The Asian countries, and in particular Mainland China, are amongst the most lucrative markets for European consumer goods. Not only does China has a rapidly growing middle class with a correspondingly high income, but Western food and beauty products have gained an excellent reputation. They are considered high quality, healthy and, most importantly, safe for consumption.

Over the past decade, China has seen some major scandals, especially in the food and cosmetics sectors, eroding consumer trust in domestic brands. As awareness of product safety is increasing amongst Chinese consumers, Western and European brands – especially organic products – are becoming more popular, despite the current economic slowdown in Mainland China.

But there is one major obstacle for organic beauty brands wanting to sell their products in retail stores in mainland China: current Chinese legislation requires foreign [i.e. non-Chinese] cosmetics to undergo a series of safety tests as part of the product registration. And these safety tests include mandatory animal testing – which is strictly forbidden by every single EU organic certification seal. As a consequence an organic beauty manufacturer cannot enter the Chinese market without seriously damaging its brand credibility, especially in the European market.

The new retail channel

But there are other options for selling organic cosmetics in China. Last year the Chinese State Council launched a new Cross-Border E-Commerce retail model, which is already proving to be a game changer.

The B2C model of selling through so-called “Bonded Warehouses” which are set up in special Free Trade Zones allows Western brands to sell directly to Chinese consumers without having to maintain a physical presence on the Mainland China territory. And this option offers an interesting opportunity for organic beauty brands: since the products are sold online and not through bricks & mortar stores, there is no need to provide proof of animal testing.

Mei Graefe, the founder of Munich based Consultancy Intergate Consulting GmbH, is a specialist in marketing European cosmetics and lifestyle brands in Asia.
She explains how the Bonded Warehouse model works: “The big Chinese online retailers like JD and T-Mall are maintaining warehouses in special Cross-Border E-Commerce zones. Chinese customers place their orders through the retailer’s website, paying for the products (including possible customs charges) through the same platform.
The international manufacturers then dispatch the products directly to the online retailers’ warehouses. When the shipment has arrived, the online retailer informs the Chinese customs authorities about the order, including product information and recipient data. After these details are checked the customs authorities then release the purchased goods. The online retailer notifies its warehouse and a courier service and the courier picks up the order and dispatches it to the customer’s address.”

The first of these Cross-Border E-Commerce zones was set up in Hangzhou (home of Chinese retail giant Alibaba) in early 2015. Other members of this first e-commerce project were online retailers T-Mall and JD.com. With preferential tax policies and simplified customs procedures, the Free Trade Zone model was designed to encourage cross-border e-commerce business and boost foreign trade in order to offset the domestic economic slowdown.

And this is exactly what happened. The pilot project was a resounding success: According to Intergate Consulting, more than 1.3 million sales orders worth 290 million RMB (40 million Euro) were registered in just one of the three trade zones camps from March to August 2015. Further E-Commerce Zones were established in January 2016. There are currently 13 cities in Mainland China with Free Trade zones, including Hangzhou, Guangzhou, Tianjin, Chongqing, Hefei, Zhengzhou, Chengdu, Dalian, Ningbo, Qingdao, Shenzhen, Shanghai, and Suzhou.

New regulations
However, as the Cross-Border E-Commerce model continued to increase in popularity – especially amongst Western brands – this development was threatening to erode the domestic market for luxury goods. In April 2016, the Chinese government announced a set of tighter tax regulations in a bid to regulate this burgeoning new retail channel. Besides raising the import tax for goods retailed through Cross-Border E-Commerce and increasing various fees and taxes for retailers and consumers the government also issued a so-called “positive list”.
Graefe explains: “This list specified more than 1200 product categories which can be retailed through the Cross-Border E-Commerce model. And although cosmetics were still on the list, the first draft of this document required newly imported cosmetics to present the required custom documents (including an official product registration) at the customs point.”

This would have essentially created the same situation that are currently facing foreign beauty brands selling their products in Mainland China stores: having to provide a detailed product registration which is only issued after a series of tests have been conducted, including tests made on animals.

Graefe comments: “Once the first draft of this list was issued there were massive protests from the big online retailers. After all, beauty products, and especially organic cosmetics, are very popular with their customers. In the end, the Chinese government agreed on a transition period extending to 11th May 2017. Until that date, cosmetics can be sold through the Cross-Border E-Commerce model without having to provide a product registration.”

However, what will happen after 11th May 2017 is uncertain, Graefe notes. “It is very difficult to predict how the situation regarding mandatory animal tests for foreign cosmetics brand will develop. There are speculations in the industry that the animal tests might be abolished at some point next year – we are seeing some positive signals – but there has been no official announcement about it or when this might take place.”

Despite the new tax regulations, industry experts expect that the Cross-Border E-Commerce distribution channel will continue to flourish. Online and mobile shopping is enormously popular in China, especially amongst younger customers, and the government is actively promoting online entrepreneurship in order to bolster the slowing economy, Graefe says.

According to figures by business consultancy McKinsey, cross-border consumer e-commerce amounted to an estimated 259 billion RMB (40 billion USD) in 2015, increasing around 50% per year. And Dezan Shira & Associates estimates that the volume of online cross-border import and export business might reach 6.5 trillion RMB in 2016.