

Operations/support

Productsearch

Payment

Fulfillment

Delivery

The ecosystem segments are discussed in more detail ahead.

Key Players

Source: Kung Fu Data

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Product search

Brand websiteIn China, company websites are primarily used to build the brand’s image or engage their consumer base. A brand’s website in China is not typically seen as a direct sales platform; sales transactions generally take place on marketplaces.

The vast majority of Chinese are not able to read English or French. Canadian companies targeting Chinese consumers should make their site available in Chinese characters. It is also helpful to have an easily accessible currency converter into Renminbi (RMB), even if the settlement currency is Canadian dollars or another currency.

Search engines and search engine optimizationThe Chinese government’s Great Firewall of China blocks access to key browsers, such as Google, traditionally used in North America. Blocked websites are accessible in China via a Virtual Private Network (VPN); however, companies should channel Search Engine Optimization (SEO) investment towards Chinese search engines like Baidu. If a company is on a marketplace platform, optimizing the in-platform SEO will be more beneficial.

Social mediaSocial media such as WeChat and Weibo are important to the overall marketing of a brand in China. WeChat currently has over 500 million subscribers in China and is extremely popular among the younger and affluent demographic. Social media is used by consumers to rate and discuss products, and can also be used by brands for marketing. Note that a legal entity in China may be required in order to establish a corporate account on some of China’s social media platforms.

APP/mobile marketsMobile applications (APPs) are becoming increasingly popular in China due to the high penetration of smartphones. Many leading e-commerce marketplace platforms (e.g. Tmall, Jumei, Yhd, and JD) have launched mobile applications allowing consumers to shop conveniently on mobile phones. Additionally, JD cooperates with Wechat to sell some products on the Wechat APP.

MarketplacesThe marketplace model dominates China’s e-commerce landscape, accounting for more than 90% of online retail transactions and is one of the most important aspects of the e-commerce ecosystem. There are several types of marketplaces in China, including Business-to-Business -to-Consumer (B2B2C), such as JD, Business-to-Consumer (B2C), such as Tmall, and Consumer-to-Consumer (C2C), such as Taobao. Business-to-Business (B2B) sites such as Alibaba also exist in the market.

22

23

In addition to large domestic marketplaces, there are also cross-border marketplaces such as Tmall Global, as well as smaller specialized marketplaces that focus on a handful of product categories such as Mei.com.

Payment

Third-party payment platformsThird-party payment platforms are an extremely popular method for purchasing goods online with more than 358 million users. The majority of payments are made through China’s two dominant platforms; Tencent’s WeChat payment and Alibaba’s Alipay. Apple Pay was launched in China in late February 2016. It is currently unclear how well Apple Pay will be received by Chinese consumers.

Credit cardsThe use of credit cards has been expanding in recent years with penetration rates exceeding 45 percent, making online transactions much easier to complete. Chinese credit cards, such as Visa and MasterCard, are accepted by domestic and cross-border marketplaces and should work on websites hosted overseas; however the settlement currency will most likely need to be U.S. dollars.

See page 52 for more information.

Fulfillment

3rd party logistics providers (3PLs)In some cases, fulfillment can be managed by the marketplace platform but not all offer this service and some companies may want to use an independent Third Party Logistics (3PL) company. These 3PLs can manage a retailer’s supply chain and usually offer warehousing services.

Depending on how a Canadian company approaches the market – i.e., cross border or China based entry – a 3PL with warehousing facilities in one of China’s bonded Free Trade Zones may be beneficial. This is advantageous as the products can be stored in mainland China, but not within the country’s customs borders, significantly cutting the time it takes to fulfil an order.

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Delivery

Consumers in North America typically do not expect one or two day delivery on products purchased online, although this is an option if the consumer is willing to pay a premium. Chinese consumers, especially those in Tier 1 cities, expect same or next day delivery.

International deliveryProducts will typically be shipped via an international express company such as UPS, DHL, or FedEx. The package will usually take anywhere from a few days to a few weeks to reach China.

Shipping fees and timing will pose a major hurdle to companies if the products are shipped from overseas as consumers, who are used to receiving online orders from within China within just a few days, may be unwilling to wait several weeks for a delivery from outside the country. Product returns will also further exacerbate any challenges from shipping products from overseas into China.

Domestic deliveryIf products are shipped from within China, delivery times can range from the same day to a few days. Many international delivery firms operate through partners for delivery within mainland China, but may be limited to a few key cities. Domestic delivery companies such as Shunfeng, EMS, and Sto Express are very popular and have vast, efficient delivery networks.

Shunfeng ExpressShunfeng Express is the largest private express company in China with nearly 8,000 locations in China and over 9,000 locations globally. SF Express is a premium service provider and focuses on providing fast and reliable service.

China Post’s EMSEMS has more than 45,000 locations and has the largest network in China; however, speed and reliability are issues.

CiaoniaoAlibaba partnered with several Chinese express companies, specifically Shunfeng, Yuantong, Shengtong, Zhongtong, and Yunda in 2013 to establish its logistics platform called Ciaoniao. The goal of Ciaoniao is to develop a national logistics network that can deliver anywhere in China within 24 hours.

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Operations and support

Third party management company / Tmall partners (TPs)

Third party management companies, also known as TPs or Tmall Partners, are one of the most important partners for a foreign company to consider for entry into China’s e-commerce market. TPs are third-party companies that manage the store page of a retailer in a marketplace platform such as Tmall. TPs also have relationships with the platform and can assist in driving traffic to a brand’s page. In some cases, they can act as turn-key solution providers and also manage logistics, in-platform media buys and promotional events. TPs can also utilize digital optimization information, usually from a data analytics company to optimize marketing efforts.

The graphic below better illustrates some of the services a TP can provide.

Brand / Retailer

TP Marketplace

ConsumersOperates marketplace

sales

Digital optimization,media and traffic

Optimize events, traffic, media, impressions,

CTR, conversion

Acts on brand’s behalf managing marketplace sales

Acts on brand’s behalf optimizing marketplace sales

3PL & Delivery

$¥

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E-commerce management software providersE-commerce management software providers and content management systems, such as Magento, allow companies to actively manage their e-commerce activities, sales analysis and other tools to optimize activities. These types of support systems can be used by the retailer themselves or by a third party management company, also known as a TP.

IT infrastructureChina’s IT infrastructure is still developing and can pose problems with regard to internet speeds. The challenges involved in accessing overseas websites from China is exacerbated by “The Great Firewall”, which can effectively throttle internet traffic, and by the newly launched “Great Cannon”, a far more aggressive tool used by the Chinese government to monitor internet traffic.

Unfortunately, there is little a foreign company, with its servers located outside China, can do to address these challenges. Companies may choose to establish servers inside China or in one of China’s Free Trade Zones, which would require the assistance of partners providing infrastructure support.

Government

The Chinese government affects the e-commerce ecosystem through policy and trade measures, such as import regulations, tariffs and testing requirements. The GACC (General Administration of China Customs) and SAIC (State Administration for Industry and Commerce) are the two main bureaus foreign e-commerce companies should be aware of.

The Chinese Government, up to this point at least, has allowed e-commerce to develop without a great deal of intervention. Some cross-border e-commerce transactions however, are attracting the government’s attention due to the circumvention of import taxes and other regulations.

The Chinese government has introduced a number of policies to support and regulate e-commerce. Policies have been evolving rapidly in recent years and are expected to continue to do so.

For more information please see page 43.

3 | VAT of most products in China is 17%; however, VAT of some products (e.g. seafood) is 13%

27

HOW CAN YOU ENTER THE CHINA MARKET?

Traditional Market Entry Channels

Domestic E-commerce Marketplaces

Cross-Border E-commerce

28

How can you enterthe China market?

29

Traditional Market Entry Channels

There are several traditional channels for entry into China’s market. Companies can choose to establish a legal entity in China in order to conduct commercial activities, identify importers and distributors in the market.

Establishing a legal entity such as Wholly Foreign Owned Entities (WFOE) or a Joint Venture (JV) in China is a front loaded process that can be quite arduous. Typically, the registration process can take anywhere from three to nine months to complete, plus extensive due diligence on potential partners. After establishing a legal entity in China, local Canadian companies are able to conduct commercial activities, such as importing and distributing products, hosting a local website, and establishing a flagship store on one of China’s domestic e-commerce marketplaces.

Alternatively, Canadian companies may identify a partner or partners to import and distribute their products in mainland China. Distribution can be through brick and mortar retail stores and/or e-commerce channels. However, there are some risks when using distributors in China as there is potential to lose control of your brand.

Setting up in a free trade zone

There are several free trade zones (FTZ) throughout China where a Canadian company can establish a legal entity. The most well known free trade zone is the Shanghai Pilot Free Trade Zone, established in 2013. Within China’s borders, these FTZs are technically outside China’s customs border and therefore products transiting from these FTZs into the customs border of China are considered to be cross-border trade.

The FTZs have different regulatory requirements and operate under different rules to companies that have set up within China’s customs borders. For example, in January 2015, the Shanghai Free Trade Zone began allowing WFOEs to invest in online data processing and transaction processing e-commerce operations, which is normally prohibited.

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There are specific reasons why a company may want to establish themselves within an FTZ. Companies can have their inventory forward deployed, which means they establish a warehousing facility outside the customs border of China, ship products in bulk to this facility, and then ship to the final customer via parcel post. This can also be done by using a 3PL with a warehousing facility located in the FTZ, which is easier than establishing a company owned entity. If a company wants to host its own platform and act as the intermediary between sellers and buyers, or if the company needs to obtain an ICP License, establishing an entity in the Shanghai FTZ will simplify the process. Note that each FTZ may have different requirements and regulations regarding the types of business activities allowed.

The map below highlights the location of several well known free trade zones.

For additional information on establishing a foreign entity in China, please visit www.tradecommissioner.gc.ca/china

Zhengzhou

ShanghaiNingboHangzhou

Tianjin

Chongqing

GuangzhouShenzhen

Xiamen

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Domestic E-commerce Marketplaces

Overview

China’s e-commerce market can be divided into two basic categories: marketplaces and independent merchants. Unlike North America, e-commerce in China is dominated by the marketplace model, which accounts for more than 90 percent of total transaction volume. Websites established by independent merchants, even large retailers, account for little in the way of transaction volume and are primarily used as marketing tools. Independent online retailers suffer approximately a 4 percent EBITDA4 loss while merchants operating on marketplaces experience a 9 percent positive EBITDA. 5

The marketplace model has taken root in China for two reasons; firstly ,the underdeveloped off-line retail industry, and secondly, the difficulty in setting up an independent retail site, which requires a significant amount of time and investment. Marketplaces are especially advantageous to merchants lacking the volume of sales to justify such a large investment.

For individual and small scale sellers, the biggest advantage of selling through marketplaces is tapping into the huge aggregate traffic flow that the sites have developed. Furthermore, marketplaces assist businesses in quickly launching store fronts with minimal upfront costs, providing many of the tools the merchant needs.

For the consumer, marketplaces offer a convenient location to shop and often have some consumer protections in place. These may include return policies and assurances that the products are genuine, which is especially important as counterfeit products are relatively common in China.

There are a number of different marketplaces operating under various models, such as a hypermarket or online mall. Canadian companies should make informed decisions on which marketplace is most suitable for their products.

4 | EBITDA – Earnings before interest, taxes, depreciation and amortization 5 | Source: Multiple sources including McKinsey Global Institute

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Model Example

Business-to-Business-to-Consumer B2B2C

The platforms/marketplaces act as hypermarkets, buying products from producers/distributors and fulfilling orders to customers.

Business-to-Consumer B2CThese platforms/marketplaces allow business to sell to consumers via store-fronts, also known

as an online malls.

Consumer-to-Consumer C2CThese platforms/marketplaces allow individuals to sell products to other consumers; effectively

an online bazaar.

Source: Sovereign Analysis on multiple sources

Note: Various B2B models exist as well, however, these are not included in the above table as this report focuses the consumer aspect of e-commerce.

It is possible for marketplaces to incorporate multiple models. For example, JD.com operates both a B2B2C (hypermarket) and B2C (online mall) model on their marketplace.

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Hypermarket model

A hypermarket is a model in which the Canadian company sells their product directly to an online platform. This is similar in many ways to selling to a distributor. In this case, the online platform manages all aspects of sales, distribution and marketing, making it a a relatively simple transaction for the Canadian company. With this model, the Canadian company is not directly involved in e-commerce in China, but rather selling to an e-commerce platform, making it a more straightforward and simple transaction.

Flagship Store – Only the brand or the brand’s master license holder with full rights to IP can open a flagship store. For domestic platforms, a legal entity in China must exist. A flagship store has the highest priority for MXD (Ming Xing Dian) traffic (free live traffic from the platform) and has all media channels available to it. If run properly, the flagship store can manage resellers (exclusive shops), acting as a brand control tool, set brand standards, and capture revenue through the brand’s own channel.

Exclusive Shop – An exclusive shop is a single brand store front on a marketplace that is typically run by an authorized reseller of the brand. The reseller has rights to use some of the brand’s IP, for example the brand logo.

Boutique Store – A boutique store is a multi-brand store front. The store front may not have any relationship with the brand as it is just acting like a re-seller, usually with several different brands being sold.

A flagship store is not necessarily the best way to launch a brand in China. It is usually best to wait until the brand has established itself and revenue is high enough to justify the costs.

Multiple exclusive shops, set up by authorized resellers, can exist for a single brand. This approach has a relatively low risk profile, and is similar to entering the market through distribution partners.

Parker Pen

Parker Pen has a multi-channel model for their e-commerce stores. Parker Pen has a flagship store on Tmall (www.parker.tmall.com) and also has 8 authorized resellers with exclusive shops. The flagship store regulates all the shops while each store has control over pricing.

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The online mall model allows companies to setup “stores” on the marketplace which are operated by the Canadian company or a partner. In this case the marketplace acts as the platform in which the stores operate. There are typically three types of stores available on marketplaces using an online mall model, which are detailed below.

Online mall model

Domestic marketplaces

Tmall, JD, and YiHaoDian are China’s leading marketplaces,

and collectively have over 600 million registered users. Some

marketplaces sell general merchandise, such as JD.com,

while others specialise in specific product categories,

such as YiHaoDian.

Tmall (www.tmall.com)Launched by Alibaba Group in 2008, Tmall is China’s largest online marketplace for domestic and foreign brands and their partners. Tmall offers flagship store fronts for brands, exclusive shops for exclusive resellers, and boutique multi-brand stores.

Tmall recently partnered with Yintai (retailer), Fosun and Forchn (private conglomerates), SF Express, and other delivery services, creating Cai Niao, which can assist foreign brands and retailers with fulfillment and delivery.

JingDong (www.JD.com)Jingdong is one of China’s key marketplaces and the largest online direct sales company. Based in Beijing and traded on Nasdaq, the company’s original B2C marketplace went online in 2004. In 2007, the domain name changed to 360buy.com and in 2013 it changed to JD.com.JD has seven distribution centers and more than 97 warehouses in 39 cities. The common cooperation model with JD, unless the brand is quite large and well known, is to utilize its marketplaces hypermarket platform – i.e., sell to JD and have them fulfil the order.

YiHaoDian (YHD)Launched in 2008, YiHaoDian is a Shanghai-based marketplace focused on selling premium groceries. Walmart began investing in the company in 2011 and eventually completed a full buyout in July 2015. The company is licensed to directly import and distribute goods from overseas.

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Ownership Subsidiary of the Alibaba GroupPublicly listed

Publicly listed 100% subsidiary of Walmart

Business model B2C(Online mall)

B2C and B2B2C(Online mall

& hypermarket)

B2C and B2B2C(Online mall

& hypermarket)

Estimated user base 400 million 105 million 90 million

Cross border version Available Available Available

Main products General merchandise General merchandise General merchandise

China business registration requirements

Legal presence in China* Legal presence in China* Legal presence in China*

Logistics / delivery Not Offered** Offered Offered

Annual fee for B2C model US $6,000- $12,000(depends on category) ~US $2,000 ~US $1,500

Security depositUS $3,000 - $33,000(depends on category

and story type)

US $2,000 - $20,000(depends on category)

US $1,500 - $20,000(depends on category)

Transaction commission 0.3-5% 1-10% 1-10%

Primary consumer payment options

AlipayCredit Card

TenpayJDpay Alipay

Tmall JD.com YHD.com

Source: Sovereign analysis on multiple sources including Kung Fu Data and interviews with industry insiders

(*) It is possible for JD or YiHaoDian to fulfill products, in which the Canadian company acts as an exporter and the marketplace resells the products; if the company has a cross-border platform, a legal presence in China is not required.(**) Tmall has begun to partner with several 3PL and express companies to create Cai Niao, a delivery and fulfillment partner; currently, Cai Niao offers delivery services for products purchased on Tmall Chaoshi (its online supermarket) and to customers who subscribed their services.

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In addition to Tmall, JD and YiHaoDian, there are numerous specialized marketplaces in China. In recent years the number of new marketplaces has been growing rapidly. The chart below is a small sample.

Name Website Key Products

Amazon www.amazon.cn General merchandise

Dangdang www.dangdang.com Books

Tmall Grocery www.chaoshi.tmall.com F&B

SF Best www.sfbest.com F&B

Fields www.fieldschina.com F&B

Epermarket www.epermarket.com F&B

51shuichan www.51shuichan.com Seafood

Fruit Day www.fruitday.com Fruits

Maijiuwang www.maijiuwang.com Alcohol

Yes My Wine www.yesmywine.com Wine

Winekee www.winekee.com Wine

VIPSHOP www.vip.com Fashion / Luxury

Mei www.mei.com Fashion / Luxury

Vancl www.vancl.com Apparel

Gome www.gome.com.cn Electronics / Appliances

Suning www.suning.com Electronics / Appliances

LAMALL www.LAMALL.com Baby products

Muyingzhijia www.muyingzhijia.com Maternity and baby products

Yiduo shopping center www.ydsc.cc Health products Source: Sovereign analysis

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Marketplace restrictions and requirements

If your Canadian company intends to sell products directly on a domestic marketplace such as Tmall or JD’s online mall, a legal entity such as a Joint Venture (JV) or a Wholly Foreign Owned Enterprise (WFOE) is required in China. Furthermore, the specific marketplace may have other requirements, including trademark seasoning, registered capital requirements and years in operation.

Alternatively, Canadian companies can work with platforms that act as a hypermarket, or a local partner that can import and distribute goods. Your local partner may be able to setup an e-commerce store front or use their existing store front on various marketplaces.

“Double 11”- Single’s Day

November 11th is “Singles Day” in China, which is a promotional sales day launched in 2009 by Alibaba Group, the operator of Tmall and Taobao, China’s two largest marketplace platforms. Singles Day, tantamount to an online version of Black Friday, caught on rapidly and sales grew from RMB 1.9 billion (US $ 300 Million) in 2010 to RMB 91.22 billion (US $ 14.33 billion) in 2015. The success of Single’s Day has prompted other platforms to also run their own Single’s Day style promotions. Double 11 is now an entrenched sales event for all major e-commerce players and has become a major bonanza with huge turnover.

The numbers represent a blitz in buying for a 24 hour period, however the weeks before and after “Double 11” tend to be relatively slow periods. Furthermore, the official figures do not account for returned merchandise.

Retailers participating in Double 11 are required to provide deep discounts, virtually eliminating any margins. However, sales generated during Double 11 affect the retailer’s overall traffic and can boost search traffic in the future.

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Cross-Border E-commerce

Selling products in China through cross-border e-commerce channels is a lower risk approach to the market as it requires relatively little investment from the company. Cross-border e-commerce has expanded significantly over recent years and the growth is expected to continue in the coming years.

Since 2012, the Chinese government has rolled out favourable policies to promote cross-border e-commerce development by setting up pilot zones in various cities for cross-border e-commerce import services, implementing favourable tax rates and policies including a streamlined application process and simplified customs clearance procedures. Cross-border e-commerce enables overseas retailers without Chinese business licenses to sell their products more easily and conveniently. Many foreign retailers have used the new business model to test the market in China before actually setting up businesses in China.

A recent Nielson study found that 38% of shoppers in tier 1 cities and 27% of shoppers in Tier 2 cities make cross-border purchases online. Cross-border e-commerce transactions are expected to continue growing. However, it is important to note that cross-border transactions are still only a fraction of overall e-commerce transactions.

There are two ways to approach the market via cross-border e-commerce:

Sell through the company’s existing foreign (non-Chinese) websiteIt is the easiest way to approach the market however unlikely to yield results as Chinese consumers typically shop on marketplaces. The company’s website can be used as a marketing and brand tool rather than a sales platform.

Utilize a cross-border marketplaceCross-border marketplaces such as Tmall Global and JD Worldwide offer Canadian companies access to the aggregate traffic of the marketplace without having to establish a legal entity in China, or sell through partners that list on domestic marketplaces.

There are currently two typical models of operation: Direct Mail and Bonded Warehouse. For the Direct Mail model, a customer places an order on a registered cross-border e-commerce platform, which will submit particulars of the order electronically for customs clearance. Meanwhile, the

products will be shipped by direct mail to customers directly from overseas locations. Whereas for the Bonded Warehouse model, products are shipped in bulk and stored in a bonded warehouse in one of the ten cross-border e-commerce pilot cities (namely Shanghai, Ningbo, Hangzhou, Zhengzhou, Chongqing, Guangzhou, Shenzhen, Tianjin, Fuzhou, Pingtan). When a customer places an order, the platform will make a real-time declaration to customs and the products will be shipped to customers from the bonded warehouse.

As e-commerce evolves, changes in government policy and regulation--for example, the changes to tax rates and the Positive List implemented in April 2016--will have a large impact on the cross-border e-commerce space. Companies are advised to keep abreast of changing government policy toward e-commerce.

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Tmall (www.tmall.hk)

Launched by Alibaba Group in 2014, Tmall Global is China’s largest online marketplace for foreign brands and retailers selling directly to China. Tmall Global has over 5,400 brands from 53 countries and regions, and over 80% of them entered China for the first time.

Ciaoniao, an affiliate of Tmall, can also assist Canadian companies listing on Tmall.hk.

JingDong Worldwide (www.JD.hk)

Launched by Jingdong in April 2015, JD Worldwide has over 1,200 foreign brands and 450 stores. It cooperates with eBay on promoting foreign brands on the marketplace.

The company cooperates with international third-party logistics companies and warehouses in three FTZs in China (Ningbo, Hangzhou, and Guangzhou) to assist foreign brands from 50+ countries / regions with fulfillment and delivery.

Canadian companies that list products on a cross-border marketplace may want to consider working with a TP to optimize their presence on the marketplace. Furthermore, some TPs can work with a third party logistics company (3PL) to improve the efficiency of logistics.

The following three are prominent cross-border e-commerce marketplaces.

Ymatou (www.ymatou.com)

Launched in 2011, Ymatou only sells foreign brands and has its own international delivery firm – Xlobo. Ymatou has about 1,000 foreign suppliers.

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Advantages of cross-border e-commerce

Traditional Trade

Cross Border E-commerce

Factories

Factories

Exporter Importer Wholesalers Retailers

Cross-border e-commerce

Consumers

Consumers

Restrictions and requirements

There are no special licensing or business registration requirements for companies selling products from an overseas website or on a cross-border marketplace. However, there are some restrictions with regard to product categories. Some products are restricted or forbidden from being imported into China without specific licenses. For example, seafood of any kind is not legally allowed to be sold cross-border and imported through cross-border channels. Products like this must come through normal import channels. You should check with the relevant agencies to understand if your product is restricted.

Listing products and selling them on one of China’s cross-border e-commerce marketplaces is not significantly different from listing and selling on a domestic marketplace, except that the company does not need a legal entity in China. You will still need to go through the platform registration process and provide the required documentation.

The above illustration of cross-border e-commerce is a simplified version. Canadian companies will still likely want to work with selected partners such as TPs and logistics providers.

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Source: Sovereign analysis

Cross-border e-commerce policy

In April, 2016, the Chinese Ministry of Finance announced new taxation policies targeting cross-border e-commerce. The new policy replaces the previously implemented postal articles tax applied to pilot zones for cross-border e-commerce. Under the new policy, retail goods purchased online through registered cross-border e-commerce platforms are treated as imported goods and are subject to tariff, VAT and consumption tax.

The new policy stipulates that products within a transaction limit (RMB2000 per single transaction and RMB20,000 every year for one person) are subject to 70% of the VAT and a consumption tax, if any. Tariffs are not applicable within the exemption limit. A big number of products sold through the cross-border marketplaces are now levied 11.9% (i.e. 17% x 70%) VAT, instead of the personal postal article tax, which used to be classified at four different rates (i.e. 10%, 20%, 30%, 50%) depending on the product category. The new policies eliminated the duty-free exemption for goods whose tax payable did not exceed RMB50.

The Positive List

The Chinese government also released in April, 2016 a “List of Imported Commodities for Retail in Cross-border E-commerce” - often referred to as the Positive List. Only products on the Positive List are now allowed to be imported through cross-border e-commerce and the Positive List is said to be reviewed on a regular basis.

In late May, the Chinese government drafted an Interim Regulation Program on Cross-Border E-Commerce Retail Importation Taxation Policies (later referred to as Regulation Program) to clarify new regulation requirements over the Interim Period. The Regulation Program was basically to retain the simplified CIQ (customs, inspection and quarantine) practices during a one-year interim term until

In April 2016 the central government issued a cross-border e-commerce Tax Circular affecting the taxes applied to products sold via cross-border e-commerce. More recently, a “Positive List” was attached to the circular as a rider, providing a list of products that can be sold by means of cross-border e-commerce.

May 11, 2017. It is unclear what to expect after the one-year interim period.The implications of simplified CIQ for importation of cross-border products are significant. The simplified requirements allow for the importation of products which would otherwise not be permitted to enter China without a CFDA certificate. The CFDA certificate is extremely difficult to acquire, thereby making its exemption a substantial incentive to import via cross-border e-commerce. Product categories affected by this include cosmetics, nutraceuticals, health foods and supplements, infant formula, and other products which require a CFDA (China Food and Drug Administration) certificate.

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Com

pany

(pos

itiv

e de

cisi

on t

o en

ter

Chi

na)

Domestic

Cross Border

Company’s China Entity

WFOE

Other 3rd PartyDistributor

in China

Brick & MortarSell in traditional

retail shop

Boutique Store

Online Marketplace

Flagship Store on E-Commerce

Marketplace

Exclusive Shop on E-Commerce

Marketplace

Sell directly to onlinemarketplace

Hypermarket Model

Partner

Distributor in China

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Once you have decided to enter the China market, there are several options available in terms of approach as illustrated in the below graphic. Initially, you will need to decide if you want to pursue cross-border entry or enter domestically by setting up your own company or working with partners. Ultimately, how you decide to approach the market affects the channel or channels available to you.

Source: Sovereign analysis

Decision tree for entering China

HOW DO YOU MANAGE

LOGISTICS?Import Tariffs

Managing Cross-Border Shipments

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Import Tariffs

Products entering China are categorized as either personal parcels or commercial cargo. Both require declaration at customs by filing ‘Article Lists’ or ‘Cargo Lists’ for customs clearance before entering China’s customs border. For product distribution and logistics from overseas to mainland China, Canadian companies will need to hire a licensed international 3PL or freight company. China’s regulations on importing personal parcels and commercial cargo are substantially different regarding import taxes, documentation, CIQ inspection and quarantine requirements, and labeling and testing requirements.

Personal parcels

China has defined personal parcels in the GACC Announcement No.56, 2014 on Cross-Border E-commerce Trade Supervision, which has been in effect since August 1, 2014. There are two important criteria for personal parcels, which are:

1) The value of the parcel must be lower than US $154except when from Hong Kong, Macao, or Taiwan, wherethe maximum value is US $123;

2) The goods in the parcel are for personal use (meaningthe quantity is reasonable).

The customs officer has the authority to determine if the parcel is for personal use or not.

Import tax – For personal parcels, import taxes are only levied on goods if applicable, and the goods are not required to go through the CIQ inspection and quarantine process. There are no requirements on labeling and testing; however, goods forbidden to be imported are not allowed. If taxes are levied, the tax rate will be different depending on the product category.

A personal parcel with a value exceeding US $154 is subject to full import tax without exemption. If import taxes payable are not paid at customs, personal parcels will be returned by the individuals/end customers or the 3PL/Courier. Exceptions to the above are personal parcels containing food & beverages and cosmetics. The tax exemption value for personal parcels containing F&B products is US $77, and the tax exemption value for cosmetics is US $15. The table below provides an example of the import tax rate

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Commercial cargo

Goods for commercial use and/or not categorized as personal parcels are usually categorized as commercial cargo and must go through customs and CIQ inspection and quarantine procedures.

Import tax – Commercial cargo is subject to various types of import duties and taxes, such as an import tariff, VAT, and consumption tax. The rate and type of applicable duties depends on the products’ HS Code classification (Harmonized Commodity Description and Coding System) as well as any free trade agreements, most favored nations agreements, or other trade agreements/disputes that may affect the import duties.

The table below provides an example of the import tax rate, VAT, and consumption tax for several products.

Import process – It can take several months for Canadian exporters and Chinese importers to prepare all of the necessary documents required for the pre-import process. For example, frozen seafood products will require Sanitary Administrative Approval, original labels and the Chinese translation, as well as registration and filing with the local CIQ office in China. During the import process, the inspection declaration, CIQ inspection and quarantine, and customs inspection might take another 1-2 weeks. If any issues occur - for example, wrong labels or missing documents - the goods may take longer to clear customs.

A large number of importers regularly experience challenges with the importation process and it is important to be aware of the specific requirements for your product categories.

For more specific information on import taxes, please contact the TCS.

Product Categories Import Tariff(MFN) VAT Consumption

Tax

Baby care productsand baby formula 10% 0 0

Seafood products 10% 0 0

Alcohol and wine 50% 0 10-20%

Dietary supplements 10% 0 0

Source: Sovereign analysis based on multiple sources including GACC

Note: MFN = Most Favored Nation

Table: Import Tax Rates on Different Products as Personal Parcels

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Managing Cross-Border Shipments

There are two principal methods available to Canadian companies engaged in cross border e-commerce in China to ship to the end customer. To ship directly to the end-consumer via an international / domestic express company, or to ship in bulk to a 3PL who can warehouse the products in one of China’s pilot e-commerce zones, and then ship the product individually to end-consumers as orders are fulfilled.

Directly ship to customer

The simplest way for a Canadian company to ship to customers who purchase from them overseas (individual parcels) is to use international express companies such as UPS, FedEx, or DHL. These companies can manage the customs process and transfer the parcel to their domestic partner for final delivery.

Although simple, the downside of this method is that transportation costs are high and delivery time is lengthy.

Depending on the product and the value of the parcel, it may be subject to tariffs and other import regulations.

Product Shipped Directly from Overseas to End-Customer / Consumer

Source: Sovereign analysis

Brand / Retailer

Consumers

Cross-Border Marketplace or Company Website

Shipped from Canada to China as personal

parcel post

Local Delivery

Clears customs as a personal parcel post

Online Transaction

China Customs

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Warehouse products in e-commerce pilot zone for forward deployment

Canadian companies can engage a 3PL with warehousing facilities inside one of China’s pilot e-commerce zones or bonded areas. When Chinese consumers order products on the company’s website or cross border marketplace, the products can be delivered directly from the warehouse inside the pilot e-commerce zone as personal parcels shipped to end consumers. This cuts delivery time significantly and also bypasses some of the restrictive regulations affecting imported products. Furthermore, if a single transaction is under 2,000 RMB or within a yearly customer limit of 20,000 RMB, VAT is decreased by 30% (making applicable VAT 11.9% as opposed to 17%). There are also no tariffs applied to purchases within these limitsThe graphic below provides an illustration of the delivery process.

If your product is not on the newly published “Positive List” the only cross border shipping option reliably available is to ship via individual parcel post originating from outside a bonded cross-border logistics area (FTZ).

See page 43 for more information on the positive list.

Source: Sovereign analysis

Product Shipped Via 3PL and Stored in Bonded Warehouse

Brand / Retailer

Consumers

Cross-Border Marketplace or Company Website

Local Delivery

Clears customs as a personal parcel post

Online Transaction

China Customs

Forward Deployed Inventory

(Stored in a bonded warehouse in pilot e-commerce zone)

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HOW DOES PAYMENT WORK?

Getting Paid If You Have A Company In China

Getting Paid When Engaging In Cross-Border E-commerce

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Getting Paid If You Have A Company In China

With a legal entity in China, a number of payment options are available, including online payment platforms such as Alipay, WeChat Pay, JD Pay, and recent entrant Apple Pay. Credit cards and other forms of payment are also available.

Alipay (Alipay.com) Launched by Alibaba Group in 2004 as an affiliate company, Alipay has the largest market share (nearly 50 percent) of China’s online payment platforms, with over 300 million users as of 2014. Alipay works with Visa and MasterCard and supports transactions in dozens of major foreign currencies. In 2015, Alipay’s parent company was rebranded into Ant Small and Micro Financial Services Group.

WeChat Pay - TencentWeChat is the most popular instant messaging App in China. WeChat Pay, which has been integrated into the WeChat platform, is one of the principal Mobile Payment systems in China. WeChat pay offers QR Code payment, In-App Web-based payments, and In-App payment when vendors integrate WeChat Pay SDK into their Apps.

Apple Pay - ApplePartnering with China Union Pay, Apply Pay began rolling out in China in early 2016. Although a relatively new entrant, Apple’s partner, Union Pay, controls all card payments in the country providing Apple Pay with some leverage; however, Alipay and Wechat Pay have a nearly 100 percent penetration rate, and it will be difficult for Apple Pay to carve out market share.

Getting Paid When Engaging in Cross-Border E-commerce

For overseas registered companies, payment platforms such as Alipay and WeChat Pay provide cross border e-payment services which allow buyers to pay in RMB and sellers to settle in major foreign currencies. For sellers, there is also no need to open a bank account in China, as once the payment is converted it will be remitted into the seller’s international bank account.

Typically, the cross-border marketplaces have already integrated one or multiple payment platforms.

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HOW CAN YOU PROTECT YOUR IP?

Protecting IP in China

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Protecting IP in China

China is often perceived as a lawless country where ‘anything goes’ regarding intellectual property (IP). China has laws that offer a great deal of protection for intellectual property, a condition of its accession to the World Trade Organization in 2001; effective enforcement, however, is lacking.

China’s enforcement of its IP laws is weak, but it does exist. Companies that formally register their IP with the appropriate authorities have a chance to prevent third-party infringement. Companies that do not register their IP have no recourse when it comes to infringement.

Trademarks

China employs a “first-to-file” system for trademark registration and affords no protection to unregistered trademarks. This is different to the Anglo-American system, by which a company gains common law rights by virtue of using a brand in commerce.

In China, it is possible for a third party to both register “your” trademark and prevent you from using it without selling a single product themselves. Such trademark squatting is common and when it occurs the options are to pay a licensing fee to the trademark squatter; buy the trademark outright; or to change your trademark.

Companies doing business in China should give serious consideration to trademarking any distinctive phrase or logo used on their products or packaging. Additionally, it is important to register both the English-language trademarks as well as Chinese-language trademarks, including potential future trademarks.

Michael Jordan and Qiaodan (乔丹)

A Chinese sports company located in Fujian province in South East China registered the trademark for “乔丹” (Qiaodan), which is the Chinese name for Jordan. Michael Jordan sued the company three times and in each instance lost the legal battle. According to Chinese courts, “Jordan” is an ordinary surname of American people and not a full name. Furthermore, the use of a human character jumping, also synonymous with Jordan in North America, was deemed to be just a shadowy figure that is difficult for the public to recognize as Michael Jordan(!).

Regardless of how well known you think your trademark is internationally, it is still important to register your trademark in China as early as possible.

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Chinese law protects copyrighted material in much the same way as the West. The problem is not the lack of laws, but the lack of enforcement. Although a creative work first published in another country automatically gains copyright protection in China upon its creation, it is advisable to register copyrights in China, as doing so provides better evidence of ownership and stronger enforcement options.

Registering with China Customs

Registering your IP alone will not limit the spread of counterfeit goods. Registration merely gives you the legal capacity to enforce your rights to that IP, and should properly be seen as one of the pieces in an overall strategy.

For any company concerned about counterfeit goods, the next step after registering IP should be registering that IP with China customs. This is not a legal requirement but a practical one. Although customs officials have discretion to check every outgoing shipment for trademark, copyright, and patent infringement, in reality they only check against the customs database. Therefore, if you have not registered with customs, there will be no enforcement.

Practical protection

Foreign companies entering China should not leave common sense at the border; it is important to exercise the same due diligence, if not more, as you would in your home country.

Once you or your product enter the Chinese market, continue to monitor it closely. Pay attention to what your partners are doing and how your IP is being used. You cannot rely on your Chinese partners to provide you with accurate market information and the onus is on you to monitor what is going on with your brand. Your Chinese partners are likely to have their own agenda that may not coincide with yours, just as in any other part of the world.

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CONCLUSIONS

Main Considerations For Approaching The Market

General Tips For Doing Business In China

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Main Considerations For Approaching The Market

Approaching any new market, especially a developing one like China, is a challenge that requires careful planning as well as commitment from all levels of management. E-commerce in China is no different from approaching the market by more traditional means.

The e-commerce marketplace model in China addresses many of the common challenges Canadian companies normally face when exporting to China. There is a cost to selling on marketplaces, such as transaction fees and not being artistically free to manage your marketplace page, but the benefits are quite obvious. There are partners to manage logistics and the marketplace already works with the main domestic payment processing companies. The marketplace itself is also familiar to Chinese consumers with a substantial amount of aggregate traffic, especially during special events. Canadian companies or their partners can focus on branding and marketing within the marketplace.

Specific considerations are:

Facing – Develop a web page and/or storefront on a marketplace with the appropriate “look, touch, and feel” that is in line with your overall brand.

Pricing strategy – Develop a pricing strategy that is aligned across all channels. Competing on price is not always the appropriate solution. Invest in finding the right price point for your products.

Service – Offer during and after sales service, either directly or utilizing a 3rd party partner.

Marketing/traffic generation – It is important for Canadian companies to invest in activities that generate traffic to their page or marketplace shop. If internal capabilities are lacking, consider outsourcing this to a 3rd party service provider.

Fulfillment and supply chain – Chinese consumers are used to receiving goods within days or hours of purchasing them. Fast and efficient fulfillment is critical to success in the market. You also need to be able to manage returns in an efficient manner. If you are unable to develop your own supply chain, then consider working with an integrated 3rd party logistics provider (3PL).

Choosing the correct model – Understanding which model you should be using to exploit the market is critical to success. It is important to spend time assessing the different options available. Use a third party consulting firm if necessary.

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Be flexible with deadlines – China does not perceive efficiencies the same way as Canada.

Senior management must be committed – You need to invest more than just money, ifnot, do not expect positive results.

Don’t check your brains in at the border – If something doesn’t make business sense,then why are you doing it?

Be mindful of corporate rigidities – Past success in other markets does not mean you will succeed in China. Adapt to specific market conditions.

Guanxi6 retires or goes to jail – You will never likely have real “guanxi” in the first place. Rely on sound business models and government procedures.

China is a low trust business environment– Do not rely on the other side’s sense of fairness.

6 | “Guanxi” is a Chinese word that refers to relationships

China is a “Rule-by-Law” country – Authority will sometimes trump regulations, be aware of this.

The Chinese are not cultures, they are unique personalities – It takes many different types of people to fill a country of a billion plus. Be careful of assumptions.

Know what you don’t know – Don’t be afraid to admit it. You can rely on trusted partners to fill in gaps in knowledge.

There is no such thing as a China expert – Even amongst locals. The country is too large and diverse for a person to be an expert on evertything within the country. You should rely on specific area experts.

To further discuss how options on how you can exploit China’s

e-commerce market, please contact the Canadian Trade

Commissioner Service at SMEGateway@international.gc.ca

It is important to remember that China, although a large and attractive market, is a developing economy and is a difficult market for foreign companies. There are significant challenges and being prepared for them is important.

You may wish to consider the ten suggestions below for approaching the China market, regardless of industry, size and method:

General Tips For Doing Buisness In China

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SOVEREIGN (CHINA) LIMITED Mray@Sovereigngroup.comSovereignGroup.com/China

About Sovereign China

With offices in Shanghai and Beijing, Sovereign China was created by the merger of Sovereign’s existing China operations and the JLJ Group in 2013. The JLJ Group was established in 2003 to accelerate international clients’ ability to understand and operate in the China market and has successfully assisted more than 600 companies from over 50 countries with their China market entry.

Sovereign China provides a suite of services designed to lead foreign investors through the market entry process and to support them to develop long-term success in China. We are with our clients from planning to execution – from assisting with understanding the market and developing a market entry strategy, through to establishing operations and providing back office and compliance support services.

Disclaimer

This report has been prepared by a team of market research professionals working in cooperation with the Consulate General of Canada in Shanghai.

This report is intended to provide a general overview of e-commerce in China and act as a guide for Canadian companies with interest in the China market. It is not intended to provide exhaustive coverage of the topic and readers should be aware that policies, regulations and general market conditions related to e-commerce in China evolve rapidly.

The information herein is made available on the understanding that the Canadian Trade Commissioner Service (TCS) is not providing legal, financial, or any other form of professional advice. Therefore, while all care has been taken to ensure the accuracy of the information in this report, the TCS does not accept responsibility for any losses incurred through errors or omissions in this report. Any person relying on this report does so entirely at their own discretion and at their own risk. The TCS strongly recommends that readers obtain independent legal, financial and related forms of professional advice prior to acting upon information in this report. The TCS assumes no responsibility for any company, product or service mentioned in this report, nor for any act or omission of any business connected with such products and services.

About Kungfu Data

As a leading analytics and optimization partner for Tmall and JD, Kung Fu Data’s mission is to level the playing field. Experts in flagship optimization and brand control, KFD works with a select portfolio of Fortune 500 brands driving revenues to number 1 in their category as well as providing TMall key account activation, third party auditing, reseller oversight, and performance management.

Kung Fu Data offers complete transparency and accountability with full dedicated resources: +70 employees, 3 bi-lingual offices in Beijing, Shanghai, and San Francisco. Our clients enjoy the highest share of brand, average unit prices, and growth rates among like competitors in category. Portfolio GMV to reach 200 million RMB in 2016.

©Government of Canada 2016 | Publication date: June, 2016

APPENDIX

Key Definitions

List Of Potential E-commerce Partners

Overview Of Key Categories

60

Key Defenitions3PLs

Third-party logistics, refer to companies that provide services to its customers of outsourced logistics services for part, or all of their supply chain management functions, usually specialized in warehousing and transportation services that can be scaled and customized to customers’ needs based on market conditions.

B2B

Business-to-business, refers to commerce transactions between businesses, such as between a manufacturer and a distributor, or between a distributor and a retailer. For example, Alibaba is the largest B2B e-commerce platform in China.

B2B2C

Refers to Business-to-business-to-consumer platform, a business pattern adopted by some e-commerce platforms such as JD and Jumei which have self-operated businesses, i.e. sourcing products from suppliers and then selling to consumers on their own online platforms.

B2C

Business-to-consumer refers to transactions between businesses and consumers, such as between a retailer and consumers, or between a distributor and consumers, or an e-commerce platform and consumers. For example, Tmall is the largest B2C e-commerce platform in China.

C2C

Consumer-to-consumer refers to electronically facilitated transactions between consumers via third-party platforms such as Taobao and Ebay.

FICE

A foreign invested commercial enterprise. This can be a JV or WFOE and has the right to import, export, and distribute goods within China.

JV

Joint venture.

WFOE

Wholly foreign owned enterprise.

RO

Representative office.

Flagship store

A flagship store is where companies can sell their own brands (R or TM trademark). It can be different types of products, but needs to be under the same brand name.

ICP license

Refers to internet content provider license, required for commercial websites (which offer goods or services to customers) with their own domain name that operate inside China, in line with the Telecommunication Regulations of the P.R.C.

ICP filing

Refers to internet content provider filing, required for non-commercial websites (which are purely informational and not involved in direct sales) with their own domain name that operate inside China, in line with the Telecommunication Regulations of the People’s Republic of China.

Franchise store

A franchise store can sell several types of products under different categories.

SEO

Search Engine Optimization is the process of affecting the visibility of a website or webpage in a search engines’ unpaid results.

Specialty store

Specialty stores sell products under the same category.

TP

TPs are third party management companies and are one of the most important partners in China’s e-commerce ecosystem. They manage the store page of a retailer in a marketplace platform such as Tmall. They also have relationships with the platform and can assist in driving traffic to a brand’s page.

VAT

Value-added tax is a type of tax imposed on the value added to a product, material, or service during manufacture or distribution.

VPN

Virtual private network is a network that uses a public telecom infrastructure such as the Internet to provide users with secure access to an organization’s network domestically or abroad. It ensures privacy through security procedures and tunneling protocols such as the Layer Two Tunneling Protocol (L2TP). Data is encrypted at the sending end and decrypted at the receiving end.

Categories Company Name /Website Description Contact Name/Email/

Phone Number

Taobao/Tmall

Partners

Kung Fu Commerce(www.kungfudata.com)

Kung Fu Data provides ecommerce intelligence using live platform data at a fraction of the cost of hiring consultants.

Mr. Josh Gardner Josh@kungfudata.com +86 186 2176 6452

Bysoft(www.bysoftchina.com)

A comprehensive web development company in China

Ms. Laura Chen laura.chen@bysoftchina.com

+86 021 6226 8616

Bluecom (Shanghai)(www.bluecomgroup.com)

Reliable and creative partner of professional e-commerce solutions

Mr. Alan Linalan.lin@bluecomgroup.com

+86 021 5266 0396

Baozun Inc(www.baozun.com)

A leading, digital and e-commerce service partner in China

Ms. Xubd@baozun.com

+86 021 6095 6000 ext. 8038

Third Party Logistics

Shanghai Shine-Link International Logistics Co., Ltd. (SLC) (http://www.chinaslc.com)

Offers high-quality logistics services. Has a national service network covering the key areas and main cities in China such as Eastern China, Northern China, Southern China and Midwest.

Ms. Cherry xin.sun@chinaslc.com/+86 021 2089 5891

Cainiao(http://www.alibabagroup.com)

Alibaba’s logistics affiliate, and a nationwide delivery service provider. +86 010 6569 0333

Kerry Logistics(https://www.kerrylogistics.com)

Asia’s leading logistics service provider with solid presence in countries and a global network covering over locations across six continents.

Mr. Zhou Han bin Hanbin.zhou@kerryeas.com

+86 021 5108 0942

DHL(http://www.cn.dhl.com/zh.html)

Express deliveries worldwide; freight forwarding with planes, trucks, ships and trains; warehousing services that go beyond just storage, but include everything from packaging to repairs; international mail deliveries; customized and specialized shipping

Ms. You christie.you@dhl.com +86 021 2305 5796

Freight/Delivery(International)

UPS Supply Chain Solutions(http://www.ups.com/content/cn/

en/index.jsx)

The largest express carrier and package delivery company in the world. A leading provider of specialized transportation, logistics, capital, and e-commerce services.

Ms. Ma Jing Jing mjingjing@ups.com +86 021 6105 7622

China Merchants Logistics Holding Co., Ltd.

(http://www.cml-1872.com)

The country’s leading full supply chain logistics service providers. Has established efficient logistics network in over 700 cities in China.

Mr. Feng Kai fengkai@cmhk.com

+86 755 18018722292

Federal Express(www.fedex.com/cn_english)

FedEx Express provides fast and reliable delivery to every U.S. address and to more than 220 countries and territories around the world. FedEx uses a global air-and-ground network to speed delivery of time-sensitive shipments, usually in one to two business days with the delivery time guaranteed.

fdxhelpdesk@fedex.com +86 010 6464 8855 (North

China) +86 027 8540 0200 (Middle

and East China) +86 020 8396 9866 (South

China)

List Of Potential E-commerce Partners

Table to be continued...

Categories Company Name /Website Description Contact Name/Email/

Phone Number

Freight/Delivery(Domestic)

Sinotrans Limited(www.sinotrans.com)

A leading global integrated logistics service provider which integrates ocean freight, air freight, road and rail transport, international express, etc.

Liu Ying gufenshichang@sinotrans.com

+86 010 5229 5722

SF express(www.sf-express.com/cn/en)

Provides logistics distribution and express delivery services. 95338 ext. # (For English)

Freight/Delivery Domestic)

Kung Fu Commerce(www.kungfudata.com)

Kung Fu Data provides ecommerce intelligence using live platform data at a fraction of the cost of hiring consultants.

+86 021 6037 5230

Bysoft(www.bysoftchina.com)

A comprehensive web development company in China

Mr. Geoffrey Zhang 00357125@yto.net.cn +86 138 0161 7133

Digital Optimization

Shanghai Shine-Link International Logistics Co., Ltd. (SLC) (http://www.chinaslc.com)

Offers high-quality logistics services. Has a national service network covering the key areas and main cities in China such as Eastern China, Northern China, Southern China and Midwest.

Hilary Li Hilary.Li

@web-presence-in-china.com+86 10 8580 3111

Cainiao(http://www.alibabagroup.com)

Alibaba’s logistics affiliate, and a nationwide delivery service provider.

Mr. Wang info@netconcepts.cn +86 21 6074 5527

Kerry Logistics(https://www.kerrylogistics.com)

Asia’s leading logistics service provider with solid presence in countries and a global network covering over locations across six continents.

Vanessa Yuan yuan@chinaseo.com

+86 21 5465 8972, ext.116

DHL(http://www.cn.dhl.com/zh.html)

Express deliveries worldwide; freight forwarding with planes, trucks, ships

Mr. Zhang Yong Qiang 3renseo@gmail.com +86 021 2305 5796

Brand Marketing

OMD China(www.omd.com/china/global-

media-agency)

A leading global advertising and marketing communications services company.

Jessie Fu Jessie.fu@omd.com+86 21 6263 3157

WPP(www.wppchina.cn)

WPP companies exist to help their clients compete successfully: in marketing strategy, advertising, every form of marketing communication and in monitoring progress.

Scott Spiritsspirit@wpp.com

+86 21 2405 0685

Payment Processing

Alipay Global(http://global.alipay.com)

Provides payment services for international online businesses. global.service@alipay.com

Infrastructure support

ChinaNetCloud(www.chinanetcloud.com)

The world's largest Internet Managed Services company. It helps firms build, optimize, and manage their Internet infrastructure.

Steve Marshall Sales@ChinaNetCloud.com

+86 21 6422 1946

Marketplace Analytics

Kung Fu Data(www.chinanetcloud.com)

Kung Fu Data provides ecommerce intelligence using live platform data at a fraction of the cost of hiring consultants.

Josh Gardner Josh@kungfudata.com +86 186 2176 6452

…Table continued

Table to be continued...

Categories Company Name /Website Description Contact Name/Email/

Phone Number

Third party marketplace platforms

Tmall(www.tmall.com)

A Chinese-language website for business-to-consumer online retail, operated in the People's Republic of China by Alibaba Group.

+86 0571 8815 8077-2-9

Tmall Global(http://tmall.hk)

Face to overseas companies, It is a platform for international businesses to sell brand name goods to consumers in mainland China, Hong Kong, Macau and Taiwan.

Ms. Tong Lu tmallglobal@service.alibaba.com

+86 400 843 2288 – 3

Jing Dong (JD)(http://en.jd.com)

A Chinese electronic commerce company headquartered in Beijing. It is one of the largest B2C online retailers in China by transaction volume.

Ms. Chen worldwide_food@jd.com (Food)

worldwide_beauty@jd.com (Cosmetics & Personal Care) worldwide_fashion@jd.com

(Clothing, shoes & accessories) worldwide@jd.com (Other categories)

+86 0527 8810 5500

Market Intelligence and entry

Sovereign Chinawww.sovereigngroup.com

Sovereign is a leading full service corporate services provider and consulting firm that specializes in China market entry – from strategy to execution – and assists clients with their long term success in the market.

Mr. Mark Ray Mray@sovereigngroup.com

+86 21 5211 0068

Reach24H Consultingwww.reach24h.com

Reach24H Consulting provides global chemical compliance solutions and have experience in assisting clients in the food, agrochem, and cosmetics industries.

Ms. Vian Fang

Excellent Tradingwww.extrading.com

Excellent Trading provides consulting, importing, and management services to overseas clients, and provide one stop ‘Turn Key’ distribution services for clients who wants to enter the Chinese market in the easiest and fastest way.

James TsangJames.tsang@extrading.com.hk

…Table continued

Source: Sovereign Analysis on multiple sources

Overview Of Key Categories

The following are high level overviews of the following four key categories:

1) baby care products & baby formula;2) seafood;3) alcohol and wine; and4) nutraceutical.

These overviews, while containing useful market information, should not be considered a substitute for comprehensive market research work.

1) Baby care products and baby formula

China boasts one of the largest markets for baby care products and baby formula in the world. Demand in China for baby care products and baby formula has been growing rapidly in the past decade and is expected to maintain at least 6% annual growth through 2024. Some of this growth is attributed to the changes made to the controversial one-child policy, as Chinese couples are more freely able to have a second child, as well as increasing disposable incomes, which Chinese couples are willing to spend a relatively large proportion of on their children.

Transaction Volume - Baby Products

Transaction Volume - Baby Formula

Source: Kung Fu Data

The market is rife with health and safety scandals. The 2008 melamine scandal, where milk powder contained dangerously high levels of melamine to increase protein readings, is still fresh on parents’ minds. The scandal affected 300,000 victims, including 6 infant deaths. This and other safety concerns are driving parents to purchase overseas products for their babies.

E-commerce has provided overseas companies with direct access to Chinese consumers looking to purchase baby care and baby formula products for their children. Monthly transaction volumes for both baby products and baby formula sales online are growing rapidly.

On Tmall, China’s largest e-commerce marketplace platform, within the baby products category, the total transaction volume increased by 35 percent from 2014 to 2015, exceeding 220 million transactions 2015. In the baby formula category, the total annual transaction volume increased by 17 percent, reaching nearly 14 million total transactions in 2015. Monthly transaction volumes for baby products and baby formula are illustrated in the charts on the left.

Source: Kung Fu Data | Note: there is a drop in transactions in Jan / Feb (except alcohol), this corresponds with the Chinese New Year holiday.

Price: RMB 20.8/20 piecesBulk Price:RMB 104/100 pieces March sales volume: 31872 Distributor: Insoftb Flagship Store

Price: RMB 218/164 piecesBulk Price: NoneMarch sales volume: Undis-closedDistributor: JD

Price: RMB 169 / 54 pieces Bulk Price:RMB 498 / 162 pieces March sales volume: UndisclosedDistributor: GOU

Insoftb (HK) Pampers (USA) Merries (Japan)

Price: RMB 29Bulk Price:136 (packaged compund baby care products)March sales volume: 14379 Distributor: Excelamb Flagship store

Price: RMB 99 / 500 mlBulk Price: RMB 108 / (+1skin lotion) March sales volume: UndisclosedDistributor: JD

Price: RMB 118Bulk Price: RMB 219 ((+1skin lotion) March sales volume:3704 Distributor: GOU

Excelamb (Switzerland) Sanosan (Germany) Califonia Baby (USA)

Price: RMB 399Bulk Price:NoneMarch sales volume: 25363 Distributor: Belecoo Flagship Store

Price: RMB 428Bulk Price:NoneMarch sales volume: UndisclosedDistributor: TEKNUM Flagship Store

Price: RMB 19999 (Incl. freight fees RMB 266)Bulk Price:NoneMarch sales volume:2000 Distributor: GOU

Belecoo (China) TEKNUM (China) Stokke Crusi (Dutch)

Tmall JD.com

YMaTou

Product

Comparison of baby products on different marketplacesSource: Sovereign analysis

Gou(Domestic Platform) (Domestic Platform) (Cross Border E-commerce)

In the baby formula category, Dutch and German products ranked second and third accounting for 22 percent and 13 percent respectively of the monthly transaction volume in January 2016. China dominated with 31 percent of transaction volume in January 2016.

Price: RMB 208 (900 g)Bulk Price:RMB 416 (1800 grams) March sales volume: 49,000 Distributor: Le You

Price: RMB 181(900 g)Bulk Price:199 (1200 grams) March sales volume: UndisclosedDistributor: JD

Price: RMB 212 (800 g)Bulk Price: RMB 410 (2 tins of 1600 g)March sales volume: 207,000 Distributor: GOU

Friso (Dutch) Friso (Dutch) Butrilon (Dutch)

Price: RMB 90.11 (2.5 ml)Bulk Price:RMB 170.11(5 ml) March sales volume: 2653 Distributor: Tian Kong Zhi Jing

Price: RMB 308 (474ml)Bulk Price:NoneMarch sales volume: UndisclosedDistributor: Child Life Flagship Store

Price: RMB 119 (2.5 ml)Bulk Price: RMB 158 (5 ml)March sales volume:22178 Distributor: GOU

Baby Drops (Canada) Child Life (USA) Baby Drops (Canada)

Tmall JD.com

YMaTou

Product

Comparison of baby products on different marketplacesSource: Sovereign analysis

Gou(Domestic Platform) (Domestic Platform) (Cross Border E-commerce)

China Seafood Consumption Per Capita

2) Seafood products

Consumption of seafood products in China has been increasing steadily since 2005 at a compound annual growth rate of about 4 percent. The overall production of seafood products exceeds 40 million tons and the industry value is expected to reach USD 112 billion by 2017. Consumption is expected to reach 42.5 kilograms per capita by 2022. As per the chart below, over one third of consumption is freshwater fish while marine fish accounts for less than twenty percent of consumption.

Source: Sovereign Analysis

The amount of seafood products being sold online is rapidly growing. On Tmall, China’s largest e-commerce marketplace platform, within the seafood product category, the total transaction volume increased by 76 percent from 2014 to 2015, growing from 11.5 million transactions in 2014 to over 20 million in 2015. In January 2016, the monthly transaction volume reached nearly 3.5 million as illustrated in the chart below.

Transaction Volume - SeafoodChinese products dominate seafood transactions, accounting for 50 percent of the nearly 3.5 million transactions in January 2016. Norwegian seafood was the second highest and accounted for 3 percent of total transaction volume in January with nearly 90,000 transactions. Canadian seafood ranked third and accounted for 2 percent with nearly 60,000 transactions.

Due to CIQ inspection requirements, seafood is not able to be purchased via cross-border e-commerce channels.

Source: Kung Fu Data

Price: RMB 20.8/20 piecesBulk Price:RMB 104/100 pieces March sales volume: 31872 Distributor: Insoftb Flagship Store

Price: RMB 218/164 pieces Bulk Price: NoneMarch sales volume: UndisclosedDistributor: JD

Price: RMB 169/54 pieces Bulk Price:RMB 498/162 pieces March sales volume: UndisclosedDistributor: GOU

Unknown Brand (UK) Wan Ju Xian Cheng (China) Jin Jun (Denmark)

Price: RMB 26 (6 ones)Bulk Price: NoneMarch sales volume: 4165 Distributor: Tmall Super Market

Price: RMB 39 (500 g)Bulk Price: NoneMarch sales volume: UndisclosedDistributor: Xian Bai Ke

Price: RMB 29.8 (400 g) Bulk Price: NoneMarch sales volume: UndisclosedDistributor: Yummy 77

Unknown Brand (China) Xian Bai Ke (China) Jia Min Yao (China)

Price: RMB 158 (2kg)Bulk Price: NoneMarch sales volume: 3714 Distributor: Tmall Super Market

Price: RMB 198 (2 kg)Bulk Price: NoneMarch sales volume: UndisclosedDistributor: Pin Xian Mao

Price: RMB 168 (2 kg)Bulk Price: NoneMarch sales volume: UndisclosedDistributor: Yummy 77

Unknown Brand (China) Pin Xian Mao (China) Unknown brand (Agentina)

Tmall JD.com

YMaTou

Product

Comparison of seafood products on different marketplacesSource: Sovereign analysis

Yummy 77(Domestic Platform) (Domestic Platform) (Cross Border E-commerce)

3) Alcohol and wine

China’s is one of the world’s largest markets for alcoholic beverages, with a per capita consumption of nearly seven liters per year. Spirits and beer are the most commonly consumed alcoholic beverages; however, wine is the fastest growing segment and is becoming more especially popular with young, affluent consumers. In terms of spirits, baijiu, brandy, whiskey, and vodka have the highest sales volumes. Baiju is a traditional Chinese spirit consumed regularly at festivals and celebrations. It is by far the preferred spirit among Chinese consumers.

Transaction Volume - Alcohol (incl. Grape wine)Source: Kung Fu Data

Transaction Volume - Spirits

Price: RMB 129.9Bulk Price: NoneMarch sales volume: 806 Distributor: Yu Jiu Xuan

Price: RMB 158Bulk Price: NoneMarch sales volume: UndisclosedDistributor: JD

Price: RMB 118Bulk Price: NoneMarch sales volume: UndisclosedDistributor: Jiu Xian

Jack Daniel’s (USA)

Price: RMB 358Bulk Price:RMB 618/1000 ml March sales volume: 532 Distributor: Bao Shu Hang

Price: RMB 408Bulk Price:RMB 899/2 bottles March sales volume: UndisclosedDistributor: JD

Price: RMB 359Bulk Price:RMB 638/2 bottles March sales volume: UndisclosedDistributor: Jiu Xian

Hennessy V.O.S.P (France)

Price: RMB 99Bulk Price: NoneMarch sales volume: 507 Distributor: Xu Long Jiu He

Price: RMB 115Bulk Price: NoneMarch sales volume: UndisclosedDistributor: JD

Price: RMB 99Bulk Price: NoneMarch sales volume: UndisclosedDistributor: Jiu Xian

Absolut Vodka (Sweden)

Tmall JD.com

YMaTou

Product

Alcohol price comparison in different e-commerce marketplacesSource: Sovereign analysis

Jiu Xian(Domestic Platform) (Domestic Platform) (Cross Border E-commerce)

Transaction Volume - Grape Wine

Considering only grape wine, the transaction volume increased by 55 percent from 2014 to 2015, reaching nearly 5.9 million transactions. Within wine, French wine accounts for the most number of transactions, accounting for nearly 25 percent of the 1 million transactions in January 2016. Chinese wine and Spanish wine are ranked second and third, accounting for 15 percent and 8 percent of the transaction volume in January 2016. Canadian wine ranked tenth in in terms of transaction volume, with 3,220 transactions in January. The below chart illustrates the monthly transaction volume for grape wine from January 2014 to January 2016:

Approximately 70% of the wine sold on marketplaces is priced at about RMB 200 per bottle. There are relatively few Canadian wine products being listed, although Ice Wine is easily found on a number of different marketplaces.

Source: Kung Fu Data

In addition to Tmall and JD, the top two marketplaces in China, specialized marketplaces also sell wines and spirits, such as Pinshang and Jiuxian. A more detailed discussion on the different types of marketplaces and approach models is found later in this booklet.

Price: RMB 186 Bulk Price:RMB 1092/6 bottles March sales volume: 36 Distributor: Yun & Yue

Price: RMB 199Bulk Price: NoneMarch sales volume: UndisclosedDistributor: JD

Price: RMB 178Bulk Price: NoneMarch sales volume: 5404 Distributor: Pinshang

Yancy (Canada) Yancy (Canada) Rigeside (Canada)

Price: RMB 158Bulk Price:RMB 298/1 white + 1 red March sales volume: 41 Distributor: Ridgeside Winery

Price: RMB 218Bulk Price: NoneMarch sales volume: UndisclosedDistributor: JD

Price: RMB 368Bulk Price: NoneMarch sales volume: 5115 Distributor: Pinshang

Yancy (Canada) Yancy (Canada) Adelberg Weinkellerei Dornfel (Germany)

Tmall JD.com

YMaTou

Product

Wine product comparison on different e-commerce marketplacesSource: Sovereign analysis

Pinshang(Domestic Platform) (Domestic Platform) (Cross Border E-commerce)

Transaction Volume - Nutrition Supplements

4) Dietary supplements

China’s dietary supplement market is estimated to be anywhere between USD 12 -20 billion and is estimated to be growing at approximately six percent per year. The exact market size is difficult to precisely estimate due to many products not being registered, products being brought in through grey channels and lack of official government statistics.

It is estimated the dietary supplement market will increase at 10 percent on average annually in the coming 10 years. In 2015, overseas dietary supplement products account for 10% of all imported sales on e-commerce platforms, reaching to nearly RMB 50 billion.

The penetration rate of dietary supplement in China is only 20 percent, which is much lower than developed countries. For example, the U.S. has a penetration rate of 85 percent and Japan has a penetration rate of 70 percent. However, the market has been significantly challenging for overseas companies to penetrate due to the regulatory environment, including companies being required to go through a stringent and cumbersome registration process (blue hat registration), fierce local competition and distribution channels that are difficult to penetrate.

On Tmall, China’s largest e-commerce marketplace platform, within the nutrition supplements product category, the total transaction volume increased by 20 percent from 2014 to 2015, reaching nearly 40 million transactions for 2015. Monthly transaction volumes for January 2014 through January 2016 are illustrated in the chart below:

Chinese products dominate in terms of the number of transactions, accounting for 28 percent of the nearly 3.4 million transactions in January 2016. American products were the second highest and accounted for 15 percent of total transaction volume followed by Australian products, which accounted for 9 percent of the transaction volume in January 2016. Canadian nutritional supplements ranked tenth, with a transaction volume of nearly 20 thousand in January 2016.

Source: Kung Fu Data

Price: RMB 19.9 / 120 g of 1 bottle Bulk Price: RMB 59 (3 bottles) March sales volume:: 7033 Distributor: CONBA Flagship Store

Price: RMB 118(1.33g*120) Bulk Price:NoneMarch sales volume: UndisclosedDistributor:JD

Price: RMB 126 (250g)Bulk Price:NoneMarch sales volume: 4253 Distributor: GOU

CONBA (China) Centrum (USA) Amway (USA)

Price: RMB 88 (100g)Bulk Price: RMB 88 (buy one get another one for free)March sales volume: 6009 Distributor: Jian Ling

Price: RMB 88 (120g/bottle) Bulk Price: NoneMarch sales volume: UndisclosedDistributor: Kang Li Yuan Jing

Price: RMB 99 Bulk Price: NoneMarch sales volume: 3373 Distributor: GOU

Unknown Brand (China) Xian Bai Ke (China) Jia Min Yao (China)

Price: RMB 313 (450g)Bulk Price: NoneMarch sales volume: 5191 Distributor: Jian Ling

Price: RMB 313 (450g)Bulk Price: NoneMarch sales volume: UndisclosedDistributor: JD

Price: RMB 199 (450g)Bulk Price:NoneMarch sales volume: UndisclosedDistributor: GOU

Amway(USA)By- Health (China) By-Health (China)

Tmall JD.com

YMaTou

Product

Dietary supplements product comparison on different marketplacesSource: Sovereign analysis

GOU(Domestic Platform) (Domestic Platform) (Cross Border E-commerce)

Both domestic and foreign dietary supplement companies must clear complicated and unwieldy hurdles in order to register with China’s State Food and Drug Administration (CFDA) and obtain what is known as “Blue Hat” certification – named so because the symbol looks similar to a blue hat. The process to obtain the certification can take 2-3 years and cost up to US $100,000 per SKU plus agent and registration fees. Because of the cost and seemingly insurmountable hurdles to obtaining the certification, many companies do not sell supplements into the market. However, Cross-border e-commerce has given companies an avenue to bypass China Food and Drug Administration (CFDA) requirements and directly sell to Chinese consumers.

“Blue Hat” registration for dietary supplements

Price: RMB 238 (1250mg)Bulk Price: NoneMarch sales volume: 3155 Distributor: Carlson Flagship Store

Price: RMB 208(1000mg)Bulk Price:NoneMarch sales volume: Undis-closedDistributor: JD

Price: RMB 125Bulk Price: NoneMarch sales volume: 1381 Distributor: GOU

Carlson (USA) Blackmores (Australia) Amway (USA)

Price: RMB 69 (50mg)Bulk Price:NoneMarch sales volume: 25369 (bulk sales volume)Distributor: Nature’s Bounty Flagship Store

Price: RMB 163 (100 mg) Bulk Price:NoneMarch sales volume: UndisclosedDistributor: VP

Price: RMB 169 (100mg)Bulk Price: NoneMarch sales volume: 490 Distributor: GOU

Nature’s Bounty (USA) Puritan’s Pride (USA) GNC (USA)

Tmall JD.com

YMaTou

Product

Dietary supplements product comparison on different marketplacesSource: Sovereign analysis

Gou(Domestic Platform) (Domestic Platform) (Cross Border E-commerce)