June 2016

BUSINESS MODELS

Scott Li, e-Commerce Program Leader, Shanghai

Echo Tan, Business Development Manager, Shanghai

Confidential

2

SESSION OBJECTIVES

1. Landscape of China e-Commerce

2. Key Business Models

‒ Domestic e-Commerce – General Trade

‒ Cross-border e-Commerce

‒ Personal Parcel

3. Management of Taobao Partners (TP)

4. Importance of Localisation

LANDSCAPE OF CHINA E-COMMERCE

4

OVERVIEW OF KEY MESSAGES

1. No one size fits all

2. Multiple marketplaces

3. Multiple models

4. Content is the KING and KOLs are used case-by-case

5. Mix of in-house resources and external partners

6. Challenge to ensure cohesiveness between branding, pricing, business models, marketing, and investments

7. Pricing strategies considered upfront

8. Partner KPI performance monitor

9. Localisation v.s. Globalisation

5

LANDSCAPE STILL DOMINATED BY TWO FAMILIES

ECOMMERCE

SOCIAL

VIDEO

PAYMENTS

1 2

3 1,2

1,2 4

1 2

KEY BUSINESS MODELS

7

EXAMPLE BUSINESS MODEL

Customer

Home

OfficeOffline &

Offline

Chinese

Tourist

Social &

KOL

WeChat /

WeiboMobile

Commerce

Digital Agency

JD.com

TP Agency

Data Agency

TaobaoOffline

RetailerTmall

Chinese

Community

Word-of-

mouth

Brand Site

Goods Sale

Subsidiary

3rd Party

Warehouses

General Trade

0% Duty & 17% VAT

Normal Customs & CIQ

Payment Dividend

1

2

3

8

TRADITIONAL: B2B CROSS-BORDER

Producer

Distributor

(WFOE or 3rd Party)

Customer

(offline)

RMB

17% Output VAT

0% Duty (FTA)

13% -17% Import VAT

Customs & CIQ

Ship and Sell - Offline

Producer

Distributor

(WFOE or 3rd Party)

Customer (offline

and online)

RMB

17% Output VAT

0% Duty (FTA)

13% -17% Import VAT

Customs & CIQ

Ship and Sell – Offline and Online

Commission

(ICP License)

Brand.com/Mar

ket places

housed outside

of Mainland

Brand.com/Market

places housed

outside of

Mainland

9

CROSS-BORDER E-COMMERCE WITH MARKET SPACES

• Why Customers purchase cross-border?

• High product quality

• Lower product price

• Brand preference

• Hard to purchase offline in China

• Cross-border less than 40% of all online shopping

• A good starting point, but eventually

evolve to domestic e-commerce?

• Establish a WFOE to manage online

and offline sales and have a

sustainable business in China?

• 27 approved cities with platforms for cross-border e-commerce

Advantages for New Zealand exporters

• No legal entity established in China

• Product not registered in China

• No CIQ label / inspection / testing?

• Last mile delivery in China is the cheapest in the world

• Limited package damage

• Limited package missing

• Commodity service

10

CBEC MODEL #1: DIRECT MAILING (“ZHIYOU”)

Description

1. Merchant receives Customer order

2. Individual parcel sent directly from New Zealand

to China (or shipped via HK)

3. Last mile delivery by local 3PL

Costs

• Personal Parcel Tax (15%, 30%, 60%)

(Exemption of tax payable is under RMB 50)

• International freight and local last mile delivery

• Commissions to online payment provider

Pros

• Exempted from New CBEC policies

• No CIQ check as long as the items are not on the

Negative Lists for postal articles

Cons:

• Lead time: 2-3 weeks versus 2 days

• Potential bad consumer experience caused by

anticipated increased Customs/CIQ inspections

and delays in clearance, and etc.

• Confusion (dispute) as to who should pay the

Parcel Tax (i.e. DDU or DDP price quotation)

Merchant

Customer

CommissionExpress Courier

Online

payment

in USD

Brand.com/Market

places housed

outside of

Mainland

Online

payments in

RMB/USD

1

2

3

11

CBEC MODEL #2: BONDED WAREHOUSE (“BEIHUO”)

Description

1. Merchant forward deploys inventory into a CBEC

bonded warehouse based on anticipated sales

2. Merchant receives Customer order

3. Market Space notifies 3PL

4. Local last mile delivery from the bonded warehouse

(after Customs and CIQ formalities are completed)

Costs

• New CBEC Taxes (@70% of full rate)

• International sea/air freight to bonded warehouses

• Bonded warehousing costs + pick & pack + last mile

delivery

• Platform driven demand connecting with inventory

planning

Pros

• 2-3 day efficient delivery to Customer

• Only model that allows certain Dairy products

• Readily re-export unsold product from the bonded

warehouse

Cons:

• Comply with Positive Lists and other registrations

requires depending on the product in question

Merchant

Customer

Bonded

warehouse

Online

payment in

NZD

Online

payment in

RMB

Licensed Market

Places

1

2

4

Commission

3

12

CBEC MODEL #3: CONSOLIDATED SHIPMENT FROM NZ

Description

1. Merchant receives Customer order

2. Pick and pack with 3PL in New Zealand

with consolidation multiple individual

parcels into a single shipment

3. Consolidated shipment delivered to bonded

warehouses in China for clearance

4. Last mile delivery by local 3PLs

Costs

• New CBEC Taxes (@70% of full rate)

• International airfreight + last mile delivery

Pros

• Cost savings on freight and working capital

compared with direct mailing

Cons:

• Comply with Positive Lists and other

registrations requires depending on the

product in question

• Lead time: 7 days to 10 days versus 2 days

Merchant

Customer

Contracted

Warehouse

(consolidation)

Bonded

Warehouse

Licenced

marketplaces

and websites

Online

payment

in RMB

Online

payment

in NZD

1

2

3Commission

4

13

PERSONAL PARCEL IMPORT TAXES (“DAIGOU”)

Personal Parcel Exemption (PPE)

• Exempt if the tax is below RMB 50

• Example #1: Import food, value RMB 99, tax rate 15%, the tax is RMB 15

• Example #2: Import cosmetics, value RMB 120, tax rate 60%, the tax is RMB 72

Registrations

• Exporter required to provide product (SKU) information to Market Space and 3PL (nothing proprietary in nature).

• 3PL to complete registrations online with Customs and CIQ.

Personal Parcel Tax (PPT)

• Two or more products with a total value under RMB 1,000 (RMB 800 for goods from Hong Kong, Macao, and Taiwan), or an order of product product of any value

Rate Commodity

15% Food (including healthcare

products), some apparel and

footwear

30% Suitcases, leather products,

electrical appliances; clothing

60% Cosmetics, skincare products.

golf-related products

14

CBEC IMPORT TAXES

CategoryPayable Tax

Before After (bonded warehouse) Difference

Mother & Baby

products, food, health

supplements, kitchen cleaning <RMB 500

10% (exempted

because the tax value is under RMB 50)

VAT17%*70%=11.9% more tax 11.9%

Mother&Baby

products, food, health

supplements, kitchen cleaning >RMB 500

10% VAT17%*70%=11.9% more tax 1.9%

Cosmetics <RMB 10050% (Exempted

because the tax value is under RMB 50. )

VAT17%*70%=11.9%

Consumption tax 30%*70%=21%

more tax 32.9%

Cosmetics > RMB 100 50%VAT17%*70%=11.9%Consumption tax 30%*70%=21%

less tax 17.1%

Old Rules: A parcel tax liability of less than RMB 50 is exempted. The maximum value per order is RMB 1,000. Each consumer is allowed to buy no more than RMB 20,000 in accumulated value in one calendar year. If exceeding the value, the consumer will have to pay the normal General Trade import taxes.New Rules: The policy of “the parcel tax liability under RMB 50 is exempted” will no longer apply. New taxes applicable to all B2C cross -border ecommerce transactions regardless of model (e.g. direct mailing, beihuo etc.). The maximum value per order is RMB 2,000 and each person is allowed no more than RMB 20,000 in accumulated value in one calendar year. If the single order exceeds RMB 2,000 or the accumulated orders exceed RMB 20,000, the normal General Trade import taxes will apply.

15

POSITIVE LISTS (FILING AND REGISTRATIONS)

• Two positive lists were co released by eleven ministries and commissions on 8th

April and 15th April respectively and the two lists cover 1293 products/categories.

• The interpretations of some of the products vary from bonded warehouse to bonded warehouses due to interpretation controversy and misunderstandings

• The remarks made to “health food categories” and “skin care products” made a huge impact on the relevant exporters who solely rely on CBEC as the remarks imply that

‒ the majority health foods and skin care products will not be allowed to trade through CBEC anymore.

‒ cosmetics which were never previously imported into China via General Trade and registered with the State Food and Drug Administration (SFDA) are not allowed to be traded via CBEC bonded warehouse mode.

• Full implementation delayed until 11 May 2017.

MANAGEMENT OF TAOBAO PARTNERS (TP)

17

TP: OVERVIEW

Situation Outlook

• More than 700 TPs for TMALL/JD/VIP, etc.

• 45% of TPs capable for full service across categories.

Pros/Cons

• Good quality TP have

‒ Good relationships with marketplace platform

‒ Familiar with the regulation.

• Easy to get good traffic and fasten all process

• TP carries similar brands so it will be good opportunity to do cross brand event and grow rapidly

• When TP handle many brands, smaller brands may became less important

• TP lack expert product knowledge, so it may be hard to do customer education through customer service

• TP model suits mass market product more so than niche market one due to marginal cost

18

TP: EXAMPLE OF TMALL TOP TP AGENCY

TP Name : Yidong EcommerceCooperated brands:

DSR Score:

19

TP: INDICATIVE COSTINGS

Service Partner Operation Only Part Store Service Full Store Service

Daily Operation

Store manage,

on/off Shelf, event

register

2%

Included client

service team.

3%

TP carry all the

service included

SEO 4%

Commission 3%~10% (Negotiable)

Market Event &

User Experience

None

5%

Marketing event

manage

7%

Included pay traffic,

CRM, DSP

10%

WarehouseOther 3PL

3%

Other 3PL

3%

Provide Warehouse

4%

Last Mile DeliverOther 3PL

1~1.5%

Other 3PL

But can enjoy

discount <1%

Other 3PL

enjoy group discount

<1%

Total Cost % 15%~22% 17%~24% 22%~29%

20

TP: KPI

Product KPI

Marketing KPI

CRM & Loyalty

Daily Sale Through Rate

Average Order Value

Discount Analysis

Price Range & Margin

Segment Performance

Inventory Performance

Return Rate

Traffic & Conversion Rate

Page View & Bounce Rate

Pre – campaign selection

After – campaign analysis

DSP performance

Paid Traffic ROI

Customer DSR

Loyalty Life Cycle

Buddle Sales

Repeat Purchase

IMPORTANCE OF LOCALISATION

22

LOCALISATION: PAYMENT PLATFORMS

• Payment Gateway

• E-Bank

China

Global

China

Global

MOST POPULAR PAYMENT

METHOD IN CHINA

Local consumer use 3rd party payment instead of credit

card

23

LOCALISATION: FESTIVAL DRIVEN SALES!

Jan

Feb

Mar

Apr

May

JunJul

Aug

Sep

Oct

Nov

Dec

1 Jul Communist Party

Youth Day

Tomb-Sweeping

Lantern Festival

11.11 Singles Day (Tmall)

Thanksgiving Day

12 Dec Double 12

25 Dec Christmas

Fathers Day

World Children’s Day

Mother’s Day

Easter Day

April’s Fool Day

1 Jan New Year

Halloween Day

Chinese New Year

Chinese Valentines Day

Spirit Day

Teachers’ Day

Mid-autumn Festival

1 October National Day

Double 9 Festival Woman’s Day

Dragon Boat Festival

USD 14.3 billion in 2015

6.18 (JD.com)

24

LOCALISATION: STORY TELLING AND CONTENT

25

LOCALISATION: WECHAT CONTENT SNAP SHOTS

26

LOCALISATION: WECHAT CONTENT SNAP SHOTS

27

DIGITAL CASE STUDY: NZWINE KOL ENGAGEMENT

28

LOCALISATION: CASE STUDY COMPARATIVE ANALYSIS

Fruit (1) Fruit (2) Dairy Supplements

Model Domestic DomesticDomestic + Cross

BorderCross-border

TaoBao Partner/TP FruitdayNo but 300+ wee

merchants Sharee Kungfu Data

Market Space(s)TMALL, JD, YHD,

vertical and etcWechat

TMALL, JD, YHD,

vertical and etcTMALL

Social MediaWeibo (310,000) +

Wechat (80,000)

Wechat (primarily

manage “wee

merchants” not

consumers)

Weibo (140,000) +

Wechat (100,000)

Weibo (4000) +

Wechat

Content HQ + WFOE Growers & Distributor HQ+WFOE HQ

KOL Yes for campaigns No yet Yes for campaigns Not yet

Call Centre No No Yes No

Headcount

• 1 e-Commerce + 4

Marketing at WFOE

• Service providers

for social media

and flagship stores

Distributor has 3 FTE

in NZ + 7 FTE in

Shanghai

• 10 FTE for e-

Commerce at

WFOE;

• Service provider for

Social Media and

Flagship stores

• 3.5 FTE for online

channels at HQ

• Service provider for

Social Media and

Flagship stores

29

OVERVIEW OF KEY MESSAGES

1. No one size fits all

2. Multiple marketplaces

3. Multiple models

4. Content is the KING and KOLs are used case-by-case

5. Mix of in-house resources and external partners

6. Challenge to ensure cohesiveness between branding, pricing, business models, marketing, and investments

7. Pricing strategies considered upfront

8. Partner KPI performance monitor

9. Localisation v.s. Globalisation