The opportunity for Canadian SMEs exporting to China's eCommerce is enormous, and the early adopters will gain a significant strategic advantage. Canada's exports to China are minimal, and there is high import demand from growing segments of the Chinese population. Plus, Canada's exports are over-reliant on one country, the US, which puts us in a position where we must diversify markets to reduce trade risks and create checks and balances for our exporting portfolio. It’s time for Canadian SMEs to enter the Chinese e-Commerce market.
The main purpose of this article is to cover key aspects of the Chinese market as a potential exporting destination for your business. In the article, we touch on key topics, such as macro and micro perspectives regarding the Chinese market, and cover new market entry strategies. Above all, we highlight key insights into the lucrative opportunity available to your business by entering China through eCommerce and what resources you can leverage to help you succeed in your international expansion.
Chinese Market is Massive and still Growing
(Size) Over the past 20 years, China has been the biggest and most reliable source of growth in the world economy. China joining WTO in 2001, as a catalyst, has stimulated China’s Compound Annual Growth Rate from 7.8% prior to joining to 13.4% 1. And, since 1960, China’s GDP growth rate has increased by 24,554% 2.
(Growth Speed) Now, China is the world’s second-largest economy after the United States, as measured by the purchasing power of GDP; and takes the top position as the largest year-on-year growth rate of GDP, showing an 8.1 percent growth year-on-year 3. Although China’s zero-covid policy has caused a slump and may condemn the economy to a stop-start pattern, China’s GDP in 2021 reached RMB 114.4 trillion, showing an increase of about RMB 13 trillion (US$3 trillion) compared to 2020 4.
(Import Demand) China’s imports of goods and services represented 16.01% of GDP, or US$ 2.36 trillion, which is 1.4 times larger than the entire Canadian GDP in the year 2021 5.
Chinese Retail Market is Advanced and Complex
(Retail structure) China also remains one of the leading retail markets in the world. In 2021, the country generated a retail sales revenue of over 6.5 trillion U.S. dollars 6. The rampant COVID-19 pandemic brought profound changes to China’s retail landscapes. Retail eCommerce has become increasingly crucial in China’s retail industry and reached over 2.64 trillion USD in sales in 2021 6.
(Geographic Complexity) China is the world's fourth largest country covering an area of approximately 9.6 million square kilometers. It spans five geographical time zones, borders 14 countries, and consists of 23 provinces, five autonomous regions, four municipalities, and two special administrative regions. The Chinese market is so large that it has to be artificially segmented into four independent sub-national markets 7:
Anhui, Hubei, Jiangsu, Shanghai, Zhejiang
Fujian, Guangdong, Guangxi, Hainan, Hunan, Jiangxi, Macau
Beijing, Gansu, Hebei, Heilongjiang, Henan, Inner Mongolia, Jilin, Liaoning, Ningxia, Qinghai, Shaanxi, Shandong, Shanxi, Tianjin, Tibet, Xinjiang
Chongqing, Guizhou, Sichuan, Yunnan
(Population & Demographic Complexity) China has the largest population in the world, and its population density is 153 per Km2 (or 397 people per mi2) 8. From the spectrum of marketing demography, Chinese customers can be broadly segmented into seven key groups 9:
THE GEN-Z - Consumers born after 1995 can be considered part of “Gen Z”. They grew up using technology and leading “digital lives.” By 2025, this group of consumers will make up about 27% of China’s population, with about half earning a university degree. From a report by McKinsey, this consumer group will make up more than 20% of total spending growth in China from 2017 to 2030.
THE MILLENNIALS - Over 400 million Chinese people fall into this group, making it a powerful consumer group, especially within the digital sphere. Millennials are much more digitally aware than their predecessors, and most spend a significant amount of time on social apps, short video platforms, and mobile games
THE URBAN SENIORS - The Urban Seniors have not grown up with technology but are eager to adopt new tools. This consumer group is interested in new experiences, learning, and social opportunities. By 2050, 35% of China’s population will be over 60 years old.
THE CHINESE MEN - Men above 40 tend to have accumulated wealth and status, allowing them to have higher spending power and purchase more expensive or high-end products.
THE INDEPENDENT WOMEN - In general, Chinese women have become better educated and make up a larger proportion of the workforce in the past decade, providing them with financial and personal freedom. As women are spending more on themselves, while still primarily being the ones in charge of household expenses, this group of consumers has a significant influence on China’s consumption habits. In general, women over 30 have much higher disposable income and are more focused on self-care. They are willing to purchase luxury products that make them happy.
THE LOWER TIER CITY YOUTH - Over 930 million Chinese people are currently living in cities that would be considered Tier 3 or lower 29, or in rural areas. This category has seen massive growth in consumption and has been driving significant e-market growth.
THE WORKING PARENTS - China’s implementation of the three-child policy has led to a natural expansion of the maternity and baby products/services market. This sector is expected to continue growing at a rate of 20-30% for the next 10 years. Currently, there are about 300 million active online users who are parents aged between 25-40 and have children below the age of 12.
Canadian Businesses should Consider Entering the Chinese Market
(Exporting should be in your toolbox for growing your business sustainably) Exporting is vital to Canada's economy. It is a driver of economic growth and strongly correlates with real gross domestic product growth. Furthermore, exporting can provide a strategically important means of growing a firm by expanding its market beyond the confines of Canada's relatively small domestic market.
(Canadian SMEs have been doing too little for such a big opportunity) China is Canada’s second-largest trade partner, and its import value is 1.4 times larger than Canada's GDP (2021) 10. That’s a significant market opportunity for Canadian SMEs. But, currently, Canadian businesses play a small role in China’s overall imports, sharing as little as 1.4% of China's potential market 11. Considering the size of the opportunity and how little Canadian business is targeting it, there is tremendous growth potential for Canadian exports to China.
(The familiar option might be a risky option) Generally only looking to our southern neighbours, Canada is overly reliant on trade with a single (and often unpredictable) export market, namely the US. In 2021, nearly 80% of Canadian exports went to the US 11. Canada needs to diversify its markets by chasing more international trade business. With China as Canada's second-largest trade partner, it makes sense to grow your presence in that market.
Top Four Market Entry Strategies
No two businesses are alike, especially when it comes to an international trade expansion strategy. Factors impacting an individual business impact decision-making, but so do various industries when compared to others. But, in general, the criteria for selecting the best-suited market-entry strategy include a timeline, capital cost, human resources, and legal matters. Based on these four foundational criteria, here are the four most common Chinese market entry strategies that businesses from abroad often consider:
1. Establishing a representative office in China: A Representative Office (RO) is an extension of a foreign company. However, ROs are permitted to engage in only a limited number of activities and are not allowed to make a profit. For example, these legal entities can only be used to facilitate the activities of a foreign company in China, such as market research, display, and publicity activities that relate to company products or services, Liaison activities that relate to product sales or services, and domestic procurement and investment are also acceptable activities. As such, they are a suitable option for companies procuring from China that need staff on the ground for quality control or keeping in touch with suppliers 12.
2. Establishing a wholly foreign-owned enterprise in China: A “wholly foreign-owned enterprise” is a limited liability company, which is wholly owned by one or more foreign investors. These enterprises can make profits and issue local invoices in renminbi (RMB), China’s official currency, to suppliers. The liabilities of shareholders to a wholly foreign-owned enterprise (WFOE) are limited by the assets they bring to the business. They can also employ local staff directly 13.
3. Establishing a Joint Venture in China: A Joint Venture (JV) is formed by one or more foreign investor(s), along with one or more Chinese entities. Usually, a foreign investor should own at least 25 percent of the shares 14.
4. Establishing eCommerce presence - Instead of establishing a legal and physical business presence in China, Canadian firms can use e-commerce to sell products from abroad. Comparatively, eCommerce is the lowest-cost entry method for the Chinese market, reducing operating risks and costs. Canadian firms can test the water so to speak of the new market and overcome the learning curve, preparing the way for full entry when the time is right. Canadian firms that choose this option benefit from streamlined Chinese customs procedures through China’s over 100 cross-border e-commerce-integrated pilot zones 15. Products sold through CBEC enjoy no import tariffs and reduced value-added taxes compared to traditionally imported products.
Retailers Everywhere Behold the Future of eCommerce
(Size) China is the largest e-commerce market globally, generating almost 50 percent of the world’s transactions 16. According to eMarketer, China’s online retail transactions reached more than 842 million digital buyers, and transactions reached $2.64 trillion in 2020, with forecasts to reach $3.56 trillion by 2024 17. In 2021, China’s e-commerce market is predicted to be larger than North America and European combined. Most significant of all, China’s e-commerce sales are expected to exceed 50% in the coming years, making it the first country in the world ever to have more online sales than traditional retail sales 17.
(Key Players) Alibaba’s Taobao and Tmall, JD.com, and Pinduoduo are the domestic platforms that dominate China’s eCommerce market, together sharing over 85% of the share in the Chinese eCommerce market. Other platforms, including Suning, Gome, Vipshop, Yihaodian, Dangdang, Mogujie, and JuMei, comprise the remaining market share 18.
(Growing engines) Several factors can be credited for the recent boom pushing eCommerce over China's 50% share threshold 19. But a significant one is the online buyer population. China has the most online buyers and sellers, aided by being the world’s most populous nation. At the end of 2021, it had 842 million online consumers 20, more than twice the US and Canadian populations combined.
Buying force from all tier cities 29 - China’s e-commerce market is not only large but diverse — providing rich pickings from various brands. Although richer cities like Beijing, Shanghai, Guangzhou and Shenzhen remain important, the main growth drivers are smaller and less wealthy cities. These cities represent emerging middle-income buyers who have turned to online stores in droves due to limited access to physical retail stores in their cities.
Stimulation from the Covid-19 - During COVID-19, the digital transformation accelerated as the number of online shoppers surged due to the closure of offline retail locations.
The rising of mCommerce (Mobile eCommerce) - More than 90% of those sales are on mobile devices, compared with less than 50% in the United States; In China, over 90 percent of e-commerce sales are done through mobile devices versus 43 percent in the US. More broadly, China has 932 million mobile internet users representing 99.2 percent of mobile internet penetration 21.
Digital payment - As China has experienced digitization across all industries, Chinese consumers have shifted directly from cash to digital payment methods. Over 98% of urban Chinese consumers already use their digital wallets for daily purchases, and most consumers don’t carry cash anymore. Digital Payments will continue to empower the growth of E-commerce due to their ease of integration 22.
Group Buying - Group buying has become a trend that began in lower-tier cities and has spread to users all across China. Apps e.g., Pinduoduo offering group buying features will allow users to obtain discounts if they purchase the product together with other users 23.
Social Commerce - Social Commerce is integrating social media and e-commerce, with many social platforms implementing features that allow users to purchase products directly. Social commerce allows brands to create a closed-loop ecosystem where they can market and sell their products on the same platform. As a result of the trend towards social buying, many predominantly e-commerce platforms have also implemented strong social aspects 24.
Key Opinion Leaders and Livestreaming - Key Opinion Consumers and Livestreaming “Live Commerce is another trend where users are becoming influential when recommending products or reviews through live streaming and short videos, as they are seen as being more authentic. China’s live streaming market is projected to reach over CNY 100 billion in 2023, at an expected 12% CAGR 25.
Shopping Festivals - Throughout the year, several shopping festivals are held by E-commerce platforms to drive sales. These shopping festivals can range from purely retail events, such as 6.18 or 11.11, or can be based on more traditional holidays, such as Chinese New Year or Qixi Festival (China’s version of Valentine's Day).
Preference for shopping online - In a study of select countries, adults favoured in-store over online shopping everywhere except in China. 54% would rather shop digitally, and only 16% preferred physical stores, while the rest had no opinion 26.
Hottest Industries to Sell through eCommerce
Canada has always been a preferred country for Chinese people to visit. Also, thanks to Canada's overall healthy image and the successful operations done by some Canadian businesses like Canada Goose, Lululemon, and Arc'teryx in China, the "Made in Canada" products are deemed as premium and high-quality by the Chinese consumers, who are willing to pay top dollar for quality, authenticity, and exoticness. As momentum for exporting manufactured products from Canada has grown, so has the global recognition of Made-in-Canada. There has never been a better time to export your products and services. Based on the high demand from the Chinese eCommerce market in terms of the most popular industries and the market vacuum of Canadian products, here is a list of sectors that Canadian businesses will see immediate success in by entering into Chinese eCommerce market 9:
Food & Beverage: China is the world’s largest food importer and consumer. In 2019, China imported US$90.8 billion, a YOY increase of 23.4%, and is expected to import more than US$100 billion in the F&B in 2021 27. Growing GDP and purchasing power have allowed Chinese consumers to pursue a better quality of life, reflecting significant growth in the F&B category. As a result, Food & Beverage has become the top category, accounting for 28% of the total consumption. In 2020, the Food & Beverage market is expected to grow at a 44.7% growth rate and is expected to grow to reach 160 million dollars (USD) in 2024.
Health Supplement: A significant segment of E-commerce is the purchase of health products. From 2009 to 2019, the market share of e-commerce for health foods increased from 0.7% to 25.5%, and online retail sales increased from RMB800 million to RMB71.6 billion. Brands should understand that the health industry in China is much more segmented. Thus, E-commerce presents the most concentrated channel opportunity for brands. Sales for vitamins and health supplements have increased and reached RMB222.7 billion in 2019. The expected market size in 2021 is RMB330.7 billion. In 2019, dietary supplements had a market share of 58% within the health food category. The industry is expected to continue growing in the future, especially as Chinese consumers are becoming more health conscious and are becoming increasingly confident in taking supplements. Health and well-being are highly valued in China, surpassing family happiness and psychological well-being. Expenditures in this category also saw rapid growth in the previous year. Influenced by better awareness of health products, over 40% of consumers purchase health & wellness products impulsively, while another 40% are influenced by other factors, such as promotions or recommendations. Only 14.7% of consumers claim they do not spend on health & wellness products.
Skincare & Beauty: By 2025, the Chinese cosmetics market is expected to reach US$87.64 billion, with a CAGR of 6% between 2021-2025. Skincare is leading the category, generating 54% of category sales. Hair care (13%) and colour cosmetics (12%) come next. The top 3 categories account for 79% of the market. Online distribution channels made up about 41% of total beauty product retail sales in 2019. Alibaba, Amazon, JD.com and Pinduoduo to account for 65% of the global health & beauty eCommerce market by 2025.
Now is the Time to Enter China
More than ever, now is the time for your business to enter China. The opportunity is simply too large to pass on. Plus, the Canadian government provides funding!
(Funding from Government) Currently, the Canadian government has various funding opportunities to help Canadian small and medium-sized companies explore international markets. Besides the financial support for product development for international expansion, associations and non-profits in helping the exporting initiatives, Canadian for-profit SMEs may access up to $50,000 in funding to assist with international market development activities. The government will cover up to 50% of costs for export marketing of your products and services in international markets where you have little or no sales. This funding opportunity could be sufficient to develop the business’ eCommerce entrance strategy and operational costs.
Find a catalyst between your company and the markets you want to reach. Discover Catalystx.
(What Catalystx can do to help) At Catalystx, we specialize in international expansion management. One of our two core services is to help Canadian SMEs expand beyond Canada through Global eCommerce. Catalystx prepares Canadian SMEs to be export-ready, integrates businesses into global eCommerce ecosystems, manages their overseas eCommerce operations and vendor performance, helps bridge the intercultural management and communication gaps, and monitors the growth of your international trade business.
Exporting can be daunting, especially when you enter a foreign country where culture is largely different from your home country. Plus, from market entry to day-to-day operations, there are numerous hurdles to overcome. So you will need a partner with experience and knowledge who shares the same vision as you and will work side by side to catalyze at the speed of international expansion. That’s us. www.catalystx.ca Stop by for a visit!
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