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Many foreign brands have already penetrated the China market and achieved success. Certainly, not all brands are successful as the tempting opportunities always come with obstacles, which business owners or entrepreneurs must overcome. For those who want to do business in China, must be very careful and vigilant before entering.
Also, competition in this gigantic and complicated arena is seriously intense, where various brands are also trying to gain their positions. Competition in the China market is equal to participating in the world market. Because at the moment that you sell products in China, you are not only competing with Chinese brands, but also international brands from all over the world.
Therefore, entering the China market must be taken seriously. You should get yourself ready by studying a lot of information and preparing yourself in various aspects, including Product Development, Sales Channels, Pricing, Promotions to meet the needs of Chinese consumers, Maintaining brand’s reputation and identity, etc. You must think beforehand and plan ahead to cover all the long-term strategies. Yet, before getting into different areas, this article will introduce you to the 2major methods of penetrating or exporting to the China Market.
This is the main or general way of exporting products to China which requires the product to meet certain China Import Rules and Regulations. However, not all kinds of products could be exported to China. Generally, the product category that you must check before exporting are as listed:
However, If a product is listed as “Free Items,” it does not mean that the product could be produced and exported immediately. For exporting to China, you still need to check whether there are any requirements, regulations, standards, and tax privileges. Thus, you need to prepare documents as listed below:
For example, any product that is food, medicine, cosmetics, food and dietary supplement, the product needs to pass the CFDA (the China Food and Drug Administration) registration, no matter if it is produced domestically or imported from foriegn countries. Also, if the product is a cosmetics, animal testing is required, eventhough on May 1, 2021, China has lifted the animal testing law, some types of cosmetics still require this process before exporting to China.
This is to verify your brand and to protect your IP and business from trademark infringement.
All of these documents need to be submitted to and approved by the Chinese authorities, while from Thai side, it also needs to be taken into account whether the product needs any certification or registration for exporting? Exporting each type of product requires different types of documents, and Thai agencies that are responsible for an issue of each type of document are also different. For example, for raw and processed food that contains aquatic animals, a Health Certificate must be issued from the Department of Fisheries; For sugar, an export permit from the Ministry of Industry, etc. After you have prepared yourself according to these basic steps, the next crucial question is:
Where and How to Sell?
Does your product need to be in physical stores? Or must it be sold on the online platform only? Would you like to sell through an integrated Omni-channel method? The answers to these questions require different criteria.
If you would like to have a storefront, you have to set up a business entity and have a business license to be able to legally operate the business according to the Chinese regulations. However, if you think that you are not ready in terms of investment and experience, the easier step for you could be selling via online platforms first. You can rely on the mainstream Chinese e-commerce platforms such as Tmall, JD.com, Pinduoduo, RED (Xiaohongshu), etc. Also, there are other choices such as opening your own mini-program shop on WeChat, if joining the larger platform does not fit your business model. Still, there are some challenges as the WeChat mini-program must be entirely in Chinese language, and you also need to set up the after-sales service system, link your mini-program with the Chinese payment, customs, and logistic systems, which are quite arduous tasks.
If you are not interested in managing all the operations by yourself, but only in selling products in China through Chinese partners, importers, distributors, or sales agents, while letting the partner operate the marketing process by themselves, you need to make sure that your partner is credible and reliable enough. Does your partner have experience in marketing in China? Does your partner have an import license for your product category? Do you and your partner mutually agree on the payment terms and conditions? As normally, the partner company will have to perform customs clearance for you, so that you are able to import the product to China in a legal way. Also, you have to pay import duties and taxes based on the CIF price (Cost, Insurance, Freight) before the product is sold to Chinese consumers. After clearing all the customs procedures, the products could be sold legally, whether through an offline storefront or online.
For Chinese licensed importers and dealers, paying for goods and keeping them in the warehouse is risky as they have to bear all the cost and the risk of loss. Thus, many dealers or import companies charge the operation fee at a very high rate, and bargain the price of the goods so much that some brand owners could not accept the agreement. In addition, the brand owner does not have rights to control the marketing and communication direction, or set the end price. Distributors or sales agents will have complete control of the selling and building brand awareness in China. For some brands that are only interested in selling the product, the mentioned concerns would not be a problem. However, for those who also want to retain the original brand identity, relying only on the distributor is very risky, as the brand owner does not have any rights to control and the product is immediately in the hands of the distributor.
Let’s take a look at the second method. This method is called the cross-border method, as it is a method of importing foreign goods into the Chinese border through special regulations. It allows goods to be brought into the Free Trade Zone through a distribution platform specially built for cross-border trade between China and foreign countries. Also, the imports can only be sold through online channels. Hence, the method is named Cross-border eCommerce (CBEC).
The method has been created since 2014 to facilitate and reduce the barriers for importers in China who have to go through the lengthy process and complicated document procedures as mentioned. In the previous method, each type of product has its own strict import rules and regulations. Asking for certain types of documents may take months or even years to complete. Thus, it is possible that at the time that you finish preparing all the required documents, Chinese people may already lose interest in your product, causing you to lose both time and money. Still, if you would like to enter the market via the first method, you have to strategically develop your plan and act in advance since it takes a longer value chain. However, the second method, CBEC, is significantly different as…
In other words, you can directly export your product in Thailand to the China Market without any modification.
Currently, there are 105 CBEC trade zones in China. For logistics and warehouses, there are 2 export models; bonded warehouses and direct mailing, which supports a direct delivery from an overseas bonded warehouse. The 2 models have respective pros and cons. Sending from a bonded warehouse in China allows the delivery to reach consumers quickly within 2-3 days, while shipping from overseas can take up to 14 days. There is also a mutual benefit of the two models in the CBEC, which is the rule that importers do not have to pay tax until an order for an end consumer arrives.
According to the special requirements of the CBEC, there is no import duty. Importers must pay only consumption tax and Value Added Tax (VAT), which will be charged only 70% of the normal rate, so the total percentage of tax will be at an average rate of 9.1% for general products, and the rate between 17.9% – 28.9% for luxury items. Also, the tax will be calculated from the retail price, unlike the first import way, which is calculated from CIF. In addition, CBEC will also use different customs regulations that are different from the general trade method.
There seems to be many advantages, but one must also be aware of the limitations of this method. CBEC is applicable with consumer goods, food, beverages, cosmetics, and healthcare products which only has around 1,400 types (Based on the CBEC import regulations 2019). Moreover, there is also a limitation for purchase ceiling for Chinese consumers. The Chinese consumer is allowed to purchase no more than 26,000 yuan per person per year and no more than 5,000 yuan per transaction or per order. If the consumers purchase over the limit, they will be charged for tax at a normal rate, according to each category of products.
And Chinese consumers can only purchase these products from cross-border eCommerce platforms such as Tmall Global, JD International, Kaola, RED, etc.
Therefore, before entering the China market, it is necessary to study the rules and regulations, procedures, differences of the export model, and their limitations. You could see the summarized version in the table below.
Compared to the general trade method, the CBEC is less risky for foreign companies or brands who want to try selling in the market, and for the one who just entered the China market for the first time.
For the brand that has already gained experience in the market and has done some market research, as well as having a clear brand identity and potential products, the general trade export model will suit the brand more. Since the brand already has the potential, the general trade model will allow the brand to access the larger market, both in-store and online. Also, when calculating the cost per unit, the first model could be more economical than the second, if the product can be sold in large quantities.
After understanding the rules and regulations, the next step is to understand yourself and the potential of your brand and product. No matter how you choose to export your product, the most significant point is you have to plan your strategy deliberately in every aspect; product development, sales channels, pricing strategy, digital marketing, as well as understanding the dynamic of Chinese market and consumer trends.
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#This article is a continuation article in the series “Ultimate Guide for China Market,” that will be gradually updated. The guide is written from the accumulated knowledge and real experiences from the writer. It is divided into several categories to draw a clear explanation on how to do business in the China Market from the beginning to the end of the process as knowing your field and knowing yourself will protect you from danger in a hundred battles #
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This article is a collaboration between Click China by LERT x China Talk with Pimkwan
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