The Chinese market is arguably second-to-none in revenue potential, but getting started here can be pretty daunting to a small business from Europe. However, many of our customers are the brave companies expanding their business to China for the first time, and we often get asked questions about how best to get started.
Our brains are filled mostly with payments and blockchains (and coffee!), so we thought we better ask our friends at LNP China to come talk on the topic. LNP have been helping some of our customers hit the ground running in China, and Alex Philips, Sales & Marketing Director of LNP China had some great insight into what makes a successful launch in China.
To get started, what kind of companies LNP is helping launch here in China, and how are you doing it?
We make it easy and safe for companies from overseas to launch in China. We have expertise in three categories: accounting & finance, human resources, and importing products into China.
At LNP we mainly help companies that have an opportunity in China that haven’t set up an entity yet. We act as an agent who can process goods imports, process payments from local clients, and employ staff on their behalf. This way they can have an asset-lite structure to support their business in the early days and test the market.
In 2000, the middle class consisted of just a few percent in China, now the middle class makes up over two-thirds of the urban population! This explains the drive behind many of the foreign companies we help support. We serve a wide mix of clients, for example, recently we have an aromatherapy oil manufacturer, a video production agency, and even a photo booth company – they’d found a niche supplying hi-tech photo booths to theme parks!
They sound … very niche!
[laughing] Yes! We also have a carwash company looking into doing business in China. Obviously there is a huge demand for these kinds of high-end products and services in China. And there’s this certain brand of premium car wash that is well-known in the UK that is getting popular here. We are even getting involved in helping set up a blueberry farm for a major fruit supplier from the UK. So again it’s super niche. We see a strong demand for premium products from the UK that appeal to the growing middle class who want a better quality of life. It works.
We are living In the internet age and a lot of businesses are now looking at cross-border models of doing business. I think many small businesses think that if they want to do business in China or elsewhere, and that maybe they don’t need all the licences, follow product regulations, and stuff like that. So now you sell online, do marketing online, speak to your customers online – do you need to pay attention to these things? What do you have to consider when selling into China from abroad?
It’s a good question! On the B2C level, the internet has certainly changed how companies can do business with China – particularly selling to China. And the government here has got a good grasp on it. The past few years have seen different government departments get together to ease regulations and allow companies from overseas to sell their products directly using cross-border e-commerce platforms.
“On the B2C level it’s great – you no longer need a company in China to sell your product to the Chinese consumer.”
The major players are JD.com and Tmall. A brand from the UK can sell their product direct to a Chinese consumer on these platforms, without needing a company or agent in China acting as an importer of record. On the B2C level it’s great – you no longer need a company in China to sell your product to the Chinese consumer.
However, B2B is lagging behind a bit. If you are selling wholesale to China you still really need an entity on the ground here, be it either your own company, a subsidiary of that company, a distributor, or an agent – someone to act handle that physical import record.
Can you expand on what needs to be considered when selling in China without a registered entity?
If you are selling B2B and are just receiving payments directly to your company back home, then you only need to consider the tax implications in your home jurisdiction.
Prior to the changes in cross-border e-commerce in 2016, regulations about what products can be imported to China via cross-border e-commerce were quite lax. You could bring products in across many categories without even a Chinese label on them. However, that changed earlier this year and the authorities are starting to get stricter.
One of the reasons behind this is that they began to find consignments of fake products being imported to China via cross-border e-commerce. Categories such as baby milk formula – which is of course, a hugely popular product – have a particularly strict set of requirements now. Cross-border providers of products like this now need to be registered with relevant authorities, you need Chinese-language labelling, and the product needs to comply with the Chinese ingredients specifications.
For many producers of infant milk formula, that has changed the game and they need to figure out how they will comply with the new regulations. Also, previously goods sold on cross-border e-commerce were levied with varying rates of parcel tax but this has now been replaced with standard VAT, but a 30% tax discount can be applied on goods sold via cross-border e-commerce. However, the big difference is that there is still zero import tax on goods sold via this channel.
What online tools, tech, or services can businesses take advantage of as they expand their remote presence in China?
JD and Tmall are the two major players in the cross-border e-commerce space, but there are other more nimble solutions that SMEs could use to take advantage of the market. WeChat is one of them. Setting up a WeChat store is now relatively straightforward for a foreign company, to enable them to sell directly to Chinese consumers. WeChat now even offers a cross-border payments solution within WeChat that allows overseas companies to accept payment for goods.
“Setting up a WeChat store is now relatively straightforward for a foreign company, to enable them to sell directly to Chinese consumers.”
Technically, this is only possible under a ‘Personal Effects’ (rahter than cross-border e-commerce) there are some tight restrictions in terms of what you can import into China through that channel. The value of goods is limited to 1000RMB per package. For many luxury brands that’s very limiting as their products are usually more expensive than that.
Goods sold through this kind of channel don’t necessarily classify as cross-border e-commerce, unless it’s connected to one of the major cross-border e-commerce channels previously mentioned hence the low limit. Instead, they classify under personal effects. However, many people do it in different ways and some people don’t bring products through the official channels to avoid this limit. But for companies that are selling low- to mid-value products, WeChat is definitely a good channel. It’s an especially good channel to test the market.
“For companies that are selling low- to mid-value products, WeChat is definitely a good channel.”
The other option is selling from your own website. Many brands we have come across are being drawn to China because of the traffic from Chinese users on their global websites. In order to scale that up, you want the website to be functional and have fast load times in China. The only way to do that is host your website in China. But to do that you need to get an ICP license, which requires your company to be registered in China. There are many service providers that can lend their own ICP licenses for a short period of time to enable you to test the market.
Setting Up Store on JD or Tmall Is Not Enough
When running their store remotely, how do small companies spread the word about their stores and products? It’s all well and good having a channel in China, but how are they generating their sales?
We have come across a lot of companies who have set up a store on JD or Tmall but struggle to drive traffic to it, because it is a very crowded marketplace and it works very differently to Amazon, for example. On Amazon the promotion platform is more transparent, and it’s more advanced in terms of how it drives traffic to your store.
“Many British brands get frustrated with that and maybe don’t achieve the success that they hoped for.”
Many British brands get frustrated with that and maybe don’t achieve the success that they hoped for. Just having a presence on JD or Tmall is not enough. There are now many specialists in China and focused marketing agencies out there that can help you develop a following on WeChat or increase your rankings on these platforms and on search engines like Baidu, to drive traffic to your store. I think you really need that specialist’s insight in order to give you a chance for success.
With their product on the market in China, most businesses are going to need Chinese-speaking customer support, marketing, business development, and generally some hands-on support in country, what’s the best way to go about hiring before registration?
There are a number of options. You certainly don’t want to be handling these kinds of tasks without a native speaker. Many of our clients choose to hire recent grads or study-abroad students and have them work from their offices in the UK. Another option is to hire a professional agency for each of the tasks, but this can be expensive.
“Many of our clients choose to hire recent grads or study-abroad students and have them work from their offices in the UK”
Finally, you can engage with freelancers to work remotely in China. This, of course, opens up all sorts of trust issues, especially with the cultural and language differences. But managed well, it can be a great option to have feet on the ground to help you grow faster on a budget. As you know, many of our clients are going this route and are making payments through you guys!
Expect Surprises When Launching in China
How easy (or difficult!) is it nowadays for a European e-commerce company to expand their offering to China?
In terms of regulations, it is easier. There’s less paperwork & applications you need to submit to get going. However, it is not that cheap to set up a store on JD.com or Tmall Global. There is a significant bond required to register a store, plus a significant annual fees, plus all the promotion and SEO costs to get your products actually seen. This is a big barrier to many small companies that might not be able to put so much money up front.
I recently heard a story of a pretty famous UK brand who had to fold out from all of these platforms, because after a year they just couldn’t recover the costs of remaining on the platform. And this is a well-known brand, which is popular among Chinese shoppers in London – they just couldn’t get a return on the investment in the first year. Companies still need to weigh up various options before diving headfirst into cross-border e-commerce.
How long does it typically take for a company to go through this whole process to set up a store on JD.com or Tmall and start selling?
It varies from case to case. If you’ve got everything lined up, you can do it in a matter of a month or two. Maybe even in less time. But in reality, it is not just setting up the store, but about the design of the store and work with an agency to figure out how to drive traffic, creating campaigns on WeChat or Weibo, that kind of thing. It’s all about an integrated approach and therefore it is more like six to twelve months investment with a lot of focus on driving the business from overseas with a help of local expertise. It is definitely an exciting route, but it requires a lot of focus, dedication and investment in terms of time and money.
For business selling to China, what can they do to optimise their supply chain?
In terms of businesses selling to China via e-commerce, the one big advantage is that you can use the bonded warehouses within the free trade zones to hold your goods – for example in Shanghai or Tianjin. When it comes to customs and clearance, the free trade zone basically moves the borders to the edge of the free trade zone. You can bring your products in, and once the order comes in they can then be released to go through all the customs and clearance. And they are closer to the end user so they can be delivered in the shorter period of time – in terms of days, rather than the consumer waiting for weeks.
And how do you take advantage of these bonded warehouses? Does JD or Tmall offer this?
You can join on one of these platforms and they have a whole list of recommended suppliers to work through that offer bonded warehouses.
Mistakes to Avoid For Successful Launch in China
What are the most common mistakes you’ve seen from cross-border e-commerce companies launching in China, entering the Chinese market?
Underestimating the cost and difficulty. For example, we were working with a manufacturer of infant milk formula from Europe recently and they had a whole business plan selling the products via WeChat and the major cross-border platforms, but then a container of counterfeit infant formula got caught in customs and all these regulations started to come in, making it all more difficult.
They had to completely rethink their strategy and now they are instead looking at setting up a company here in China and bringing it here through the traditional trade route or through distributors. So you need to be on your toes when you are doing business in China and be patient as it can take a lot of time to be successful.
Any more juicy mistakes that you have come across?
[laughing] There are so many. One that happened recently. A British company came to us and they had a Chinese name for their product. Unfortunately, the two words they picked meant “lose a lot of money” in Chinese. It was a phonetic translation of the brand name. Then another company had a problem registering their company as the Chinese name they chose sounded too similar to the translation for “Gareth Bale”.
Anything other advice you would like to leave businesses getting launched in China?
Don’t underestimate the Chinese market. It has a lot of potential, but in most cases, you need to dedicate a serious amount of time and resources to making a strategy here work. There are two key bodies of knowledge. The first is around strategy: selling your product, localisation, marketing, and the sales process. The second is more technical: regulation for certain product categories, limits to WeChat sales channel, things like that. What we see time and again are companies trying to figure this all out for themselves, getting distracted from what they’re good at – their core business. Our opinion is that operational support is key. You need partners with local expertise to allow you to focus on your business.
To wrap up, you got any crazy stories about payments in China?
[laughing] Lots of crazy payments stories. There was an Australian company selling a patent for medical device to a Beijing company. The negotiation took two years and finally they signed the agreement and agreed on monthly payments. A few months went by and Australian company still didn’t get paid anything. The company’s representatives finally flew over to China to examine what was going on.
They had this crunch meeting in the board room and suddenly this sports bag with 250k Australian dollars in cash was lifted onto the table! The representatives obviously refused to accept the cash, explaining that there wasn’t even any way to get this amount of money onto a plane, so the Chinese company had to figure out another way.
“They had this crunch meeting in the board room and suddenly this sports bag with 250k Australian dollars in cash was lifted onto the table!”
In the end one of the Chinese company’s board members had a brother-in-law studying in Australia, so they found some way to pay the Australian company through him. The driver behind all of this – why they didn’t just pay directly through a bank – was simply tax evasion. Royalty payments for patents have a 10% withholding tax, so they were keen to avoid this. It’s important to be aware there are all sorts of different dynamics happening in the background in China when doing business here.