Is China still an online opportunity for Western brands?

September 29, 2015 04:16 PM

Long lines were forming this month in cities around China, just several weeks after China’s stock market freefall began. But the people in those lines were neither ragged nor hoping for a handout of rice. Many of them wore T-shirts emblazoned with English slogans or Western-branded polo shirts. They were queuing up to be the first to buy the new Apple iPhone and Apple TV.

China’s upwardly mobile middle class, for the most part at least, has survived the big stock market plunge that has dominated business coverage of China in the U.S. media since June. And my impression that everyday life in China has been little changed by the financial market volatility was reinforced during the six days I spent this week in Guangzhou, the big industrial city in southern China that once was called Canton, and Hong Kong. In fact, as the purpose of my trip was to attend and speak at a conference on cross-border e-commerce and then to meet with several companies active in this fast-growing arena, I encountered a series of people—Chinese and non-Chinese—who were looking ahead to rapid growth in online sales, both for Chinese companies exporting via the web and Western brands selling online to China’s large and increasingly affluent middle class.

That’s not to say that the stock market was a non-event for China’s consuming class. “Everyone has a story about a friend who had to sell real estate or take out a second mortgage to cover a margin call,” Charlie Bodycote told me. That’s in part because many investors in China, a country famous for its love of gambling, bought stocks on margin. But Bodycote, a Brit who has spent the last eight years in Hong Kong and currently heads up an e-retail software startup called Purecomm, did not think the Chinese economy was fundamentally damaged. “7% is still 7%,” he said, referring to Beijing’s estimate of China’s economic growth this year. At that pace, China’s economy, already the second-largest in the world, would double in size in 10 years and likely pass the U.S. a few years later.

“Things are OK,” said Gregoire Grandchamp, a French native who is the vice president for business development at Lili & Beauty, which expects to help Western brands like L’Oreal, Revlon and Maybelline sell more than $300 million worth of cosmetics this year to Chinese online shoppers. “Since I arrived in China 12 years ago I’ve heard the Western media criticizing China and underestimating its potential,” he told me. “What China has accomplished on the economy side is amazing. The issues in China are environmental and more space for cultural activity. But on the economic side things will be fine. Everyone is working hard here, striving to have a better life.”

Nor was there any sign of gloom and doom at the Hong Kong headquarters of Alibaba Group, China’s dominant e-commerce company that burst onto the world scene a year ago when it pulled off the world’s largest IPO, raising $25 billion on the New York Stock Exchange.

The two managers I met with shrugged off questions about the stock market, and the dramatic fall in Alibaba’s own stock, which is now below its IPO level after rising sharply in the first few months after the September 2014 stock offering. Crystal Liu, a corporate affairs manager, suggested Alibaba would let its numbers do the talking, including the results from the upcoming Singles’ Day, an annual online shopping holiday every Nov. 11 that Chinese call 11/11 for the date’s numerical designation. “11/11 will be the test,” Liu said. “We’ll be happy to share the data with you then.”

The 11/11 numbers will have to be big to impress, as Alibaba’s sites sold $9 billion worth of merchandise during the 24-hour sales last year—for context, U.S. shoppers bought $2 billion worth of merchandise last Cyber Monday, the Monday after Thanksgiving that was the biggest U.S. online shopping day in 2014.

Last year was the first time Alibaba had taken Singles’ Day international in a big way, promoting eye-catching discounts on, its online portal that enables shoppers all over the world to buy directly from Chinese manufacturers, often at rock-bottom prices. Alibaba is preparing for even bigger global sales this Nov. 11 in North America, including having members of its U.S. team spending two weeks at its main corporate headquarters in Hangzhou, near Shanghai, getting ready for the big event.

The recent U.S. business press coverage of Alibaba mirrors the sky-is-falling tenor of some Western reports on China’s economy. A notable example was a Barron’s cover story recently that predicted Alibaba’s stock price would fall another 50%. Among the arguments: Alibaba’s growth is slowing. That’s true. In its most recent quarter, Alibaba reported only 34% growth in sales on its two big online shopping malls in China, Taobao and Tmall, which account for most of its revenue and profits. That was down from 40% in the previous 12-month period. Still, many companies would take 34% growth. And almost any company would take the profits Alibaba reported in its recent quarter: just a hair under $5 billion.

Like the Alibaba managers I met in Hong Kong, Chinese business executives don’t seem to be spending much time worrying about the Western press. They’re working to make more money. And quite a few of them are succeeding, at least those that buy and sell online, the business I cover.

Take Steven Yang, the 33-year-old founder and CEO of Anker, a 4-year-old company based in Shenzhen that produces mobile phone chargers and accessories. Yang, gave a presentation to the cross-border e-commerce conference in Guangzhou, explaining how Anker had become a top 10 seller on Amazon and eBay in its field. Yang says Anker’s 2014 revenue topped $100 million and he’s projecting 50% growth this year.

He told me his sales in China have not been affected by the stock market plunge “perhaps because most of our accessories are below $50 and active stock market investors constitute of only a fraction of the population.” Some luxury car sellers, on the other hand, have been hit by the market crash, he said.

As for his own company, he said he lost one employee whose stock market losses affected his work, but otherwise saw little impact. Nor was he concerned about Beijing in June suspending new IPOs on China’s stock exchanges in order to keep those offerings from draining cash from existing shares. Yang is planning an IPO for 2017, but that’s far enough off that he’s not worried about the current freeze.

Anker is among the many Chinese companies taking advantage of Beijing’s moves in recent years to make it much easier for Chinese firms to export, and for overseas companies to import goods into China, especially for online sales. The government has created what it calls “free trade zones” in seven cities, designed specifically to streamline customs clearance when Chinese consumers by products from overseas websites. Generally there is no duty charged on purchases of under 500 RMB, or about $85, though the threshold varies by product.

The government has also taken steps to encourage Chinese manufacturers to export for online sales, including by making it easier to move money in and out of the country. What’s more, deals between the China and Hong Kong postal services and their counterparts in the U.S. and elsewhere make it possible to ship a parcel to or from China in less than a week for a few dollars.

That’s unleashed Chinese companies to sell even inexpensive items, such as garden hoses and cell phone covers, online in the West, particularly on Amazon and eBay. A government official said at the conference last weekend that the Guangzhou airport had shipped 600,000 packages to foreign online shoppers in 2014, a number that shot up to 3 million so far this year. 40% of those packages were destined for eBay buyers and another 20% for consumers who purchased on Amazon sites around the world, estimated an official from China Post-owned logistics service EMS.

There is similarly strong growth in Chinese online shoppers buying goods from Western brands, whether it’s on big Chinese shopping malls like Tmall, Jumei, or, or directly from foreign websites, taking advantage of the duty-free shipments through the free trade zones. Market research firm Nielsen estimates Chinese consumers bought $16.3 billion worth of foreign goods online in 2014.

Many Chinese consumers want to buy Western brands, not just for the cachet but also because they don’t trust the quality of Chinese goods. That’s particularly true in categories like food, vitamins and supplements, baby products and cosmetics where consumers want to be sure the products are safe.

Among those who can attest to Chinese consumers’ demand for foreign products is Arthur Chang, founder and CEO of Uco, a company that operates stores on Tmall and other Chinese shopping portals for such brands as Estee Lauder, Clarins and L’Occitaine. Chang expects to move nearly $200 million worth of product for those brands this year, and says sales for his 5-year-old company have been growing 70-80% for the past couple of years while profits have been doubling.

The stock market tumble affected Chang more than most Chinese, as he had been talking to investment bankers about an IPO. That’s off for now. But he didn’t seem overly concerned. He explained to me that China’s stock markets are new, and volatility is to be expected. He seemed confident the market will rebound and that he’ll get his IPO opportunity before long.

That kind of confidence was the rule, not the exception, among the businesspeople I met during this short trip. While Western commentators wring their hands about China’s prospects, the country’s entrepreneurs just go about making money. And increasingly they’re getting a helping hand from a government intent on eliminating unnecessary barriers to trade. The view from the ground is that China is doing okay economically, and that Western companies would do well to look for ways to profit from the growth ahead.




Top Solution Providers