Could China's incoming e-commerce law be a 'sword of Damocles' for the industry?

To say China’s e-commerce landscape is the most advanced anywhere in the world is to state the obvious. For at least the last five years business folk, including marketers, have been caught between gawping and licking their lips at the meteoric growth of e-commerce in China, and the riches that have come with easy digital access to a population of 1.3 billion increasingly wealthy consumers. According to eMarketer, China e-commerce sales will pass US$1.5 trillion this year.

However, as with many recent technological innovations, the market has moved ahead much faster than those in charge of governing. This means that today, China’s e-commerce world is renowned globally as both a marvel of high-speed consumerism and a veritable pit of proverbial snake oil salesmen, rampant with unregulated sellers dealing in fake wares that are a constant thorn in the side of legitimate brands.

As such, the passing of China’s first e-commerce law in August marks a critical moment, one that will reshape the landscape when it comes into force on 1 January 2019. As Robbi Wu, head of e-commerce at Dentsu Aegis Network puts it: “The speed at which China’s e-commerce growth outpaced its ability and wishes to regulate the sector are finally being tackled, although to what degree is still unproven”.

The new rules

The new e-commerce law went through four rounds of debate and regulates many different areas related to the sales of good and services online in China, but broadly orders all online sellers to provide greater consumer protection. This includes the obvious platforms such as Taobao, JD and Tmall, but also covers social selling on the likes of WeChat, a relatively new and thriving e-commerce channel.

Perhaps the most significant ruling is that e-commerce platforms and the sellers that use them are now jointly liable for any deemed infringements of the rights of a consumer or an IP holder. In short, platforms that now sell substandard or fake products on their sites could be financially liable together with the seller.

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This is a massive shift that, according to Jill Meng, head of APAC customer success at Edge by Ascential, is tantamount to “the sword of Damocles hanging over the e-commerce industry in China”.

Many online sellers, particularly on C2C platforms, are effectively mom-and-pop outfits that haven’t been regulated before, let alone held liable for the goods they sell. As such the sale of fake goods is rife online, with many consumers satisfied with a cheap approximation of the luxury brand they desire.

“C2C marketplaces, such as Taobao, will have growth challenges [because] they will have to invest more to mitigate the risk presented by uncertified sellers,” Meng adds. Given C2C selling is a cornerstone of China’s e-commerce landscape, Taobao and others will have to swiftly adjust both their business models and offerings to come in line with the new law.

Taxing times for small players

Coupled with the new regulations around quality of products is new tax legislation, which could be another hurdle for the e-commerce platforms. Until now, selling online was essentially a tax-free endeavour for small players, which allowed them to drive prices down and sales volume up. Now that they will have to pay tax, together with diminishing sales if their products aren’t up to scratch, observers predict a vast number of small sellers will simply go out of business.

For B2C sellers like JD, the legislation could mean an increase in their market share and brand profile because they deal a lot with large brands and established sellers. They may be able to expand into the gap left by the vanishing small sellers.

For the likes of Taobao and Pinduoduo, more C2C players, however, the new ruling could mean a significant blow to their revenues. But Wu at Dentsu Aegis says from a brand equity perspective, the long-term could be promising as these platforms shed their associations with substandard products, particularly as they look to grow outside of China.

Chinese workers sort parcels, many of which are from 2018's Singles' Day online shopping spree, in Neijiang city in China's Sichuan province.

“The issue arises from the increasing sophistication of online customers, together with the need for China to scale beyond its borders from an e-commerce perspective,” he says.

These changes could also lead to higher prices for consumers, but Cindy Jin, director of e-commerce at Reprise China, points out that China’s e-commerce platforms moved beyond simply competing on price alone a while ago, reflecting “the evolution in Chinese consumption”.

“We will likely see some impact on pricing [with the new law]. But major Chinese e-commerce players no longer fight on price only, especially as a lot of brands are going omni-channel” and seeking to engage consumers through experience, Jin explains.

Campaign approached Alibaba and Tencent for comment regarding the new law. An Alibaba spokesperson said the company has been closely following its development, and that "we hope the introduction of the new law will bring positive development to the industry".

Big brand windfall

While they may be tough on the small sellers, these new regulations are music to the ears of big brands whose profits have been undercut by counterfeit products for years. This is especially true for luxury brands, as the e-commerce law is also expected to take the hammer to another of China’s e-commerce idiosyncrasies: the ‘daigou’ – people who shop overseas on behalf of consumers in China.

Now that these daigou services will be taxed, Meng estimates around 75% could stop operating. “This will impact the ‘grey’ e-commerce industry and open up opportunities for foreign luxury brands to invest in e-commerce in China with more confidence,” she opines.

Even more granular changes stand to benefit big brands, such as a new financial penalty for sellers that delete negative reviews or buy fake reviews. Without this distraction, brands can further leverage Chinese social media campaigns to generate and promote genuine positive feedback, reinforcing their brand equity online. 

A Louis Vuitton store in Shanghai

So what do large, foreign brands looking to capitalise on the new law need to do? According to Wu, not a lot.

“Many foreign brands have been looking at how delivery, costs and disputes work as part of an overall branding strategy for a long time,” he explains. Because they operate globally, they follow international standards for the sale of products online.

While the new law is generally very good news for big brands, John Pabon, founder at Fulcrum Strategic Advisors, cautions brands against being too complacent given how quickly China’s economic outlook can change.

“Today the new e-commerce law is targeting smaller mom-and-pops and the counterfeit sellers, but next year, it might target MNCs for not having transparent supply chains or fair pricing, for example,” he warns. “So it’s important from the brand positioning and marketing perspectives to get ahead of newer regulations in future, and actively use marketing to do so.”

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The changes to China’s e-commerce outlook from 1 January are fundamental and could upend the system as it currently stands. Many may rail against the potentially huge cost to small sellers and even some of the big e-commerce players themselves.

But in many ways, this new law is simply the cost of upgrading China’s e-commerce system at a time when the country pivots from a manufacturing to a service-led economy and looks to take its platforms global. The e-commerce gold rush may well be over, but there’s still plenty for brands and marketers to be excited about.

“Chinese e-commerce has come of age,” Wu states aptly. “These laws primarily safeguard consumers who expect e-commerce to deliver on the tenets of retail philosophy. E-commerce strategies that focus on the overall consumer experience will always win.”

Jenny Chan contributed reporting to this article.