Is WeChat ecommerce doomed because of China’s new laws?
China’s ecommerce industry has developed at breakneck speed, quickly growing to become the world’s largest market for ecommerce. With the market’s worth swelling to over 1 trillion US dollars, regulation has struggled to keep pace with the market’s growth, especially as social media platforms like WeChat become a place for WeChat ecommerce.
However, in January 2019 the Chinese government took significant steps toward regulating the market in the interest of consumer protection, transparency, and intellectual property protection.
The law is certainly a step in the right direction for China’s WeChat ecommerce industry which has essentially been like the wild west for nearly a decade. Counterfeit goods, fraud, and tax evasion were all common issues present in the market, and this law took significant steps to address these issues.
One group that’s sure to be affected is what are known as Daigou. Daigou which literally translates to “buy on behalf,” are essentially traders who purchase goods abroad on behalf of buyers in China. These individuals have had a massive influence on cross-border commerce in China, but this law could severely limit their activity going forward.
How did the Daigou Phenomenon Begin?
Foreign goods in China have long been seen as a sign of prestige and higher quality than goods produced domestically. This perception has been prevalent in the Chinese market for decades, and while it might not be as strong as it was previously, Chinese consumers still maintain a preference for foreign goods in many product categories.
This strong demand for foreign goods has given rise to a network of cross-border traders known as Daigou. These individuals travel to other countries, purchase goods, and bring/send them back to China either for sale to personal contacts on Chinese social media giant WeChat through WeChat marketing or through WeChat ecommerce channels.
The Daigou craze started around 2008, when China experienced one of its largest food safety scandals to date. Over 20 companies in China were found to diluting milk with other food materials and most dangerously a chemical called Melanine.
The diluted milk resulted in the death of 6 babies and the hospitalization of over 50,000. This incident caused a crisis of confidence in Chinese consumers toward domestic Chinese brands, resulting in the increased popularity of foreign milk and other goods.
While the demand for baby formula may have provided the spark for the rise of the daigou industry, today daigou also trade heavily in supplements, luxury goods, and more.
However, it’s not all about consumer confidence in the Daigou trade. Many of the products Daigou send back to China are heavily taxed through official channels, making it often cheaper to buy things like luxury goods through this channel. Even with the cost of shipping it can often be cheaper to purchase goods through a Daigou than through an official brand store in China.
The Success of The Daigou
Today, the Daigou industry has been valued in the billions of dollars, with hundreds of thousands of Chinese around the world taking orders from domestic Chinese for foreign goods. A recent report from Frontier Strategy Group estimated that around 7% of China’s ecommerce takes place through daigou channels.
While there are benefits to purchasing products through Daigou as mentioned previously, their success is also due to one other important factor, their ability to build individual relationships with buyers.
Typically, buyers will communicate with a Daigou and ask about ongoing sales, product recommendations, and more. Given that the communication is 1 to 1 it helps to foster a relationship between the buyer and selling resulting in increased trust and a greater willingness to buy.
In fact, many brands and companies prior to this recent change in legal status have come to rely on Daigou as a source of sales and marketing in China. Balea, a German Skincare brand, for example, reported that nearly 1/3 of its sales come from Daigou and other indirect sales channels.
China’s New Ecommerce Law: Good for The Industry, Bad for Daigou
China’s new ecommerce law went into effect on January 1st after being passed on November 21st in 2018. The ecommerce industry had previously been relatively unregulated, but with the massive growth of the market, the Chinese government recognized that more consumer protection was necessary.
The law defined the primary roles in the industry and established rules regarding taxation, intellectual property, IP protection, and data privacy.
Daigou had previously been able to avoid taxes by declaring their imports as personal items. As a multi-billion dollar industry, this essentially resulted in the government missing out on huge amounts of tax revenues. This law will now require smaller sellers to pay income tax on their activities for the first time.
The new law essentially requires Daigou to register as a business to continue selling online in China and to report their sales to ensure proper taxation. This is likely to have a massive impact on the profit margins of Daigou worldwide.
Daigou typically purchase products overseas and sell the products at a mark-up, however with this increased tax burden they will likely see their profits begin to shrink if they are unable to raise prices.
However, many of the higher level daigou have welcomed this change in Chinese law. The daigou industry had previously been full of bad actors who brought distrust to the industry as a whole. There are plenty of reports from scorned buyers who have been sold fake goods, expired products, or waited months for their shipments to arrive.
More established daigou will have the resources necessary to comply with these new laws and continue to operate under these new regulations. While the industry as a whole may take a short term hit from these increased regulations it’s likely that it will emerge stronger and even bigger than before in the coming years.
Daigou and WeChat Ecommerce
With WeChat having an over 90% penetration rate in China, it makes sense that Daigou would use this tool to reach their target customers. However, given the “gray” nature of their work, many Daigou simply use WeChat as a communication tool to manually accept orders, provide status updates, and broadcast what products are available.
Many also chose to work with Alibaba’s C2C ecommerce platform, Taobao. As a C2C ecommerce platform, naturally, sellers were not required to have a business entity, making this an attractive platform for individual daigou.
Many daigou have also chosen to open WeChat Ecommerce Stores to improve their sales and create a more efficient sales channel. Given that opening a WeChat store only requires a WeChat official account, this was an easily accessible ecommerce option for many Daigou. Platforms like T-Mall and JD.com have more stringent regulations, which led to WeChat becoming one of the de facto ecommerce platforms for daigou.
The Impact Of China’s New Ecommerce Law
Since it’s passing the impact of China’s New Ecommerce law has been difficult to measure. Many of the stipulations set out under the law have still not been clearly defined and enforcement of some of the more clearly defined parts of the law has not been consistent.
In response to this lack of clarity, daigou have essentially just been trying to lay low on many of the more popular platforms. Some have taken steps to avoid image and text filters by posting drawings of products rather than the products themselves and communicating only by voice message.
While enforcement has seemingly been quite lax, the danger is still there. Under this new law platforms can be held liable for the actions of users on the platform, so it’s understandable that they’d likely now be on the lookout for any bad actors.
Ultimately we are still in the adjustment phase and the results of this new law being fully implemented are yet to be seen. Given the circumstances though it is likely that a few things will come to pass with this new law in effect.
First, many consumers who previously relied on Daigou will begin to use legitimate China cross-border ecommerce channels (Tmall Global/Kaola), as the law also encourages growth in this sector through increased tax deductions. The law also hopes to eliminate the plague that is fake reviews on Chinese ecommerce platforms, increasing transparency in the quality and efficacy of products sold online.
Second, many of the shadier daigou will likely give up their operations as platforms and the government step up scrutiny on daigou as a whole. Of course, there will always be bad actors in this market, but they’ll likely need to really step up their creativity to get around the new regulations set out by this new law.
Finally, given the new regulation in regard to intellectual property and the government’s opening up toward cross-border ecommerce more overseas brands will enter the Chinese market directly.
While all these signs might point to the death of daigou, it’s unlikely that this industry will ever completely die out. The truly professional daigou have a loyal customer base that trusts them to assist in their purchasing decisions and are unlikely to other channels. As long as daigou comply with this new law they will still likely remain a force in China’s cross-border ecommerce market.