Supplementing cross-border trade in China with domestic sales "best way in the long run": TSI Australia chief

Norris shared this view when speaking at the HPA Summit held in Shanghai last month.

Currently, many overseas brands are selling products through cross-border e-commerce, since they would need a long time to secure required approvals — such as 'blue hat' registration, which currently takes two to three years to complete — before they can enter China's brick-and-mortar stores.

While Norris acknowledged that cross-border e-commerce "will not go away"​, he urged overseas brands to "supplement cross-border trade with domestic​ trade"​, describing the approach as the "the best way in the long run"​.

Having experienced the sudden shakeup in China's cross-border e-commerce regulations in 2016, including tax increases and abrupt bans on some goods, it dawned on him that there was a huge amount of uncertainty lurking in China's cross-border e-commerce space.

"That's why (I) encourage businesses to take a supplementary to protect them."​

Ensuring sustainability and finding ways to back up monumental growth became a key focus for him.

He believes that as regulations evolve, domestic manufacturing "will be an easy route (and) faster route to market, and will allow people to scale up much more effectively than international manufacturing"​.

To do so, brainstorming about the types of products to make will not suffice — finding the right partners and being able to withstand changes are just as important to successfully navigate China.

"You do need to reframe your thinking: what product category do I want to be in, what partners do I want to work with, and are they flexible enough to move with me as the decisions change?"​

From his experience with projects involving businesses bringing products into China, "none of it stays on a linear course; they all take twist and turns​”, and with every change, people ask, "Do I have the right partners? Will they stick with me?"​

As such, regulatory consultants and distributors or agents are often the first and some of the most important people to look for, since "they can cover some important parts of the value chain"​.

"In the ​longer term, we feel that registrations and partnerships with providers who can deliver multiple steps of the value chain, will be required to win big and to maintain that scale."​

TSI achieved a milestone in domestic trade in China last year, winning the first ever China Food and Drug Administration (CFDA) Manufacturing Licence​ for β-hydroxy β-methylbutyrate (HMB) production in China.

The exclusive licence was granted to TSI's Jiangyin Pharmaceutical facility (a wholly owned TSI Group company) to produce HMB for use in Chinese food products. The CFDA also gave the green light to the group's HMB for a wider variety of Novel Food categories, such as baked goods, beverages, candies and chocolates.

Diversification​

According to Norris, it is easy to establish cross-border e-commerce trade, and it provides a solid base to test products, consumer adoption and brand fit, but this comes with volatile policy change.

This means companies should not rely on e-commerce alone.

"I think everyone understands that it (cross-border e-commerce) is a quick route to market, (but) I think everyone is nervous that it could change rapidly. ​I don't think there is a single business out there whose leadership is saying that cross-border (e-commerce) is all it needs."​

More foreign brands are aware of the need to diversify their business models in China beyond e-commerce channels.

In an exclusive interview​ with NutraIngredients-Asia​ last year, Blackmores' CEO Richard Henfrey commented that the company's long-term fortunes in China would depend on establishing a successful retail business alongside its currently thriving cross-border e-commerce sales.

Future developments​

Zhang Zhong Peng, director of the China Chamber of Commerce for Import and Export of Medicines and Health Products (CCCMHPIE), believes that while e-commerce is flourishing, direct sales should not be neglected.

He said that although e-commerce sales are popular with younger consumers, direct sales are still commanding considerable results in second- and third-tier cities, and rural areas. In China, both retail and online sales of consumer goods have been growing over the past five years.

Retail sales grew from RMB21.4 trillion in 2012 to RMB36.6 trillion last year, whereas online sales recorded a steeper growth, from RMB1.3 trillion to RMB7.2 trillion in the same period, Zhang said.

In terms of functional food and supplements, direct sales still dominate, accounting for 49% of total sales models, followed by online shopping (24%) and pharmacy (23%).

Last month, a draft e-commerce law was submitted to the NPC Standing Committee, China's top legislative body, for a third reading to further regulate online market order and protect consumer rights.

The draft law further clarifies e-commerce operators' liability, and punishment for the infringement of consumer rights.

However during the discussions, some lawmakers suggested that the draft should include more items to regulate cross-border e-commerce transactions, local news CGTN reported.