Delivery workers sort parcels for their customers in Beijing, China on “Singles Day,” a holiday that has grown into the world’s busiest day for e-commerce, Nov. 11, 2016. (AP Photo/Andy Wong)Delivery workers sort parcels for their customers in Beijing, China on “Singles Day,” a holiday that has grown into the world’s busiest day for e-commerce, Nov. 11, 2016. (AP Photo/Andy Wong)

NEWS ANALYSIS

China, the world’s largest e-commerce market, counts more than 400 million online shoppers even as half the country remains offline, but eager Canadian businesses face significant hurdles to gain market share.

Chinese e-commerce giants Alibaba and JD.com are making a big push in Canada trying to get more Canadian businesses to join their platforms and sell to the Chinese.

Alibaba’s billionaire chairman Jack Ma will be making his pitch to Canadian business—alongside Canadian Prime Minister Justin Trudeau—at an event in Toronto called “Gateway 17” on Sept. 25. 

The Toronto Region Board of Trade hosted JD.com in July for a business roundtable with more than 50 Canadian companies.

Canadian products have an excellent reputation in China. The growing Chinese middle class is leery of cheap Chinese goods and values the quality of Canada’s manufacturing and pristine environment for agro-food products.

More broadly, China is undergoing a lengthy transformation from an investment-oriented economy to a consumption-based one—away from heavy industry and toward the service sector. E-commerce has a vital role to play in the Chinese government’s strategy.

“E-commerce platforms are really helping to standardize market access in China to people of all income groups, which is an important priority in China,” said Jan De Silva, president and CEO of the Toronto Region Board of Trade, in a phone interview.

Reasons for Concern

E-commerce might simplify certain aspects of doing business in China, but pervasive challenges like lack of rule of law and intellectual property (IP) violations are but a couple of the difficulties foreign businesses face.

U.S. President Donald Trump initiated a probe into China’s IP theft, which is estimated to be responsible for between 50 and 80 percent of all IP violations that harm the U.S. economy, according to the IP Commission Report. The U.S. Chamber of Commerce estimates 86 percent of all counterfeit goods come from China and Hong Kong.

Bottles of wine from Clear Lake Wineries, an export operation of Ontario wines to China. (Courtesy Mary Whittle)

Bottles of wine from Clear Lake Wineries, an export operation of Ontario wines to China. (Courtesy Mary Whittle)

“A lot of product on Alibaba is counterfeit. Consumers know that too,” said Mary Whittle in a phone interview. She is the CEO of Clear Lake Wineries, a family-run business that exports Ontario wines to China. 

However, China is cracking down on IP violations for good reason. It realizes that some of its companies can be global champions provided other companies don’t plunder their IP. So they must be protected. The number of settlements in the last few years is up roughly fourfold under the stronger judicial framework, says De Silva. 

IP violations aren’t limited to fake goods. They can derail a business when an unscrupulous company learns of the legal name of a legitimate business and becomes the first to register or use that name in China. It then files a claim against the genuine business when it tries to register or use the name in China. 

The Canadian Trade Commissioner Service (CTCS) warns that patents and trademarks registered in Canada or other countries are not usually protected in China and that regulatory enforcement can still be unsatisfactory. The CTCS website even has an extensive section on business risks related to corruption in China.

A lot of product on Alibaba is counterfeit. Consumers know that too.

— Mary Whittle, CEO, Clear Lake Wineries

Another warning from the CTCS, in a section titled “An Introduction to E-Commerce in China,” states: “Government policies regulating the marketplace are dense, complicated, and prone to changes without notice.” 

An extreme example of China’s opaque regulatory enforcement is the case of John Chang and Allison Lu, owners of Lulu Island Winery based in B.C., who are facing a minimum of 10 years—and possibly life—in prison for alleged wine smuggling into China. The winery said it believed it had followed all the applicable laws, yet Chang has already been serving jail time.

“The arrest of Mr. Chang and Ms. Lu for a fabricated customs violation is an assault on their basic rights, a breach of China’s international trade obligations, and China’s own customs laws,” Conservative international trade critic Gerry Ritz said, as reported by the CBC in May.

In an email to The Epoch Times, Brianne Maxwell, spokesperson for Global Affairs Canada said: “We are following the case of Mr. Chang and Ms. Lu closelyCanadian officials are in contact with the relevant Chinese authorities and are providing consular assistance to Mr. Chang, Ms. Lu and their familyCanadian representatives have raised the case with Chinese authorities at high levelsTo protect the privacy of the individuals concerned, further details on this case cannot be released.

Rule of law is necessary for business to thrive in a legitimate manner. Clearly it still has a long way to go in China.

The Chinese e-commerce giants are basically facilitation and delivery mechanisms. But doing business in China is much more than filling an order. The Chinese consumer is bombarded with options and a variety of marketing schemes. The reality is that many countries are trying to sell to the Chinese, which makes marketing efforts to distinguish products costly. Competition is intense.

Whittle says she was told by JD.com that a business could spend $400,000 on a marketing campaign for a month and there’s no guarantee the message would register with consumers.

“It is a very difficult market to penetrate and you can do a lot of things right and it’s still hard, very difficult to break through the noise, competing against every other country and every other product,” Whittle said.

The e-commerce giants may be trying to put dollar signs in the heads of Canadian businesses, but there are many factors for success that are beyond their control. 

Follow Rahul on Twitter @RV_ETBiz

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A woman walks out from a Sam's Club in Shenzhen, in southern China's Guangdong province, on Nov. 15, 2015. (AP Photo/Ng Han Guan)A woman walks out from a Sam's Club in Shenzhen, in southern China's Guangdong province, on Nov. 15, 2015. (AP Photo/Ng Han Guan)

Walmart said it would sell its Chinese online e-commerce business to JD.com, as part of a strategic alliance between both companies. In return, Wal-Mart Stores Inc. (NYSE:WMT) will own 5 percent of JD.com Inc. (Nasdaq:JD), China’s largest e-commerce company by revenue.

JD.com will acquire Walmart’s Yihaodian marketplace platform, including the brand, website, and app. Based on JD.com’s recent share price, the stock deal is valued at roughly $1.5 billion.

JD.com has a very complementary business and is an ideal partner that will help us offer compelling new experiences that can reach significantly more customers.

— Doug McMillon, president and CEO, Walmart

Yihaodian, launched by two Chinese entrepreneurs in July 2008, is an e-commerce platform selling grocery products. Walmart first invested in Yihaodian in 2011 and took full control of the company in 2015.

“JD.com has a very complementary business and is an ideal partner that will help us offer compelling new experiences that can reach significantly more customers,” said Doug McMillon, president and CEO of Walmart in a press release. 

JD.com’s shares jumped nearly 5 percent to $21.06 on the Nasdaq Stock Market on Monday afternoon. The e-commerce company headquartered in Beijing is a major competitor of Alibaba’s Tmall. It sells electronics, mobile phones, and computers online and is trying to expand its offerings to compete with Alibaba’s Taobao and Tmall.

Walmart and JD.com agreed to team-up in several strategic areas in China including both online and offline retail.

As part of the deal, Walmart will continue to operate the Yihaodian direct sales business and will be a seller on the Yihaodian marketplace. Both companies will work together on growing the Yihaodian brand and business under its current name and market position.

Sam’s Club China will open a flagship store on JD.com, expanding the availability of Sam’s Club’s high-quality imported products across China. It will offer products through JD.com’s nationwide warehousing and delivery network.

Walmart and JD.com will use both supply chains to create synergies, including broadening the range of imported products.

Experts believe, forming an alliance with JD.com could give Walmart a better chance to remain competitive in the Chinese market and boost its retail sales.

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Walmart’s China stores will be listed as a preferred retailer on JD.com’s O2O JV Dada, China’s largest crowd-sourced delivery platform. This partnership will drive online traffic to Walmart stores and allow customers to order fresh food and other items. Walmart will continue to operate its own physical stores.

China offers enormous opportunities for both online and offline retailers. However, it also has significant challenges due to recent economic slowdown and fierce competition. Experts believe, forming an alliance with JD.com could give Walmart a better chance to remain competitive in the Chinese market and boost its retail sales. 

“We’re excited about teaming up with such a strong leader in JD.com,” said McMillon. “We also look forward to offering customers a tremendous number of quality imported products not previously widely available in China through Walmart and Sam’s Club.” 

“We look forward to further developing Yihaodian, which has tremendous strength in important regions of eastern and southern China. … We are also delighted to welcome the Sam’s Club flagship store onto the JD.com platform. Sam’s Club’s unique, high-end product selection meets the demand from China’s increasing affluent consumers for high-quality, imported products and has already proven popular in the Chinese cities where it has stores,” said Richard Liu, CEO of JD.com.

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