E-commerce in China

According to the PRC Telecommunications Regulations (中华人民共和国电信条例), telecoms services in China shall be subject to a licensing mechanism, under which the telecoms services are catalogued into basic telecoms service and value-added telecoms service, and each of them has different thresholds. Telecoms service provision is a restricted sector for foreign investment. The eventual foreign equity in a value-added telecoms service provider shall not exceed 50%.

E-commerce distributing sales information through internet constitutes internet content provision (ICP), which falls under the definition of being a value-added telecoms service. In accordance with Administrative Measures on Internet Content Provision, as for a for-profit ICP, the operator shall secure an ICP license from Miit, while the operator of a non-profit ICP is only required to record its website with Miit. Non-profit ICP refers to ICP providing publicly shared information at no charge.

Practically, in terms of an e-commerce website, if the website owner just provides sales information of or sells its own manufactured products though the website, it shall be deemed as a non-profit website and is required only to put its website on record. Since there have been no authoritative guidelines clearly distinguishing between non-profit and for-profit up until now, different areas may have different practices. This ambiguity may lead to uncertainty for foreign e-commerce operators.

Jihon Cheng
Partner
Zhong Lun Law Firm




The international perspective

A foreign retailer can set up an online site with an international domain name (for example .com domain names) to sell its products or services to PRC customers. If the website is hosted outside China and the sales are concluded in foreign exchange overseas (even though through the Internet), the foreign retailer will not be regarded as providing any telecommunications services or engaging in any business operations in China. Online services provided and hosted by servers located outside China are beyond the jurisdiction of PRC authorities. Consequently, PRC telecommunications regulations will not be applicable to the foreign retailer and it will not need to establish a legal entity in China or obtain any permits from PRC authorities.

While this model is legally permissible, there are several disadvantages from a business perspective. Firstly, PRC authorities may, and they regularly do, block PRC customers' access to websites hosted overseas if they find any of the content of these websites objectionable. Secondly, under such a model, the customers within China must pay for the products or services in foreign exchange, not Rmb. Rmb is not a freely convertible currency and not many customers have easy access to foreign exchange.

Multinational corporations could use foreign exchange to make payments offshore, but such an arrangement would not work for purely domestic customers. While online credit card payment is one of the possible payment options for PRC domestic customers, most credit cards issued in the PRC are Rmb credit cards which only permit payments in Rmb, and the foreign retailer's customers will be limited to a small group of persons who have foreign exchange credit cards. Thus the attractiveness of such a business model is reduced and selling goods or services via the Internet to customers in China do not generally yield good results for foreign retailers.

With respect to the registration of .cn domain names, currently, due to the strict control over the Internet by PRC authorities, .cn domain names can only be registered by entities established in China. Neither PRC individuals nor foreign entities or individuals are able to register such domain names.

Jeanette Chan
Partner
Paul Weiss Rifkind Wharton & Garrison




The specialist perspective

It would be easy to conclude that developing a successful e-commerce business in China is not feasible based on recent internet-related headlines. This is not true.

There are 384 million internet users in China and they are quickly adopting the internet as their storefront of choice. In 2009 e-commerce sales in China grew to US$36.6 billion and this year, it is expected to grow 90%. Here are three important concepts for successful e-commerce in China:

Put the right management in place, and give them power: A recurring theme of former eBay China employees was that its China management felt they lacked the power to take initiative and respond to market needs in China. eBay attempted to execute the same strategy that had been successful in the US without fully taking into consideration key differences in how the Chinese market was developing. Consumers found the eBay site hard to navigate and were not as comfortable with online payment options that at the time were geared more towards protecting the seller than the buyer. Make sure strong local management has a place on your team, and make sure they have a voice.

Work with the government, not against them: Many laws surrounding the internet and online commerce in China are still being formed or are poorly enforced so it is sometimes difficult to say what will work and what will not, but a good first step is following what companies know to be best practices in other markets. Foreign companies in China need to play by the rules, even when they see local companies acting otherwise.

Build trust with your intended consumer base: Chinese consumers deal with the fear of buying fake or dangerous products on a daily basis and purchasing something online increases their risks. To assuage consumers' fears, companies need to put strategies in place that will ensure buyer safety. Online payment systems like AliPay are now widely accepted by younger consumers, and the number of credit cards in China increased from 13 million in 2005 to more than 180 million by the end of 2009. However, the majority of consumers still want to pay cash on delivery and physically see their purchase before they are comfortable.

As long as companies do their best to adopt best practices, give their local management room to make decisions, and work to understand consumer motivations there is no reason why multinationals cannot have extremely successful e-commerce businesses in China.



Ben Cavender
Associate principal
The China Market Research Group