Trade War Concerns and Online Retailers in China

Trade War Concerns and Online Retailers in China

Fears of trade tensions between US and China arose yet again on 7th September when President Trump warned he was ready to impose tariffs on another $267 billion of Chinese goods, on top of the $200 billion in duties he had already threatened to slap on China subject to a 10% tariff.  And this is further to the US imposing 25% tariffs on $34 billion worth of Chinese goods in July, which then led China to respond with similarly sized tariffs on US goods. China has likewise promised to retaliate yet again if the US imposes new tariffs according.

These actions have many worried, especially those online retailers either already in, or preparing to launch in the Chinese market. Will price hikes also directly impact the online retailing platforms in China and existing Chinese clients? 

Tariff implications for different Chinese e-commerce models

It is important to understand at this juncture that there are two e-commerce models in China, namely cross-border and in-country. The tariffs are only being applied to in-country ecommerce, which makes up the overwhelming majority of total ecommerce sales in China. Those brands under the in-country model commercially import products into China, paying VAT and tariffs in advance, as well as having to adhere to stringent regulations.

On the other hand, tariffs are not being applied to cross-border ecommerce. This applies to international brands selling to Chinese customers, yet it is the customer who is technically importing the product. Even if the trade war were to newly implicate cross-border commerce deriving from the US, the Chinese consumer is not expected to be majorly impacted because of the overall lack of market share of American products. Rather, the cross-border sector is dominated largely by Japan, Australia, South Korea and New Zealand for product categories, including mom and baby, personal care and cosmetics.

Chinese top 4 online retailers for foreign brands

For international brands looking to enter the Chinese market, an understanding of the four major online retailers for foreign brands needs to be obtained with the strengths and weaknesses of each:

  • Alibaba: Alibaba’s platform is known as being merchant friendly on the data front in terms of traffic generation and targeting. Alibaba is consistently introducing new data tools and even integrating offline data. Conversion rates are increasing, though cost per click is going up as well. However, the onboarding process for clients is far from straightforward because of their non-standardized application process which lacks of sophistication when vetting for brands.
  • JD: JD is open to hosting other international brands on its platform, although they tend to purchase inventory from those brands that are either category leaders or have a really strong presence. JD also sells their own inventory and they therefore favor their own listings in terms of search. Traffic generation and advertising technology is far inferior to what we see on Alibaba’s channel.
  • Tmall: Tmall is the place to start for those new to the Chinese market, simply because they have 60-65% market share and new traffic opportunities. Because Tmall is gradually becoming more exclusive, it is a better platform for those larger brands with over 30 million in sales and a marketing budget of at least 20% to invest in China. Tmall is always considered the end game where brands end up investing most of their money.
  • WeChat: WeChat has developed mini programs that are effective in terms of building affinity and improving engagement, although because WeChat did not originally start of as a transaction channel, consumers are not accustomed to checking out and converting on that channel. Actual traffic and sales statistics are therefore less than the other three main channels within China.

The key impact of the tariffs and potentially escalated trade war is, perhaps rather surprisingly, minimal for the four main ecommerce channels, at least for their Chinese consumer-facing businesses which accounts for the vast majority of their revenues. Chinese consumers are not going to slow down spending. A series of merchants may be forced to raise their prices across a small number of product categories, however, there are plenty of other competitors and options outside of US brands. These channels are well insulated because of their business models.

Trends going forward

Going forward, experts predict that the ecommerce platforms in China will continue to innovate and evolve. Online platforms are currently putting hardware into existing infrastructures to leverage offline traffic, for example. This can be seen by the placement of ‘smart mirrors’ in retail locations which scan a woman’s face, make skin-care and coloring recommendations, with purchasing options then made available through Alipay. Digital vending machines are also on offer at physical stores that allow customers to see a product in person and access customer reviews, yet the product is then shipped rather than being able to purchase it on the spot. Alibaba has likewise partnered with Watson to take advantage of foot traffic in high-volume stores and run an experiment to promote certain cross-border brands not certified for offline sales.

Innovation trumping tariffs

Overall the potential of an escalated trade war has had little impact on retail in China as of yet due to the nature of the different ecommerce models. Cross-border trade has been untouched so far, and even if this sector were to eventually be implicated, the big four online platforms are not expected to be dramatically affected because of the amount of competition from other international importers. Innovation in retailing continues to be a theme for the major Chinese ecommerce platforms, which should serve them well in allowing them to respond nimbly to any future events.

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