Entry to China: Opportunities & Challenges for International Companies

By Dana Nino | 23 March 2015

China is the world’s second largest consumer economy and third largest cross-border online shopping destination, with $264.8 billion in ecommerce volume in 2014, according to Cybersource. The future and scale of ecommerce in China is enormous, and consumer interest in western products is at an all-time high as “more than 60 percent of Chinese consumers are willing to pay more for ‘Made in USA’ products and nearly 50 percent say they prefer a product made in the US to a Chinese product of equivalent price and quality. More than half had chosen US-made products over less expensive Chinese goods in the previous month,” according to research from Boston Consulting Group (BCG).

For US-based online retailers, the opportunity is readily available for companies that understand the market and, more importantly, can solve the biggest obstacle they have traditionally faced: how to easily and cost-effectively manage payments in and out of China. With online retail spending expected to exceed $1 trillion by 2019, according to Forrester, the incentive is clear.

Misconceptions

When it comes to shopping habits and preferences of the Chinese consumer, there is no shortage of western misconceptions. One common assumption amongst US retailers is the belief that big brand products manufactured in China are readily available to Chinese consumers and will have limited appeal when sold on a US retailer site. The truth is that the quality of goods sold in the US is much better than the same goods sold in the local Chinese market. Surprisingly, Chinese consumers do not have access to buy high quality US branded products that are manufactured in China, as those goods are designated to only be shipped overseas. Chinese consumers are not legally able to buy direct from manufacturers and the products on the street have no appeal as consumers want to avoid black market, counterfeit items. As such they are willing to pay a premium for familiar western brands that they know are authentic. 

Another misconception is that western brands may not have broad appeal or brand recognition if the retailer has not invested marketing dollars for China. Savvy Chinese consumers are already very familiar with most western brands and are buying already, not only when they travel, but from local online marketplaces. Some of these Chinese marketplaces have answered the demand for US products by shopping direct from US retail locations, paying retail and then posting products online in China at a premium. To replicate a US shopping experience, several marketplaces have now added “live” shows where the hired shopper will enter a physical US retail store, take live video of products on the shelf and stream the video to Chinese consumers during a ‘shopping live show’. Viewers can instantly buy the products they see on the shelves of their favorite US stores. This unique market experience is gaining immense popularity in mainland China as it enables a virtual US shopping mall experience for the consumer. This format exists and is thriving to address the lack of western product shopping options available to Chinese consumers.

What’s Hot?

Several product categories are in huge demand in China currently and will fetch premium prices from Chinese consumers: toys, pet products, personal care/health products/vitamins, baby products (baby formula is especially in demand), automotive, senior/elderly care items, luxury apparel (shoes, bags, clothing).

Travel (with $47 billion in digital travel sales in 2014), education and gaming being additional key verticals in China. For international retailers offering these goods and services the biggest challenge they face isn’t related to brand recognition but more about overcoming the complexities and regulations of doing business directly with Chinese consumers.

Complexities of Pricing and Payments Regulations in China

Expansion into new regions is not without the expected headaches; however this is especially true when it comes to the ever changing financial landscape of China.

Pricing products in US dollars (USD) is a common mistake that many US retailers make when they expand globally. According to a whitepaper by E4X, “international consumers have a general aversion to USD only pricing and greater confidence on sites that offer local pricing.” Not only are Chinese consumers more comfortable shopping and paying in their own currency (and less apt to abandon their cart or leave the site to check foreign exchange rates) many times they simply do not have the means to make purchases in USD. Using a gateway payment service provider like Geoswift allows retailers to collect local CNY payments via all of the major payment methods in China. Geoswift converts to USD for settlement to US bank accounts. For simplicity for the consumer and to protect conversion rates retailers should always price in CNY. This can be accomplished easily by converting the product price from USD to CNY (aka DCC) at the time of checkout so that the Chinese consumer is able to complete the transaction knowing the exact amount of CNY they will be charged, reducing cart abandonment, customer service issues and chargebacks.

The regulatory requirements related to payments in China can be overwhelming to foreign companies. The Chinese yuan (CNY) is a highly regulated currency and the currency exchange process is widely dominated by domestic banks. From the consumer’s perspective, there is a heavy amount of paperwork required to clear any trade into or out of China. Recently however, the State Administration of Foreign Exchange (SAFE) and the People’s Bank of China (PBoC) have been relaxing the monetary policy by appointing select domestic companies to do cross border payments with banks, in specific sectors.

These organisations have also begun to reform annual limits imposed on Chinese individuals for allowable off-shore payments which has, in the past been a deterrent to Chinese consumers. If payments fall under several categories such as travel, education and ecommerce, the old limits no longer apply. This is a key change in the economic landscape for retailers as well as shoppers in China, opening up a new demand for off-shore products.

Knowing the do’s and don’ts of a new market can be the biggest barrier to entry, making it crucial to partner with a payments provider that has extensive local market expertise and operations, able to provide merchants with best practices for entry to global locations and help navigating the complex financial and regulatory requirements of foreign financial markets. As the consumer retail landscape in China continues to grow, US and European retailers need to prioritise their global expansion plans to include China at the top of their strategic expansion plans. Offering direct, streamlined shopping options that allow Chinese consumers the same checkout options and convenience that they expect from their local shopping sites, will be critical in gaining market share. Never before has the economic landscape in China been so open to foreign commerce within its borders, and the opportunity to expand into China is not only financially compelling but now a relatively simple endeavor with extremely impressive returns.
 

By Dana Nino, General Manager, Geoswift US

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