“A Game of Thrones”–Foreign VMS Brands in Cross-Border Ecommerce 2.0 —Jason Zhang, Managing Director of Asia Pacific & Great China, Atrium Innovation

1. “A Game of Thrones”–Foreign VMS Brands in Cross-Border Ecommerce
2.0
—Jason Zhang, Managing Director of Asia Pacific & Great China, Atrium
Innovation
Today, I would like to share two key words with all of you. One is
cross-border ecommerce, and the other is the future of health care
industry. Who will be the winner, we need to wait and see.
Before studying cross-border ecommerce, we need to recognize its
property. Otherwise, we cannot formulate an appropriate, practical
policy and sales strategy. Cross-border ecommerce is not a simple

2. extension of domestically general ecommerce, but actually a change of
trade and consumption model in the context of globalization. It is a
process from quantitative change to qualitative change, and a
subversion of the whole business model innovation under the
background of the whole consumption upgrade. If we cannot recognize
this point, we are probably difficult to introduce our excellent products,
services and technologies into China. Today, Chinese consumers,
especially those 200 million emerging middle-class ones, firstly enjoy the
world’s most advanced and safest goods and services fairly, justly and
synchronously, which all benefit from the development of cross-border
ecommerce. Of course, its influence at macro level is profound, and will
probably continue in international trade, tax, and foreign exchange
management and other aspects. But at the enterprise level, its influence
lies firstly in competitive pattern, secondly in commodity level, thirdly in
retail format level and fourthly in capital level.

3. Firstly, at the competitive pattern level, domestically general ecommerce
has been settled. Tmall and Jingdong occupy 70% to 80% market share,
and other players are squeezed in small market space to operate, which
either has unique business model or has to be subdivided in the vertical
field. The real start of cross-border ecommerce is in 2014. In the past two
year, the development of the whole ecommerce is very fast, but we
cannot see a very clear leader. The whole size of the platform of the four
largest ecommerce in 2016 is not more than 10 billion. Four large
cross-border retail ecommerce need a next round of game. The one who
can firstly break through 50 billion, even reaching 100 billion, and make a
distance from competitors can be the leader of the whole industry and
platform.
Then, one of the four business owners told me they have made a lot of
achievements. In 2016, I asked him what now his biggest challenges and
problems are. He thought for a moment and answered that his ability to
push new products was poor. Chinese largest leader in ecommerce
platform is still focusing on the same single product and over-relying on
famous single one of famous brands. Therefore, price competition has
made the industry development encounter a bottleneck. If brand owners’
ability lies in innovation, research and constant new products offering,

4. then for these cross-border ecommerce, the core competence may lies in
choosing, exploring, and promoting new products, which would also
become their core competitiveness.
Personally, I maintain a lot of interest in whether WeChat business
channels which are under the platform of cross-border system will rise or
not and the traditional retail pattern before.
Secondly, the rise of this cross-border ecommerce is at commodity level,
and in fact, behind which, its driving force is consumption upgrade.
Before, the international brands had trade or geographical
discrimination on Chinese market. Therefore, they would sell first-class
goods to their domestic consumers; export second-class goods to

5. European and American market; and export third-class goods to
developing countries including Chinese market. This strategy has been
eliminated now. It is no doubt that Chinese consumers ask to enjoy the
world’s best goods and services. There is no future if they today still
take the outdated goods into Chinese market.
Another level is the concept of geography. Japan and Korea currently are
still the most popular top three regions of cross-border commodity. Their
geographical features are obvious. The makeup of Japan and Korea, and
the fresh, dry cargo of America currently have geographical labels in
goods industry. However, as for whether they will have a great expansion
or not, we will have to wait and see.

6. Thirdly, at retail level, we see a very obvious trend. Not only brand
owners, but also more and more international retail giants will enter
Chinese market through cross-border ecommerce. Different from
Wal-Mart, Carrefour and Large Distribution, they entered into China in a
dozen years ago through offline, but now it has become a bottleneck
restricting their development. On the contrary, German Audi and British
Macy’s entered into Chinese market through online. Will this transition
have an impact on the future pattern? It is worth pondering of our each
brand owner. Tmall has been hiding after these retail brands and is
different from them. Brand owners can supply goods and open stores in
multi-platform, but international retail giants are often only tied to one
platform. And the future challenge is how to talk and compete with
them.
Fourthly, it is at capital level, which is the most prominent especially in
health care industry. Whether in industry capital or enterprise level,
China has become the largest investor of merger and acquisition of
health products. Some dairy and pharmaceutical companies will
continue to enter this market. Domestic brands achieve industrial and
technological upgrade through capital, which is a good means. The
impact of Chinese enterprises seizes this opportunity to integrate

7. through the combination of the cross-border form and capital resources.
In the end, the birth of the 2.0 era now is due to the change of policy.
Since the birth of cross-border ecommerce, there have been many
uncertain factors. 408 New Deal in 2016 almost had a devastating blow
to the whole industry, which was called fuse. In May, the country has
made some transitional policies. It was in March 17 this year that the
State Council spokesman, about the regulatory speech after the
transitional period of cross-border trade, the first time gave cross-border
shopping a property definition at policy level, which was called personal
belongings. We saw the first time that the attitude of national regulatory
authority to cross-border ecommerce is positive, which will accelerate
the future development of this industry.

8. In 2016 summary of Tmall International, there are ten big popular
phenomena about cross-border ecommerce, such as the outburst of
health care industry, which is one of the biggest market highlights. There
are three big categories in cross-border ecommerce: cosmetics, health
products, maternal and child products. Among which, health products is
the only one category that has both reasonable profitability and
long-term development potential. Although overall, it is a good
information, policy and macro-environment. From the real practitioner, it
does not seem so optimistic. The whole policy is a dividend for the
industry but a competition for enterprises. Last whole year’s data
indicate that the industry did not show such a fast development. Tmall
International data indicate that since April and May last year, the amount
of the whole foreign VMS has been declining. As for reasons behind,
brand owners need to study carefully how to stimulate consumer
demands for the next step and where the opportunity is for the market.
More optimistic is that the data from January to March this year has an
obvious recovery, which reflects a phenomenon. That is, the whole
category of industry is classifying and then producing leading brands,
and part brands having good development have widened the gap with
some small and medium-sized brands.

9. Facing this pattern and challenge, what opportunities do those brands
just entering Chinese market have? Personally, I want to think about it
from four levels. From the geographical level, if health products of
Australia and New Zealand will be thriving. From brands’ opportunities,
how do small and medium-sized brands locate? What innovations and
breakthroughs do we have in business model? Many brands of Australia
and New Zealand are driven spontaneously by Haitao, Daigou, some
small and medium-sized buyers. But now, this pattern has changed, and
brand owners are in the first line, interacting and communicating with
Chinese consumers necessarily and directly. The last one is where the
opportunities are for the whole industry, where the opportunities are for
the whole category. Due to limited time, I cannot elaborate them one by
one but only focus on two key opportunities to share with you.
Firstly, I think it is an opportunity for channel. If we compare the health
care products market between China and the developed countries,
especially with the market as the representative of the United States,
there is a big difference in channel. In China, direct sales accounted for
about 50% share of the whole industry, offline and physical stores about
20%, and the real e-commerce about 20% and now about 30% probably
because of the fast development of recent two years. Even though this
comparison, the direct sales industry of the US account for less than 20%,

10. e-commerce less than 10% of the whole category, and its largest channel
is from the professional health products and food retail stores. How does
future enterprise, whether it is a domestic brand or a foreign brand,
achieve channel upgrade and transformation? Maybe this is a very
realistic and also a direct opportunity.
Secondly, it is the category, which is currently a particularly prominent
problem of the whole industry, especially in domestic brands. China's
health products companies conquer the world with a single product. In
the past 10 years or even 20 years, they make the core single product
their main business source, such as some famous Chinese brands of
health products—melatonin, Dong-E E-Jiao and so on. Actually, it is the
same in overseas. 70% business of foreign VMS in cross-border
ecommerce is from the top ten products company. How can we expand
the product line and service in subdividing category to give consumers a
more comprehensive choice? Taking melatonin for example, whether it
can provide more services and goods to consumers in the sleep health
management or intestinal health management, or consumers will
produce aesthetic fatigue, and then accompanying industry competition
will make the industry develop unhealthily.

11. Finally, I would like to end up my speech today with three questions. In
the Western economics, there are three main basic issues: what to
produce; how to produce; and who will consume? This is also what top
economists think every day. Actually, each enterprise needs these three
main basic issues. No matter which industry, it is that novice fights for
price; veteran pursues quality; and the industry's core issue returns to the
goods itself. For f brands, especially those just entering into Chinese
market, there are two most deadly cognitive errors. The first one is that
they often overestimate their brand impact, and the second one is that
they underestimate the complexity of Chinese market and the criticality
of Chinese consumers. All companies really think about how to show
sincerity to the market, how to respect your consumers, and how to take
out the best goods and services to please your consumers, which is a
long-term solution for a brand to achieve success.