Glasgow School for Business and Society Department of Management MBA Luxury Brand Marketing

DEVELOP IN A MORE DECENT WAY A Case Study on Online Purchasing Agency Industry in China

Course Title: Global and Globalization Citizenship Module Code: MML221695 Trimester A (2012-13)

Module Leaders: Dr. Simone Baglioni Module Tutors: Dr. Carol Doyle Dr. Anne GasteenDr. William Henderson Dr. Manos Maganaris Dr. Sovan Mitra Dr. Mahdi Zahraa

Date of Submission: 3rd December 2012 Submitted by: Yi Liu

SID: S1231474 Develop in a More Decent Way -a Case Study on Online Oversea Purchasing Agency Industry in China

Issue:

Understand what caused online online oversea purchasing agency agency in China

Analyze the problems and risks involved in online online oversea purchasing agency agency

Discuss viable approaches related to standardization and development of online online oversea purchasing agency agency industry in China

Introduction

Stewardess Tax Evasion Case has shaken the Mode of Online Oversea Purchasing Agency in China Xiaohang Lee, a Chinese 30-year-old former stewardess was sentenced to 11 years and fined 500,000 yuan (approximately 50,482 pounds) for buying a large amount of cosmetic products from South Korea duty-free shops and selling them in her Taobao.com online shop without customs declaration, which involved import linkage tax evasion over 1.3 million yuan (approximately 151,464 pounds) (Zhao, 2012) . This recent news has triggered controversy within public and brought online oversea purchasing agency industry into firing line. Moreover, it has caused some small-scale online oversea purchasing agents withdrawn from market to avoid illegal issue, and it is likely that a rise in cost of online oversea purchasing agency due to the majority of sellers might be forced to follow formal channelpaying proper tax and freight (Xu, 2012).

Along with the rapid growth in online oversea purchasing agency industry nowadays it is resistibly prevailing in the wake of increasingly maturing market of

online shopping in China yet it can be indicated from the stewardess tax evasion case that there are plenty of hidden perils within online oversea purchasing agency industry that need to come into notice and be solved.

In this case study, the general situation of online oversea purchasing agency industry in China would be analyzed, and it will discuss about the relative issues from the perspectives of both consumer and online oversea purchasing agent. In the end, the viable solutions would be provided in order to make online oversea purchasing agency industry not only develop better in current business environment, but also maintain its intrinsic competitive advantages at the same time.

Background Overview What is online oversea purchasing agency in China? It is a culture and custom in China that people who travel, study, or live abroad will buy various goods as gifts to their family members, relatives and friends in China when they return. From that, domestic people will request those particular group of people to buy on their behalf in foreign countries and giving some tips in return. Today online oversea purchasing agency is seen as an approach for people in China access to the goods that are not available or much higher price in domestic market, but in stock or much cheaper in foreign market, such as United States, United Kingdom, France, and Australia these kind of hot countries for Chinese people traveling or studying. Generally speaking, online oversea purchasing agency is simply finding someone or agent company to buy on somebodys behalf in foreign countries which is running bases on the Internet and international logistics(Chen, 2011).

Why online oversea purchasing agency market is huge? In 2011, the amount of transaction in online oversea purchasing agency market reached to 24.1 billion yuan (approximately 2.43 billion pounds) and it is expected to reach 48 billion yuan (approximately 4.85 billion pounds) in 2012 (see appendix 1).

In addition, the increasing number of middle class, Chinese student studying abroad, and increasingly open and rapid communication of information from foreign countries also have stimulated this particular industry. Furthermore, the thriving phenomenon of Chinese online oversea purchasing agency industry actually can be seen as a reflection to further globalisation of China because it involved a circulation and trading of various kinds of commodities went beyond import trade.

There are three main reasons that driving Chinese consumer to buy products through online oversea purchasing agency:

Better Quality Chinese people are inclined to have exocentric mentality, in other words, they perceived the quality of goods from foreign developed countries were better than domestic one. The recent exposure of cosmetics and food safety problems such as excess level of heavy metal in cosmetics products (Wu & Zheng, 2012) and market entry of substandard milk powder in China (BBC News, 2009) however activating this thought again in Chinese peoples mind. Consequently, cosmetic product and powder milk product occupied the first (22%) and second (18%) place of overall product consuming category within online oversea purchasing agency in China (see appendix 2). It is difficult and time-consuming to rebuild peoples confidence on domestic product and this has led online oversea purchasing industry to a unabated circumstance.

Cheaper Price There is a wide gap between China and some specific foreign countries in terms of price difference in goods, especially in luxury sector. For example, a COACH legacy Haircalf Pocket Tanner Tote price in American official website was 898 dollars (COACH, c2012), converting to China Yuan is about 5,593 yuan. However, the official price for the same bag in China went up to 9,990 yuan (China COACH,

c2012). The most vital reason for almost two times price of that kind of luxury product is the charging of a series of taxes and dues, such as custom duty, consumption tax, and value-added tax, which means the total of taxes and dues can reach around 70% to 100% of the original price. Undoubtedly, the luxury goods, particularly in bags products, occupying the third place (12.5%) of overall product consuming category within online oversea purchasing agency in China (see appendix 2).

Appreciation of the China Yuan In online oversea purchasing agency industry, consumer will use China Yuan as transaction currency to deal with agent rather than US dollar, Euro or Great Britain Pound etc. In recent years, China Yuan is continuously appreciating (see appendix 3). On the contrary, price of the oversea product can be seen as a continuous depreciation to those consumers if that price remain the same in foreign markets. In other words, they are able to get a better deal because of the appreciation of the China Yuan. Thus, it triggered the online oversea purchasing agency to develop further as people start to search more cost-effective products from outside of Chinese market.

As to online oversea purchasing agent There are huge market space and profit-driven for agents within the Chinese online oversea purchasing agency industry due to numerous consumer base in domestic of China and the profit from service fee of oversea purchasing agency, rebate of certain partnership or membership, and logistics discount. The online oversea purchasing agency industry in China can be divided into two types of sellers: 1. Self-employed agent International student, flight attendant, tour guide and people who is on business trip are the main procuring forces of online oversea purchasing agency industry. They takes advantage of location to directly purchase the foreign products and sell them via Taobao and Weibo. The former one is similar to Ebay and Amazon yet a huge online

shopping website in China (MZ Hosting, 2011); the latter one just likes Twitter, a micro-blogging service which is free and the most common and popular social sharing platform in China (Hewitt,2012).

2. Specialized Online Shopping Website The majority of specialized oversea purchasing agency website generally consists with professional e-commerce platform, foreign procumbent partner, logistics partner, and customer service center. For instance, www.usashopcn.com is the biggest online oversea purchasing agency website in China which even has branches in New York and Los Angels etc. and it is the only oversea purchasing agency company that can reduce the consumption tax in United States for Chinese consumer

(www.usashopcn.com, c2012).

What makes Online Oversea Purchasing Agency Special? Online and Oversea purchasing forms the competitive advantage of this particular industry. First, the obvious advantage of electronic commerce, which in here means selling over the Internet has reduced a considerable operation cost, especially for selfemployed agents. Second, not only the greater categories of goods and better quality in oversea market comparing to Chinese market, but also the earlier launch time for new products provides an initiative advantage to online oversea purchasing agency industry. It combined those factors and built up a strong competitive advantage of price, timing and brand competitiveness.

Problems within the Online Oversea Purchasing Agency Industry in China The lower product price and greater accessibility these two main positive factors of online oversea purchasing agency actually indicated that it is an integration of existing resources by doing this business. However, even though Online Oversea Purchasing Agency itself has unique advantages and it can not be denied that the demand within this sector is rising year by year so far, there are still quite a lot of distinct problems

and risks because it is easily running in the gray area for such an industry. Indicating from the steward tax evasion case above, a series issue of smuggling, counterfeit, after-sale service and so onappeared and will constantly appear which not only has drawn attention to relevant departments but also cause Chinese government strengthened the regulation of online oversea purchasing agency industry. Hence, it has to faced with both risks from economy and legitimacy.

Prolems and risks to Consumer: Quality and After-sale service From consumer point of view, it is hard to guarantee the quality and after-sale service of the products bought from online oversea purchasing agents or websites due to the indirection access to the foreign goods. If there are problems such as lose, damage, discrepancy in product specification etc. it is difficult to deal with the return policy since the agents or websites are just the middleman between domestic consumers and foreign sellers. Sometimes there are some unscrupulous agents or websites sold counterfeit or unqualified products to people especially in luxury sector. Usually they stock from leatherware trafficker with very low price then sell the goods with the original price (He & Chen, 2012). However, not only counterfeit bags but also counterfeit receipt appeared in market even if before a receipt or invoice of luxury goods was a valid certificate of their bloodline (Zhou, 2011). Furthermore, there is no authentication service in any luxury counter therefore it is easily to generate disputes like one case happened in Shanghai, a girl from rich family spent 380,000 yuan (approximately 38,302 pounds) on a Hermes Porosus bag from an online oversea purchasing agent but this girl was not the first owner and there was no receipt, sometimes it also was a means for agents to avoid tax without invoice. As to authentication, Hermes counter also refuse her. After a long-time mediation even though this case ended up with refund from agent (Zhu & Qian, 2012), it involved so many unnecessary troubles to consumers.

All those problems can possibly result consumer in difficulty of self rights and

interests maintainance as oversea purchasing industry is an emerging industry and Internet-base businessagents doing business online has made this industry carry an characteristics of high fluidity, in other words agent did not need to do registration in Chinese ministry of commerce and it was very difficult for relevant ministries to supervise and follow the circumstances rapidly if there was any illegal agent. In addition, the usual contact means between consumer and agent was the Internet or phone, consumer lacked of transparency of agents information and valid identity if they wished to complain. Furthermore, most of the oversea purchasing agency websites generally were just a transaction platform for both consumers and agents, which means they are irresponsible for the quality and transaction of products.

Problems and risks to agents: Cost Increase The majority of agents in online oversea purchasing agency industry use post as their distribution channel. Since the sharp increase in transaction of oversea purchasing, there was a serious loss in Chinese custom revenues. Consequently, the Chinese customs released an adjustment of tax allowance relating to postal items in 2010, which set from 500 yuan (approximately pounds) to 50 yuan (approximately pounds) (General Administration of Customs of Peoples Republic of China, 2010) . Base on this adjustment, basically all the products of oversea purchasing agency have to be charged taxes which has directly added up to cost in this industry and narrowed the interest space. In addition, recently the Department of Primary Industries of New Zealand has issued a statement that they would act vigorously against the illicit export of infant formular milk powder, the both accessibilities of oversea purchasing agency, mailing and carrying by person has been blocked referring to New Zealand (Want China Times 2012). This would be another increase in cost since New Zealand is the main milk powder exporting country and the most welcome one in China, agents have to find another way to procure.

Tax evasion There are minority of agents, like the former stewardess from the case, carry foreign goods through personal custom clearance. According to the regulation of custom in China, the tax exemption is higher if people bring products from abroad rather than mail them. However, the real situation is that a lot of people like the arrested former stewardess underquote or even not quote the price of parcels in order to avoid tax. Thus, if agents is not doing business in a proper way or lacking awareness of tax rules and laws, it is easily to be suspected with smuggling and crime, which actually involved legal risks with online oversea purchasing agency industry. In addition, most of the private agents do not have the notarized qualification of foreign trade and actually they are taking some kind of pressures and risks anyway.

Solutions Those problems and risks have led online oversea purchasing agency industry into a dilemma, especially to agents. If they do increase the price, shift the additional tax to consumer, they will lose their competitive advantage in price difference; If they remain price in same, probably what they earn even can not pay the tax and force them be in risk of breaking law. Hence, it is imperative to plan some solutions for that.

Enhance Industry Self-regulation Enhancing online oversea purchasing agency industry to regulae itself is a positive way to facilitate the protection for both agent and consumer. One hand, the oversea purchasing agency platform websites like Taobao.com, actually can implement verification system and filter the unqualified agents for consumers, ensure they have less chance to deal with undesirable agents. On the other hand, formulating relevant service regulations and spread the legal knowledge for agents in case of touching the legal limit.

Cooperate with Foreign Trading Company and Individuals

Even cooperate with foreign trading company may increase the cost of doing oversea purchasing agency business, it can reduce the risk in tax evasion and ensure everything agents do is legal. In addition, agents could joint with each other could reduce the cost fee in terms of construction and service fee from online shopping websites.

Formalize the Industry Standard Chinese government should regulate the regulators, in other words, pushing and supervising the relevant departments to perfect the tax law and industry regulation referring to online oversea purchasing agency industry within the e-business environment. For example, implementing the revenue department to open online oversea purchasing business specific channel in order to validly supervise the transaction activity within the industry.

Conclusion Overall, the online oversea purchasing agency industry of China is still on its stage of growth although there are many issues relating to consumer side, quality and aftersale service of oversea purchasing products, and agent side, cost increase due to tighten taxation policy and illegal risk. Whereas the distinct price difference, better quality of goods these two main features are still the main driving force of further development within the industry. Furthermore, the various solutions would be able to keep online oversea purchasing agency industry on the right track, which may let this industry to an optimal situation.

Recommendations Looking at the bigger picture of online oversea purchasing agency industry in China, there are still a lot of notice foreign brands, like TOPSHOP, ASOS and REVIERISLAND these British brands have not shown in Chinese market yet which might imply that the growing space for this industry is still huge. In addition, the

former stewardess case even has shaken the original mode of online oversea purchasing agency industry, actually it can be seen as a reforming period that a trend of eliminating the unqualified agents could be happen in the short term. Furthermore, the most-profitable luxury sector within the online oversea purchasing agency industry might move up to the second place of most popular oversea purchasing agency products ranking from the coming year since China has occupied 28% of luxury goods consumption in this year (ChinaScope Financial, 2012). However it is an irreversible trend that online oversea purchasing agency industry in China will develop into a more standardized market with greater consumer base since Chinese government is implementing and adjusting policies.

Appendices

Appendix 1 2009-2013 Transaction Size of Online Oversea Purchasing Agency in China (Source: China Electronic Commerce Research Centre, 2011)

Appendix 2 2010 Most Popular Goods Bought Online through Overseas Purchasing Services (Source: Gao, 2011)

Appendix 3 Currency Exchange Rates Between the U.S. and China (The Data Mine,

2012

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