In the third of our series on exporting to China, Kristina Koehler-Coluccia from Woodburn Global reviews the main routes to the China market, from e-commerce to distributors
Deciding on the right route to enter the China market is the first step if you want to export and sell into the country, whether that’s through cross-border e-commerce or a local distributor.
The second step is to evaluate your market potential. There is no point in coming into the market if you don’t know what opportunities exist and what they are. Knowledge is power; research and data mining are fundamental to establishing your business.
China’s Zero Covid policy is still in place, and unless you are willing to do lengthy quarantines, you may not be able to travel to China in person. It is important to know that there are companies on the ground that can do this evaluation for you.
Using cross-border e-commerce to gain a foothold in China
If you are interested in selling your products in China but are not ready to establish a presence in the country yet, then cross-border e-commerce could be a good place to start.
China has the largest digital buyer population in the world, home to more than 840 million online shoppers. In 2021, China’s e-commerce market was larger than the US, the UK, Japan, Germany and France combined, and in 2021, e-commerce sales reached 52% of total retail sales, making China the first country in the world to have more online sales than traditional ones.
According to The eCommerce Guide, Alibaba’s Taobao and Tmall and JD.com dominate the Chinese e-commerce market with 50.8% and 15.9% market share, respectively, followed by Pinduoduo (13.2%) in third place.
Instead of establishing a presence in China to sell online, foreign firms can choose cross-border e-commerce, benefitting from streamlined customs procedures through over 100 cross-border e-commerce-integrated pilot zones. Those zones limit Chinese consumers to purchasing up to RMB 5,000 (£601) per transaction and no more than RMB 26,000 (£3,125) per year. They must work with authorised partners to record customs transactions.
China has long led the world in aggregate e-commerce sales figures and share of total retail. However, the country may have reached a behavioural tipping point, fuelled by the restrictions of the Covid-19 pandemic.
The current cross-border e-commerce regime permits overseas sellers to sell goods directly to Chinese consumers through certain registered e-commerce platforms (e.g., Tmall Global, JD.com). The qualifying products can be imported on an expedited basis at reduced import tax rates. The products are either shipped from overseas or stored in a bonded warehouse.
Distributor or professional employer organisation?
Once the Chinese consumer is familiar with your product and you feel ready to have a presence on the ground, the next possible step could be to partner with a local distributor or a professional employer organisation (PEO). Both options have pros and cons.
As a new foreign business owner in China, investing in a corporate structure may seem out of the question when you first get started, therefore, you need to look for low-cost options. Using a PEO to enter the Chinese market could be the ideal solution. PEOs specialise in assisting small companies regarding benefits and human resources for their workers.
When you partner with a PEO, they hire the individual on your behalf so that you don’t have to incorporate a company in the country. All employment requirements are fulfilled, including the payment of social benefits, which allows you to start your business immediately. China has a complicated legal system, which can make hiring or firing an employee difficult. Finding a PEO that understands local customs and regulations may be of help for your business.
When you partner with a professional employer organisation (PEO), they hire the individual on your behalf so that you don’t have to incorporate a company in the country
When you sign an agreement with a PEO, you are adopting a co-employment structure. This means that your employees are also the PEO’s employees and that it will have authority over your tax and healthcare responsibilities.
If you think this option is not for you, a local partner could help you move your business forward. Using infrastructure and logistical know-how that already exists may prove to be more time and cost-efficient. The distributor model allows businesses to leverage local expertise and is a popular method among foreign companies. Finding the best-fit partnerships will be critical to your business success.
There are several advantages of working with a distributor, including instant market exposure, expanding brand awareness, benefiting from a local presence and leveraging existing contacts. They can help you access a wider network of customers and channels in new markets.
In general, distributors have processes and teams that know how to sell to their customers and deal with local customs and regulatory requirements. This helps businesses increase sales and make significant savings.
Nevertheless, you should be aware of the disadvantages. Being detached at the local level can result in challenges, such as identifying whether your products are a good fit for the market, or whether your distributors are selling through the most effective channels.
Be risk aware, not risk-averse
The distance from your target market in China can cause problems, such as the lack of brand control. Of course, it is crucial to protect your brand. Your distribution agreement should consider who is responsible in the event of a third party bringing a claim against distributors for products infringing on intellectual property rights, for example.
When researching a potential partner, use traditional web engines but include Chinese platforms as well. Make sure the partner’s address and phone numbers are real and ask to talk to clients. Small steps can take you a long way in China. They are the difference between a fruitful relationship and a catastrophic one.
Finally, take the time to design your business plan. Use a local professional to handle your trade needs, such as outsourcing to a media agency or hiring a local person through an agent.
You need to be a problem solver to succeed in China. Do not underestimate the challenges, but rather, be prepared to stay flexible to handle any situation.
This article is part of a series on exporting to China. See all the articles in the series below.
Part 1: How to conduct market research
Part 2: Protecting your trade mark
Part 3: How to choose the correct route to enter the China market
Part 4: The dos and don’ts of choosing a distributor
Part 5: How to find and hire staff in China