War of Cross-border Consumerism: Risks Lie Ahead

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(Chinese Version)

During the second half year of 2015, competition among cross-border e-commerce platforms is growingly fierce. The entire industry seems premature. Last year, when government gave its policy nod to the industry, companies and platforms soon started a one-year race of competition and outmaneuvering even without familiarizing themselves with the consumers first. During the period, not only were Tmall International, JD Global Buy and Jumei Global Store incubated by e-commerce giants, but also were Kaola.com and Shunfeng Haitao established by their Internet and logistics-based mother companies. Besides, startups like Mia.com, ymatou.com and xiaohongshu.com that are less known also finished at least two rounds of financing. There are now more than 5000 cross-border e-commerce platforms and enterprises, and more than 2000 thousand enterprises involved in foreign trade through such platforms in China, according to statistics from the Ministry of Commerce.

And problems come right at the heel:

First of all, faked goods manufacturers package themselves as OEMs of foreign products and find their ways into cross-border platforms, when consumers are not yet able to tell genuine foreign products from faked ones.

Secondly, homogenization is widespread. More than 60% of the products sold by over 90% of cross-border e-commerce platforms are diapers and baby formulas, not to mention the limited brands.

Moreover, fierce and ruthless competition over prices did no good in nurturing the market and replacing independent shopping service providers.

At last, smaller e-commerce platforms living on tariff differences cannot survive, due to the lack of an effective and complete supervision mechanism, and the changeability of import tariffs over postal articles.

1. Problems with cross-border e-commerce platforms

On August 17, Tencent Tech reported about a Chinese ‘OEM’ of the South Korean cosmetics brand 3CE. Though the manufacturer was able to provide an inclusive set of qualification – certificates of brand authorization and trademark rights, and manufacturing permit – this Chinese 3CE is an entirely different thing from the Korean 3CE and actually belongs to a company in Wuhan.

As its website introduction shows, the brand was registered at the ‘development zone of Panlongcheng city, Huangpo, Wuhan, Hubei province’, declaring itself as the official OEM of the Korean brand 3CE. Selling record on the webpage of its flagship store on Alibaba shows that its best-selling product, the ‘Genuine 3 CONCEPT EYES Lady from the Star Lip Stick Sample of Color 2606’ has been sold more than 500 thousand times. However, according to 3CE’s Chinese spokesman, the Hubei 3CE is not authorized at all. By registering trademarks of foreign brands in China, companies like Hubei 3CE are able to perform selling by forging counterfeit authorization documents, according to Tencent Tech.

Similarly, Mia.com, a maternal infant care e-commerce platform, is also busy receiving stormy complaints from customers. Its ‘Betta’ brand baby formula shares similar OEM pretext with Hubei 3CE. Mia responded earlier that authorization certificates (without seals) for Betta were available, yet feedbacks from Beta Japan turned out that Mia was not authorized at all. Mia then changed its wording by claiming authorization from Beijing Yisaisi International Trade Ltd. – though its products come from ZOOM.T Ltd. instead of Betta Japan. Yisaisi Investment (legal person being Wu Zhou) has registered numerous trademarks of international famous brands in China, and one of the major products pitched by Beijing Yisaisi International Trade Ltd. is exactly Betta.

Strangely, on the breakout of Mia’s ‘Betta scandal’, the so-called ‘genuine’ Betta feeding bottles on JD.com and Amazon were all ‘sold out’, as storage information on the websites showed. Attentive readers already found out, that the manufacturer of JD’s Betta feeding bottles is Betta Infant Products (Beijing) Ltd, with its legal person also being Wu Zhou.

According to informants from the industry, the so-called authorization gained by cross-border platforms in China mostly comes from domestic manufacturers, or similar foreign-trade companies like Beijing Yisaisi International Trade Ltd. The real overseas brands may not be aware of any authorization deals. On the other hand, relationships among manufacturers, trade companies, and overseas headquarters still remain murky.

It is therefore not hard to visualize a future where ‘fake authorization’ incidents will only increase when competition among cross-boarder platforms intensify.

Besides existing problems with the sourcing process, a more serious structural problem lies ahead: homogenization. More than 60% of the products sold on over 90% of cross-boarder e-commerce problems are diapers and baby formulas, while categories of other major products do not differ much. Diaper brands feature those of Kao Corporation, Goo.n, Moony, while formula brands are mainly those of Milupa, Nutrilon, and Royal FrieslandCampina N.V. Not only were such brands surprised by the consumption frenzy of Chinese e-commerce platforms and consumers, but risks are also underlying. The competition frenzy has resulted in, to say the least, faked foreign products, faked authorization and price increase. Yet as a matter of fact, quite a few P2P e-commerce platforms have stocked up so many diapers and formula that finding a popular selling channel has become near to impossible.

Large stocks also bring about clumsy capital turn over and high storage cost. Amid the war over prices, room for profits can never be comfortable whether the prices drop or not.

2. A distinguishable brand is yet to be established

Different from the time when only Taobao was invincible, current cross-border e-commerce platforms do not distinguish much from one another right from the beginning, technically. The industry is rather a premature baby hastened out by government policies.

Since late 2013, pilot projects of cross-border e-commerce trade have sprang up in Ningbo, Shanghai, Chongqing, Hangzhou, Guangzhou and Shenzhen, with tax deduction policies being carried out through such platforms as stimulation. Buyers only need to pay the same amount of taxes charged for individual postal articles, while normal import charges over tariffs, VAT, and consumption tax were all waived.

In July 2014, the General Administration of Customs published the Announcement About Supervising Goods& Articles Imported& Exported Through Cross-border E-commerce Platforms and Announcement About Adding New Customs Supervision Code, namely the ‘No.56’ and ‘No.57’ documents well known in the industry, providing a policy nod to cross-border e-commerce and to the bonded import model which was already a common practice.

Smelling the favor of policies, capital swarm into every city with pilot projects, with 2014 alone seeing the establishment of numerous cross-border e-commerce platforms within the harbor of bonded areas. One of the earliest was Tmall International, established in February 2014, and 1hcang.com of Yihaodian, founded in the Shanghai Free Trade Zone in September 2014. Besides, global services on vip.com and jumei.com, as well as direct mailing services on Amazon.com almost started at the same time. Early this year, after four months of itchy preparation, 163.com also came up with its ‘Kaola Overseas Purchase’ platform. ‘Shunfeng Haitao’, a similar service platform of the logistics giant Shunfeng, also came online at the same time. It was not until April this year that JD.com, which had been busy with its listing, brought forward its own ‘JD Global Buy’. Now, with e-commerce giants, famous Internet and logistics companies all on the battlefield, the war is finally complete with all the forces.

A good news for new entrants is, there are only seven pilot cities in the entire country. Storage space inside bonded areas is still a scarce resource to be vied for, which somehow limits the ambition of e-commerce giants in enclosing land and provides new players more chances to have their own land. Through Alibaba’s Cainiao (or Rookie Logistics) network, Tmall International boasts the most scattered and largest storage sites across the seven places, while the new entrant Kaola Overseas Purchase also grabbed the largest storage space (60 square km) inside bonded areas in Hangzhou. Meanwhile, the Ningbo Municipal Government also invited its fellow folk, Ding Lei, founder of 163.com, back home with 163.4 square km of land for storage. Generally speaking, with merely six months of establishment, Kaola already ranks on top of the national list in terms of storage size.

Still, the ‘giants’ cannot monopolize the market within the blink of an eye, given that they can only cooperate with appointed and a limited few logistics service providers (for example, companies in Hangzhou can only work with EMS and Zhongtong Logistics). Even JD.com is losing its logistics edge. In order to take the market, marketing and price have the final say at the end of the day, due to which Jumei.com, Kaola, Ymatou.com and Mia.com have started several price wars over diapers alone.

For the consumers, there is not even a single cross-border e-commerce platform for them to devote loyalty, nor did any demonstrates the determination to burn money for customer loyalty during the fight for lower price and more consumers, which can be costly and futile. Once the prices rise, the loyalty is gone. Beating competitors down has always remained the top priority of cross-border e-commerce platforms, rather than turning the industry for good and unleashing its huge potential. Therefore, no well-known brand has emerged so far to captivate the consumers.

3. Core competitiveness is necessary amid murky policies

Without trustworthy brands, malicious competition over prices will not only induce faked products, but also enrage some particular brands. For example, Kao Corporation has once issued warnings to an e-commerce platform, denouncing it for tarnishing its image and reputation as a high-end brand that took more than a decade to come. Their products were so popular that Japanese markets had to limit the number of Kao Diapers bought by each person each time, and sometimes had to raise the prices to keep balance. Other famous foreign food and luxury brands are also reluctant to authorize sales rights to Chinese e-commerce platforms, fearing that quality and price may suffer as a compromise.

Different from domestic traditional e-commerce companies, cross-border e-commerce platforms find harbor at bonded zones in particular cities, with their goods monitored and supervised under the jurisdiction of the Customs, while sometimes national quality inspection bureaus also jump in make sure faked products do not survive. Among the several big cross-border e-commerce platforms, Tmall International and JD Global Buy inherit their traditional M2C third-party model, which has allowed them to attract huge numbers of sellers overseas in a short time and the products are thus more miscellaneous than others. Yet the flaws are also obvious. Numerous inspection raids from the State Administration for Industry & Commerce proved that faked products are never a rare thing on Tmall and JD, even some ‘overseas sellers’ are of no exception in selling those. Media reports have exposed numerous domestic suppliers before, who were able to sell faked products on third-party cross-border platforms by pretending to be overseas sellers. While JD once had a Costco flagship store on its website, the service was soon called off when the official Costco issued an announcement, claiming to have never made such authorization.

Which comes to why Jumei decided not to sell luxury products on its third-party platform, and started to sell cosmetic products all acquired by itself in the first place. According to its founder Chen Ou, though they may suffer from short-term loss, this will guarantee them more control over the supply chain and boost healthy development in the future. To echo that trend, some emerging cross-border e-commerce platforms, such as Kaola, have insisted on outsourcing products on their own, trying to recreate another B2C legend in the cross-border industry that JD had been known for, if not here. Kaola’s founder Ding Lei has emphasized more than one time that in three to four years, Kaola’s capability to purchase overseas will well make itself one of the top three platforms. Ding Lei himself is quite confident in their ability to respond to the Chinese consumption needs, dismissing the notion that those current e-commerce platforms are blessed with a cross-border edge, ‘e-commerce relates itself essentially to commerce, not electronic. They (Alibaba and JD) may have electronic genes, but none are commercial.’

Ding Lei is headstrong in making ‘good price, good quality’ as Kaola’s distinctive pitch by outsourcing products directly overseas. However, its distinction is not so distinguishable. By maintaining supply on its own, the products will be limited in number, which is quite similar with most cross-border e-commerce platforms, and none has demonstrated distinctive core competitiveness.

Policy is the last straw to break the camel’s back. Here are some of the possible results from its changeability:

1) More pilot zones will open up, possibly across the entire country.
2) Ordinary trade tariffs will keep decreasing, postal taxes and trade tariffs may shrink and merge.

For those who want to make a profit by using tariff differences, both changes will do no good. When policies compromise to the market, giants like Tmall and JD will definitely be more advantageous in terms of storage size, investments, logistics, and business scale. With the era of global consumption within reach, what happens if Tmall International stands out as an independent and invincible commerce channel like Taobao and Tmall? Will other platform still be able to seek investments and fight on?

The possibility of being acquired or swallowed hangs heavy on the heart of entrepreneurs. Ding Lei shares his own opinion of cross-border e-commerce, ‘the 1.0 version of domestic e-commerce features low price, as the buying force skews towards the richer and stronger middle class, quality will be the selling point for the 2.0 version of global e-commerce.’ The judgment rings true. This is exactly the core competitiveness worth fighting for.

What does not exist today is not doomed for tomorrow. What will happen after 2015? Let’s wait and see.


[This article is edited and published with authorization from author @Lin Momo. Please note reference and hyperlink when reproduce.]

 Translated by Sharon Lee (Senior Translator at Echo), working for TMTpost.