Polish cosmetics export to China within the cross border e-commerce framework

Text was updated on December 6 2018 to include the latest regulatory changes.

Costly and time consuming process of cosmetics registration combined with the requirement to conduct tests on animals were the main obstacles discouraging Polish cosmetic companies to enter Chinese market. Cross border e-commerce has created the great opportunity for Polish cosmetic industry to build the presence among Chinese consumers. Some brands such as Ziaja used this opportunity and Polish cosmetics e-commerce export to China started to take off. The new regulatory framework that had been established in 2016 and was planned to come into force on January 1st 2019 would significantly limit the window of opportunity to sell cosmetic trough the Chinese cross border e-commerce platforms. Fortunately the last minute changes of the regulatory framework implemented in the end of November seem to reverse the earlier changes and leave the channel of Chinese CBEC open for Polish cosmetics. However as the regulatory framework in China and rules interpretation is subject to dynamic changes Polish cosmetic companies wishing to offer their products directly to Chinese consumers will have to adopt more flexible approach and also use alternative channels to offer their products to the Chinese customers.

Boom in the Chinese cross border e-commerce.

In the recent years China cross border e-commerce boom has significantly lifted the volume and the value of the total Chinese consumer imports. Vendors from all over the world, with majority from the developed countries, have used the various e-commerce channels to promote and sell their goods to the Chinese customers. Chinese shoppers have enthusiastically bought increasing quantities of the imported products displayed on the Chinese cross border e-commerce platforms such as Tmall Global, JD Worldwide, Kaola, Yang Matou, Miya (the first two of them formally registered in Hong Kong). The valuation of the Chinese cross border e-commerce retail market imports varies depending on the methodology, e.g. 8.9 bln usd (official data) and over 60 bln usd. Cosmetics are one of the key groups of products sold trough this channel and they constitute significant share of the sales volume with some platforms dedicated to the sale of cosmetics and accessories.This sales channel could be also and opportunity for the Polish cosmetics e-commerce export to China

What constitutes cross border e-commerce in China

“International e-commerce is called cross-border e-commerce, when consumers buys online from merchants, located in other countries and jurisdictions” or simpler but broader definition: “Cross-border ecommerce is international ecommerce. It is literally “selling across a border using ecommerce”, as opposed to the general concept of “ecommerce”. There are generally two models of e-commerce to China: direct purchase and the Chinese Cross Border E-commerce (CBEC). Both models only comprises transaction falling under B2C and in some cases C2C schemes.

Models of cross border e-commerce to China
Original source of graphics: Foraychina.pl

In the direct purchase transaction model Chinese consumer orders products directly at the foreign online shop or on the foreign e-commerce platform and the seller dispatches the goods by the international post or the international courier delivery.This is the typical B2C channel for Polish cosmetics e-commerce export to China. After arrival at China parcel goes trough the customs where random parcels are checked. Custom authorities can impose the parcel tax. If the goods are not classified as items for personal use they will have to go trough the regular import procedures. The last mile delivery is made either by a local branch of the courier delivery company or by the China Post. This mode of parcel delivery is called “Direct mail” as the purchased products travel directly from the foreign location to the Chinese customer.

Original source of graphics: Foraychina.pl

In the CBEC model Chinese customer places order on the Chinese e-commerce platform, in the shop established on such a platform or in a Chinese stand-alone online shop. The payment is usually processed trough the solution integrated with the platform or by another Chinese payment channel. There are variations of this model. In the diagram presenting the cross border e-commerce models there are presented only the most relevant for the export of Polish cosmetics to China:

1. Foreign brand owner, brand distributor, multibrand operator or even supermarket e.g. Walmart opens a shop on the CBEC platform.

2. Platform operates as a vendor. It sources the products abroad and manages the whole transaction process. Foreign brand owner or distributor is a platform’s supplier. This model is dominant in the operations of Kaola or VIP Shop.

3. Foreign brand cooperates with an online shop (boutique, multibrand, supermarket) already established on the platform. Shop acts as a foreign brand’s dealer e.g. Ivy Beauty

Under the current CBEC regulations two modes of goods delivery are possible: Direct mail as already described above (with the modification that order is placed on the Chinese platform not foreign platform or online shop) and the delivery mode with the bonded warehouses used as a distribution center. The second solution is time and cost effective. Not the single product but the larger batch of goods is sent to the Chinese bonded warehouse. The preliminary custom clearance is performed when the batch of goods enters the bonded warehouse and the final clearance is handled when the single product is dispatched to the Chinese consumer. Shipment of the batch of goods from abroad to China decreases the cost of transportation per unit. The physical location of the bonded warehouse in China shortens the time between the order and delivery to several days (usually between 2 and 4) instead of weeks (many platforms have 25 day limit for the direct mail mode). Till the end of this year both modes can be applied in Polish cosmetics e-commerce export to China

Original source of graphic: Foraychina.pl

Cross border e-commerce regulatory framework under current regime

Till the end of 2018 the goods including cosmetics purchased under the cross border e-commerce framework are treated as the products purchased abroad for personal use. Under this regime the Polish cosmetics e-commerce export to China is fairly easy. They do not have to be registered in China and granted permit to be sold in the Chinese domestic market. They also do not have to meet Chinese requirements on packing or manual. Almost all cosmetics can be sold trough cross border e-commers with only the small fraction of products forbidden entry to China, mainly on the grounds of the phytosanitary or national security regulations. The purchases are however constrained by the limits imposed on the transaction value. Value of parcel with products classified as for personal use cannot exceed 1000 rmb (for single item transaction the value can be higher). Theoretically all parcels coming to China under this regime are subject to the rules governing the collection of the so called “parcel tax”. However in reality the tax is levied only on the small part of the parcels checked randomly by the customs. Some foreign sellers also send the parcels as private gifts from physical persons with the reported value below 500 rmb. Those parcels are exempted from the parcel tax unless customs officer questions the reported value, the parcel status and decides to impose the tax

Main drivers of the cross border shopping popularity among Chinese consumers

1. Lower prices in the cross border e-commerce than offered in the Chinese domestic market. The price of goods imported to China trough the traditional channels and then sold legally in the Chinese brick and mortar outlets or domestic online shops should include the import VAT, custom duties and consumption tax. Effective rate of accumulated import taxes and duties for cosmetics is between 53,5% and 65%, depending on the product type. The goods sold under cross border e-commerce schemes have been so far only subject to randomly collected parcel tax. The tax rate for cosmetics is set at 50% but levies are collected only on the fraction of the total quantity of parcels flowing to China. Chinese consumers usually avoid paying the taxes.

2. Pursuit for genuine products. Chinese customers are highly suspicious about the authenticity of the foreign goods sold in the Chinese domestic market. They prefer to source the cosmetics from the providers located abroad, even if transaction is being processed by the Chinese cross border e-commerce platform. Buying abroad gives them better assurance that branded product they buy is original.

3. Access to some products unavailable in the Chinese domestic market. Under the Chinese regulations registration of the imported cosmetics requires tests on animals. For many brands this requirements is the critical factor in the decision to not register their products in China. Many niche brands also do not enter Chinese domestic markets due to costly and time consuming cosmetics registration procedures. Cross border e-commerce is often the only opportunity for Chinese customers to many foreign products and brands unavailable in the domestic markets.

Cross border e-commerce an opportunity for Polish cosmetics exports to China

Several polish brands for couple of years have considered or even have tried to enter Chinese market (e.g. Irena Eris ). Very few succeeded. Cosmetics registration process, although simplified recently, is still long, complicated, arbitrary and expensive. Chinese cosmetic market is also highly competitive with majority of world leading brands being present and recognizable among Chinese customers. Few Polish cosmetic companies have resources and operational capabilities to register the wide range of products in China to successfully compete with the global behemots. For the majority export oriented Polish cosmetic manufacturers amount of money, time and knowledge required to enter Chinese market create an impenetrable barrier. For many of those, willing to put efforts in competing on the Chinese market, the final obstacle is the requirement of testing product on animals as the part of the cosmetic registration procedures. As growing numbers of customers in Poland, EU and other developed countries and regions refuse to purchase animal tested products many innovative Polish cosmetic brands give up the idea about traditional export to China. For many its far more important to build the reputation and position in Poland and Europe than counting on the huge but distant and difficult Chinese market. Cross border e-commerce is a great opportunity to offer Polish cosmetic to the Chinese consumers without meeting the requirements imposed by the Chinese law. Ziaja is a great example of the successful brand that used this channel to build the presence among Chinese consumers. Other brands tried to follow.

New Chinese e-commerce law

In the end of August the new Chinese e-commerce law was adopted. It enters into force in January next year. The impact of this law on the Polish cosmetics e-commerce export to China will be however limited. Key concern can be provisions introducing the joint responsibility of the seller and e-commerce platform for inappropriate and misleading advertising. Providing inaccurate information about the products functions, ingredients, features will be subject to hefty fines. Many platforms and other online sellers will rather choose to offer well known and documented products of the multinational corporations than to take the risk of distributing Polish cosmetics while relying on the documentation and information provided by Polish companies.

CBEC regulations and their impact on Polish cosmetics export to China

More profound and meaningful impact on the Polish cosmetics e-commerce export to China will have the rules on CBEC passed in April 2016 and November 2018. Set of regulations governing all the channels within the CBEC framework will finally enter in force on January 1st 2019. Products sold trough CBEC will be no longer subject to the rules applied to the goods purchased abroad for personal use. The single transaction value threshold has been raised to 5000 rmb and the accumulated annual value of the transactions per person cannot exceed 26 000 rmb. Parcel tax has been replaced by the set of custom duties, VAT and consumption tax. Its total accumulated effective rate will be between 11,2% and 25,5%, depending on the cosmetics type. Those rates are much lower than the effective accumulated rates applied in the traditional imports.

The range of products allowed to be sold trough the CBEC channels will be limited to the items included in the special positive lists. In April 2016 two lists (list 1 (EN, CN) and list 2 (EN, CN) comprising over 1200 items were published. Cosmetics are included in the positive lists but only the cosmetics, that have been already registered in China. Cosmetics that have not been registered in China, even tough they have been already sold on the Chinese cross border e-commerce platforms, will be excluded from scheme. This regulation if implemented effectively would close the CBEC channels after January 1st 2019 for all the non animal tested cosmetics as they simply cannot be registered in China. The new regulation would mainly also excluded Polish small or even medium size cosmetic companies which could not afford to pay the registration costs or don’t want to invest in the market that is not of the high priority to them. These regulations would have an impact on the Polish cosmetics e-commerce export to China unless adjusted or not applied strictly.

In November China’s prime minister Li Keqiang promised to extend the positive catalog of products by another 63 products and to relax the framework for the cosmetics import to China via CBEC channels. The new regulations have been issued. The cosmetics have been included in the extended list of products allowed to be sold under CBEC framework but the requirement of the prior registration of cosmetics have been also included in the notice at the bottom of the positive list. It seemed that non-animal tested cosmetics and all other cosmetics that have not been registered in China will be put out of the CBEC framework. In the following days in the several guidelines and notices form various government agencies the general rule that all products included in the positive list are treated as products for personal use and will be exempted from the requirement of prior registration in China and no certificates or permits will be necessary to sell them under CBEC framework. The inconsistency in regulations is a little worrisome as it is not clear if in the future the clause will not be used as lex specialis. This inconsistency should be remembered and take into consideration as Chinese regulators often change the interpretation and apply the rules, even at a later time, that were considered invalidated. At the moment however the interpretation that all products included in the catalogue are treated the same way prevails. This means that cosmetics can be sold under CBEC framework without prior registration. If this interpretation persists it will mean that door of Chinese cross border e-commerce are widely open for Polish cosmetic brands.

Direct Purchase model after January 2019

Implementation of the new regulations on CBEC does not mean that the direct purchase channel will be closed. Polish companies still can sell and send products directly to the Chinese customers. However Polish cosmetics e-commerce export to China will face new challenges. As the new regulations will force many companies to switch to this channel the rise in the quantity of post parcel and courier deliveries can be expected and subsequently the backlog at the customs processing centers as well as the possible increase in the quantity of lost parcel. Chinese authorities want to promote the cross border e-commerce but under stricter control over the flow of goods from abroad. Therefore it is possible that the number of random check ups of parcel will be increased and the parcel tax collection will be more effective. It should be also noted, that the parcel tax rate has been increased to 60%. As almost none Polish companies have their products registered in China so far they are effectively cut off from the CBEC. It means that they will not able to use the infrastructure of the many Chinese cross border e-commerce platforms and their position in the Chinese Internet. The special preferential CBEC tax/duty rates will not be applied. In case of huge increase in direct mail parcel checkup and levies collection it will increase the actual product prices, but if current situation persists there will be no negative effects. The cost effective solution of the Chinese bonded warehouse and integrated with bonded warehouse logistics solutions supported by platforms will be probably off limits.

Near border e-commerce as a cost effective alternative.

This model is something between the direct mail and CBEC model in the bonded warehouse delivery mode. It’s one of solutions for Polish cosmetics e-commerce export to China. It can be applied for the companies that for various reasons don’t want to use the CBEC framework. For some the cost placing products on the Chinese CBEC platforms can be too high. The highly formalized cooperation with most leading platforms that in many cases requires trained Chinese speaking employees can be also a factor. Some, especially cruelty free brands would like to avoid even the unsubstantiated under current CBEC framework accusation of complying with Chinese requirements on animal testing.

The batch of goods is shipped to the warehouse located in Hong Kong or Taiwan. The goods can be ordered by the Chinese customer on the Hong Kong, Taiwan, foreign e-commerce platform or a foreign online shop, or even maybe on some Chinese platforms (if in practice they cope to keep a part of their operations outside the CBEC model). The cost and time of sending parcel from Taiwan or Hong Kong to mainland China is similar to that applied in the CBEC bonded warehouse model. The only difference is that parcel will have to meet the requirements and be subject the custom procedure for the goods for personal use. The parcel tax will be applied. The drawback of this solution that product cannot be offered on the majority (or maybe all) CBEC platforms. Opeating in this model will deprive the Polish sellers benefits of the using the platform’s infrastructure and positioning but with application of the near border e-commerce model they still will have opportunity to offer their goods in cost and time effective manner.