by Gabriel Walker
December 22, 2018

New Year’s Eve 2018 might go down in history as the day that Kiwi businesses were cut off from China, with new cross-border e-commerce (CBEC) regulations set to hit on December 31.

Or, then again, it might not…

There’s plenty of scaremongering going on around China’s new tax reforms, but not a whole lot of facts – or understanding.

Half of the CEOs I come across seem to be freaking out, while others don’t seem concerned at all.

But what actually are the regulations, and how are they likely to impact your business?

What we know about the CBEC changes so far

Here’s the deal –  for many years, Western businesses have been reliant on daigou, or ‘grey channels’, to get their products into China.

It’s not exactly illegal, although it’s not entirely the ‘right’ way of doing business either – China’s economy has ultimately benefited from these many grey channels, so they’ve turned a bit of a blind eye to them.

Now, however, China has decided to implement new cross-border e-commerce or CBEC, regulations which will allow them greater control over these import channels, enabling them to stop some and tax others.

Essentially, instead of being able to sell your product to a daigou, who will then bring in your product as personal goods, all CBEC retail goods from foreign companies (which, let’s face it, means basically everything) will have to be registered with the CFDA (China Food and Drug Administration).

Any supplements, vitamins, cosmetics, infant formula, or skincare products will likely be the first regulated, followed later by healthy foods.

Foreign companies will continue to be able to sell directly via their own online shops – but without a license to market in China, the question is whether anyone will ever find you.

Instead, if you want to engage in CBEC, you’ll need a Chinese address, be a registered business and ICP (Internet Content Provider), and have the legal ability to market yourself to the Chinese market.

What are the CBEC positive lists?

This isn’t actually the first time that the government has tried to regulate cross border e-commerce in China.

Here’s a little background…

Back in 2016, the CBEC positive lists – or, more formally, The Positive List on Cross-Border E-Commerce of Imported Commodities at Retail – were released by 11 Chinese government departments, including Ministry of Finance, General Administration of Customs, AQSIQ, and CFDA.

They essentially outlined everything that could – and couldn’t – be imported via cross border e-commerce channels.

Suddenly, nearly all dairy products and health foods were excluded – two of New Zealand’s favorite things to export to China!

In April 2016 the ban on certain goods and increases on goods and services tax went into play, and it was pretty much a shit show.

Companies throughout New Zealand were hit hard, losing sales from their daigou channels.

The implementation was apparently followed by the collapse of 70% of CBEC businesses importing into China (at least according to Sun Hanwu, Chairman of Sunsult Investment), although it’s hard to say exactly how accurate that number is!

In the end, implementation was delayed to ensure a smoother transition, and companies now have until the end of 2018 to get their business registered – however, this is fast approaching.

So, why is China putting a new e-commerce law in place (and why now)?

The official reason for a new e-commerce law is pretty logical – China’s legislators are concerned about health products, skincare and consumables getting across the border without any kind of quality control.

Makes sense – every other major economy in the world has pretty stringent rules, with Europe banning certain chemicals in cosmetics, and Japan holding food safety as its most important issue regarding consumables.

The changes come after increasing complaints about CBEC products, such as food, formula, diapers, supplements, and cosmetics, that aren’t controlled (or even supervised) by the authorities.

However, while this is likely part of the decision, in all likelihood it’s more of an economic call than anything else.

With daigou going unregulated, China’s missing out on a huge opportunity for tax on products being imported via cross border e-commerce.

So why has it taken this long?

Put simply – daigou are good for the Chinese economy.

They bring billions into the Chinese economy each year, with daigou generally getting a bigger slice of the pie than the company who manufactured the products originally.

There are, without a doubt, economic benefits to China’s own people from having ‘grey’ CBEC channels exist.

The line they walk between benefiting the economy and having more control over what’s coming in and out (and where the profits go) is why it’s taken so long to put them in place.

Should I be worried about the new tax reforms?

If we take the new tax reforms at face value, the simple answer is yes.

If you rely on daigou, or Chinese nationals importing your products as ‘personal goods’, then you’ve definitely got a reason to be concerned.

But we don’t know yet exactly how it will be rolled out.

So what are a couple of scenarios that we could see over the coming months?

Scenario one: Tax reforms are enacted instantly; daigou trade stops overnight

If China does decide to make grey channels live up to the same requirements as official channels, that’s massive – in fact, it could mean no more imports literally overnight.

And the impacts will be global – there is a trillion dollar industry reliant on grey channels that could be completely cut off from China straight away.

The scariest part is, there’s basically nothing you can do about it – it’s essentially a reset button.

If your only channel into China is cut off by New Year’s Day, you’re left starting at zero – having to deal with all the hoopla around officially registering your business, using completely new import channels, and starting your marketing from scratch.

Scenario two: A gradual introduction of tax reforms via major ports

In reality, enacting tax reforms takes time. And in a nation as big as China, with as many entry points, it could take a lot of time.

So I suspect that once January 1st hits, we’re likely to see an introduction of screening points at major ports.

It could be randomly checked to begin with, or given significant manpower to make an example of those first few daigou who try to sneak product in.

Following the major ports, we’re likely to see people across the country trained to identify and remove CBEC products that don’t live up to regulations.

In this scenario, you might have a few days, weeks, or even months before you’re caught.

Daigou are likely to keep trying to bring product into the country for as long as possible, so you could too.

However, a word of warning: Once you have been caught, from that day forward you’re done.

The second you’ve been caught, that’s it. You lose $100,000 in product and are cut off from that revenue line instantly.

Although tax reforms and regulations aren’t always black and white in China (that’s how daigou have thrived for so long after all), enforcement is immediate and unforgiveable. You certainly won’t be appealing it.

Why would a business use daigou in the first place?

I’ve taken a pretty in-depth look into daigou, or grey channels, previously but the basic gist is this – for a long time, daigou have really been the only way for a Kiwi business (and other businesses across the world) to break into China.

Building a brand in China is HARD. To use their search channels, social media, e-commerce platforms, and other marketing channels, you need an ICP (Internet Content Provider) license, a national ID, and a local address, not to mention the countless other hoops there are to jump through, like utilizing Chinese payment methods.

This can take a long time, and cost you plenty – without any guarantee of success out the other end.

Daigou, on the other hand, can seem pretty appealing – they’re a quick way into the market, with instant customers waiting for you on the other side.

And while there are some pretty big downsides that, to me, don’t make daigou worth it, up until now they’ve basically been the only way for a Western business to get into China.

The other thing to consider is that, although daigou are inherently ‘grey’ and sit on the cusp of legal and not legal, it can feel to many like they’re not in fact trading in China so the justification is easy.

When your first transaction is here (selling to a Chinese native), it can be easy to convince yourself that it’s not really Chinese trade.

For a business just wanting to make sales, which doesn’t want to be concerned with the regulatory framework in China, selling to a Chinese native can be an easy way to do it.

The problem with data on cross border e-commerce in China

Probably the scariest part about the new regulations is that we just don’t know how much of an impact they could have.

You see, here in New Zealand (and I would imagine in several other Western countries), we don’t know how much of our GDP is reliant on cross border e-commerce in China.

And yeah, okay – it might just be me that’s clueless.

Except it’s not. NZ officials don’t have any idea how many people are using grey channels (spoiler alert: it’s basically everyone doing trade with China).

Instead, they’ve got a fairly arbitrary number that demonstrates how much of our GDP China contributes to.

Statistics NZ talks about our GDP being based on the production approach (measuring the total value of goods and services produced here minus the costs) as well as the expenditure approach (measuring the final purchase of goods and services – including exports and excluding imports).

While the production approach might be giving us an accurate view of overall NZ GDP, it’s the expenditure approach that shows us the impact that other economies have on us.

The problem? While GDP is, without doubt, capturing everything exported via official channels, daigou aren’t exactly what I would call official… If these exports aren’t being declared, how do we know how much China is actually contributing?

It could be three times higher (or even more) than we think.

You see, while data is great, it’s only really useful when it’s accurate.

From a mathematical point of view, you would have to uncover which manufacturers are declaring specific numbers of sales and compare them with retailers declaring different numbers.

That would be immensely time-consuming and simply isn’t happening.

Will New Zealand’s e-commerce into China get hammered?

Normally, New Zealand’s size and distance from everyone else protects us from many of the biggest issues facing the world.

We’re too far away to go to war with (and hopefully no-one would want to anyway!), our small nation didn’t get nearly as badly hit by the GFC as some of the bigger developed economies, and hopefully nuclear fallout won’t take as long to hit us if the world does all come crashing down like it seems it might…

Unfortunately, in the case of crackdowns around less-than-legal e-commerce channels (namely daigou), our small size might be to our detriment.

If China wanted to implement new regulations in stages, starting with New Zealand would make sense.

We’re an economy that’s small enough to not have the impact on their own economy that the US or Australia would, but are Western and developed enough to serve as an example to show the danger of using grey e-commerce channels to others.

Cutting off New Zealand’s access to daigou would have a minimal economic impact on China – but it would definitely scare the crap out of Australia, the US, and the UK.

Comvita’s China story

The impact of regulations on daigou channels is probably clearest when we look at one of New Zealand’s biggest exporters to China – Comvita.

For many years, Comvita was one of NZ’s biggest success stories in terms of trading in China.

Using a combination of partnership with their long-term distributor and various daigou, or grey channels, Comvita estimated in 2016 that Chinese customers consumed about 60% of their total sales.

They were riding high, doing what so many Kiwi businesses dream of – building a brand in China and capturing part of the biggest market in the world.

Then things changed.

Following the implementation of the initial e-commerce law changes in 2016 (with an 11.9% duty on daigou sales), Comvita quickly started losing sales.

Daigou started cutting their purchases of honey, and, combined with some not-great weather, Comvita’s bottom line bottomed out.

As Comvita chairman Neil Craig shared, “The inventory build-up in the informal channel was significantly bigger than we thought. When the tax was imposed it had a bigger impact than we expected.”

The result was pretty bleak – Comvita’s shares lost almost a third of their value in six months, a loss of $7.1 million in the six months ending December 31, 2016.

The good news – they’d already gone into a 51/49% joint venture with their long-term distributor Shenzhen Comvita Natural Food Co (SCNF), with Comvita as controlling shareholder.

Although it didn’t protect them from serious losses due to a drop in daigou sales, it did mean they already had a legitimate presence in the Chinese market, and have the feet on the ground to continue to grow their brand there.

Comvita’s Chief Executive Scott Coulter described it as “working through a painful period of channel rebalancing from informal to more formal paths to China… The informal channel business in Australasia remains the largest risk to our short-term projections.”

With the new e-commerce law changes coming into play at the end of this year, that risk is without a doubt still there – and for businesses who don’t have a legitimate channel like Comvita, that risk is looking higher and higher by the day.

However, that doesn’t mean that it’s not still possible to succeed in the Chinese market – and succeed legally!

Getting legal: CBEC import models to actually succeed in China

Still keen to break into the Chinese market (or need to restart after using daigou)? You’ll now have essentially three options of CBEC import models:

  1. Market your own business in China. Whether you’re selling from your own website or via China’s many e-commerce platforms, losing your direct-to-customer CBEC import model means you’ll need to start marketing your own brand in China.
  2. Online shops on channels like WeChat are essential if you’re keen to do e-commerce in China right, but to start marketing via China’s native channels, you’ll need an ICP (Internet Content Provider) license. To get an ICP, you need a registered business, with a business number, an address, and no overseas ownership or interests.
  3. And then there are the licensing fees to pay in order to sell your products on China’s native e-commerce platforms. It may all sound straightforward, but it’s far from. It’s a little depressing the number of businesses I’ve talked to who’ve spent two years trying to get into the Chinese market, investing hundreds of thousands of dollars, only to give up in the end!

Verdict: It’s possible, but difficult

Go into a joint venture with a Chinese company.

Comvita’s been able to weather the losses they faced when their daigou sales started shrinking, thanks to their joint venture with a Chinese native company who they had worked with for some time.

For a business who has been collaborating with a Chinese company for some time, this gets around some key obstacles, as you’re able to utilize the Chinese company as your representative in China.

Verdict: Awesome if there’s a business you can trust enough – but as with any joint venture, it pays to be careful.

Utilize a shared ecosystem.

The best option in my (admittedly biased) opinion is to make use of a shared ecosystem such as Silk Cloud, which has an uncapped pilot license for trading in China – something virtually unheard of for foreign businesses.

Unlike daigou, a shared ecosystem allows businesses to control their own profits, build their own strategy, and create long-term brand equity that will enable them to grow within China.

For example, Silk Cloud “stocks” each brand in the Silk Cloud store across all popular Chinese e-commerce platforms, from WeChat Store to Taobao.

Instead of each brand individually paying tens of thousands of dollars for the license to list their products on each store, brands leverage the Silk Cloud license for free to access millions of potential customers.

Add to that marketing support in conjunction with ROCKETSHP, payment platforms, and guidance around succeeding in the Chinese market and you’ll be able to build long-term brand equity in China, for long-term growth. 

Verdict: Unsurprisingly, your best option for long-term success in China

Is it even possible to succeed in China?

The Chinese market has been protectionist for some time – promoting domestic companies and making it difficult for Kiwi businesses to enter the market by themselves.

With countless restrictions on how international businesses can trade in China, Kiwi businesses struggle to get on an even playing field with domestic Chinese companies.

However, China is a huge market with plenty of potential, and you shouldn’t be put off by the headaches that these new cross border e-commerce regulations are creating.

If you’re prepared to put in the effort to take the right approach, and if you tap into the expertise of people who know the Chinese market inside out, you’ve got a pretty good shot at gaining long-term growth from the biggest market in the world.

We’re all about opening the Chinese market to your brand – legally and legitimately. So get in touch to get started with the e-commerce experts.

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