As China has overtaken the United States and other top economies in GDP, it is hard to ignore such a massive market. Especially considering the enormous internet penetration in recent years, with over 800 million users, it may seem like the perfect place to set up an e-commerce operation.
With its ominous Communist government, it is an intimidating market to enter. Simultaneously, China is still a worthy market, as long as a company fulfills its compliance requirements.
Here are some of the main challenges that Western companies face when getting into this cryptic market:
If you are accustomed to doing business in the United States, following the regulations of China can be quite frustrating. The fact that the government has reformed several times in the past few decades, with a plethora of ministries and departments, does not inspire any more confidence.
For example, becoming an importer into China requires a customs registration license, which has a waiting period and stringent requirement to obtain. For every batch of items exported to China, a lot of paperwork needs to accompany it. That may include documents like proof of origin, a bill of lading, invoices, and business information of the manufacturer.
As a manufacturer, specific industries require a China Compulsory Certification (CCC). Overseas inspectors will visit your factory to see if it meets the requirements set by the China Quality Certification Center. If you produce food items, expect to have stricter labeling requirements.
Starting a local branch for your e-commerce business is also a critical yet headache-inducing step. According to the World Bank, China requires over 11 different procedures to register a company. Even as an internet-based business, you may need to be physically present or have a representative to comply with their bureaucratic procedures. It may take slightly more than a month to have all of the required paperwork processed, which is much slower than most other nations.
Protectionism and Corruption
While China is an industrial giant for foreign exports, the government still wants to preserve its domestic market. That is why the Communist party has set industrial policies that limit the penetration of foreign goods.
Some industries also receive direct subsidies from the government to stay afloat. The most prevalent example is the electric vehicle production subsidy, which receives around $10,000 for each produced vehicle. Consumers also get incentives to purchase Chinese goods, which may be financial or involve fast lanes through its bureaucracy. Without subsidies, many of these companies would not even have a foothold to compete against superior foreign products.
With its protectionist policies in mind, state-owned companies or businesses with friends in the government are the main beneficiaries. While the Chinese government pretends to have economic advancement as its goal, most of these policies are used to bully foreign companies in hopes that they give up on their Chinese expansion. That creates a system that eliminates competition so existing monopolies may grow fatter.
The abuse of protectionism is especially prevalent in the growing tech sector, both digital and manufacturing, mostly facilitated by the infamous Great Firewall of China. Since the domestic market is somewhat isolated, many unicorn startups have thrived in such a large economy.
Taking advantage of the government’s strict internet laws and favoritism, top social media companies like Weibo or Baidu dominate niches that Facebook or Google would have filled. Alibaba also has a firm grip on the e-commerce market, making it a scary playing field for foreign startups.
While taxes in China are not the worst in the world, they still bleed your profit margins. The average import tax rate across-the-board is just under 10%. VAT taxes vary between 10% to 16%. Consumption taxes, like liquor or cigarettes, have varying rates between a mere 1% to a whopping 40%.
Special trade zones do offer slight tax incentives for some industries since customs has an indirect role when processing goods and encourages bulk shipments. Shanghai, Guangdong, and Fujian are some of the locations that have these free trade zones.
With a cold trade war looming between the United States and China, there is some retaliation in the form of tariffs. Goods that come from the United States receive an additional import tax of more than 15% for a long list of items. If you have an American-based e-commerce company with articles featured on the list published by China’s Ministry of Commerce, your business venture is as good as dead.
On the flip side, the country has decided to cut tariffs on some types of goods to remain competitive. These include textiles, machinery, electronics, cosmetics, and home appliances. Of course, knowing the unpredictable nature of the government, these cuts may be temporary.
Did you know…
Hong Kong, although part of China, is not affected by this trade war. Shipping from Hong Kong to the US and the other way around is financially significantly more interesting than to ship directly between the two superpowers. Hong Kong is a tax-free haven, and shipping from Hong Kong to the US has a tax free threshold for bulk shipments up to a certain amount. Finding a fulfillment provider in Hong Kong would be a great idea as it is a hub to Asia and the rest of the world.
Floship, an order fulfillment provider based in Hong Kong, can help prevent your business becoming a victim of these trade wars. Interested in saving money on shipping? Fill out our No Strings Attached consultation form to discuss your business needs, or read our dedicated page for more information.
Getting your goods legally into the country is only a small fraction of your operation. You also need to be able to propagate your products in an entirely different culture with a different language and means of doing business. Even businesses that thrive in the United States fail to meet the needs of Chinese consumers.
With online advertising, the Great Firewall and local regulations should be taken seriously as a hurdle for a remote company. It’s not like you can set up a Facebook page, Adwords campaign, and expect it to reach Mainland China.
You will have to learn how social media advertising works through platforms like Weibo, WeChat, and Youku. Using these platforms will also require flawless Mandarin translations and compliance with relatively intrusive identification procedures. The content of your website must comply with the country’s ever-evolving rules, especially if you register a Chinese domain extension.
The Chinese government is increasing its anti-foreigner sentiment regarding both business and ethical values. Due to frustration with the Chinese While Hong Kong is still an isolated zone, it may serve as a gateway to do business using Western ways of doing things. If your e-commerce niche is lucrative, however, the hundreds of millions of online consumers are a light at the end of the tunnel.