Introduction

The world’s no. 2 digital economy, the PRC transacted some 40 percent of trade online in 2021. With COVID forcing even more shopping online, the PRC’s cross-border e-commerce (CBEC) sector is also booming. Now the fastest growing trade mode, digital flows will be further streamlined for trade to the PRC as Beijing vies to set the global rules for the trade.

Two-way CBEC trade volume reached over US$276 billion in 2021, reports PRC customs, a 15 percent growth y-o-y accounting for some 5 percent of the total. Total CBEC imports stood at US$203 billion by 2021, up by some 28 percent y-o-y, while exports dropped by 0.9 percent y-o-y to US$76 billion. The total CBEC import and export figure is expected to reach US$363 billion by 2025 with an annual growth rate of above 10 percent, according to the Chinese industrial research firm iResearch.

Coastal provinces Guangdong, Shandong, Fujian, Zhejiang and Henan are major CBEC hubs. Accounting for some 40 percent of the total, they were the top five provinces for CBEC trade volume in 2021. Baskets of local policy sweeteners, including subsidies and tax cuts, support cross-border e-commerce firms in expanding logistics networks and localising operations overseas. International e-commerce traders eyeing the PRC market are greenlit by two expanded lists of allowed CBEC retail imports and growing numbers of CBEC pilot zones, currently 165 scattered across the country.

2019-21 total CBEC volume increases, but growth slows

source: GAC

PRC e-commerce platforms have expanded overseas, above all in emerging markets. Second to Amazon, AliExpress (the overseas service arm of Alibaba) won more than 25 percent of the global consumer market in 2020, reported Statista. The e-commerce ‘DTC’ (directly to customs) model shortens conventional supply chains, reducing transaction costs and helping SMEs reach and profile international consumers. Amazon partnered with PayPal and UnionPay on payment services relying on FedEx and UPS for logistics. Alibaba, on the other hand, has taken the route of developing its own cross-border logistics and financial solutions while partnering with local digital payment services to advance international market penetration (see AliExpress case study).

AliExpress no. 2 after Amazon for global market share in 2020

source: iResearch

But with sluggish overseas demand, an inflationary environment and tightening foreign platform regulations, growth went off the boil in 2022. Customs data records trade via CBEC in Q1 2022 at C¥434.5 bn. Exports grew 2.6 percent y-o-y while imports shrank by 4.2. In Q1 2021, CBEC export and import growth reached 69.3 and 15.1 percent.

Publicly listed CBEC firms mostly saw profits plummet in H1 2022. Many suffered lingering impacts from a crackdown by Amazon (May-October 2021) on accounts posting fraudulent reviews. From Q1-Q3 2022 only some 30 percent of Amazon-registered Chinese CBEC sellers made any profit, according to the service platform Yuguo. However, some R&D savvy exporters investing in original innovation and product improvement have steered clear of the anti-fraudulent campaign and have since seen profits jump after the Amazon ban, reports Yuguo.

2021 was a time of peak demand for PPE-related consumer goods that has since waned. Recovering global economic activity in H1 2022 saw demand for industrial goods—machinery, power tools and vehicle components rise and they are now faring better than goods for consumers.

To expand further, PRC firms will need more overseas warehouses to localise global operations as well as the services of independent sites to navigate the risk of tightening foreign third-party e-commerce platform regulations. Positioning high-quality products ahead of market trends remains the final coup for winning customers. But for B2C sellers, global brand-building never ends.

supporting policies

Responding to the boom in e-commerce, Beijing agencies jointly issued a 14th 5-year plan to develop the sector in late October 2021. The goal is to take aggregate CBEC deals from C¥1.69 tn in 2020 to C¥2.5 tn in 2025, a projected 10 percent of total PRC trade. The plan highlights the need to expand cooperation via

➤ developing ‘silk road e-commerce’
➤ supporting multinational SMEs to participate in global trade
➤ strengthening CBEC firms’ capability to handle trade friction
➤ Beijing actively taking part in CBEC rule-making

A top-level document on advancing ‘new forms of foreign trade’ issued on 9 July 2021, urges expansion of CBEC pilots and encourages firms to set up warehouses overseas. Ren Hongbin 任鸿斌 MofCOM (Ministry of Commerce) notes CBEC volumes have expanded by a factor of 10 in the past five years. He says more work is needed to

➤ research and develop IP protection guidelines
➤ expand the retail import list to offer more choice to consumers
➤ streamline return and exchange processing

The list of CBEC pilot zones was expanded via a sixth round in February 2022, adding 27 cities and areas to 105 existing pilots. The list grew further with 33 cities and areas added in November 2022; the total now runs to 165 pilot zones enjoying VAT exemption and reduced consumption taxes. Multiplying CBEC pilots, notes Liu Ying 刘英 from the Renmin University Chongyang Finance Institute, will help curb logistics costs, connect local supply chains and improve the business environment.

expanding CBEC pilot cities, 2015–22

To promote fast-track CBEC return services, GAC (General Administration of Customs) in a September 2021 notice, approved setting up CBEC retail imports return storage and selection warehouses inside customs special monitoring zones. To streamline customs clearance, a customs B2B regulation model was promulgated nationwide from 22 pilots in June 2021.

CBEC firms will face more intense competition as the sector gets more crowded

➤ Huo Jianguo 霍建国 China WTO Research Institute warns that developing all-round overseas logistics networks will be critical,: relying on policy support and extracting profits from manufacturers does not have a long life
➤ Fu Yifu 付一夫 Xingtu Finance Research Institute urges CBEC platforms to improve big data algorithms that will alert firms of real-time market demand and consumer preference. A cohort of tech-savvy professionals for organising CBEC industrial training programs is urgently needed.

promoting digital silk route

Creating ‘silk road e-commerce’ links with Belt and Road Initiative (BRI) member states has boosted international CBEC collaboration. Since 2016 Beijing has signed e-commerce collaboration MoUs with 26 countries, including Chile, Brazil, Singapore, Australia, Hungary, Italy, Russia, Pakistan and Senegal. Bilateral sessions have been held regularly, bolstering policy liaison, easing industrial coordination in logistics and digital payment, SME digital transformation, online consumer protection, and more.

China and five central and eastern European countries co-launched a ‘China-Central and Eastern European e-commerce cooperation mechanism’ in June 2021, deepening multilateral dialogue on e-commerce trade promotion and regulatory alignment. A similar mechanism was created between China and five Central Asian countries in 2022.

Localities are urged to engage in ‘silk road e-commerce’ cooperation schemes. Conferences were held in Hebei, Shaanxi, Zhejiang, Guangxi and Fujiang in 2021 to help guide provincial officials. Meanwhile, ‘online classrooms’ went live for authorities and e-commerce traders from partner countries with content covering major sectoral trends, regulatory hotspots, innovative practices, as well as useful toolkits. Live streaming has become a popular way of promoting local goods and exchanging market information.

bringing in goods via CBEC

advanced economies lead PRC CBEC retail import Q1-Q3 2022

source: MofCOM

CBEC’s touted fast customs clearance and small-scale packaging makes it a popular channel for a wide range of goods beyond conventional wholesale procurement. An adjusted list of CBEC retail imports was released by central agencies in February 2022. On the basis of the 2019 edition, 29 items with strong consumer demand in recent years, such as ski and golf equipment and household dishwashers, were added. The list has been expanded three times since 2016. The scope of cross-border e-commerce retail import pilots has meanwhile grown to include all FTZs (free trade zones), comprehensive CBEC pilot zones, comprehensive bonded zones, import promotion innovation demo zones and cities with bonded logistics centres. A three-year pilot for importing drugs via CBEC was launched in Henan province in May 2022, including 13 types of prescribed drugs. The State Council subsequently issued approval in September 2022 for qualified FTZs to pilot CBEC imports of certain drugs and medical equipment.

makeup leads food in PRC CBEC imports Q1-Q3 2022

source: MofCOM

CBEC firms going global

Many outbound CBEC firms have struggled over the past one and a half years. The campaign against fraudulent reviews launched by Amazon in May 2021 shut down over 50,000 PRC seller accounts servicing more than 1,000 firms and 600 brands. New EU regulations on e-commerce value-added tax and product safety took effect in July 2021 and have further tightened market access for PRC firms. Most recently, PayPal has fined or frozen many CBEC accounts for violating third-party payment rules when operating on their own digital sites, such as sending empty packages or wrong products. IP infringement is another recurring issue that often takes place among sellers whose business models require a large number of SKUs (stock-keeping units) with low-value goods.

Leading CBEC player Youkeshu 有棵树 had over 300 accounts shut down by Amazon. Tianze Information Co. 天泽信息, Youkeshu’s parent company, saw its revenue drop by 64 percent to C¥423 million in H1 2022 after a loss of C¥949 million in H1 2021. Other firms, such as Tongtuo Technology Co. 通拓科技, have been fined tens of million yuan by PayPal due to violations of platform rules and IP infringements.

On the contrary, a batch of CBEC firms who invested in product innovation and long-term brand-building survived regulatory scrutiny and sustained revenue growth, such as Lege Co. 乐歌股份 and Anke Innovation Co. 安克创新. The latter has invested some 7 percent of its revenues in R&D Jan-Sept 2022, growing by 40 percent y-o-y. While Anke’s third-quarter profits grew by some 19 percent from last year, Lege achieved some 8.6 percent growth during the same period.

A leading CBEC player selling intelligent furniture and office products, Lege has invested in its own overseas warehousing and logistics services–offering them at the same time to nearly 400 SMEs. The firm signed a shipbuilding contract with a capacity of 1,800 TEU in January 2022, with the ship expected to launch in March 2023. Operating its own container ship should enable Lege to navigate shipping price shocks.

Although a few leading CBEC players can scale up their R&D spending, still more, lacking funds, seem stuck at the bottom of global value chains. Lack of added value and rising local production costs is speeding up their exit from the market. More recent data indicate that a few publicly listed CBEC firms have reported a slight revenue recovery in Q3 2022. However, waning overseas demand amid global economic downturn and persisting inflation is expected to weigh on e-commerce exporters.

setting up independent website

CBEC independent digital sites steadily growing 2016-2021 (%)

source: iResearch

Independent websites, or the DTC (direct-to-customer) model, lets CBEC firms dodge third-party regulation, rising service fees and access restrictions on consumer data. The trend has slowly emerged since 2016 (see diagram). Responding to Amazon’s freeze on CBEC accounts from the PRC, Shenzhen’s Commerce Bureau convened affected firms in August 2021, urging them to create digital sites of their own to navigate third-party regulatory risk and offering funding support of up to C¥2 million for qualified projects.

The freeze, reports Shenzhen’s Cross-Border E-Commerce Association, led to over C¥100 bn in losses among PRC firms, some 30 percent of which were based in Shenzhen. With the pandemic speeding up CBEC’s overseas markets, PRC sellers comprised almost half of the total registered on Amazon in 2021, compared to just 10 percent in 2016. The ban, while not exclusively targeting PRC firms, noticeably dented Amazon’s Q2 profits.

As well as setting up their own, many firms are actively exploring new overseas sales platforms. According to a MofCOM calculation, PRC firms launched some 20,000 independent sites overseas in 2021. Nearly 30 percent of CBEC firms had by 2021 set up independent sites using domestic SaaS (software as a service) platform builders, such as SHOPLINE, reports the think tank Ebrun.

Independent sites help cultivate consumer loyalty, but brand building entails long-term commitment and advertising investment. SMEs struggle to find the staff and marketing skills to operate digital platforms. Many operate accounts on several platforms at once (Amazon, eBay et al.) to maximise exposure. Industry insiders urge this two-channel model on small players: they reinforce each other. Third-party sales platforms provide market feedback, advancing branding and making independent sites more attractive.

At one time, brands with independent sites often worked with social media influencers, a cost-effective way to spread good product reviews. The strategy is, however, now getting stale. Evolving into sites that aggregate and provide services for third-party sellers may be the ultimate  manifestation of such independent sites as they grow in influence. Industry experts suggest this may be the case for SHEIN in the clothing sector (see case study).

building overseas warehouses

International consumers have noses for faster, cheaper delivery. Overseas warehouses are becoming critical, allowing CBEC firms greater cost control over shipping. Localities are rolling out millions in subsidies, above all in coastal provinces. Overseas warehouses owned by PRC firms have doubled, reports MofCOM, from some 1,000 in 2019 to over 2,000 in 2021. The Shenzhen Cross-Border E-Commerce Association reports around 250 overseas warehouses were operated by CBEC firms registered in Shenzhen by the end of 2022, with the total construction area ranked No. 2 nationwide.

With storage overseas, shipments can anticipate holiday seasons when large numbers of orders are placed, and containers are in high demand. Products can be grouped in single bulk shipments, streamlining customs clearance and curbing logistics fees. More to the point, locating warehouses in regional transport hubs enables flexible exchange and return services. Yet, costly investments need to be made early, and sellers face risk of inventory overstocking.

Some conventional firms, e.g. Zongteng Group, were able to transform into inclusive CBEC logistics providers, but third-party shipping and warehousing services are often more affordable for SMEs. As Amazon’s ‘FBA’ (fulfilment by Amazon) gets costlier, similar services offered by PRC firms gain market share. Cainiao, Alibaba Group’s logistics arm, operates over 300 m2 of overseas warehousing and over 1,800 international sea and air freight lines, serving both third-party and independent sellers. As PRC CBEC platform giants, most notably AliExpress (case study), go global in emerging markets, small B2C sellers hope to take advantage of their customised logistics services to reach local customers.

Global demand for overseas warehouses, however, has waned since the second half of 2022 due to falling consumer spending and the return to normal shipping fees.

According to Wang Xin 王馨 Shenzhen Cross-Border E-Commerce Association (see profile), a large number of overseas warehouses built by CBEC firms and logistics companies during the past two years are now idle with high empty rates at the beginning of 2023.

The cost of building warehouses overseas has more than doubled from the pre-pandemic period, for example, the annual rental for a 10,000 square-metre warehouse in Los Angeles was around US$10 million in 2020—but reached US$300-400 million by the end of 2022, making it difficult for new players. Expansion is further dampened by the 2-3 year profit cycle. Qu Rengang 曲仁岗 Disifang’s (China’s leading export and import logistics firm) overseas warehouse business notes that in the next 3-5 years, overseas warehouses would seek to transform from general storage to brands or goods-specific storage, streamlining costs for automatic goods selection and categorisation. Qu urges more transparent industrial standards for overseas warehouse operation, prompting more regulated sectoral growth.

Lege Co. 乐歌股份, one of a few PRC CBEC players invested in their own global logistics system, has since been consolidating its 15 overseas warehouses, turning a few small ones into one big one to spread out operational costs per square metre. Xiang Lehong 项乐宏 Lege’s chairman remains optimistic about future demand from business, referring to the US’s manufacturing reshoring strategy and preference for local assembly and shipments.

risks affecting two-way CBEC sellers

regulatory compliance and IP protection (see Feng Xiaopeng profile)

Global regulatory scrutiny—not least of PRC violation of intellectual property rights—is now a key risk for its CBEC suppliers. The need for legal assistance has created an entire industrial chain. Trademark and copyright infringement has been a two-way issue, with many Chinese SMEs plagiarising foreign products while foreign sellers copy certain locally designed products. Firms are urged to make full use of third-party legal services, such as those provided by AliExpress, for their own protection. Heatedly discussed in WTO and regional negotiations, greater coordination in cracking down on cross-border IP fraud is on the cards.

Meanwhile, as overseas regulators tighten up anti-monopoly scrutiny of platform giants, PRC sellers face rule changes offering tempting returns yet entailing greater compliance. Top-notch independent players, like SHEIN, may also be subject to non-PRC information and algorithm disclosure.

looking forward: emerging markets and RCEP

Tech giants and massive CBEC platforms like Alibaba, Tencent and JD.com, as well as the e-commerce business of social media platforms Tiktok and Xiaohongshu, have expanded their footprints in emerging markets. They are especially prominent in Southeast Asia, profiting from booming local digital economies and young populations. According to a 2022 report on the Southeast Asian digital economy jointly released by
Google, Temasek and Bain, total Southeast Asian e-commerce transaction volume reached $131 bn in 2022, growing by 16 percent y-o-y, and expected to reach $211 bn by 2025.

Nevertheless, the ASEAN e-commerce market is getting overcrowded with ever more intense competition among local and PRC e-commerce platforms, but its logistics services present huge market potential. After entering the regional market seven years ago, JD.com shut down its e-commerce businesses in Indonesia and Thailand at the beginning of 2023, but its local storage and logistics arm remains active. Alibaba’s presence in ASEAN is run by AliExpress and Lazada, a local e-commerce platform acquired by Alibaba in 2016 with the local delivery network. Currently, Cainiao Logistics and Lazada co-run over 400,000 square metres of bonded warehouses covering 6 ASEAN countries.

The lack of adequate transportation infrastructure, modern digital payment methods and a skilled labour force are outstanding challenges facing PRC e-commerce logistics expansion in Southeast Asia.

On the other hand, the effectiveness of RCEP (Regional Economic Partnership Agreement) in January 2022 presents Chinese CBEC firms with new opportunities with regard to China-ASEAN trade

• reduced tariffs on imported raw materials and intermediate goods
• unified rules of origin, customs procedure, quarantine and inspection
  requirements and technical standards, etc.
• streamlined cross-border logistics via simplified customs clearance and authorised economic operator (AEO) mutual recognition; will face little competition from nascent local logistics industries
• comprehensive IP regulations and dispute settlement mechanisms

In addition, emerging markets in Latin America, Middle East and Southeast Asia, such as Brazil, Mexico, Gulf countries, Kenya, etc, have been targeted by PRC e-commerce giants and logistics firms as the next growth points, given e-commerce saturation in some North American and European countries. Jitu Express 极兔速递, China’s top express delivery firm, has set up in Brazil in May 2022, providing local delivery services to all Brazilian states. Its international services network offers customs clearance overseas storage and “last mile” delivery services to Chinese CBEC sellers with independent websites.

PRC online goods moving up the value chain

In the age of e-commerce, cross-border transactions have been streamlined, digitised and personalised. If done well, this should ensure direct and faster global delivery of tailored products from the PRC. If local regulation allows, sellers’ own websites and PRC-run overseas warehouses should underpin the trade with PRC brands becoming ubiquitous in some markets. PRC agencies wholeheartedly support the sector’s expansion into emerging markets, above all in Southeast Asia, where RCEP is cutting red tape for cross-border transactions.

But shrinking global demand and an increasingly political trade environment are challenging PRC firms’ strategies. Transforming from a quantity to a quality and innovation business model is ever more urgent in an overcrowded and more costly sector. IP infringements, nonetheless, remain conspicuous. Firms need to raise their game in compliance, standards, and risk to maintain e-commerce markets.

Beijing is stepping up its ambition to lead the drafting of global digital services trade rules, recognising that it is vital if the PRC CBEC industry is to thrive in the long term.