1. E-Commerce in China
What you need to know from a structure and business point of view
Presentation by Klako Group
Magento in Shanghai - November 2013

2. Consumer Profile & Behavior
Chinese Online Shopper Profile:
• 90% of online shoppers are between 10-39 years old
• Over 70% are living in urban areas
• Have a monthly income of under RMB 5,000
• E-Commerce market is likely to grow in size by more than 3 times
• Shoppers in lower tier cities spend a higher amount of disposable income on online sales
• wealth more concentrated with young generation (≠ developed countries)

3. E-Commerce Market
bn USD
2012: China close US’
market size. China’s
online market in 2012:
approx. USD 200 bn.
CAGR since 2003: 120%
Sources: Forrester, Euromonitor, Japanese Ministry of EAI, Destatis, Centre for Retail Research

4. E-Commerce Market
Reasons for fast evolving E-Commerce market:
• Online prices
• New product categories sold online
• M-commerce increasing
• Increasing internet users
• Increasing confidence in online retailing
• Traditional retailers tap into the e-commerce market (e.g. Suning)
• Improving logistics infrastructre
• Social Media as new Channel

5. Consumer Behavior
Source: iResearch

6. China‘s Ecommerce Market
Unique Characteristics in comparison to
other markets:
Online Retailing share distribution (transaction value)
• Dominated by Marketplace
• C2C share comparably big
• Less developed retail landscape in lower tier cities –
Ecommerce to boost consumption
• Fast delivery essential
• COD – payment
Future Challenges in particular to China:
• Underdeveloped infrastructure (critical development
pillar for China)
• Consumer demands evolve
• Efficiency increases necessary – demand for service
providers
• Mobile commerce
Source: iResearch

7. China‘s Ecommerce Market
Source: iResearch 2012

8. China Single‘s Day Nov. 11th
Sources: CNBC, Alibaba Group
*) numbers are representing Alibaba Group’s Taobao &
Tmall, which have a combined market share of more than
90%.
USD 4,4 for every Chinese citizen

9. Business Models in China
Marketplace strategy:
Advantages
• Outsourcing the complete IT aspect
• High market penetration (Tmall & JD around 70%)
• Chinese consumers are familiar with these platforms – have accounts already
established and know the procedures
• Tool for new consumer companies to create brand awareness
• The platform handles the after-sales service as well as delivery of the products
• Consumers use marketplaces for initial searches
• No ICP License necessary
Disadvantages
• The platform has its own terms and conditions
• Annual fees for utilizing the platform have been rising year on year
• Generally requires a legal entity to be established in China in order to sign the
service agreement
• Tend to be price competitive & many competitors
• Payment only in RMB
• Limited brand building possibilities (store loyal ≠ brand loyal)
• Low margin of B2C operators. Start to introduce private labels – potential
competition?

10. Business Models in China
Own Ecommerce platform:
Outside of China
Advantages
• Easy to setup and minimal investment (e.g. translation)
• Complete access to the system
• Using Own Corporate Design
• Familiar 3rd Party system easy to integrate
• Acceptance of Chinese credit cards possible (discussion with bank necessary)
• Alipay available for overseas payment assistance
Disadvantages
• Traffic generation difficult – high Marketing cost
• Access time to website from China increased (Great Firewall, “3 Seconds Rule”)
• Delivery issues (lead time & import duty)
• After sales service difficult
• No ICP license - risk of IP address being blocked
• Most chin. 3rd Party payment providers require Business License
• No VAT Invoice (Fa Piao) issuance possible

11. Business Models in China
Own Ecommerce platform:
Inside China
Advantages
• Complete access to the system
• Using Own Corporate Design
• Familiar 3rd Party system easy to integrate
• Low access time
• Easy integration of chin. 3rd party payment systems
• Issuance of VAT Invoices (Fa Piao) possible
Disadvantages
• Business License necessary
• High costs (setup & maintenance)
• Traffic generation occasionally difficult
• ICP License necessary?

12. Ecommerce Regulations
Critical questions to be asked:
Is my business defined as commercial in nature?
•
Yes: Commercial ICP License
Chinese Company or JV to hold ICP License, capitalized with min. 10 Mio RMB,
feasibility study, technical capabilities etc.
•
No: Non-Commercial ICP License / ICP Registration
to be applied for online at MIIT
.

13. Structure Case Study 1:
Facilitating E-Commerce business through a Hong Kong company
PO
Your existing entity
Overseas or
Your suppliers
overseas
invoice
payment
Your Hong Kong company
•Convenient & quick
incorporation
•Low tax (16,5 % CIT)
•Pick & pack warehouse (no
Import Duties)
•Know-How base
•Strategy Development
•Supplier & Distributor liaison
PO
invoice
Your Distributor’s
Warehouse within
China
payment
China Customs
Direct shipping
E-Commerce business solely out of Hong Kong?
• Longer delivery lead time & import duty (exclusion criterion)
• No VAT Invoice (Fa Piao) issuance possible
• Chinese 3rd Party payment provider require CN Company
• After sales service difficult
• Hong Kong expensive location for big operations (rent, salaries, etc.)

14. Structure Case Study 2:
Facilitating E-Commerce business through the Shanghai Pilot Free Trade Zone
PO
Your existing entity
Overseas or
Your suppliers
overseas
invoice
payment
shipment
Your Shanghai FTZ Company
allegedly
•Simplified & quicker
incorporation
•Capitalization at the discretion
of investor
•Bonded warehouses
•Reducing customs & import
red tape
PO
invoice
payment
Your end client or
Distributor within
Mainland China
shipment
Second line
E-Commerce business in the Free Trade Zone?
• SH PFTZ Warehouse ≠ Mainland China Warehouse
↳ “second line” from PFTZ to Mainland China incl. VAT & consumption
tax
• Interconnection with PFTZ companies and Mainland not 100% clear at
this point in time
• Additional office space in Shanghai downtown
• Ecommerce warehouses normally in less populated areas with good
access to big part of consumers

15. Structure Case Study 3:
Facilitating E-Commerce business through the China Trading Company
PO
Your existing entity
overseas or
SPV
invoice
payment
shipment
China Customs
Your China LLC
•Using full potential of CN
market
•Quick delivery possible
•All functions necessary can be
conducted within China
•Most effective way to do
business in China
•Issuance of VAT Invoices
•Tmall Stores available
•Own online store available
E-Commerce business from within Mainland China?
• Mainland China has its own regulatory environment
• Gatekeepers common (SAFE, MOFCOM, etc.)
• Capitalization requirements (approx. USD 140,000)
• Dealing with red tape cumbersome
• Long establishment procedure
PO
invoice
payment
shipment
Your end client or
Distributor within
Mainland China

16. Structure Case Study 3 (continued):
Facilitating E-Commerce business through the China Trading Company
Government bodies involved
• Ministry of Commerce
• Administration of Industry and Commerce
(AIC)
• Public Security Bureau
• State Administration of Taxation
• State Administration of Foreign Exchange
• Customs Office
• Quality and Technical Supervision Bureau
• Statistics Bureau
Nature of Tax
Approximate timeline in weeks
2
4
2
Tax Rate
Enterprise Income Tax
25% of profit
Dividend Tax
Normally 17% of
turnover
Business Tax
3% - 45%
progressively
• Business License (company legally established)
4
5
• Bank Account Opening, Capital Injection, Verification
Report, updated Business License
5% of turnover
Individual income tax
• Approval Certificate
• Company Chops, Enterprise Code Certificate, Tax
Certificate, Statistics Certificate, Foreign Currency
5-10%
Value Added Tax
• Name Approval
5
• Finance Certificate & Customs Registration

17. Considerations for Ecommerce in China
China’s Ecommerce market to
grow up to USD 650 Mio by 2020
Start small – progressive
approach
Chinese consumers very pricesensitive.
Business Model and Structure
need to be carefully evaluated
Customer Service must be
“instantaneous”

18. Klako Group – Our Team
Our founder, Mr. Klaus Koehler, has lived in Hong Kong since 1970. After many years of international trading activities with Hong
Kong and China, he established Klako Group Holdings and its associated entities in 1979. Since then, Mr. Koehler has built up
an experienced international team of accountants, legal and professional consultants (European, American, Chinese).
The members of our team are multilingual and combine many years of expertise in accounting, tax, manufacturing, international
trade, consulting, recruitment, etc. Our cultural and professional diversity gives us the flexibility and knowledge required to
understand our clients' needs and offer integrated service packages. Sharing our understanding and knowledge of both the West
and China is one of our major principles for success.
Contact:
China Headquarters - Shanghai
Mr. Volker Englert
Supervisor Sales & Customer Services
15/F Cross Tower
318 Fuzhou Road,
Shanghai, 200001, China
Tel: +86 21 6391 3188 Ext. 8007
Fax: +86 21 6391 2032
Email: info@klako.com

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