Does a company need to operate overseas offices to be considered “global?” The rapid development of China-U.S. e-commerce is challenging traditional assumptions about how international business is conducted. Cross-border e-commerce allows American retailers and entrepreneurs to sell products directly to Chinese consumers online. This burgeoning market is expected to increase in value from $40 billion in 2014 to more than $240 billion in 2020. Some of the Chinese players in this area may sound familiar, like Alibaba and JD.com, but others like Ymatou.com and Metao are not as well known. Fascinating dynamics are at play through the Chinese diaspora population’s active participation in this marketplace, along with international companies that may be competing with their existing local outlets in China through a legalized ‘gray market.’ How did this multi-billion dollar marketplace emerge in the first place?
From Offline to Online
Chinese consumers have long been accustomed to purchasing international products from within the walls of the Middle Kingdom. Many employed a common practice known as daigou(代购). Daigou describes the phenomenon when a Chinese consumer pays a friend traveling overseas or an international agent to purchase products on his or her behalf. These “personal buyers” use individual mail or personal baggage to avoid hefty import duties. Traditional daigou is illegal, when the items being purchased are not for the bearer’s own use. It is also inconvenient: delivery times are long, potential for fraud is high, and there is no after-sales service since the purchase is made through an unauthorized channel.
All of this changed in September 2013 when China launched the first Free Trade Zone in Shanghai. This opened the door for international corporations and individuals to sell directly to Chinese consumers online at significantly reduced costs—and 100% legally. A crop of new Chinese businesses have emerged to take advantage of this market, and new ones continue to go live each quarter. Almost all of them employ ‘marketplace’ models similar to an Amazon or eBay. Chinese consumers browse online stores to shop for in-demand international products like infant formula, vitamins, cosmetics, and a wide variety of other products. On the business operations side, each company has a slightly different approach to building international supplier networks and delivering products to end consumers in China.
The Current Landscape
The cross-border e-commerce market remains fairly underdeveloped. In large part, this is due to the relatively recent emergence of the drivers necessary to fuel cross-border e-commerce: development of free trade zones, establishment of Chinese cross-border marketplaces, and increase in the number of foreign brands willing to participate. As a result, Chinese e-commerce firms are fighting fiercely to expand as quickly as possible to capture market share and solidify their place as market leaders in this new industry. In 2014, Alibaba launched its cross-border e-commerce website called Tmall Global. JD.com released a competing service in April 2015 called JD Worldwide. Meanwhile, relatively unknown ‘cross-border’ companies like LightInTheBox, Ymatou.com and Metao are competing equally fiercely on this new e-commerce frontier.
Yet all of these Chinese e-commerce firms operating outside of China face major obstacles. There is a lack of understanding among foreign brands and retailers about what cross-border e-commerce is and how they can leverage it to sell their products to Chinese consumers. This is in contrast to the demand side, where Chinese consumers have long been accustomed to shopping online for foreign goods. The success of Alibaba’s Tmall Global so far has been underwhelming, since they have depended on signing up big brands like Calvin Klein, Philips, and Disney. Many of these brands are concerned about ‘channel conflict’ since they already sell in China through distributors or their own sales forces. To raise awareness about the benefits of cross-border e-commerce, Alibaba Chairman Jack Ma traveled to New York and Chicago in June to argue that cross-border e-commerce can support global trade and increase jobs in the U.S. Ymatou.com has taken a different approach, focusing on individual Chinese diaspora buyers to supply overseas products for their marketplace, as well as building its own international logistics capabilities.
Despite these challenges faced by Chinese firms, cross-border e-commerce between China and the world is set to increase dramatically in the years to come. In addition to private sector efforts to develop this market, the Chinese government is also implementing policies to support its development as a means to stimulate domestic consumption in China. The potential benefits to American business and the U.S. economy are also significant. For the first time, American businesses and entrepreneurs can sell their products in China from the U.S. with fairly limited upfront costs and significantly lower risk than opening a wholly-owned local subsidiary in the Middle Kingdom. The cross-border e-commerce phenomenon is just the latest example of how an increasingly globalized China is changing the traditional landscape of international business. As its corporations, people and commercial policy continue to go global, and as disruptive technologies like e-commerce continue to evolve, it will change how we do business on both sides of the Pacific.