China Market Entry Guide: An Introduction

China has the biggest consumer market in the world and its economy shifts towards domestic consumption. As a result, increasingly more foreign companies want to sell here and grasp market shares.

Yet, many exporters are unaware of the challenges that companies face when entering the market. It has a completely separate ecosystem with different search engines, buying behaviors, and legal setups. It’s crucial that you get your feet wet first.

In this article, I share the key info you should know prior to entering the Chinese eCommerce market.

Topics covered:

• Market Entry Strategy
• China Market Entry Obstacles
• Market Entry Research
• Incorporation

Market Entry Strategy

As disposable incomes and the appetite for foreign products increase in developing Asian countries, we see a greater demand for market entries.

This requires hand-holding and expertise from local companies with in-depth knowledge of local demand, product suitability, partner introductions, and compliance, just to mention a few.

The complexity and costs required for a market entry also depend on the involvement of the entry. Below I’ve listed different kinds of market entries and what they mean practically for exporters.

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Initial Marketing Campaigns

Brands that are new to the Chinese market and want to understand the current interest and enhance brand awareness typically work with eCommerce agencies at a start. In short, these companies help you create a Chinese website, focus on SEO, and other marketing activities.

Besides, offline pop-up events and collaborations with key-opinion-leaders (KOL’s) become increasingly popular and important. Maybe you’ve seen that brand ambassadors or celebrities try new products like protein powders and supplements to encourage fans to buy.

In China, the usage of WeChat mini-programs has been proven to increase local brand awareness, engaging buyers. Another interesting concept is the launch of pop-up stores, which is typically done by bigger brands due to high costs.

Hermes is one company that did so in the past. Vipshop, for example, has expanded its service offering, allowing sellers to:

• Set up pop-up stores
• Support to create Chinese websites (.cn domains)
• WeChat mini-program stores

The pop-up store is seamlessly set up and integrated with the WeChat app.

Cross-Border eCommerce

The cross-border eCommerce model grows at a rapid pace in Asia as you can instantly access the markets and overcome market entry barriers.

The most popular option when selling cross-border in mainland China is to store the products in a fulfillment center in Hong Kong or a bonded warehouse in one of China’s free trade zones.

The Chinese government favors cross-border sellers by offering tax cuts and dedicated fast-tracked channels for the industry.

However, we also see more stringent import requirements and the Chinese government puts more pressure on marketplaces to control the quality of listed goods. This happens both in the EU and China.

Examples of eCommerce platforms that allow cross-border sales include:

• Tmall Global (tmall.hk)
• JD Worldwide (jd.hk)
• Kaola

Tmall Global is the most popular but also the most expensive platform to launch your products. JD Worldwide comes in second place with slightly lower operating fees.

Even if you face lower entry barriers when selling cross-border, there are limitations to product categories. Bulky and heavy products are not suitable unless you have a high price point.

The same goes for perishable and frozen products that require costly logistics setups, with a risk that most of your profit diminishes. Besides, your outreach is generally smaller. By selling both on domestic and eCommerce websites, you can maximize sales.

Domestic eCommerce Operation

Exporters sometimes become confused when I mention the terms ‘local eCommerce’ and ‘cross-border eCommerce’. In short, the first option has a larger audience and fewer product restrictions.

By selling on Tmall.com, which is the local eCommerce website in China, you are sometimes allowed to add your products on Tmall.hk, the cross-border version. Naturally, sales can increase greatly.

If you plan to sell wine, ice cream, or meat, a local setup will most likely be your choice. Shipping the products from Hong Kong, one by one, won’t be suitable from a product quality nor logistics perspective.

Instead, stocking the products in a bonded warehouse with proximity and financially viable shipping options is preferred. Also, the tax rates for the bonded model are low to traditional imports and you can enjoy a 30% discount on the general rates.

Yet, selling on local eCommerce websites also brings additional challenges.

First, you have to set up a company, a directly-owned or a subsidiary. Having a Wholly-Foreign-Owned-Enterprise (WFOE) with a parent company in another company is common.

Secondly, the products have to go through more rigorous testing, authority registrations, and certifications if needed. Not only will this add time but costs, with the risk of rejections.

A Swedish exporter would have to pay for traveling as well as inspection costs when CIQ-personnel visit their factories for inspection.

China Market Entry Obstacles

Below you can find some of the main (financial) obstacles when entering the Chinese market.

Tariffs

China divides import tariffs into:

• General rates
• Most-favored-nation (MFN) rates
• Agreement rates
• Preferential rates
• Tariff rate quota rates
• Provisional rates

Many countries, including the US, are subject to most-favored-nation (MFN) rates, being part of the World Trade Organization (WTO). Also, import tariffs are determined based on the HS codes of your products and can vary greatly.

While import duties change frequently, the rates typically range between 2% to 10%. Keep in mind that nations with free trade or preferential agreements can be exempt from paying duties.

Australia, on the other hand, has experienced issues due to escalating conflicts with the nation, resulting in wine tariffs reaching 200%.

Cross-border eCommerce

Imports through official cross-border eCommerce channels are exempt from import duties and with a 30% deduction of VAT rates. The VAT rate is therefore reduced from 13% to 9.1%.

Keep in mind that a consumption tax might be added for certain products. The threshold is usually RMB 10 / gram and for watches and jewelry, for example. The consumption tax is calculated as follows:

(VAT + Consumption tax) / (1 – Consumption tax) x 0.7 = (13% + 15%) / (1 – 15%) x 70% = 23.1%

Setup Costs

Due to the need of setting up a local entity, companies will be subject to additional setup costs and running costs. This is something I will cover in greater detail below.

Product Standards & Labeling Requirements

While cross-border sellers are not subject to labeling regulations, companies that plan to sell on local eCommerce websites must adhere to Chinese labeling regulations. Labeling requirements are stipulated in Guobiao Standards (GB), translated as national standards.

The standards are to some extent different from the US and EU standards and require that you create and print labels in Chinese. These can be attached to the products before departure from the country of manufacturing, or when the products have arrived at a bonded warehouse.

Example A: Food and Beverage Packaging

Food and beverages are imported in large volumes and sold in everything from supermarkets to eCommerce stores. As the products are edible by humans, strict labeling requirements apply.

Notably, the most common reason why CIQ keeps or rejects goods is due to non-compliance with labeling requirements.

Examples of GB standards for food labeling include:

• GB 7718 2011: General Rules for the Labeling of Prepackaged Foods

• GB 7718 2004: General Standard for the Labeling of prepackaged food

• GB 13432 2013: General rules for the labeling of prepackaged food for special dietary use

In addition to GB standards, you must also follow common national regulations.

For example, AQSIQ’s Order 27 of 2012 issued the General national regulations for wine and beverages. The regulation applies to the issuance of labeling for prepackaged food and wine.

Example B: Clothing Labeling

Clothing labels come in the form of tags attached to the clothes in the stores. The tags typically hang in a strap that you cut off after the purchase is made.

The same as for food products, GB standards, and common national regulations will determine what requirements you must adhere to. One GB-standard used for clothes is GB 31701-2015, called the safety technical code for infants and children textile products.

Market Entry Research

Below you can find an overview of the different items that are important when creating a market entry strategy.

Marketplace Research

China has a dozen online marketplaces that target different customer segments and product categories. Taobao, for example, has the largest consumer base but is mostly known for having low-cost products on display. Besides, you cannot sell cross-border on the website.

At the same time, premium eCommerce websites have popped up, including names like Tmall and JD.

Before you select a marketplace for your product, you must do thorough research to understand which site is most suitable. For instance, if you only plan to sell cross-border, it’s highly relevant that you find a website that accepts cross-border sales.

JD Worldwide or Tmall Global could be suitable options, for example.

Besides, you must consider the costs required to set up a store on the selected marketplace. Companies that start selling on Tmall often have years of sales experience and sell in multiple markets with sound financials.

They are willing to sacrifice a budget for their market entry, in case business goes south.

You also have to confirm how to get paid by Chinese consumers. While payment solutions like Stripe exist, sellers should do sound research to understand the complete process from the payment from customers until they receive the money in their bank account back home.

Tmall

Tmall is a spin-off of Taobao and was launched by Alibaba in 2012. It’s one of the most popular platforms with hundreds of millions of registered users.

It’s renowned for being one of the most competitive websites and sellers work closely with Tmall Partners to sell in their brand and to assure a flawless product introduction.

Examples of brands available listed include Tom Ford, Royal Canin, The North Face, Darlie, and Schneider Electric.

Tmall is the go-to site for buyers of fashion and food products, for example.

JD

JD was launched shortly after Tmall and is one of its biggest competitors. The website is comparatively easy to access and with lower setup and running fees. While you can find fashion products on JD, it has more male users and many buyers of electronic products.

Examples of brands listed on JD include Sony, Huawei, and Nike. You can notice by the layout that the websites target different customers.

Kaola

Kaola is one of the biggest cross-border eCommerce websites, but often source products themselves. You also have the option to set up a flagship store, even if this is not the main business model.

The website was launched as late as 2015 but has grown fast since and currently has around 30 million registered users.

The costs to sell on Kaola are similar to JD. If you’re a seller of food or beverages, then the site should be at the top of your list. Examples of brands listed on Kaola include Nescafé, Evian,
Heinz, Swisse.

In recent years, the site has focused more on other product segments like clothes and fashion products.

Setup Costs

Entering a new market requires planning and that you allocate a budget for the entry.

The costs will be used for expenses of incorporation (if needed), shipping, import tariffs, store setups, marketing, and product registrations. Marketing requires many costs as you have to build up a sufficient brand presence before you can even start selling the products.

Again, the setup costs needed will depend on how you sell the products, if you go for a pure cross-border eCommerce sales model or if you sell on local eCommerce websites.

Competitor Cost Analysis Research

One of the most important tasks before entering a new market is to confirm the entry barriers and competition. A thorough competitor analysis research can help you confirm what they sell their products for, estimated profit margins, and what market segment to target.

Shipping & Logistics

Your market entry setup will also determine the logistics options available, which in turn affect the costs.

For example, a popular option among cross-border sellers is to store the products in Hong Kong. Even if Hong Kong fulfillment and the bonded model in mainland China come with different benefits and drawbacks, the first option is considerably more expensive.

Hong Kong fulfillment is generally not an option when selling on local eCommerce websites. By using a bonded warehouse, you can save around 50% in logistics fees thanks to lower labor and last-mile delivery costs.

Incorporation

If you plan to sell products offline and on local eCommerce platforms, you must set up a local mainland Chinese entity or work with an importer that has one. Cross-border sellers, on the other hand, don’t have to set up local companies.

General Requirements

You have three options when incorporating in China. You can set up a Representative Office (RO), Wholly-Foreign Owned Enterprise (WFOE), or Joint Venture (JV). Wholly-Owned Foreign Enterprise (WFOE) is the most popular company structure among foreign investors.

The steps involved during the pre-licensing are:

• Name approval
• Office/facility lease
• Environmental impact assessment (manufacturing companies)
• MOFCOM approval or record-filing
• Five-in-one business license

The steps during the post-licensing are:

• Carving chops
• Open a foreign exchange and RMB bank account
• Foreign trade-related procedures (traders and manufacturers)
• VAT taxpayer procedures

The minimum share capital is RMB 30,000.

Documentation

Before you can incorporate your new company, you have to prepare the necessary documentation. This typically includes:

• Certificate of Incorporation
• Bank Reference Letter
• Passport copies
• Brief introduction of the foreign investor(s)
• Total investment and registered capital
• Registered address, leasing contracts, and more
• Letter of Authorization

Trading WFOEs also need the latest annual audit report copy from the parent company.

That’s it for this article. I hope you found it useful and interesting. If there’s anything else you wonder about, feel free to write a comment below or text us directly.