Why cross-border e-commerce from China has become a serious threat

Original images by Mohamed Hassan

In the first article of this series we read how Amazon aggressively recruited Chinese merchants for its platform. Public criticism about fraudulent tactics of some of these sellers made Amazon ban 3.000 of them in 2021. In the second article we read how this made many Chinese merchants realise their dependency on Amazon. They started diversifying across more platforms, both western and Chinese. On top of this there has been a trend of manufacturers and platforms selling directly from factories to western consumers, bypassing importers, wholesale and retail and thereby being able to charge much lower prices. In this third article we’ll explore why these trends have become much more prevalent now and how they are supported by the Chinese government.

The earlier two articles might have made it look like these trends were triggered by Amazon’s ban of fraudulent Chinese merchants, but nothing is further from the truth. AliExpress, the cross-border platform of Alibaba, has been active for over ten years and there have been many other cross-border e-commerce sites from China. The success of C2M/F2C (consumer-to-manufacturer/factory-to-consumer) platforms is a more recent phenomenon, probably inspired by the enormous success of Pinduoduo in China’s domestic market. So, what exactly has made cross-border e-commerce take so much momentum?

There was no need for panic…

Eight years ago, around the time of Alibaba’s record-breaking IPO in 2014, lots of news about the Chinese e-commerce company was appearing in Dutch newspapers for the first time. Most articles voiced concern that Alibaba would threaten western e-commerce platforms (little did they know how marketplaces like Amazon were already welcoming Chinese merchants).

At the time I wrote an article (link in Dutch) and gave an introductory speech at a public screening of the Alibaba documentary Crocodile in the Yangtze. In both the article and speech, I argued that we shouldn’t exaggerate the threats. In my opinion Alibaba had more urgent matters to take care of in its home market, among which competition with JD.com and Tencent, which had just opened e-commerce functionality in its WeChat chat app. With approximately 80% market share in its domestic market at the time, Alibaba could only loose some of that to new competition. I wasn’t wrong. In the years that followed Alibaba has had to fight newcomers like Pinduoduo (link in Dutch) and short-video apps Douyin and Kuaishou. Recent estimates by Morgan Stanley predict Alibaba’s market share in 2024, ten years after my speech, will be 42% of China’s e-commerce market.

In 2016, when Alibaba opened an office in Amsterdam, there once again was a slight feeling of panic in the e-commerce sector in The Netherlands. A local newspaper published an article with a cartoon depicting two giants, Amazon and Alibaba, squashing local e-commerce ‘midgets’ Bol and Coolblue. Again, I wrote an article (link in Dutch), explaining how Alibaba’s office was a business development office, meant to recruit brands that wanted to sell to Chinese consumers on Tmall Global (link in Dutch). As such, it was much more of an opportunity than a threat.

Four years later, in 2018, I watched a documentary on local TV that blamed the bankruptcy of retail stores in The Netherlands on Chinese webshops. I wrote an article (link in Dutch), explaining how this reasoning did not make sense since data showed that only 0,12% of all retail purchases in The Netherlands were done on Chinese webshops. And they hardly were the product categories of the shops that has gone bust.

… but this time it’s serious!

As you see, I’m not someone who cries wolf. But I do think the tables have turned in recent years. In 2020, China’s e-commerce exports grew to RMB 12.5 trillion (€1.8 trillion), a 40% rise compared to 2019. Amazon has opened local websites in many countries, taking an estimated million Chinese merchants with them. China’s second biggestr e-commerce company JD.com has opened pickup stores in The Netherlands. TikTok is testing e-commerce initiatives in the UK (more on that in the next article). Shein has become a popular fast-fashion outlet. And although less developed e-commerce markets like Southeast Asia and the Middle East are low-hanging fruit, there is no doubt that Chinese merchants and platforms are now aggressively seeking out your wallets.

China has changed rapidly since my aforementioned articles, and I can see several reasons for the growth of cross-border ecommerce from China:

1. The domestic market for e-commerce is stagnating. Although China’s internet penetration is only 74%, the annual growth of online Chinese has dwindled to 4%, making acquisition of new online shoppers harder than it used to be.
2. Competition has become much fiercer over the past years. Alibaba used to have 80%+ market share when it had its IPO in 2014. Now it owns little more than half of the market. Alibaba has lost precious market share to newer players like Pinduoduo, Bytedance (Toutiao/Douyin) and Kuaishou. 

3. Not only competition between Chinese platforms is fiercer, so is competition among manufacturers of goods on these platforms. Increasingly they have had to invest heavily in advertising on the platforms to be visible at all (one of the ways marketplaces make a profit). Some have decided to leave domestic platforms and make much better margins on platforms like Amazon (as seen in the first article in this series).
4. For Chinese e-commerce companies, there are two large markets left to grow in: the so-called ‘sinking market’ (smaller cities and rural areas) and the international market. The sinking market sees all large internet companies compete for consumers that have more time than big city dwellers (and therefore watch a lot of live commerce) but also less disposable income. Pinduoduo has a strong grip on this market segment. In the international market, players like Alibaba have penetrated though platforms like Lazada in Southeast Asia, Daraz in Pakistan and Trendyol in Turkey. These markets look a lot like China 10-15 years ago, so Alibaba hopes to replicate its success there. 
5. Because of strong established players in European and American markets they are more difficult to compete in for Chinese e-commerce players. But facing challenges in markets like India, where many Chinese apps were banned after military clashes on the India-China border, Alibaba will need other markets to reach its goal of serving 2 billion global customers by 2036. The strategy presentation at Alibaba’s latest Investor Day focused on continued globalisation as one of its growth pillars.
6. In some sectors, especially the apparel market, brands have started to move their manufacturing to lower labour cost countries like Bangladesh and Vietnam. Supply chain problems during the COVID-19 crisis and recent lockdowns in China also made western importers consider a more diversified sourcing of their merchandise, even though this is easier said than done. Some of these trends, as well as the trade war with the US and increasingly stricter enforcement of anti-counterfeiting laws by the Chinese government, have causes overcapacity in the Chinese industrial sector. This is one of the factors leading to the C2M movement (link in Dutch) of Pinduoduo, where Chinese manufacturers and farmers are selling directly to consumers. This model has now also been exported to western markets (as we saw in the second article of this series).
7. In many western countries, COVID-19 has caused robust growth in e-commerce. Brick-and-mortar shops were often closed in lockdowns or people thought it safer to shop online. Often this was done on domestic websites, but as we’ve seen in the first article in this series, even goods on Amazon are often shipped directly from China. Sometimes online shoppers were not even aware where the products originated. This even resulted in a hilarious scare in 2020, when consumers started receiving packages of ‘mysterious seeds’ from China in the mail. At least some of these turned out to be delayed deliveries of orders they had placed months earlier.
8. Last but not least, the government is supporting cross-border commerce in several ways. Let’s have a closer look.

Government support and prompting

The Chinese government has been very supportive of cross-border e-commerce exports as it helps Chinese companies sell on the international market. But it does not necessarily prefer this to be done through western platforms like Amazon. In March 2022, Hong Yong, an Associate Research Fellow at the Institute of E-commerce under the Ministry of Commerce published an article in the overseas edition of People’s Daily, which was translated by the Pekingnology newsletter. Hong named three reasons why merchants should avoid reliance on Amazon:

1. High operating costs: the price for traffic inside Amazon continues to rise. [Note: Gaining traffic through Facebook, YouTube and TikTok for an independent platform is cheaper. It’s not surprising that it’s exactly these channels companies like Shein are using to acquire new customers.]
2. Amazon has shut down many accounts of Chinese merchants, leading to inability to withdraw funds or inventory (see the first article in this series).
3. Since 2021, Amazon no longer provides core consumer data (name, address, etc) to merchants that let Amazon fulfil their orders from its warehouses [which is required to be eligible to sell through Prime]. This makes analysing preferences, precision marketing and product design more difficult compared to running an independent channel.

Hong also warned of a similar ‘chokehold’ effect by SaaS (software-as-a-service) companies that help merchants build websites. Without naming names, Hong clearly refers to Shopify.

Hong describes how 200.000 independent Chinese cross-border e-commerce websites have already been built, how these will help reduce ‘chokeholds’ by platforms like Amazon and how the government should further encourage this trend. Hong named 3 requirements for supporting independent cross-border e-commerce websites:

1. Optimising policies in support of independent e-commerce websites, including speeding up the digitization of traditional trading companies.
2. Strengthening oversight over independent e-commerce websites, including cracking down on fake statements and exaggerated traffic. 
3. Building a talent pool for building independent e-commerce websites.

Months before Hong’s article, central and local governments had already started programs to stimulate independent cross-border webshops. Mid-2021 the central government decided it would encourage its exporters to build up overseas warehouses and enhance cross-border logistic capabilities. It has also set-up more than one hundred pilot zones for cross-border e-commerce that offer tax benefits. 

In August 2021 the government of Shenzhen, where roughly one third of all cross-border e-commerce from China originates, announced it would support businesses that worked through independent channels (their own websites) with 2 million RMB (approx. €295.000) per project. It also offered grants of 2 and 3 million RMB to operators of overseas warehouses. In November 2021 Guangdong province announced the development of 30 new industrial zones dedicated to cross-border e-commerce that can support 100,000 companies. In May 2022 the Shenzhen government handed out 11 million RMB in grants to companies that provided services to the cross-border e-commerce sector. These included payment solutions, website builders and logistical service providers.

Last but not least, after last year’s harsh rectifications (link in Dutch) of the platform industry in China, the Chinese government has made it clear that they expect platform companies like Alibaba, JD and others to play a role in helping small and medium sized companies reach foreign customers. In December 2021 the  National Development and Reform Commission (NDRC) wrote in a policy document which explicitly mentions the need for platform companies to “develop cross-border e-commerce, actively promote the construction of overseas warehouses, improve the level of digitization, intelligence, and facilitation, and promote small and medium-sized companies to rely on cross-border e-commerce platforms to expand the international market.”

Actually, some of the leading Chinese e-commerce companies have already been expanding their global logistic networks for years. AliExpress uses the network of logistical centres that Cainiao, a joint venture between Alibaba and several logistical service providers, has built around the world. JD Logistics, the logistical arm of Alibaba’s biggest competitor JD.com, has also expanded their global footprint. From where I live in The Netherlands, it’s a 170 km drive to Alibaba’s nearest Cainiao warehouse in Liege, Belgium and only 40 km to JD’s nearest warehouse in Venray.

To sum things up, many developments in the past years have turned the tables and cross-border e-commerce from China has become a serious challenger to western webshops, brands, importers, wholesalers and retailers. They need to be prepared for what’s already here and for more to come. e-Commerce in TikTok falls in the latter category and will be discussed in the next article.