Date
23 October 2017
Intense competition has led to price wars in China's cross-border e-commerce industry. New tax rules have added to the problems of the smaller players. Photo: Xinhua
Intense competition has led to price wars in China's cross-border e-commerce industry. New tax rules have added to the problems of the smaller players. Photo: Xinhua

China tax rule poses challenge for cross-border e-biz startups

Cross-border e-commerce has become increasingly popular in China in recent years. This has led to an influx of money as well as new players into the sector.

At the beginning of 2015, we saw the largest-ever financing round for a cross-border e-commerce company in the mainland: Sailing Capital’s US$100 million investment in Ymatou.com.

During the capital feast in the past few years, huge number of startups raised money from angel investors, and competition has become increasingly fierce.

With many big players as well as startups, price wars have broken out in the sector. Firms without sufficient capital support will be washed out.

Many big players, like Kaola, which is NetEase’s cross-border online retail platform, have been given tax incentives, helping them keep billions of yuan worth of inventory in bonded zones in China.

The small startups in the sector, in contrast, can only afford to keep smaller quantities of stock in their warehouses. That makes them basically less efficient than the bigger ones.

In addition, big companies are able to offer large amount of subsidies to the sales channels.

Chinese authorities recently released a new policy which would impose new tariffs on cross-border e-commerce and significantly increase the cost of many low-value items.

The new rules will also eliminate duty-free exemption for goods whose tax payable does not exceed 50 yuan. Those with thin margins will have to transfer the cost to customers and place themselves in an unfavorable position in the price war.

The new rule may reflect the government’s intention to integrate business in the sector. Under such circumstances, even those startups which have successfully completed B round financing will face big competitive pressure. If they fail to get new money, the game is over.

That said, I believe that if the startups bear in mind consumer demands and deploy unique business models, they still have a chance to beat the big players such as those backed by Baidu, Alibaba and Tencent.

This article appeared in the Hong Kong Economic Journal on March 31.

Translation by Myssie You

[Chinese version 中文版]

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MY/DY/RC

Director at Spring Capital

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