Services help retailers ship to—and collect payments from—consumers in China.
Katie Evans , Managing Editor, International Research
Buying online from overseas e-retailers is popular in China. So popular, it has its own Chinese moniker: hai tao, which roughly means "ocean search."
Twelve million Chinese consumers bought from retailers overseas online in the second half of 2012, according to the China Internet Network Information Center, a government-sanctioned research organization. 34% said they did so because the brand they purchased was unavailable locally, while 30% cited better product quality guarantees.
"Chinese consumers are hungry for high-quality products at reasonable prices, and they know this is what they get when they buy direct from U.S. retailers," says Jingming Li, group vice president and head of Alipay U.S., Alibaba Group Holding Ltd.'s payment unit. Alibaba is the largest e-commerce operator in China.
Chinese consumers want to buy direct from foreign retailers for several reasons. Goods purchased directly from foreign sites are often less expensive than the same merchandise bought at retail in China, and the selection and quality when buying directly from foreign sites is often better, Alibaba says. U.S. goods are more costly when sold in China, in part, Alibaba says, because many Chinese online sellers employ agents to travel to the United States and purchase goods to bring back and then sell online in China for a significant markup. That process also means the selection might be slim. For example, Chinese sellers touting high-end MAC Cosmetics might only have a few colors. The growing demand in China for goods direct from foreign web sites has even sprouted a network of Web-based agents, coined "Haitao-ers" who, for a fee, will make purchases on behalf of Chinese consumers, handle currency conversions and take care of getting the product into China and delivered.
Selling to Chinese consumers is alluring to North American retailers because online spending in China is growing at a much faster clip than in the United States. The number of Chinese online shoppers has grown by 125% from 108 million consumers who made at least one online purchase in 2011 to 242 million in 2012, says the China Internet Network Information Center. That helped fuel 42% growth in China's e-retail sales in 2013 to $305.74 billion, from $215.31 billion in the prior year, Beijing-based Internet research firm iResearch Consulting Group estimates.
But despite a massive potential sales pool, selling direct to such a far-away region is complex for U.S. e-retailers. They must navigate foreign taxes, customs and duties and accept payment methods other than the U.S.-standard Visa, MasterCard and PayPal. Then they have to get the goods to the shopper. Foreign shoppers, meanwhile, want to know items ordered from abroad will clear customs quickly and what they will have to pay upfront. Several Chinese e-commerce service providers have emerged that seek to address these challenges, and they're hoping U.S. retailers will use their services.
The Alipay payment option is a prime example. Alibaba says it is now in talks with several large U.S. web merchants to provide fulfillment services to help them display fully landed costs for orders to consumers at checkout and to deliver orders placed by Chinese consumers on U.S. e-commerce sites.
Retailers who accept Alipay—a popular Chinese payment option similar to PayPal—can use the Cainiao (pronounced: TsaiNow) logistics network that taps into hundreds of couriers throughout China, enabling delivery to even the most remote locations, Li says. Before, Alibaba only offered this service to Chinese sellers on Alibaba marketplaces Tmall and Taobao. With Alibaba's new offering, the merchant's back-end systems are linked to the Alipay payment infrastructure and, via that, to Alibaba's Cainiao logistics network. This integration means that when a Chinese consumer elects to pay via Alipay, the Alipay system can manage a large part of fulfillment.
Using data generated by the merchant's e-commerce platform, Alipay first calculates the shipping cost and customs duties on the order and collects the total from the consumer in China in Chinese yuan, remitting it to the merchant in U.S. dollars. The merchant ships the order to a U.S.-based Cainiao warehouse; there are several, including in Los Angeles and New York. Cainiao finds the customer's verified address on the Alipay database and uses it to generate a local Chinese shipping label—avoiding any confusion around China's notoriously complex addresses. It finally dispatches the order to China by air. Once the item arrives in China, Alibaba hands off the package to a local courier for home delivery.
Alibaba says it has an agreement with the Chinese government that customs officials will open and inspect no more than 5% of shipments coming from Alibaba's U.S. warehouses because all the customs and duties will be prepaid. This, Li says, lets U.S. e-retailers guarantee that goods will arrive within 10 days. But most, he says, will arrive in four to five days.
Alibaba won't say what it charges for the fulfillment service except to say that the fees it charges are "much less" than what a U.S. merchant could likely offer on its own because of the rates Alibaba has negotiated. Alibaba says it is also common for retailers to pass on the fees to Chinese shoppers.
As part of its North American push, Alibaba is also opening its Alimama digital advertising network to U.S. retailers to help reach Chinese shoppers hungry to shop with stateside merchants. Alimama, originally designed as an advertising platform for merchants selling on Alibaba's Taobao and in TMall marketplaces, serves targeted ads on Alibaba sites, and Chinese news and media sites. Li says Alimama serves targeted ads based on what Chinese shoppers search for and that its ads produce billions of impressions daily. Li says the ad network, which is similar to Google Inc.'s DoubleClick, offers many pricing structures from pay per click to pay per transaction.
Retailers that work through barriers to sell into China are posting encouraging sales. Apparel retailer Revolve Clothing is one U.S.-based online retailer using Alibaba services to help it sell to Chinese consumers. Since the retailer began accepting Alipay about a year ago, its sales to Chinese consumers have doubled, says David Pujades, chief operating officer for the retailer. "Using a trusted payment platform for Chinese shoppers made a big difference for us," he says.
K'Nex, a manufacturer and retailer of educational building toys, also began selling into China about a year ago after researching new international markets and deciding that selling in China would be a smart move, says president and CEO Michael Araten. "When we were exploring new markets for selling online we looked at three things, concentration of kids, concentration of discretionary income and concentration of broadband Internet access," he says.
China, he says, has the largest emerging upper-middle class in the world and, given China's one-child policy, in many families, the parents and two sets of grandparents are focusing on that one child, especially on helping him learn. "These six people are all trying to buy for the child, and they believe in hands-on learning," he says.
When first considering selling into China, K'Nex conducted focus groups with Chinese parents with the help of the U.S. branch of the World Trade Organization. The feedback from those focus group meetings convinced K'Nex that its products would sell well in China. Araten says parents were impressed with the engineering principles and spatial intelligence the company's toys foster in children.
Rather than sell to Chinese consumers through its U.S. e-commerce site, as Revolve Clothing does, K'Nex uses Export Now to sell its goods in China on Alibaba's Tmall. The U.S.-based vendor helps K'Nex manage a store and advertise on Tmall, says Araten, who found out about Export Now through a webinar offered by the U.S. Department of Commerce.
Araten says Export Now helped it craft a Chinese marketing strategy that plays up in advertisements on Tmall and on its Tmall storefront the toy's educational advantages, and that K'Nex toys are made in the United States. Export Now also takes care of payment, accepting Alipay on behalf of K'Nex and remitting funds to K'Nex.
Araten says at first he was unsure if his company's toys would resonate with Chinese shoppers since they are more expensive than many others available to Chinese shoppers. However, with the right marketing, K'Nex has gone from selling a 10 to 15 units per week in China to hundreds per week.
Despite some Western brands being available from U.S. sellers on marketplaces like Tmall, some Chinese consumers still prefer to shop directly from U.S. web sites. On its English-language blog, Alibaba estimates around 60% of those who practice hai tao are women, including Chinese mothers who might be concerned about product safety in milk and baby bottles. Others include consumers fearful that they will receive counterfeit versions if they buy Western goods via Chinese e-commerce sites. Western brands have long complained about China-made knock-offs of their goods being sold online, including on Alibaba's Taobao.com.
"It has always been a challenge for global brands to establish in China," Li says. He says using Alibaba's services can help U.S. merchants build trust with Chinese consumers because Alibaba is a household name in China. "You enter the market as a trusted seller and you get to leverage your existing online infrastructure to minimize your investment," he says. Not to mention that the proposition promises to open the door to some 300 million Chinese consumers who shop online and just might be seeking a Western brand that will deliver.
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