Online Distribution – Part II: Selling Online When You Are Based In China?

11 June 2016

Despite a recent boom in cross-border sales, domestic e-commerce remains the largest online market in China. Any brand distributing its products in China should have both an offline and online strategy.

In our last newsletter, we talked about online distribution when you do not have a China-based company. In this new issue, we will examine the possibilities for players with operations set up within the territory of the People’s Republic of China.

The rise of sophisticated online Chinese platforms such as Tmall and JingDong has sped up online buying practices and increased spending in China. International companies with a legal entity in China have also started to sell online from China. Options offered for online distribution include (i) distribution from your own website or (ii) distribution through a Chinese platform.

The setting up of a distribution platform or online market place is a highly regulated business that we will not cover in this newsletter. As far as the legal aspect of these options are concerned, foreign-invested companies must comply with proliferating legislation as well as the practices imposed by Chinese online players.

Operating from your own website

For commercial and marketing reasons, well-known foreign brands with established retail operations in China have all designed websites with a section dedicated to online sales that is directly accessible to Chinese consumers.

There are few legal issues for a foreign-invested company practicing online sales of its own products on its own website.

  • Relevant business scope

Any company incorporated in China must have a business scope that defines its present and future activities.

A foreign-invested company operating an online retail business must have a relevant business scope and comply with specific local requirements.

For example, the exact wording on the business license of a foreign-invested company for online sales activities differs between authorities in Beijing and Shanghai. Indeed, different authorities use different wording to describe similar activities.

  • Operating a retail shop in China

A foreign-invested company wishing to sell on its stand-alone website must first open its own retail shop. Although this is ignored by many foreign players in China, it is still a legal requirement and could give the authorities a good reason to close a company down.

  • Selling its own products

The website of a foreign-invested company cannot be an intermediary platform as this kind of activity is still limited to Chinese companies (with some exceptions). Regulatory constraints are explained in section 3 below.

Using a website implies that products sold on the website are bought and owned by the foreign-invested company before being sold on to its Chinese consumers. Even if the distribution implies a business model based on consignment, for regulatory reasons, only retail companies which buy and sell products are authorized to sell through an internet platform.

It should be noted that some specific products, such as medical devices, also require specific authorization to be sold online.

  • Obtaining an ICP number

To run a stand-alone website offering online sales, a foreign-invested company needs to get an Internet Content Provider number (ICP bei), a state-issued registration number which is granted by the authorities. In order to get this, the company’s website has to be hosted on a China-based server. As of today, only companies with a legal entity in China can obtain such an ICP number.

Using a Chinese platform (Tmall, JingDong, Yihaodian)

Selling products through an existing website platform, such as Tmall or JingDong, is a popular and practical option for foreign-invested companies. Each brand can open its own e-store; a dedicated online shop to sell its products.

Chinese customers are familiar with the interface and functionality of these million-user platforms. When sellers have operations in China, delivery times are quicker and logistics services offered by the platforms’ ease the carrying out of delivery.

However, this industry has quickly become professionalized in China with the emergence of a type of new service provider: TP or “Tmall Partners”. Despite the name, this is a generic term and not solely related to Tmall. These service providers act as intermediaries between brands wishing to open their e-store and Chinese platforms. Their role and utility have been recognized by major Chinese platforms.

There is no explicit restriction in Chinese law regarding the practice of online selling through a platform for online shopping. Requirements are imposed by each platform.

To launch a dedicated e-shop, most platforms request that brands provide the business license number of the Chinese company that will own the e-shop. Some platforms, such as Tmall, even require that such a company has existed in China for a period of at least two years to make sure its business is stable.

Most platforms also request to see the China trademark registration certificate for brand products sold online. A simple filing certificate from by the Chinese Trademark Office is not enough. The registration certificate proving ownership of the brand is required and proof of registration in China is required. Knowing the time needed to register a trademark in China (15-18 months), properly filing and registering trademarks has become more necessary than ever for operating and selling in China.

Setting up its own platform

In practice, setting up its own platform means the foreign-invested company puts the seller and final buyer in contact through its platform.

Such a platform can exist in China only if an Internet Content Provider License (ICP zheng) for online data processing and online transaction processing activities is granted by the China Ministry of Information.

Obtaining an ICP license is subject to regulatory constraints. The list of the main conditions to be complied with is as follows:

– The foreign-invested company operating the platform can only be incorporated in a specific area of the Shanghai Waigaoqiao Free Trade Zone;

– The minimum capital of the foreign-invested company is RMB 1 million;

– The foreign-invested company must provide Chinese language customer support;

– The server of the foreign-invested company must be located in the Free Trade Zone.

For more details about setting up of this kind of platform and the relevant requirements, please refer to LEAF’s April newsletter on Digital & Telecommunications activities in the Free Trade Zone.

For more information, please contact:

Bruno Grangier

b.grangier@leaf-legal.com