E-Commerce in China: Typical Mistakes and Solutions for European Brands
How can brands seize the opportunity presented by 610 million active online shoppers? [1] E-commerce in China differs vastly from Western standards. Business is conducted on platforms like Tmall, Taobao and JD. Amazon, Paypal and brand-operated online shops generally do not work. Neither do most western learnings and strategies apply. Yet, brands like Cosnova have figured it out. Read on to learn:
- What are the opportunities in the Chinese e-commerce market in detail?
- What are the top 3 mistakes by brands?
- How did Cosnova successfully seize the market and how can you do it too?
Table of Contents:
- A Great Market for European Brands, Especially for Certain Industries
- The Chinese E-Commerce Challenge
- #1 Ignoring the Preference for Marketplaces over Brand Webshops
- #2 Fail to See Social Media as the Commerce Ecosystem
- #3 Insufficient Respect for the Pride and Culture of the Chinese People
- Case Study: Cosnova’s Cross-Border E-Commerce in China
- Your Next Steps to Enter the Chinese E-Commerce Market
A Great Market for European Brands, Especially for Certain Industries
Little did Volkswagen know, when it entered the Chinese market in 1978, it was the ticket to become one of the world’s largest automotive brands 40 years later. [2][3] Others failed in the face of the challenges offered by the great opportunity in the east. L’Oreal’s mass-market cosmetics brand Garnier had to withdraw. [4] Revlon followed suit. [5] Even the global e-commerce behemoth, Amazon, had to call it quits. [6]
Depending on the definition, China has between 200 and 400 million middle class citizens with purchasing power similar to Europeans. [7][8] With China still being the strongest growing major economy in the world, Dr. Ulrich Stephan, Chief Investment Strategist of Deutsche Bank expects consumption spending of private households to double in the coming decade. This would make China a 13 trillion US dollar market. That’s about the size of the USA. [9]
While in the past machine builders and industrial technology providers have benefited from growth in China, more and more consumer products are being sought by China’s rising middle class. Automotive was one of the first, but now we see many categories booming: OTC Pharmaceutical Products, Sportswear/Sneakers, Beauty & Cosmetics, Health Products. [10]
So, why did Garnier and Revlon fail? Why did Amazon?
Chinese are craving for international products. With the current trade tensions between the US and China limiting US business activities, this presents a particular opportunity for European brands. Especially “Made in Germany” is sought after. [11]
“There is a sometimes surprisingly strong positive bias towards German quality… that is still quite entrenched in the Chinese consumer mindset,” — Kerstin Kaehler, General Manager of the German Enterprise Centre [12]
Likewise there is strong demand for French and Italian luxury items, anyone who has ever been to a Louis Vuitton store pre-COVID will know.
Again, why did Garnier, Revlon and Amazon fail?
The Chinese E-Commerce Challenge
The online share of retail in China is currently at 42%. This already yields a $2.090 trillion ecommerce market. It is still growing at a staggering 18.5% annually.[13][5]
Take a huge market, demand for foreign products and the inclination towards e-commerce and you get an immense opportunity to market your products. Especially for anyone without an established retail network this makes online first sound like a viable strategy. But apparently a difficult one.
E-Commerce in China has developed in its own right. This in part due to the language. Especially the spelling barrier naturally limits exchange between China and the rest of the world. Furthermore, the great firewall essentially separates China’s Internet from the Internet elsewhere. As a result e-commerce in China differs vastly from what Westerners take for granted.
Yet the Chinese e-commerce market is not some sideshow. It accounts for 53% of the global e-commerce market. [15] Does it account for 53% of your online business already?
Before you start to set things in motion for online first, a quick warning: The lack of an established retail network might translate into somewhat low brand recognition and thus a more difficult start than e-commerce launches in your home market. On the contrary, running a globally well-known brand or operating in an industry, where Chinese people do not trust local manufacturerers, might be a benefit. So it is worth analyzing whether it is the right time for an e-commerce market entry. And the good news is that there is a lot of market data available for Chinese e-commerce platforms — much more than we are accustomed to in western e-commerce. There are answers. You can buy them.
#1 Ignoring the Preference for Marketplaces over Brand Webshops
In Western markets the faith we put into a brand translates to trust into its webshop. Consumers happily buy directly. In China to the contrary, consumers trust almost exclusively well-known local marketplaces. The market is dominated by Tmall, Taobao and JD.com, and some new rising stars such as independent Pinduoduo (PDD). The first two are owned by Alibaba Group and JD is partly owned by Tencent. This trend is even fortifying, with Tmall for instance showing an increase of 23% in gross merchandize value for 2020. [16] A presence on these marketplaces is a necessity, having a brand-owned webshop is somewhere between nice-to-have and irrelevant.
Building and operating a presence on these marketplaces, which are vastly different from Amazon or other Western platforms, requires some expertise. To get a general idea, what Chinese marketplaces look like, have a look at my article here: “AliExpress: Is Amazon under Siege in Europe”. While this article presents AliExpress, a platform created by Alibaba to target international consumers, it certainly gives an idea what to expect when looking at pure Chinese platforms. This is nothing that can be done without support.
While adding some complexity, the marketplaces also provide a number of benefits to brands and sellers. There is neither a need to locally host a website in China that needs to be registered with the authorities. Nor is paying for a content distribution network (CDN) that relays a foreign website into China necessary. There is no need to set up Chinese payment tools like AliPay or WeChat Pay yourself as credit cards or Paypal are not used. Finally, a definite plus is the low cost: Sellers mostly pay between 1% and 6% of sales, which is considerable less than what Amazon asks for.
#2 Fail to See Social Media as the Commerce Ecosystem
Not only the point of sale is different, the marketplaces have built entire ecosystems around them. Social factors play a fundemental role in Chinese commerce. Social media platforms like WeChat, Little Red Book and Weibo integrate considerably more into the purchasing process than WhatsApp, Instagram or Twitter.
While for the purpose of explanation marketing professionals often compare each Chinese social media platform to a western counterpart, this comparison falls short. Take any of the Chinese platforms and you will find they are more complex by an order of magnitude. While WhatsApp is still mostly a messaging tool, WeChat is a social media storyline, mobile payment solution and third-party application platform. It offers booking tools for restaurants and flights. It allows to repay credit cards, pay utility bills, top up mobile phones or even buy wealth management products. It is the gateway to numerous public services, like visa applications, driving records, and medical services. It also contains a publication platform used by authors and traditional media, similar to medium.com. And this is by far no complete inventory. [17][18] Therefore, it is important to take note that the Chinese e-commerce ecosystem is a kind of its own. Typical simplifications fall short as a foundation for strategic business decisions.
Nonetheless comparable to western marketing, finding and managing influencers to promote a brand to its target customers is one of the corner stones of success — equally in China. The sheer size of the influencer population, however, potentially turns this into an organizational nightmare.
Taken as a whole the social media environment provides substantial opportunities to drive sales on the marketplaces. WeChat Pay and AliPay, the two dominant payment platforms, which are conveniently owned by the two major e-commerce players (Tencent and Alibaba) ensure smooth payments. And even a CRM system, mailing and text messaging application is included on the merchant side of the marketplace platforms to fully integrate the social communication streams.
Ultimately, we find a 360 degree e-commerce solution. But it is a closed shop and only works well for brands using all its parts. Entering the Chinese market happens not on your terms but essentially on those set by Alibaba and Tencent. While this means a little less autonomy, it also means a proven system that works — if you know how to work it.
#3 Insufficient Respect for the Pride and Culture of the Chinese People
Chinese are proud people with millennia of celebrated history. If you want to do business with them, they expect that you endear yourself to them. Most products offered based on European material will not be accepted. Expect to recreate all your brand imagery with Chinese people and adapt it to local norms, values and events. Your product may be foreign, but it needs to feel sufficiently local to your consumers, while still exhibiting some of its heritage. A tightrope walk.
“No matter how great your own brand value is in the domestic market, a foreign company has to start from scratch in China.“ — Peter Heckmann, Managing Director Alix Partners [19]
Part of the Chinese culture is an almost obsessive consideration phase. Therefore, a product needs masses of content to show its benefits and superiority. Product pages will be long beyond the understanding of a Western webdesigner. Translating existing content will thus by far not suffice.
You will also need video content. Alibaba has recently started to demand explaining video footage for each product. If it is not there, the product gets penalized.
Lastly, during this consideration phase, Chinese consumers will want to haggle. It is not uncommon that customers use the chat functions to ask for a discount. Slow reaction times are a zero-discount policies are fierce conversion killers.
Due to the cultural dissimilarities and the size of the Chinese market, launching a product is a significantly larger effort than in a western home market, but the potential payoff is also much larger. Just imagine how many consumers will make a purchasing decision based on a German piece of content vs. on a Chinese one.
Case Study: Cosnova’s Cross-Border E-Commerce in China
In 2018 Cosnova founder Christina Oster-Daum found herself managing a successful cosmetics company with subsidiaries in several European and American countries. However, the great market in China had remained elusive.
She knew the strong and growing demand for beauty products. Further proof was provided by grey importers, so-called DaiGou. They were already importing Cosnova brands, like essence and CATRICE, and selling them on digital platforms.
“Our brands were already present in China before we became active ourselves.“ — Cosnova-CEO Christina Oster-Daum [19]
While this situation meant Cosnova was already selling in China, it had no control over its brands. DaiGous could free-ride on the good reputation and even ultimately endanger it.
Going all in by founding a wholly foreign-owned enterprise (WFOE) and directly entering the Chinese market at first seemed difficult due to the peculiarities of the market as described above. Soon it turned out to be virtually impossible as Cosnova had pledged against animal testing and Chinese regulation calls for state-conducted animal testing for imported cosmetics.
Understanding their need for a partner to help develop the China strategy, they set out to solve the challenge. Here is the solution they found, working with an agency focused on e-commerce strategies and implementation for the Chinese market.
April 2019 saw the launch of their Tmall Flagship-Store for essence and CATRICE. [20] As you can see by the “.hk” in the link, it is based in Hongkong. This so-called cross-border business allows customers from mainland China to order the products but does not trigger the animal testing regulation. It has other advantages like not having to invest time and money into establishing a Chinese entity and registering products. It is less risky and requires fewer capital then setting up an own Tmall store. [21] In May 2020 Cosnova started to work with the Chinese Influencer Yanjiu. The marketing campaign led to a huge but undisclosed number of orders, 97% of which came from new clients, with a staggering conversion rate of 31%. [20]
As local legislators have announced, we can expect an easing of regulations on animal testing as part of the required approvals for cosmetics in May 2021. Consequently, numerous international players are positioning themselves to enter the domestic market, i. e., to sell directly out of warehouses in mainland China. One of them is Cosnova.
Even for an established company with many global activities, entering China was not a trivial matter. Only strong focus by the CEO and a cross functional team with strong capabilities inside Cosnova allowed for the rapid and successful execution of its China strategy, with all the necessary budgets, marketing activities and product localizations. This strong C-level support will remain crucial.
“We want to keep developing and respond to customer needs as well as possible. Otherwise you will be quickly overtaken by the local brands.” — Elisa Boldt, Marketplace Manager China at Cosnova
With the initial success on Tmall, Cosnova now plans its launch on WeChat, VIP and Little Red Book, thereby building its stronghold in the Chineses e-commerce ecosystem.
Your Next Steps to Enter the Chinese E-Commerce Market
With the market potential in China being so evident, it is only a question of time when a growing brand manufacturer should embark on this venture. As a founder myself, I generally cherish an optimistic let’s do attitude. But after having lived and worked in China myself, let us hear another expert opinion:
“If a brand wants to use this potential, it should carefully weigh up the necessary measures. It requires a market-specific strategy and ideally an implementation partner on site who helps to control everything from day-to-day operations to marketing activities.” — Karl Wehner, Managing Director Alibaba Group (Germany, Switzerland, Austria, CEE, Turkey)
There are ample risks and uncertainties associated with the Chinese market, think of the social credit point system, capital flow controls, joint-venture regulations — just to name a few. My conclusion as entrepreneur, agency professional and lecturer on internationalization strategies is absolutely in line with Karl Wehner’s quote: If you want to go to China, make it a five year project, spend the first two years planning, enter the market with a partner, and don’t expect a break-even before year five. Of course this is highly generalized, so you might be able to do it in three years. But you will not be able to do it in one. And you will most likely not be able to do it alone.
Now it is up to you. E-Mail me at medium@inupio.com to learn what I would look for when selecting a partner or to exchange further thoughts on the topic.
Thank you for reading.
Below are some of the published references that went into writing this post. In addition, I have spoken to a number of relevant people and shared experiences from my own work.
[1]https://www.statista.com/statistics/277391/number-of-online-buyers-in-china/
[2]https://www.volkswagenag.com/de/news/stories/2018/04/volkswagen-in-china-a-long-lasting-friendship.html
[3]https://www.wheels.ca/top-ten/these-are-ten-biggest-automakers-in-the-world/
[4]https://www.manager-magazin.de/unternehmen/industrie/l-oreal-garnier-china-a-942520.html
[5]https://www.glossy.co/beauty/inside-revlons-china-re-entry-playbook/
[6]https://www.cnbc.com/2019/04/18/amazon-china-marketplace-closing-down-heres-why.html
[7]https://www.bmwi.de/Redaktion/DE/Artikel/Aussenwirtschaft/laendervermerk-china.html
[8]https://chinapower.csis.org/china-middle-class/
[9] Stephan, Dr. Ulrich (2021): “China: Privatkonsum boomt” in: PERSPEKTIVEN am Morgen, Deutsche Bank, 09.02.2021
[10]https://www.azoyagroup.com/blog/view/5-china-e-commerce-categories-to-watch-in-2020/
[11]https://www.azoyagroup.com/blog/view/10-german-brands-that-chinese-consumers-are-crazy-for-and-why/
[12]https://asiatimes.com/2019/09/german-businesses-adapt-to-chinas-changing-market/
[13]https://www.ibisworld.com/china/industry-trends/fastest-growing-industries/
[15]https://www.emarketer.com/content/global-ecommerce-2020#page-report
[16]https://www.statista.com/statistics/1024171/china-tmall-gross-merchandise-volume-growth-rate/
[17]https://qz.com/1167024/all-the-things-you-can-and-cant-do-with-your-wechat-account-in-china/
[18]https://chengdu-expat.com/wechat-hidden-features/
[21]https://www.azoyagroup.com/blog/view/how-tmall-tmall-global-are-different-and-why-it-matters-to-brands/
