Full transcript below:

Welcome to China Paradigm, a show powered by Daxue Consulting, where we interview season entrepreneurs and experienced managers in China about the business and experience in the country.

Matthieu David: Good morning. I’m Matthieu David, the founder of Daxue Consulting and its China marketing podcast, China Paradigm, and today, I am very happy to be with Liang Sun. You are the founder of a company called Generate and you founded it 7 years ago, in 2013. Generate is focusing on supporting businesses, especially B2B businesses, but I feel you do more than B2B, especially focusing on B2B sales networks in China. So, supporting B2B businesses in their sales in China. You are very close to Belgium. You have an office in Belgium, an office in Shanghai and you are very involved in the Belgian community. And as for now, you are up to 100 or even actually over 100 independent sales and marketing associates. So, as far as I understand, for people who are listening to us, your company, Generate, has a B2B sales network in China of sales associates, whom you call sales associates or salespeople in China. You are in 6 cities, as far as I understand, and those people have a duty to develop the businesses of the clients you have, especially in B2B. So, thank you very much for being with us and the first question I ask is, about the size of the business and you can always correct me if you think there is additional information to add, but what is the size of your business?

Liang Sun: Thank you very much for inviting me. It’s my pleasure to share our experiences and expertise. So, as I said the core competencies of Generate is our B2B sales network in China, the network of independent salespeople. For Generate itself, we have a small team of four full time in Shanghai and a handful of part-time staff. So, in total, we have roughly seven people and capabilities internally, and half of them are managing the independent sales and the other half of them are siding sales support for our customers or project management for our customers.

Matthieu David: I’d like to understand better on how you work, and I really liked your website because when I went on your website, I saw your very organised way of working and that is matching quite well with my way of thinking. You have sales navigation, sales outsourcing and management, and sales recruiting. It looks like very thorough, very organised and very systematic. Could you tell us more about the service you provide to your clients?

Liang Sun: Sure. When a company wants to export their product or technology to China, whether they are experienced already, whether they have some projects already, we feel like they need help when it comes to sales, localizing the sales force, and therefore, our solution here is we help you, starting with the sales navigation program. We help you select the market segments. For example, the other day my clients told me they have three market segments: material handling, theme park and machineries. I said, “Let’s start with material handling.” Then we would help them understand what is the market competitive landscape. What are the key players? What are the channels to market? How do customers make their buying decisions? Who are the decision makers and influencers?

Then, instead of going on with the tech search, we start mobilizing our independent sales force. They are either networkers or experienced key account managers. We would bring the products to their portfolio, which are usually complimentary products, for them to sell the different products to the same key accounts that they have been serving for the past years or decades to monetize their B2B sales network in China. Once there are a few deals going through, the customer would want to hire their own salespeople, but then they may not have the legal entity to do it, nor do they have their offices to do it. Then we help them with recruiting the right person and then putting them in our payroll and our offices for a couple of years until the customer wants to set up their own office and their legal entity and then we would do the rollover to let them go on with it themselves.

Matthieu David: Got it. I feel you are a very systematic person. I looked at the website and the way you express yourself. I feel you are systematic in organizing your services in very clear steps. How do you charge your clients? For instance, we are talking about sales navigation, sales outsourcing, and sales recruiting; I believe you have a very clear way of charging them and a way of incentivizing on success, as well. What is your business model?

Liang Sun: Yeah, indeed we have our pricing scheme and we are structured as we believe that even small companies should have a process or structure in place. In the meantime, we are flexible, and the small companies, medium companies, and enterprise customers may have different preferences on how they want to pay for our services. So we work on hourly rates, or we work on their rates or we work on project fees, plus commissions. So, it is flexible.

Matthieu David: What is the typical way for a B2B sales network in China? I believe the first step is… sales navigation would be like a product. We look at the product, we investigate the market, we talk to the associate. What kind of channel could work? What kind of channels would not work or maybe your product is not ready for China? You need to work on a new product and come back to China. So, I believe that this is a project. It could be I don’t know, 100 000 RMB, 200 000 RMB, but I feel it is a product and then you have recruiting. Here, I feel that it’s more like a percentage, maybe of the salary of the people you recruit, like head hunters do, which is very typical of headhunting and then you have the sales outsourcing and management and I believe as far as I understand that it would be a retainer, plus performance fees (learn more about recruitment). Would you mind sharing a bit more about, if someone is listening to us and would like to project himself in working with you, what should he expect in terms of investment, and at the same time, an incentive to you?

Liang Sun: Sure, as you said, the sales navigation program is a product. It has already indicated a certain level of commitment, should the customer choose the product, and before that, usually the customers have experience in navigating the sales themselves or through us, so, often than not we would start with a day or two’s work. They would give us a clear mandate. “Liang, can you talk to three potential customers or three sales? Give us feedback on our product. Could you investigate this competitor?” What are their products? How do they sell? How do they charge? So, then for us, it is quite easy. It is a few phone calls because we have a professional network for B2B in China to get the information.

Matthieu David: This navigation is a few days. It’s nothing exceeding a week, right?

Liang Sun: No, sales navigation as I said, it is a certain level of commitment. It could take three months. Before the customer commits three months, we want them to have a feeling about how does it look to work with us. So, if a mandate is a few hours, we will take it with an hourly rate. If the mandate is two days, we will take it and then deliver a one-page report. That takes us two days to work on.

Matthieu David: I see, so sales navigation you feel that within three months is enough. Three months is a pretty sizeable amount of time for a company when they want to make decisions. It’s not short either. So, three months is good for you to go through different aspect, to explore things with different associates. So within those three months, are you dividing the different steps or you spend time and explore whatever you can? How do you organise those three months?

Liang Sun: Yeah, so the scope is to select the market segments, contacting the market competitive landscape research, and mobilizing my sales force. So, in practice or operationally we would induct my full-time project manager for up to a week and let him or her get familiar with the product mandate and then what we would do is up to 5 independent sales associates to the project manager, for her or for him to induct those sales associates. Then those sales associates would bring the product in front of their customers over tea or dinner after their own product is selling, they will say, “Hey, would you like to see something else that is cool?” for their feedback. If the Chinese customer wants to initiate their business discussions or put their customer in the shortlist. So, after three months, we would be given our European principles. The feedback from the sales associates, the feedback from the customers, the shortlist of the prospective partners or customers and a cost indication on how you want to move forward and usually, the sales navigation program would end with a proposal for a one-week commercial agenda arrangement in or near Shanghai for the European process to come over here to meet 10-15 potential partners or customers.

Matthieu David: I see. I am on your website and indeed, so you talk about the scope and then the deliverables and so it’s a few pages of feedback and prospects and so on and then you have the options and options is more of activation options, being exhibitions, commercial agenda or execution of the program and it would be more what you would do next, which is to actually sell for them; sales recruiting in China and so on. Is it correct?

Liang Sun: Yes, because sometimes the customer wants to participate in an exhibition, sometimes they need us to induct them on the Chinese business culture and so we have add-ons for them to choose from. 

Matthieu David: I see. So, that was the question I often have for people who do exhibitions. We have clients who go through exhibitions and we know companies who only organize exhibitions for them and so on. How useful is it to go to exhibitions, because every time I go to an exhibition, I see someone who wants to sell me something and I want to sell something to him. It’s a one-way talk only. So, everyone is here to sell, but nobody is here to buy. So, what is your feeling on exhibitions? Do you still feel it’s useful? What do you feel or maybe I was not at one of the good ones?

Liang Sun: I am very glad you asked me the question. We don’t believe in exhibitions to put it in a simple way, although most of our clients still want to participate. It is good for them because they can have a feeling about what the industry looks like in China just by talking to the people during the exhibition, and if we were the European company and we want to go to China, we would not have a booth; it’s an unnecessary cost. We would simply walk around. We did a test with a customer when we said, “Could you give us half of the budget for the booth and let us do something creative?” I asked my entire team of 4 people, wearing the customer’s T-shirt and then we brought cardboard with our tops and we had lollipops or mint or flower or whatever, the promotional products in our pockets, just to catch random participants or visitors for a few minutes’ conversations. “Have you heard of this product? What are you doing here? Would you be interested in our product or could you give me some feedback? We are new here. We don’t know what to do. Where should we go?” Often than not, it is so much more efficient. You have no idea how willing the visitors or participants are willing to share as long as they don’t consider you as a competitor. So, rather than sitting in our booth, waiting for the people to come and sell us something, we mobilize our team to walk around actively looking for buyers.

Matthieu David: Yeah, I feel though to add on, exhibitions could be good to understand your competitors. I have a sense of partners or people who may have additional products to sell with you, as you said with your sales associate and their B2B sales network in China, you make sure that they don’t sell them products as a conflict of interest, but they may sell a door because actually, a door system or entry system because they are in the building industry and the new mall needs an entry system, but that’s not their core business, so, it is complimentary. So here, you may find complementary partners, but indeed, trying to find clients within exhibitions, exhibitors should not sell on it, right? They shouldn’t talk about finding clients for exhibitions. That doesn’t exist, right?

Liang Sun: Actually, more often than not, our customers leave the exhibition with a few solid prospects or even purchase orders. So, it works. Whether the purchase order is solid or not is another matter. Still, they find that their return on investment is fine, but what I want to say here, is the follow-up after the exhibition is more important than the exhibition experience itself because when they are back in Europe, how are they going to follow through with the process, given the different language, the different time zone, and the different response time expectations. It is quite challenging and that’s why we provide sales outsourcing so that our project manager can be their part-time or full-time representative in China following up with the process.

Matthieu David: Going back to your sales associates and the B2B sales network in China, I have the feeling that something you emphasized, you mentioned on average that they are 42 years old and so that means they have experience and they have at least 15 years of working experience. There are several questions: How do you recruit them and how do you make sure they are good ones. And finally, how do you make sure there is not a lot of conflict of interest, because you may have one guy who may want to have a lot of things to sell, but actually within the different things he is selling, you may have a conflict of interest selling the same products as competitors.

Liang Sun: Yeah, let me answer the question in this way. First of all, it is a private network. It is a network built upon trust. I would say everyone in our team, including me, work with less than ten sales associates directly and our sales associates may have their sales associates. So, we know each other. It is not like we only have a few phone calls. We meet each other on a weekly basis and working with sales associates is a cost-effective way, meaning more variable costs than fixed costs and also, it’s easier to get started with and easier and also less commitment. Your full-time sales know a lot more about your company than the part-time external sales force. Whether you want them to avoid conflict of interest or not, you can’t control them because they are out meeting customers. So, working with part-time and external sales force it is safer.

Coming back to your questions about conflict of interest and overlaps, it doesn’t matter to us because we sign the non-compete, non-circumvent, and confidentiality agreement with our principles and then we co-sign the confidentiality and the non-compete with the sales so that they can get on with it. We gave them a questionnaire for them to pre-qualify the Chinese customers’ interest. Once there is a qualified lead, we nominate the leads at our European principles. Once the nomination is accepted, we bring the buyer directly in contact with the seller for them to initiate the business discussions and our project manager may assist in the communications and our sales associates, who are closer to the customer over dinner, over drinks or karaoke, often than not may influence the customers buying decisions. That’s how it works. So, as a result, more qualified hot leads coming and also, the deal closing rate gets increases.

Matthieu David: I see. Your clients are incentivizing you to the volume of sales you do and also the number of leads you bring, or the time you spend because it could be a very long process in B2B sales in China. They may spend a lot of time to translate, it may be technical. It may be very costly for you, and if they pay only with the volume or most of your earning comes from percentage of sales. You may have to wait for a few years before being profitable. How do your clients reward you?

Liang Sun: Yeah so, we are a consulting company and we are not a sales agent working on commission. So, we do have our overhead and expenses covered. In the meantime, we are result-oriented, and we consider ourselves pricing quite aggressive. We often describe ourselves as street fighters, helping customers find shortcuts on signing deals, and getting projects. So it is competitive and yet, we cover our overheads and expenses and make a small profit on those fees already.

Matthieu David: So, the second step is sales recruiting. When you say sales recruiting in China is it that you recruit full-time sales for your clients or is it the associate you activate?

Liang Sun: Yes, so after the three-month navigation program, often than not, there are prospects that are ready to buy or that are already buying, and then we would say you need a full-time salesperson and to follow up closely or to serve your existing customers. We can help you find one and we can put them in the office. The principal would pay us a monthly fee, which includes the offices, employment, and sales support. They can stop the project and the whole recruitment with a months’ process and then we will take care of the hassle. So, again, for them, it is less commitment, but faster setup and same results.

Matthieu David: So, you recruit for them and you hire the people for them with your structure, right?

Liang Sun: In the accounting book, yes. They are on our payroll. The customer pays us a monthly fee to cover the employment and also the cost of our sales support and payroll services.

Matthieu David: I see, but when they sell actually… the company in Belgium, where you are going to involve the client because you cannot invoice for them.

Liang Sun: No, so what I do is I invoice the customer in China. They get the project fees, they share a commission with us because we also charge a commission, so that our fixed or upfront fees are quite aggressive and we want to get rewarded by commission mainly. Then we would give part of the commission to the sales because the sales representative has a job. It is a low risk for them and it is comfortable. But we take all the risks and so we have a higher sales commission than the full-time salespeople that we employ for our customers.

Matthieu David: I see so, so what’s going on is that those clients you have don’t have to create their own company in China. If they do sales, they would invoice directly from Europe, their end-client, and then they would give you some commissions as a reward, or percentage of sales. You are consultants and so you are a consulting company, advising on how to negotiate a dealing and supporting them, but you are not invoicing for them. Am I correct?

Liang Sun: Nope, unless their customer requires it, but sometimes the Chinese customer will require RMB invoices. Typically, it is a service contract for IT serves, project management services and we will assist because we have legal entities both in Belgium and in China and so we can help in that.

Matthieu David: I see. Then, the tricky aspect of your business is that, if you are successful or if you do well in your job, you should lose your client. Your client at some point would start a company in China, have their own structure and so on and that is actually what you say, that after 12 months or until your objective that your client has a company in China and he is successful in his company, what is the next step after the recruitment of a sales advisor and sales in China, by your structure?  

Liang Sun: So, we consider ourselves successful if the client wants to leave us within 24 to 36 months because that means that we have succeeded in helping our customers enter into the China market and have a solid footprint. We usually don’t charge a rollover fee, which means after 24 months, our sales can become your sales. They are free to go and please, refer other customers to our business. This is the way that we believe, and in two years clients are already better than a market research firm’s three months clients. You will be surprised how often our customers come back to us for due diligence support or other supports because they trust us. 

Matthieu David: Is it the reason why you have now digital marketing, brand strategy, design, and social media campaigns, trading? It seems you expanded and that I think I was not very clear on. Those words, digital marketing, brand strategy, design, social media campaigns and talk about Weibo and WeChat, are B2C? (read about optimizing Wechat marketing in China)

Liang Sun: Not exactly, because B2B sales and marketing in China also need WeChat.

Matthieu David: Can you elaborate on it? I think it is a misconception with a lot of B2B businesses, thinking that WeChat is B2C.

Liang Sun: Okay so, the reason we started the digital marketing exactly, is because our clients were asking for it. We have succeeded in helping them sell and they want to market because they have a budget to spend, to create a brand, and market awareness. We tell them honestly, the path on WeChat you need to outsource the work to professional firms and more often than not, we outsource to Chinese firms because we believe they are cost-effective and their foot is on the ground, they are local. Then the customer needs our support on project management and language communications, and they believe in our model. We work on project management fees and to answer your question on the B2B marketing and sales in China, yes, WeChat is a good B2B marketing tool in China (find a guide to B2B marketing in China).

I will give an example. We are helping one of the largest Belgian companies in industrial machinery sector on managing their China marketing and the starting point is starting up a WeChat account, they have a factory in China, for their sales people in China to use as a tool. So when they are done with meetings, they can say this is our company brochure. There is our QR code, please subscribe to our WeChat account to see our project references and news and exhibitions that we are attending. With WeChat, it is so much easier to share news or project references or information to the prospects who can then share internally or externally to other people because everything in China is on WeChat these days.

Matthieu David: I see, so basically even B2B when you are at an exhibition, people follow you on WeChat and that means that it is also used for B2B sales network in China because you build a connection, not only through a dinner and lunch, but also through WeChat and people keep your contact and follow you, right?

Liang Sun: Yeah.

Matthieu David: Talking about sales recruiting in China, how do you recruit a good sales person in China? What is a good sales person in China? To give you a bit of what people think, it’s that a good sales person is someone who is good at networking and relationship building in China. So, basically you would always favour people who are 50 years old with a lot of experience, more than someone who is let’s say very inventive, more than someone who is actually a good speaker. I found that a lot of people tend to think in terms of sales people and recruitment by their guanxi, network, which is very often difficult to assess (learn about leveraging guanxi for business in China). People may say, “I know this one and a lot of people,” but how do you assess it? So, basically an open question: how do you assess a good sales person in China?

Liang Sun: Yeah, let me start by saying that we believe sales is a service, it is an art and most importantly it is a process and we divide the process into three aspects; the lead generation part, the sales follow-up part, which is usually technical and the deal closing part, which is where the network comes into play, guanxi. It depends on the principal’s needs. If they need a sales engineer to follow up on the existing leads that they have, or they need a lead generator, a door opener to get new leads, or they have leads and engineers, but they need a super networker and client relationship manager to close the lead, spend time with the customer to understand what they want. So, typically one person can be very good at one or up to two of the three parts in the process, and we think we can do the sales recruitment because over the last 7 years we have done many cases. We only recruit sales people, because we as a company or me as an individual are sales person in the core and we believe it takes a sales person to understand what a good sales person is.

Matthieu David: Maybe I should have started with this question, but I really want to understand your business first and I think the people listening to us also want to go in depth in understanding what you do and how you serve your clients. But if we go back in time, 7 years ago, what made you start this business?

Liang Sun: That’s a very good question. I started the business 7 years ago because I was lucky enough to have a mentor and he taught me one day, he said, “Liang, never hire sales people.” He came to China for the first time in 2013 to close down a factory and office because the sales people were turning the company inside out. The invoices and goods were going out, but they never saw the money and so they fired everyone. Then this general manager, my mentor, turned the payments terms from 60 days post-payment to 100% pre-payment and because of that, they lost 80% of the customers and kept 20% of the customers, and then the company started to be profitable. So, he taught me, Liang work with sales agents. Let them get on with it. Give them commission. Don’t tell them too much. Hence, I started this model because we believe in partnerships. We respect people’s privacy and we work in teams. We believe in incentives and transparency, and we share referrals.  

Matthieu David: How do you build this professional network of references in China because what you described from outside looks like a perfect world, but in fact when you have intermediaries, you have people you need to share with and so on, it is something difficult to have a contract with someone. It is somehow difficult to make everyone happy and to make sure that everyone understands what you are doing as well. How do you work with all this?

Liang Sun: Yeah so, I started business when I was 26 years old; just a fresh graduate from grad school in Belgium. So, the same mentor introduced his best sales person to my network. Now, we are talking about the sales person that was generating the best revenue, whether the revenue cancelled or not was another matter, but a great sales person in their own way; they make money for themselves and their customers. Then, I spent enough time with them to let them understand what products I have. They were in the construction industry, selling floors, selling roofs, waterproof membranes, selling walls, paintings and then I said, “Would you like to sell Belgian roof top solar panels? Do you want to sell the warehousing racks?” It is all to the manufacturing facilities or project directors, general managers. So, clients and our sales people were motivated because they are money driven and they want to be more helpful in front of the customers and at the same time, they are very careful about sharing their professional network for B2B in China. So, I have to pre-qualify the credibility of my European principle so that I will be comfortable to bring a mandate to them because we care about our relationships and our reputation. This is how I started and this is how I work.

Matthieu David: What direction of the leads you meet with when you may describe those kinds of networks? I believe some European or US companies believe it is a bit too blurry now to go through networks, or guanxi and relationship building in China. It may create a bit of anxiety and people may be a bit nervous about not understanding what’s going on and you talked about trust again, trust enough to contract. American and European businesses want to contract. They want everything clear and written, transparent. I mean transparent by the end client and everyone to be and here, you have to protect their own network, their own wealth, right for the people who introduce you, the good salespeople? So, how do articulate this?

Liang Sun: So, you mean the cultural difference, one is contract-driven and in China it is relationship-driven, right?

Matthieu David: It’s kind of culture, but it is basically a business practice. The business practice is that people own networks. They don’t want really to share it because of the wealth they have, it’s a property, and to go further I longed so that LinkedIn could not have been as successful in China as in the West because people don’t want to show who they are connected to. I studied in Beijing University and I really have this feeling that people wanted to show that they are connected and are relationship building in China, but they don’t want to tell with whom.

Liang Sun: Yeah let me give an example. We were mobilising ourselves here to sell the Belgian rooftop solar solutions and we let ourselves introduce a prospect factory in Suzhou, and all of a sudden my sales people and sales associate disconnected and disappeared for one week and after a week I called them up and said, “Hey, what happened? Are you okay?” He said, “Liang, sorry, I was busy with managing the relationship with the security guards at the door and the decision-makers. We had a lot of fun and they are ready to sign a contract.” He gave me some invoices after dinner and said, “Look, you guys had a lot of fun. Good. Let’s sign the contract then.” I am result driven. I don’t ask questions too much. I trust my sales, but they do bring results.

Matthieu David: Yeah typically, I mean fortunately you are here because a lot of European and American businesses would not be comfortable by this kind of absence of communication, having to spend so much money on entertainment, when you have so many regulations in Europe on the amount you can spend on entertainment, for instance.

Liang Sun: Yeah that’s also why we exist, because we can be localised when it comes to our operations and also, we comply with the European and American anti-bribery or anti-corruption act. So, to give our European principles and production and comfort that they need.

Matthieu David: What is the expectation in terms of timeline to get some sales? What is your experience when you entered B2B sales network in China? Should your client expect to get some momentum after 3 months, 6 months, 1 year? I know it can depend on the kind of business. It can vary from one industry to another, but could you give a sense of what expectation they can get?

Liang Sun: Yeah, B2B sales network in China and it really depends on the sales cycle. It can be as short as 3 months; It can be as long as 3 years and the customer understands it. The company that I mentioned that has 3 market segments, material handling, machinery and theme parks, for the material handling, for example, they want to sell to China Railway and they know it is after 3 years.

Matthieu David: It depends, but I think what we can remember is that minimum 3 months basically you are saying it is not serious to expect results before 3 months. It is a minimum of 3 months to get a bit of something and it can go up to 3 years when it is a very large partnership unit with like China Railway where it will take time and we understand it.

Liang Sun: Let me give another example. If the European company sells floors or furniture, then if we manage to give them the right contacts to the distributor that wants to try the container, then the deals can go through very quickly. So, it really depends.

Matthieu David: We are in April 2020 and everyone is talking about the same thing in all the media. It started first in China and now it is Europe talking about it, impacted. It is the coronavirus. How did it impact your business and your clients?

Liang Sun: Let’s talk about our clients. If they are in manufacturing settings in Europe, then they are busy with business continuity planning. Overall, they are quite busy conducting the business the best way they can and therefore so are we. We decided not to take new projects for the foreseeable future to focus on supporting our existing clients to go through the crisis. At the beginning of the year, we signed a few new projects and for the sales navigation program and after the virus outbreak, we gave the customer the option to postpone the project or even cancel the project because we told them simply, we are not comfortable with conducting the market research because it may not be valid in 6 months and the people in China have other priorities. Thankfully all of them took their money back, so our burden is off. To give you a question, it is going to be a very hard year for us which is fine, because we are financially strong. We believe in long term. We believe in value we create and the money will come, eventually, but so far, we focus on the existing projects and we don’t take new clients for the next say three to six months.

Matthieu David: The clients you were representing with your sales associates and your B2B sales network in China, those people that you hire for them, what is the situation now? Do you feel we are back to business in China? I am currently in Shanghai and I see a lot of people in the street walking. I see all the shops open, but I see a lot of shops are also closed, who didn’t get back to business. It could be restaurants; it could be coffee shops. I also see much fewer or people in malls and stores. I was checking the Apple store and it was pretty empty. Maybe it was too early. I went early to check, but I think it is not back exactly to the level we were before the crisis. What about you in B2B? Do you feel business is back?

Liang Sun: People in China are going to all places, which is a really good sign and whether the business is back, I still think it is too soon to tell because the impact on the businesses and the revenue loss, which is negative, but the government subsidies are positive. How will it impact the industry on the macro level and the individual businesses on the micro-level? It is too soon to tell. It takes a few months. So, right now we feel like the business conversations are still going forward, but whether they would make a buying or selling decision, would still take some time to go back to normal.

Matthieu David: I saw on your LinkedIn profile that you are lecturing and among the topics you are covering, there is made in China, 2025 and this topic seems very wide and a bit theoretical. So, my question is what practical do you get from this made in China, 2025. What practical conclusions do you get that you could bring to your clients and in your lecture?

Liang Sun: In a nutshell, we believe that made in China would help the Chinese manufacturers to export more and more high-value added products to the world and those products are created in China and they are made in China. This is also a business that we are starting to get involved in. We ourselves, buy and sell high-value products from China to Belgium and we also have our clients finding not sourcing and not manufacturers, but we call supply chain partners from China. Because of the incentives, it’s a trend that we believe and we ae spending more internal resources supporting the European companies buy high-value products from China.

Matthieu David: So, the next step for your business would be actually to do what you did from foreign businesses in China, to do it for Chinese companies in the west?

Liang Sun: We decided not to think of it that way. We decided to keep our clientele as the Europeans and the Chinese companies that we introduced to the European companies are our stakeholders, but now some of them are becoming our suppliers because the relationship and trust is there. We told them that there is a market opportunity in China and our European clients may become our clients again, but not for export into China, but for buying from China. It is all about relationship building in China and trust and product and the money flow and good flow from an operational level. The network is built upon trust.

Matthieu David: Very interesting. It is time for the last questions and you received them before the interview. Typical questions that we ask at the end of the interview, what books inspired you most during your entrepreneur journey?

Liang Sun: I would say it’s the Robert book, Rich Dad Poor Dad. You probably have heard of the book. I only worked for a company 6 months in my life and I will never work for a company again. Part of the reason is the book. I believe my capabilities in managing my money more than the government and I equipped myself with good lawyers, accountants and bankers and so, this book made me start and continue and made me keep my head up when I had bad times, because I will never work for someone again and I may fail, but I will never go back to another company and I believe eventually I will succeed because I need to succeed once. 

Matthieu David: Can I ask you a personal question because I understand the desire of working on your own and as an independent, but it sometimes is made at a price. The price being that you postpone some decisions like getting married, like having kids. Are you married? Do you have kids because I believe when you’re an entrepreneur that is something you think like 10 years after others?

Liang Sun: I totally agree with you. A lot of people say that they want to keep a work/life balance. I don’t believe it, or a work/family balance. I also don’t believe that. I believe that either you go fully committed to your business or career development or you connect to your family more. I don’t have kids, but when I do, I want to sell my business and be a freelancer so that I can afford to be a good father, which is the most important job of all time. Right now, my business is the most important job.

Matthieu David: Yeah so, the good side is that you are independent and you make your decisions and reach that conclusion you have in mind. The down side is that indeed, you have to postpone some things in your life. Some people don’t realise when they start a business just after studying that it will cost a lot of things. What do you read to stay up to date about China? What are your favourite newspapers or magazines, even Chinese ones? Are you reading  Caixin, Renmin, SCMP?

Liang Sun: All of them. I would say I only read the titles nowadays and I do read the Economist and CNN, BBC and then I read the titles in the Chinese media channels so I can make my own judgement, which news is true or false, in my opinion, but most of the time I keep being informed by talking to my network and the successful people in the industry.

Matthieu David: What kind of resources would you trust more or what newspapers would you trust more in China to get very accurate numbers, good information? I tend to like Caixin. How about you?

Liang Sun: I would say I remain skeptical on all news channels. Every media outlet has their own agenda and they are trying to be as objective as possible. So, all the numbers and the data and opinions I use them as a reference and combine those resources with my network and my own judgment, and then I can make my business decisions. 

Matthieu David: What book would you recommend on China? A book that you would recommend to foreigners to understand China better or a book that you liked because you understood your own country better as well?

Liang Sun: Well, I think if you ask a foreign entrepreneur living in China, they can answer the question so much better because I believe there quite a few good books in English, written by foreign entrepreneurs living in China and so I read them. What I do is, I live in the country I do business with and now I am spending a decent amount of time in Belgium, because that is what I believe is the best way to understand how business is done in Belgium and living in the country itself is like reading books. I learn so many new things everyday by talking to the people there.

Matthieu David: What productivity tool do you like best? I don’t think WeChat is that productive. We waste a lot of time on WeChat, I feel. What productivity tool do you like to use in your daily work?

Liang Sun: My team uses quite a few tools that I introduced them to: Monday.com and Pipe Drive as a CRM tool, Trello as a management tool. I still use Trello every morning or what I do is I put less than 3 things on the to-do list of the day and the other 5 forecasts I have is urgent and important, which is what I do today. Urgent and unimportant, I let my team get on with. Important, not urgent I schedule another day to do it and another thing is the unimportant and the unurgent, then I will remove them. So, the reason I make sure there is less than 3 things is that I want to be free before 10am. I start my day very early. I start my day at 5am. In China I start my day at 7am, after the workout. It is quite cool and then I a full of energy and so, the purpose is to empty my to-do list and forget about all the tools before 10 am and from 10am to 6pm I do the things that my mind tells me to do and usually I am very productive. I call the customers or suppliers I need to talk to. I call the team I need to talk to. I call my government officer contacts for tea. It is productive and it is the way I find productive.

Matthieu David: It is very interesting. I am happy we met through the nonimportant, nonurgent for the podcast. I am glad you considered it as important to schedule the call. I am very curious about the tools you are using, Monday.com, Pipe Drive, and Trello. The first thing I am surprised of is they are all western tools. Second thing I am curious about is, how do you learn about them? I knew Monday.com because it’s everywhere on YouTube. I know about Pipe Drive because I listen to a lot of podcasts and I think they were sponsoring one of the podcasts. I know about Trello because I will use it at some point. My third question, sorry, I have questions on this because I feel that you have a very organised mind, so I am sure you have a process. So, the third question is how do you choose one tool over another one? Pipe Drive is in competition with Salesforce, with Zoho, with so many other CRM and so on. I understand it is more B2B here, so how do you choose? The first question is, why only western tools? The second question, how do you find them and third one, how do you select them?

Liang Sun: Yeah so western tools is because we have both a European and China team and the China team are English speaking. The European time may not be Chinese speaking. So, we have western tools and all the tools that are mentioned, including Google Docs, Drop Box. They are high Chinese alternatives, equally as good, if not better and we don’t spend too much time on making choices because we believe how we use them is more important than choosing the tool itself. So, now we have been using Pipe Drive for a couple of years. We know there are better and cheaper ones, but we don’t change because we are used to it and it is good enough.

Matthieu David: Interesting. I always have a hard time choosing software because I would go with it for years, and if they go bankrupt, I don’t know why they don’t raise money to go on. I have to start again. I always look at the exit strategy to be able to extract all the data easily. I’d like to have your opinion on an unexpected success or an unexpected failure you witnessed in China? The reason why I am asking this question is because Peter Drucker, the thinker and consultant of business strategy, he wrote many books on business strategy. He says we can assess innovation when we look at unexpected success happening or an unexpected failure happening and this unexpected success or failure gives a sense of direction of what is changing in society or in business. What would you say over the past 3 or 5 years as an unexpected success you witnessed or failure in China which can give us an idea of the changes that are happening here in the country?

Liang Sun: Yeah, I know the book you mentioned. I know the person. I have heard of him and he is from the innovation perspective, from the entrepreneurship perspective. I consider myself more a businessman than an entrepreneur. So, the way I see it, the unexpected failures and success is more than the right time and the right place or the wrong time at the wrong place. So, I believe luck plays a large role in a business success or failure. If you ask me the recent success, I will say the medical companies or the medical supply companies are masks manufacturers. They don’t need to do anything. They need to be at the right time and at the right place, they will be successful for a year or two, at least. The failure is the same. I mean, so many good companies are not going to go through with this because it is not a good time for them, but the good ones will go back up after the crisis is over because we believe the best time to start a business is after the crisis.

Matthieu David: That is interesting. Basically, you don’t believe what Peter Drucker is saying because what you are saying is that an unexpected failure or an unexpected success is based on timing, is based on luck and not necessarily showing a change in society or business. That is an interesting way of seeing things because that’s in some way, how much timing is important in success and it is random. Facebook succeeded, but MySpace failed in a few years of difference and we can see many, many examples like them. Thanks Liang, for your time. It was very, very instructive. I really enjoyed talking to you. I really enjoyed when in the podcast I see that there is a process in mind with the person I am talking to. They have thought about what they did. They chose tools, they know about what they do and they have a process and clearly, you are this person. So, thank you very much for spending time with us on to China Paradigm, the China marketing podcast where we interview entrepreneurs in China, and I hope you enjoyed it.

Liang Sun: Thank you very much Matthieu.

Matthieu David: Thank you everyone for listening. Bye-bye.

Liang Sun: Cheers.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

Do not hesitate to reach out our project managers at dx@daxue-consulting.com to get all answers to your questions

This article China Paradigm transcript #100: Behind the scenes of a B2B sales network in China is the first one to appear on Daxue Consulting - Market Research China.

China is also an exporter of coffee. In 2017, China exported $237 million of coffee beans. As of June of 2019, China has exported around 1.4 million 60-kilogram bags of green coffee beans. Export of green coffee beans shows a stable growth, as quality is improving.

Data Source: qianzhan, China’s export of coffee beans

On-trade sales of coffee mainly go through three types of establishments: coffee shops/cafés (independent and chained), Internet cafés and fast food restaurants. Currently, both in the instant coffee market and China’s coffee shops chain market, foreign brands occupied a large amount. It happens due to lack of domestic coffee brand in the coffee bean market in China.

The coffee commodity chain in China is still developing

Dry processing is simple to operate and is the most traditional and cheapest coffee bean processing method. It is the most common method in China. The deep processing of coffee includes roast and ground coffee processing. This way is the most suitable for making espresso, which is the type of bean most used in Chinese coffee culture. With the rapid growth of coffee beverage consumption, many manufacturers across the country are currently actively working on the coffee processing industry. Such companies as Dehong Hougu Coffee Company, Hainan Lishen Company, Baoshan Orchid Company, Yunling Coffee Company are focusing on building commodity chain that will let them to be competitive in the coffee bean industry in China.

The assistance of Nestle and Starbucks

China’s primary coffee growing region is in Yunnan Province, accounting for 98% of production in the coffee bean market in China. Nestle had established agricultural assistance services across Yunnan and has since been the largest single buyer. Another international lead firm, Starbucks, followed Nestle by established its own sourcing operation in Yunnan in 2009. Nestle operated several collection stations across Yunnan, while Starbucks also established a smaller-scale farmer support center.

Source: ResearchGate, China and the changing economic geography of coffee value chains, ‘Main coffee production areas in China’

Starbucks plans on roasting facilities in China

There are few roasters in China compared to in Western coffee-consuming countries. However, their number is growing due to the increasing popularity in coffee and demand for more specialty coffee companies. There are big commercial roasters in China that focus mostly on mass production for instant coffee. Alongside this, there are also single-shop roasters that often aim for higher quality and roast on a small scale.

In 2020 Starbucks China announced that it will invest about $130 million in China to open a roasting facility in 2022. The project is set to handle Starbucks’ largest roasting capacity, including a roasting plant, warehouse, and distribution center. It will strengthen the coffee industry in China. Beyond roasting, once in operation, the park will integrate green coffee bean warehouse management and processing. With plans to co-locate a highly automated and “intelligent” distribution center that will become the heart of the Starbucks distribution network in China. The facility also will serve as a training ground for coffee roasters.

Coffee bean market in China is entering a stage of rapid development

Increased demand for coffee beans

The demand for coffee in the Chinese market grew in the past five years.  At present, the Chinese coffee market is entering a stage of rapid development. According to statistics, the per capita coffee consumption in China was 6.2 cups in 2018. In 2019, China’s per capita coffee consumption was about 7.2 cups. As coffee consumption is rising in China, the demand for coffee beans will also grow.

Data Source: Prospective Industry Research Institute, ‘China’s per capita coffee consumption’

In 2019 the most consumed coffee types among coffee drinkers in China  were single origin, espresso (including espresso drinks like Americanos and lattes), and cold brew. That is why espresso beans in China make up a large part of coffee bean exports to China.

China’s coffee bean imports have been on an upward trend

In the past four years, China’s coffee bean imports have been on an upward trend. From January to November 2017, China imported 110,000 tons of coffeebeans.

QYResearch predicted that coffee bean export to China will grow to 124,000 tons in 2020. In terms of origins, the biggest supplier of coffee to China is Vietnam. In 2018 the export volume of green coffee beans to China was 84,300 tons, and the export volume of roasted coffee beans and instant coffee powder was 28,800 tons. The slight decline happened in 2018 has rebounded in 2019.

Data Source: Zhiyan Consulting, ‘Exports of green coffee bean and roasted coffee bean to China’

Vietnam, Indonesia, Malaysia, Brazil, and the US are the key countries in coffee bean exports to China. In 2017 Vietnam accounted for almost half of all imports. Based on these origins, and information from external sources, Robusta is the most common imported coffee to China. Robusta is also known as espresso beans in China. However, imports from Colombia and Central America have been increasing significantly in recent years, growing at over 25% per annum. Now it makes up around 5% of the total.

Data Source: International Coffee Organization, ‘Coffee bean exporters to China’

Coffee bean industry in China: the quality is improving

China produces 138,000 metric tons of coffee beans annually. However, although China’s coffee production is high, it is difficult to directly associate coffee with China. This is because the coffee beans in Yunnan used to be of low quality, mostly used as raw materials for instant coffee. However, China already can produce good quality coffee beans.

Yunnan coffee plants is the key producer of coffee bean in China

A French missionary brought coffee to Yunnan province in the late 19th century, marking the crop’s introduction to China. Nestlé also arrived early in Yunnan to encourage the cultivation of coffee. Hogood Coffee, the largest domestic instant coffee maker, appeared in 2007. It has been responsible for cultivating much of the coffee in the Dehong region. In 2013, Yunnan Coffee Traders became the region’s first dedicated specialty coffee exporter. In 2018 they were the largest exporter of Yunnan specialty coffee in China. Much of the Yunnan coffee is exported to Germany and Japan.

Other centers of coffee bean market in China are Fujian and Hainan. Fujian and Hainan mainly grow Robusta. However, the domestic production is too small and these espresso beans in China are usually coming from Vietnam.

Coffee bean brands in China

Illy: A market leader in China

Italian roaster illycaffé has been in China for 15 years, in that time establishing itself as a clear market leader in the coffee bean market in China. It accounts for 30 percent of the imported roast and ground coffee segment in China. With a long and celebrated history as an innovator in the coffee industry, illycaffé is perhaps most famous for its signature blend of nine varieties of Arabica coffee selected from the best harvests in the world. Along with the introduction of new products, illycaffé is taking its products to the market through several channels. The company works with more than 1,000 clients in China in the hotel, café, and restaurant segments. In addition to this, the company’s Italian-style café franchise Illy Caffe has three outlets across the country, and there are another nine illycaffé retail outlets providing full range of Illy products – beans, ground coffee, and capsule machines.

Lavazza: Premium coffee grounds in China

Yum China Holdings has entered a joint venture to develop the Lavazza coffee shop concept in China. As the first step, a Lavazza flagship store in Shanghai, has opened its doors to customers in Asia. Recently, the Lavazza Group has embarked upon a process of international development aimed at tapping into new markets. Meanwhile, Yum China has made encouraging advances into China’s coffee market. In 2019, this brand sold 130 million cups of coffee to Chinese consumers. More than just the classic Italian espresso, Lavazza employs a variety of roasting and extraction techniques, introducing unique coffee creations to China for the first time. Bel Paese Coffee is an exclusive line-up created for the Chinese market, offering a “unique journey of tastes from across the different regions of Italy.”

Rwandan coffee enters China’s market

Rwanda was the first African nation to join the Alibaba-led Electronic World Trade Platform. Organized by the Alibaba group, the online event aimed at promoting Rwandan coffee which is available on the Chinese e-commerce market. Event featured coffee from Gorilla Coffee – a brand from Rwanda Coffee Company, promoted to about 20 million fans that were following online. By the time of buying, up to 3000 pieces (about 1.5 tonnes) of the coffee were bought online in a space of about 1 minute. Besides, as a result of the agreement, Rwandan coffee is available on Alibaba’s platforms. Coffee lovers in China also can access the product through Tmall.

Prospects of the coffee bean market in China

Due to growing middle class in China and the popularity of coffee among younger generation, coffee bean industry in China has a great potential. Forecast predicts that the average annual growth rate of coffee consumption in China will reach 15% in 2020. 

Data Source: QYResearch, ‘Annual growth rate of coffee consumption in China’

With the improvement of the living standards in China and the recognition of coffee culture, it may stimulate domestic coffee consumption. Forecast shows that the size of China’s coffee market will reach 217.1 billion yuan in 2025.

Data Source: qianzhan, “China’s coffee industry market size forecast’

As the size of coffee market in China is growing, it offers boundless potential for coffee bean industry. In the future China can become a major coffee-consuming country. Due to the growing gap between supply-demand in domestic coffee market, foreign producers increase a variety of exported coffee beans to China. Furthermore, with the constant improvement of domestic living standard, the consumption and demand of coffee will expand rapidly.

Learn from a coffee shop entrepreneur in China

See our report on the tea market in China

This article The Coffee bean market in China: Where does China import beans from? is the first one to appear on Daxue Consulting - Market Research China.

The total import of seafood in the first quarter of 2020 was 22.8 billion yuan. Import in the first quarter of 2020 fell by 27% from the fourth quarter of 2019. It is the lowest value of import volume since 2018.

    
[Data source: Statista, ‘China’s import of seafood’]

The COVID-19 outbreak in China came to public attention in January. It was announced during the Lunar New Year, which is also the traditional peak season for consumption. Before the outbreak, China’s seafood import had achieved consecutive growth during 11 quarters. However after the news broke, the seafood market in China experienced a decline in import. 

On the one hand, COVID-19 outbreak impacts the consumption of seafood in China. By the first quarter of 2020, consumption was almost stagnant. On the other hand, the import and transportation of Chinese seafood was blocked.

China also saw the decline in export of seafood products due to lockdown measures in other Asian countries.

[Data Source: General Administration of Customs of China, ‘Growth in exports of seafood from China’]

Fish industries are suffering from the COVID-19 outbreak

Producers of freshwater species are taking a big hit in the fallout from China’s coronavirus outbreak. They cannot harvest lot of fish and shrimp, but they still need to feed them. It erodes the financial wellbeing of producers.

Particularly hard hit was the crayfish industry. The peak season for crayfish consumption starts around May and lasts through the summer. The epicenter of the outbreak, Hubei province, is also the largest production area for crayfish in China.

Due to isolation, all key tilapia processing factories on Hainan Island faced ongoing labor shortages. Fish factories are operating at average of just 25 to 40 percent of normal output. 

The Seafood market in China after COVID-19

Although China’s seafood import slowed in 2020, consumption has a potential to grow.  

The coronavirus epidemic in 2020 will have a serious impact on the Chinese and global seafood supply chain. It will also have an impact on both supply and demand of seafood in countries. Entering the middle of the second quarter, there has been no obvious improvement in catering consumption. Therefore, there is a probability of China’s seafood import growth to decline this year.

However, the Chinese market has recovered from COVID-19 earlier than other countries. There is a hope that once the supply chain of seafood will get back to normal, the industry will function normally.

Short-term effect of COVID-19 outbreak on the seafood market in China:

The epidemic control measures interrupted logistics and seafood catering companies had to cancel a lot of orders. Seafood products processing company’s halted operations, and the market transaction volume was extremely low. This has led to serious backlogs for farmers and middle-level distributors. It directly affected the income of fish farmers and distributors at all levels. Many small market participants could not afford the losses caused by the epidemic and went bankrupt.

In terms of international trade, the epidemic has caused panic in the global seafood products industry. Due to concerns that the epidemic will affect China’s demand for import of seafood products, the prices of foreign seafood have fallen steeply. In terms of exports, many countries have introduced entry controls. Under the circumstances that China has not completely controlled the epidemic, short-term forecast of seafood export is also not optimistic.

Mid-term effect

After the epidemic is over, experts expect that the public will experience retaliatory consumption. After the news emerged that the source of the virus could be the seafood market in Wuhan, the Chinese became more suspicious of seafood. However, gradually the demand for seafood is returning to normal, as scientists have not yet figured out which animal the infection occurred from.

[Source: Baidu Index, search frequency for ‘seafood’]

In addition, 2020 is the ending year of China’s “Thirteenth Five-Year Plan”. According to this, China’s total output of target fishery products in 2020 should be 66 million tons. 

Long-term effect

With the improvement of people’s income level and the development of logistics, China’s seafood products consumer market will maintain long-term growth.

In addition, compared with wild terrestrial animals, wild seafood products are healthier. Since China has gradually issued policies and laws prohibiting wild animals trading, the demand for seafood products may increase. Experts claim that the market scale of aquaculture products in the future will be even broader.

The Chinese seafood market before COVID-19

In the big picture, the Chinese seafood market is booming. China has a long history of eating seafood, especially for coastal residents, seafood has always been an indispensable component of a complete dining-table. After China’s reform and opening-up, an active import of foreign seafood began. Back then, imported seafood was considered novel and luxury. However, seafood is now accessible to the Chinese mass market. With China’s economy growing and people’s quality of life elevating, the seafood market has expanded continuously, e.g. the sales quantity of processed seafood, including chilled, frozen and shelf-stable seafood, shows a steady growth since 2012.

The credit of Chinese seafood market’s growth can go to rising per capita disposable income in China and improved life quality, both in rural and urban areas. In 2017, the disposable income of national residents has achieved a 7.3% year-on-year growth. This means, more consumers are able to afford seafood, even in inland rural areas.

 

Chinese seafood consumers want it all: Health, Freshness and Taste

China has a rich catering culture and a long food-therapy history, Chinese people deeply believe in the relation of what they put in mouth and their health condition. In recent years, environmental pollution and food safety have been seen as crucial issues, imported seafood is often considered more nutritious and safer due to the water quality and stricter quality control. Consumers are becoming more and more aware of the health benefits of seafood, such as the high amount of unsaturated fatty acids.

“Besides pork and egg, seafood has become an important source of protein for Chinese consumers, which influences the consumption structure in China”, says Mike Vinkenborg, project leader of Daxue consulting.

Although the health factor plays an important role of Chinese dining table, taste cannot be compromised. As we can see from the comments on Chinese popular e-commerce platforms, positive feedback coming from seafood buyers mainly focuses on deliciousness and freshness, while negative feedback is usually about safety issues.

Brands capitalize on preference for freshness and flavor when naming their brand

Naming brands or products in China is a tricky, yet crucial part of a market-entry since Chinese people attach great importance to names. Not only the pronunciation but also the chosen characters have to be taken into consideration for brand naming. Looking at the Chinese seafood brands’ naming, most seafood vendors try to emphasize freshness by using Chinese words “鲜 (meaning fresh)” and/or “生 (meaning raw/living)”, as well as to imply deliciousness by using words like “味(taste)” and/or “香 (good smelling)”.

Source: daxue consulting, brand name’s on China’s seafood market

Chinese consumers are hungry for imported seafood

China has been one of the most important seafood markets in the world, its market demands of imported seafood have reached 7.6 million tons in 2017. In 2017, Russia is the largest exporter of seafood to the Chinese market. USA, Canada, New Zealand, and Norway are also important sources for importing seafood in China. Imported products mainly include shrimp, salmon, crab. Based on the information from e-commerce platforms, most popular imported seafood are frozen products. The top sellers’ prices are relatively low among all segments of imported seafood on JD. During important festivals, seafood has been one of the main products purchased online. For example, 38% of food sales on Fresh.jd.com came from seafood during Chinese New Year in 2018.

 

The most related keywords of “salmon” on Baidu Index mainly consist of “the way of making salmon”, “Norwegian salmon”, “price” and other saltwater fish like “trout” and “grouper”.

The most related keywords of “lobster” are “crayfish”, “Australian Lobster”, “lobster breeding”, “Australian” and “how to cook lobsters”.

Baidu is the number one search engine in China. More than ¾ of the total search is made by Baidu. Baidu index collects and analyzes the statistical data of searching behavior, which reveals the market trend.

Qualities of the Chinese seafood market that brands should consider

The Chinese seafood market is highly seasonal and festival-dependent

As we can see on Baidu index, the search frequency of both “saltwater fish” and “saltwater shrimp” went significantly high during the periods of Chinese New Year (normally at the end of Jan. to the beginning of Feb.). And again, search frequency grew enormously every year in the fall season, which is considered by the Chinese as a good season to eat fresh fish/shrimps. Due to the Chinese national day, which is on the 1^st of October, the search frequency goes very high every time at the beginning of October. The whole country will have a 7-day-holiday at this period of time, and seafood producers may also prepare special gift boxes with living or frozen seafood inside so that the Chinese consumers can just grab it in an online or offline shop and bring as a present when visiting family or friends.

 

 

Chinese seafood is as peculiar as it is delicious

Many kinds of seafood which Chinese consumers love are not common in other countries and even considered as peculiar, like sea cucumber, fish balls, turtle and eel. However, even though consumers from other countries don’t purchase certain kinds of seafood, it is still an opportunity for international seafood exporters. For example, there are lots of dried sea cucumber from the U.S., Canada and New Zealand being sold at relatively high prices, China has a long history eating sea cucumbers and believe they have a lot of health benefits. Also, seafood snacks are quite common in China, e.g. processed dried squids or fish, which suit many Chinese consumers’ taste better and considered as a healthier option compared to other snack options like candy or chocolates.

Seafood has different presentation and distribution channels in China

As mentioned before, Chinese consumers attach great importance to the freshness of the seafood. That’s why purchasing living seafood on a Chinese traditional food market is still common, especially for the older generation. Meanwhile, many retailers and restaurants present their seafood in glass tanks or on the ice, no matter if it is fish, crabs or turtles, in order to show the freshness of their products.

By looking at the Chinese catering industry structure, we see hot pot contributing 22% of the total revenue of China’s catering industry, following by Buffet with 12% and barbecue as well as Japanese cuisine both with 5%. For all these types of Chinese cuisines, seafood plays a significant role, which provides huge opportunities for imported seafood. For example, a major proportion of imported salmon on Chinese seafood market are not consumed at home, but on the catering market. China has no long history of consuming salmon, however, in the last decades, Japanese cuisine has become very popular, especially among Chinese millennials. Sushi and Sashimi (Japanese raw fish) are being widely accepted, raw salmon is even on the menu of many traditional Chinese restaurants as an appetizer.

 

 

 

Despite traditional offline retail channels and catering market, Chines e-commerce platforms can also not be ignored. Besides well-known platforms like Taobao and JD, many fresh food platforms have been developed and are achieving great success, e.g. the sales value of seafood has entered the top 3 on FFresh.jd.com in2017. For domestics and international seafood brands, dedicated websites are also important distribution channels. “Most popular seafood brands on the Chinese Market are selling their products on main e-commerce platforms. Fish dominates the seafood consumption in China for its rich variety and affordable price”, says Vinkenborg.

 

On Tmall/Taobao, frozen shrimp is the most popular product among all categories of saltwater shrimp and abalone is the most popular products among all categories of shellfish. There are many imported abalones being sold from different areas like Australia, South Africa, and New Zealand. According to Vinkenborg: “Argentinian shrimp remains the most popular imported seafood in China, salmon and crab also perform well in terms of online sales.”

A new blended retail ecosystem offers opportunities for fresh seafood distribution

New-retail is a retail ecosystem that blends online and offline channels in a unified way. Due to the rise of e-commerce, traditional retail businesses have experienced downturns. A number of foreign retailers have encountered difficulties in China, including Korea’s Lotte Mart, the US’ Walmart, and France’s Carrefour. But the growth of online retail sales will slow down as physical retail still dominates consumption, especially in the seafood section. Although many seafood products can be bought online, Chinese consumers’ buying habits make them prefer fresh seafood which they can see in a tank or on ice. New-retail offers good opportunities for the distribution of seafood on the Chinese market.

The Chinese seafood market meets all requirements for new-retail thanks to its strong consumer base, increasing purchasing power, preference for novel and luxury shopping experiences, and the widespread use of mobile payment.

Pioneer example of the new-retail model while selling seafood in China: Hema Xiansheng

Hema Xiansheng (盒马鲜生) owned by Alibaba is a combination of a supermarket, restaurant, seafood market, and mobile application. According to Daniel Zhang, Alibaba Group CEO: “Hema supermarket is what you get when you imagine a seamless blend of the online and offline shopping experience.” Chinese consumers can order seafood on Hema mobile App, which will be delivered within 2 hours to wished address. Consumers can also go to Hema supermarket to purchase grocery and pick up fresh seafood, which can be prepared and served directly in the dining area of Hema supermarket.

Now is the ideal time for foreign brands to enter the Chinese seafood market

To sum up, the booming Chinese seafood market is offering huge opportunities for international seafood exporters. This is supported by the following chain of events: 1) the rising disposable income, the life quality of Chinese consumers has been significantly improved and can afford seafood as a protein source. 2) Because of the improving quality of life, Chinese consumers are pickier about the health, freshness, and taste of seafood. 3) Seafood from overseas is considered safer because of the higher water quality and stricter control standards.

Yet international seafood exporters should pay attention to and take advantage of the particularities of the Chinese seafood market. For example, the climaxes of the Chinese seafood market is dependent on seasons and festivals; the sales volume reaches the peak during Chinese New Year, followed by Chinese national day. There is also much peculiar seafood like sea cucumbers and eel which are not consumed in the west also offer opportunities for seafood exporters. Last but not least, the different distribution channels of Chinese seafood market should also be taken into consideration. For instance, the catering industry is a crucial distribution channel for China’s seafood market. Popular types of cuisines like Hotpot, buffet and Japanese food all contribute an enormous percentage of seafood consuming amount.

Authors: Chencen Zhu & Valeriia Mikhailova

Daxue Consulting can help with the analysis of any market in China, including the seafood industry

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China has become the largest import market of Australian wines, overtaken the traditional markets such as the United States and the United Kingdom. From 2014 onwards, the import value has increased rapidly and surged by 533% during 2014-2018. In 2019, the import value of Australian wines reached 1.2 billion AUD. These figures have revealed the evolving size of the Australian wine market in China.

In 2012, China was Australia’s third-largest international market. From June 2011 to June 2012, the value of China’s import of Australian wines increased by 20%, but the quantity dropped by 24%. The reason was that Chinese consumers focused more on high-end luxury wines, according to Tony Spotonm, professor at the University of South Australia. The return of Australian wines in China will show in the long run. Chinese consumers still maintain curiosity about Australian wines.

[Data source: Wine Australia, ‘Import Value of Australian Wine in China’]

Australian wines account for a large market share in the import wine market in China

Regarding the import wine market in China, from 2014 to 2017, the total volume and value of import wine had increased gradually. In 2017, China imported 0.746 billion liters of wines with a value of 2.789 billion USD. In 2018, the figure slightly decreased to 0.688 billion liters with a value of 2.85 billion USD.     

Specifically, Australian wines have accounted for a large proportion of the import wine market in China. In 2018, Australia, France and Chile were the top-3 import partners in the wine market in China, and Australia ranked at the second.

Australian wine sells for a medium price in China

In 2015, China became the fourth largest wine consumption market in the world. Nevertheless, the average price of the import wine was 3.3 EUR (25.56 RMB) per liter, which was higher than that in some traditional markets such as France and Russia. This indicates that Chinese consumers are more likely to purchase costlier wines.

In 2018, the Australian wine was positioned in the second class in the import wine market in China with an average price of 40.6 RMB per liter. Additionally, it had approximately 30-RMB gap compared with the average price of Zelanian wines, which indicates that Australian wines in China are not considered high end.

How Australian wine companies in China leverage E-commerce

According to Euromonitor, store-based retailing and online selling are the main distribution channels of the wine market in China. Moreover, China’s E-commerce sector has accounted for more than ¼ of the total sales volume owing to its growing trend. To keep pace with E-commerce trends, Australian wine companies in China have utilized the online sector to promote their products. Meanwhile, they can increase brand exposure via traditional distribution channels. By 2017, there have been 32 Australian wines sellers on Tmall, 26 of them are flagship stores.

[Data source: Euromonitor, ‘Distribution Channels in China’s Wine Market (2013-2018)’]

For example, Treasury Wine Estates has established 3 official online distribution channels. 2 of them are online flagship stores on Tmall and JD respectively. The last one is an authorized self-operated store on JD. Also, Treasury Wine Estates has operated brick and mortar stores in different cities and collaborated with hypermarkets and supermarkets in China such as Metro AG, Walmart, Sam’s Club, Yonghui Superstores and Ole.

[Photo source: Tmall, ‘Online Store of Treasury Wine Estates’]

[Photo source: JD, ‘Online Store of Treasury Wine Estates’]

Casella, another famous wine producer in Australia, has also set up its online store on Tmall. By collaborating with Telford China, a well-known import agent, Casella can promote its products effectively in the wine market in China.

[Photo source: vinehoo, ‘Casella’s Collaboration with Telford China’]

[Photo source: Tmall, ‘Online Store of Casella’]

The reason behind the popularity of Australian wines in China: driven by cost-effectiveness and acceptable tastes

China imposes zero tariffs on Australian wines

 It is easy to see that Australian wines are gaining recognition from wine consumers in China. Wine producers there are fully aware of this, as they say, ’If we are not in China, we are on the way to China.’

As a representative of the new world’s wines, Australian wines receive much welcome in the wine market in China. They are Hardy’s, Yellow Tail, Jacob’s Creek, Lindemans, Rosemount, Penfolds, Wolfblass, and Banrock Station.

Penfolds

[Photo source: Treasury Wine Estates, ‘Logo of Treasury Wine Estates’]

According to IBISWorld, Penfolds is a part of Treasury Wine Estates Limited (TWE), an Australian-owned wine manufacturer and distributor. In 2010, Foster’s Group split its wine and beer sectors and created TWE. After its demerger, TWE became one of the world’s largest wine producers. The brand has vineyards across Australia, New Zealand, the United States and Italy. The company’s brands include Penfolds, Lindeman’s, Wolf Blass, Rosemount Estate, Beringer Vineyards and Matura.

Penfolds is one of the oldest and most representative wines in Australia. The company has developed a variety of products under the Penfolds brand to tailor to different social occasions and consumers’ needs. Penfolds vineyards also cover a range of climates, soil and regions to grow various types of wines.

[Photo source: Penfolds, ‘Products of Penfolds’]

Yellow Tail

[Photo source: Casella, ‘Logo of Casella’]

According to IBIS World, Yellow Tail is affiliated with Casella Wines Pty Limited, a family-owned winery established in 1965 in the Riverina region of New South Wales. Over the past five years, Casella Wines has extensively utilized its acquisition strategy by purchasing several vineyards and wineries across Australia.

Yellow Tail is the result of the persistent business vision, making wines to bring families and friends on any occasion. Bearing this in mind, the founders of the brand have created an approachable wine that everyone could enjoy. Yellow Tail wines are cost-effective while maintaining the average quality.  

[Photo source: Yellow Tail, ‘Products of Yellow Tail’]

Jacob’s Creek

In 1989 and 1990, Pernod Ricard acquired Orlando Wines and Wyndham Estate and merged the two entities into Orlando Wyndham Group (OWG). In 2013, Premium Wine Brands changed its trading name to Pernod Ricard Australia.

Jacob’s Creek has a long history of making wines. In 1976, the brand was born. Since then, the brand has dedicated to innovating novel products. From the blend of Shiraz and Cabernet Sauvignon to French-style rose, they have embodied founders’ effort and passions.

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Economic recovery is uneven across regions

There is not a direct correlation with the number of cumulative cases and pace of economic recovery. Rather, it could be explained by the main industries of provinces. Inner Mongolia and Qinghai, where mining is an important part of the economy, seemed recover a bit slower due to decreased energy demand. Tibet, visited by over 30 million tourists a year, is second slowest to recover, despite only having one reported case. However, with the exception of Tibet and Hubei, all provinces are only a few percentage points, or fractions of percentage points away from regular output.

[Data sources: Trivium China, National and provincial health commissions, daxue consulting analysis]

Industries most hit by Coronavirus

As of April 10th, 95% of large companies have resumed operations. However, most companies are not yet at full production. Large corporations have been around the 80% mark since the last week of March, and may linger for a while until demand returns to normal. The service industry and SMEs are bearing the brunt of the impact, especially those in the tourism, catering, and transportation. SME’s, have been trailing behind large corporations in their recovery.

Manufacturing: may see some irreversible changes

Motor vehicle manufacturing was the most impacted according to China’s national statistics. General Motors, Nissan, Renault, and PSA (the owner of Peugeot) all have factories in Hubei province. After factories re-opening, China’s auto manufacturers may still face a decreased demand. According to China’s Association of Automobile Manufacturers estimations, car sales will be down 10% in the first half of 2020, and down 5% during the whole year. This is assuming the outbreak remains under control.

Many computer and electronic manufacturing is also concentrated near Hubei, the epicenter of the outbreak. 290 out of 800 plants named in Apple’s global supplier list were located in regions in China that had major delays in returning to work.

[Daxue Consulting CEO, Matthieu David-Experton, interview with FranceTVInfo.com on China’s economic recovery after COVID-19]

The delayed impact of supply chain

Supply chain delays may be felt up to five weeks after manufacturing plants re-opened. Shipment between Asia and Europe or the US can take around a month, meaning that we are not yet finished with the delays despite plants in Hubei opening up again. Additionally, many factory workers are migrant workers, and were not able to return to their jobs for an extended period, even if operations had resumed.

Many countries interpreted the COVID-19 supply chain impact as a sign that they had put all their eggs in one basket. The Japanese government announced that it would provide $2 billion in loans for companies shifting production back to Japan.

Back in 2019, an AmCham survey results showed 39.7% of companies were either considering or actively moving their supply chains out of China. In the midst of the trade war, the pandemic may be a nudge for companies to move manufacturing.

None the less, Chinese factories are resuming operations. According to a Bloomberg report, Apple’s iPhone 12 will be released on time, contrary to early rumors. The phone was not scheduled to start being manufactured in China until May. Assuming there is no second rise in the pandemic, China’s factories will in the clear by then.

Logistics: continued positive trend for container volumes

The logistics industry is reflective of China’s recovery from the Coronavirus. In the first week of March, Chinese ports had a 9.1% jump in container volumes. Among them, the growth rate of Dalian, Tianjin, Qingdao and Guangzhou ports was 10%. However, the ports in Hubei are recovering slowly and face a lack of staff and workers. Apart from ports in Hubei, the epicenter of the virus outbreak, other ports along Yangtze river have returned to normal operation. The cargo throughput of three major ports at Yangtze river, Nanjing, Wuhan (in Hubei) and Chongqing increased 7.7%, while the container throughput increased 16.1%.

Shipping rates have increased 20-fold

Freight shipping rates for dry bulk and crude oil have begun to show early signs of recovery as Chinese industries recover from Coronavirus. The Baltic Dry Index, which is a proxy for dry bulk shipping stocks and the general shipping market, has risen by 50 percent to 617 on March 6, while on February 10 it was 411. Charter rates for very large crude carriers have also regained some footing in recent weeks. It forecasts daily rates for Capesize ships, or large dry-cargo ships, to rise from about US $2,000 a day in 2020 first quarter, to US $10,000 in the second quarter, and to more than US $16,000 by the fourth quarter.

[Data Source: sofreight.com, China’s recovery from Coronavirus Report by Daxue Consulting, growing BDI in March 2020]

Daily charter rates for the VLCC tankers from the Persian Gulf to China have risen to US$28,816 per day on March 5th from US$12,500 the previous month. A March 2nd report by IHS Markit noted that as Chinese industries recovering from Coronavirus, the final week of February saw a resumption of industrial production in China. Container cargo lines may have to wait longer for resumption, as it takes time for manufactured goods to roll out of factories for export. It is expected that the recovery time will be in the second or third quarter.

[Data Source: China Ports Association, China’s recovery from Coronavirus Report by Daxue Consulting]

While Chinese industries recover from Coronavirus, highway logistics also getting on track to recover.  From March 16 to March 20, 2020, the China Highway Logistics Freight Index, was 984.41 points, up from last week; the LTL light cargo index was 967.94 points, an increase of 0.01% from last week. From March 23, the demand for highway logistics is stable and the highway freight index rebounded slightly. From the perspective of later trends, the demand for highway logistics is expected to rise steadily, and the freight index may fluctuate and rise.

[Data Source: China Federation of Logistics and Purchasing, China’s recovery from Coronavirus by Daxue Consulting, growing China’s highway logistics freight index]

Retail and restaurants: customers return to shops

The Coronavirus impacted Chinese consumption in the long-run, and many of those impacts are still unfolding. However, during the pandemic, we are saw retail sales in China shrink by a fifth in the first two months of 2020, compared to a year earlier. In terms of China’s recovery from the Coronavirus, offline retail has a large uphill climb ahead of them. However, restaurants and supermarkets are indicators of the positive trend ahead.

[Data source: qianzhan, China’s recovery from Coronavirus by Daxue Consulting]

Offline restaurants and shops reopening

The Chinese offline retail industry is recovering from Coronavirus, on March 13^th all 42 official Apple retail stores opened for hundreds of shoppers. IKEA, which opened three of its Beijing stores on March 8, also saw high visitor numbers and queues. Earlier, on February 27 Starbucks opened 85% of its stores.

[Source: daxue consulting, Starbucks coffee shop in Shanghai, China enforcing social distancing by blocking off chairs]

Some restaurants narrowly avoided disaster

Had the pandemic shutdowns lasted two months longer in China, many more restaurants would have been in serious trouble. Over half of restaurants in China reportedly do not have enough cash to cover operating costs for more than six months. Normally, the restaurant industry makes 15% of their annual revenue during the lunar new year holiday. But this year, the China cuisine association reported that the restaurant industry lost 78% of revenue during the 2020 lunar New Year season.

Although China has a sophisticated meal delivery ecosystem, which has measures to ensure sanitary and contactless delivery, delivery alone was not enough to save the F&B industry. 65.8% of restaurants reported to the World Federation of the Chinese Catering Industry that their revenue reduced dramatically compared to the lunar New Year period of 2019. However, 15.1% of restaurants actually experienced a revenue increase.

[Data source: World Federation of the Chinese Catering Industry, daxue consulting’s Coronavirus economic impact in China report]

As of March 24^th, Yum China reported 95% of its stores were either partially or fully open. Around 10-20% of stores either with restricted hours or serving delivery only. Also as of March 24^th, Starbucks had also opened 95% of its stores in China, after being closed for 40-60 days.

Super market chains

As of February 20th, the average opening rate of large-scale supermarket chains nationwide exceeded 95%, and the average opening rate of convenience stores has also been around 80%. However, large-scale shopping malls such as department stores and shopping malls currently have a relatively low opening rate of about 50%.  

Baidu search statistics show that after a month-long lockdown, China’s consumer demand is increasing. At the beginning of March, information on “resumption” on the Chinese search engine increased by 678%.

China’s recovery from Coronavirus in the travel industry: surge in domestic tourism

The tourism industry felt the most immediate impact of the epidemic. According to our Coronavirus economic impact in China report, the damage to the Chinese tourism industry was equivalent to a loss of 1 trillion yuan GDP.

Despite only having one reported COVID-19 case, Tibet Autonomous Region has the second lowest economic resumption rate after Hubei. Tibet’s economy, growing a double digit speed for twelve years straight, is largely dependent on tourism. According to China Daily reports, in 2018 Tibet’s tourism revenue was nearly 50 billion yuan, constituting around 30% of the province’s GDP.

Plane tickets are selling again

From March 1^st to March 8^th, more than 300 Chinese scenic areas reopened. In Hainan, tourism contributed to around 20% of the local GDP in 2018. Since the Hainan tourist sites’ reopening, they have received over 74 thousand tourists and 23 thousand tourism workers have returned to work.

As more and more places have no new reported cases, the domestic tourism market is accelerating the pace of recovery. Qunar and Ctrip, two of China’s biggest online travel service providers, have resumed bookings for travel packages and attraction tickets after a two-month hiatus.

Ctrip started selling travel packages and attraction tickets on its app last week as the country accelerated the pace of reopening parks and tourist spots. As of March 17, tickets to 1,449 well-known tourist spots across the country could be bought online while 40 percent of China’s top national tourist spots have reopened, according to Ctrip. Results from a recent Ctrip online survey of nearly 15,000 netizens showed that 78 percent expressed willingness to travel in the near future.

[Data Source: China Institute of Travel Studies, Ctrip, China’s recovery from Coronavirus Report by Daxue Consulting, Chinese people are willing to start traveling in late spring and summer]

Where Chinese tourists are itching to travel after the Coronavirus outbreak

According to Ctrip Global Play Platform statistics, as of March 11, the number of scenic spots reopened and resumed on the Ctrip platform has exceeded 1,000, and the resumption rate is more than 25%. There are more than 100 scenic spots open nationwide.

[Data Source: China Institute of Travel Studies, Ctrip, China’s recovery from Coronavirus Report by Daxue Consulting, growing demand for domestic tourism in China]

Additionally, Chinese customers can now book presale travel packages for April and May on Qunar’s app and website. Qunar is now offering 1,000 domestic travel packages for regions including Shanghai, Xinjiang and Sichuan, based on the respective local government guidelines for the resumption of tourism. According to Qunar’s data, as of the end of February, more than 90% of hotels in China (excluding Hong Kong, Macao and Taiwan) have resumed operations.

Qunar claimed that online searches for China’s upcoming May 1st holiday soared 76 percent at the beginning of March compared to the previous week. The words “scenic area”, “museum”, “tourism” and “landscape” have become the key words of the national tourism industry network information in February.

For the full year of 2020, Analysys is forecasting that the proportion of domestic tourism in the country’s travel market will increase from 47% last year to 60%. However, that number depends on how long international travel restrictions remain in place.

Industries that may explode post Coronavirus outbreak

Online retail: outbreak encouraged the rapid movement from offline stores to digital

Since the outbreak of the Coronavirus epidemic, most people in China spend more time at home. Even consumers living in third to fifth tier cities are becoming keen to shop online. Surveys show that this group made twice as many online purchases for the first time during the epidemic than consumers living in first-tier cities. According to the GfK China Consumer Confidence Study of February 2020, more than 40% of consumers use online shopping more frequently, resulting in a surge in demand for online shopping and home delivery. More and more consumers are also shopping for the first time through platforms such as third-party apps, official brand websites, and WeChat communities.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting, more people choose online shopping during the epidemics]

Carrefour reported vegetable deliveries growing 600 percent year-over-year during the Lunar New Year period and JD.com saw an increase of 215 per cent in online shopping grocery sales to 15,000 tons in just the first 10 days of February 2020. According to the Mob data center, from January 22 to February 6, 2020, the number of new users in Hema Fresh, Daily Fresh, and Ding Dong’s continued to grow.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting]

As for online shopping in the future, half of consumers look forward to home delivery, and 40% of the respondents (mainly younger and wealthier consumers) want environmentally friendly packaging for their products.

Great potential of online catering industry

The food delivery market in China experienced high growth from the end of February to the end of April. More and more customers choose to order food home instead of eating out.

The survey shows that among the merchants that were in business in early February 2020, more than 70% of orders from their restaurants and shops accounted for online food delivery. In the short term, online food delivery has become an important driver for catering businesses to survive the crisis. Whereas in the long run, the epidemic has accelerated the digitalization of the catering industry.

In January 2020 Meituan Waimai announced in-app feature for contactless delivery, allowing the courier to leave an order in a convenient spot for the customer to pick up without interaction. So far Meituan Waimai claimed that contactless delivery has been launched in 184 cities across the country and is expected to cover the whole country.

As some food enterprises gradually recover their food delivery services, hoping to compensate some financial losses, contactless food delivery in China growth will last for a period of time

The demand for epidemic prevention drives the demand of the cloud video industry

During the new Coronavirus epidemic, many companies and schools adopted remote office work and online teaching. It is expected that telecommuting at this stage will help to increase the recognition of video conferencing.

[Data Source: qianzhan, China’s recovery from Coronavirus by Daxue Consulting]

At present, the domestic software market represented by cloud video conferences is  US $173 million, but the growth rate is considerable, with a CAGR of 25% in the next five years. It is estimated that the size of the domestic software video conference market in 2023 will reach 537 million US dollars, which is three times more than current one.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting]

The demand for epidemic prevention and control is expected to drive the demand for the cloud video industry, and the industry penetration rate is expected to gradually increase. At present, the penetration rate of video conferences for about 35 million small and medium-sized enterprises in China is less than 5%. China’s video conferencing market is not the only technology to receive a boost from the virus, some AI technologies were advanced during COVID-19 as well.

Sport industry: in the long run, the epidemic will not change its’ development

One of the Chinese industries recovering from Coronavirus is sport industry. In 2018, the total scale of China’s sports industry (total output) reached 265.9 billion yuan, and the added value of the sports industry reached 107.8 billion yuan. In 2018, the added value of the sports service industry was 653 billion yuan, and its share in the sports industry increased from 57% in 2017 to 64.8%. According to the data of the State Sports General Administration, the added value of China’s sports goods and related products manufacturing in 2018 was 339.9 billion yuan, accounting for 33.7% of the total added value of the sports industry.

In the short term, the new coronavirus epidemic will have a more significant impact on the development of the sports service industry and it will be prominent in offline clusters such as sports competition performances, stadium operations, sports equipment and related product manufacturing. It has less influence on the online sports.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting]

In the long run, the epidemic will not change the vigorous development of China’s sports industry. On the contrary, people will pay more attention to their physical health and increase their enthusiasm for participating in physical exercise.

China goes back to work: Signs of recovery from Coronavirus

Manufacturing: top manufacturing companies resumed production

From February 18th to 20^th 2020 China Enterprise Confederation set up a research group to conduct a targeted survey on the resumption of production. It showed that China’s top 500 manufacturing companies resumed work and resumed production at 97%. Among the enterprises that have resumed work and resumed production, the average employee turnover rate was 66%. The average capacity utilization rate was 59%.

Chinese SME’s recovery from Coronavirus

As the largest employer, China’s recovery from the Coronavirus is not complete until SME’s are back on track. SME’s are the hardest hit from the Coronavirus outbreak in China. According to a survey by Beijing and Tsinghua universities, 85% of SME’s say they would only last three months without a regular income. However, as of April 10th, SMEs are over 80% recovered.

China’s state owned enterprises recovery from the Coronavirus

In general, the indicators of state-owned enterprises are significantly better than those of private enterprises, and there are more difficulties and problems in resuming production and production in private enterprises.

In terms of different industries, technology-intensive industries, and capital-intensive industries have a higher resumption rate, while labor-intensive industries have a lower recovery rate.

From the perspective of regional distribution, Guangxi, Anhui, Jiangxi, Hunan, Sichuan, Henan, Shandong, Hebei, Shanxi have higher rates of resumption.

[Source: Xinhua, China’s recovery from the Coronavirus by Daxue Consulting]

The capacity utilization rate in labor shortage regions such as Jiangsu and Zhejiang and the Yangtze River Delta and Pearl River Delta regions is lower.

Tech supply chain is gradually recovering

As Chinese industries recovering from Coronavirus, there is a hope for the resumption of the global supply chain. For example, Foxconn Technology claimed that the company’s factories in China would be running at their normal pace by the end of March. Compal Electronics and Wistron expect that by the end of March computer components production capacity will return to the usual low-season levels. Philips, whose supply chain was disrupted by Coronavirus, is also recovering now. At present, the factory capacity has been restored to 80%.

China auto sales fell significantly. However, Volkswagen, Toyota Motor and Honda Motor resumed production on February 17. On February 17 BMW also officially resumed work at Shenyang’s world’s largest production-based subway West Plant, and nearly 20,000 employees returned to work. Tesla’s Chinese factory claimed that it has exceeded the pre-outbreak level and since March 6 more than 91% workers returned to work.

[Source: Reuters, an employee wears a face mask to work on a car seat assembly line in Shanghai]

As Apple prohibited its engineers to travel to Asian countries, the launch of Apple’s new phone may be postponed from September to October. However, Apple’s CEO Tim Cook called this “temporary condition” and suggested iPhone makers  wouldn’t make quick moves out of China.

During China’s recovery from the Coronavirus, the upstream and downstream of the industrial chain gradually link up again. Foreign firms are more and more confident in their businesses in China.

Assistant Author: Valeriia Mikhailova

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This article China’s recovery from the Coronavirus outbreak is the first one to appear on Daxue Consulting - Market Research China.

Credit insurance is a part of the non-life insurance market. It is a type of insurance where the insurer is liable for the economic loss suffered from failed contracts or failing to pay off debt. Credit insurance in China can protect companies from the risks of trade such as customers failing to pay. The credit insurance market in China is growing along with the increase of global trade.

Size of credit insurance market in China

In addition to China Credit Insurance, only commercial insurance institutions such as Ping An, PICC, and Dadi Insurance have entered the credit insurance market.  However, due to their lack of awareness and understanding of credit insurance business, they have also failed to develop credit insurance business on a large scale, so the business scale of credit insurance has always been relatively small compared to the entire national economy. Domestic credit insurance is still a huge market that is just beginning to develop.

In 2018, China’s credit insurance premium income was approximately 24.25 billion yuan. Except for the credit insurance premium income decline in 2013 and 2015, other years showed a steady growth overall, and the year-on-year growth rate reached the largest in 2009.

The credit insurance claims expenditure in 2018 was approximately 12.79 billion yuan, an increase of 35.1% year-on-year. Except for the slight decrease in credit insurance claims expenditure in 2014 and 2015, the overall year showed a steady growth trend, and the year-on-year growth rate reached the highest level in 2008.

Products in the credit insurance market in China

General commercial credit insurance in China

General commercial credit insurance is for  commercial activity. The holding party requires the insurer to act as the guarantor of the other party and assumes the holder due to the credit risk of the guarantor. Insurance that suffers from loss of commercial interest. The contract stipulates that after the insurance accident occurs, the insurance company shall calculate the amount of the insurance company according to the loss and damage degree of the target according to the insurance liability. The amount is determined based on the subject value of the commercial contract between the parties.

At present, the domestic credit insurance market in China generally covers wholesale and not retail.  Its insurance types mainly include sales credit insurance, loan credit insurance and personal loan credit insurance.

Sales credit insurance in China

Sales credit insurance provides credit guarantee for deferred payment or instalment payment of domestic trade. The insured is the manufacturer or supplier.The insurer underwrites the credit risk of the buyer (ie the obligor); the purpose is to ensure that the insured (ie the right holder) can recover the credit on time and protect the trade.

Loan credit insurance in China

Loan credit insurance guarantees the loan contract between the financial institution and the enterprise to cover credit risk. After the lender has insured the loan credit insurance, the borrower can obtain compensation from the insurer when the borrower is unable to return the loan. Loan credit insurance is one of the important means to ensure the normal turnover of bank credit funds.

Personal loan credit insurance in China

Personal loan credit insurance  is insured when the financial institution makes a loan to a natural person because the debtor fails to perform the loan contract causing the financial institution to suffer economic losses. Since the individual’s situation is very different and the residence is scattered and the risks are different, the insurer must conduct a comprehensive investigation and understanding of the borrower’s use, operation, business reputation, and private property, and require borrowing if necessary. The person provides counter-guarantee; otherwise, it cannot be rashly covered.

Export credit insurance in China

Export credit insurance covers the loss of exporters’s business while operating in China, covering the commercial and political risks.  According to the contract, the insured pays the insurance premium to the insurer, and the insurer compensates the economic loss caused by the buyer’s credit and related factors under the insurance contract. In the credit insurance market in China, export products mainly include short-term export credit insurance and medium- and long-term export credit insurance.

Short-term export credit insurance in China

Short-term export credit insurance refers to an insurance that covers a credit period of no more than 180 days, and the export goods are generally a large number of primary products and consumer products. Short-term export credit insurance in China is currently the head office of the export credit insurance institutions insurance companies and their branches. The most widely used, most insured and relatively standardized export credit insurance category.

Medium and long-term export credit insurance in China

Medium and long-term export credit insurance refers to export projects of capital or semi-capital goods with a credit term of more than 2 years. For example, complete sets of production equipment for factories or mines, large-scale transportation vehicles such as ships and aircraft, overseas engineering contracting and special technology transfer. Due to the large amount of medium and long-term export projects in China, the contract execution period tends to be longer. Additionally, the operation is often complicated, and the products or services involved need special design and special manufacturing. Therefore, insurance contract does not have a uniform format. Instead, the insurance contract parties negotiate the insurance conditions, insurance rates and charging methods according to different export products, service contents, delivery conditions and payment methods.

What is unique about the export credit insurance market in China

The business product line is unitary. It is mainly based on the export credit insurance business and of a certain scale of domestic trade credit insurance. However, it is still focus on the credit risk arising from the provision of commodity product transactions, and there are fewer commodities involved in underwriting credit risks due to various forms of credit business, not to mention products related to investment and consumption.

Due to market access, policy factors and products factors, the institutions that currently operate export credit insurance is monopolized by Chinese Credit Insurance only. There are no more than five institutions that operate domestic trade credit insurance in China.

Institutions are often reluctant to utilize credit insurance in China

Due to incomplete laws and policy measures, institutions are still reluctant to participate in the credit insurance market on a large scale. Credit insurance lacks relevant legal guidance, maintenance and restraint, and lack uniformity in business and products. Compared with property insurance and life insurance business operators, credit insurance has high technical coverage, high risk concentration, high cost of underwriting claims, low protection for operators, and low efficiency of comprehensive operations.

The credit insurance market in China has yet to reach maturity

Credit insurance is underdeveloped in China because of its special business model in terms of marketing and operation. China Export and Credit Insurance Corporation, known as Sinosure, reflects typical issues faced by China’s credit insurance industry. Sinosure has been the main and most important credit insurance provider since 2001. The state-owned insurance company can promote the rapid development of export credit insurance in combination with policy and government objectives. Areas whereby economic model is export-oriented, such as The Pan-Pearl River Delta Region（PPRD）and Yangtze River Delta, are well-protected by local government. The local government directly insures companies in order to protect the survival of local export-oriented enterprises during a financial crisis.  

On the other hand, as the only company that operates policy-oriented export credit insurance, and the main provider of credit insurance in China, it is also hindrance for credit insurance to develop in China. For example, the problem of China Credit Insurance’s registered capital and the amount of risk commitment is seriously mismatched, the problem of reinsurance and sub-insurance is difficult to implement, the problem of excessive insurance coverage and excessive insurance procedures. Although these problems reflect the issue of China’s Credit Insurance, at the same time, it can be said that it is a problem that must be encountered by the operating agencies involved in the credit insurance business.

Export Credit Insurance companies in China

Sinosure (China Export and Credit Insurance Corporation)

[Source: Sinosure official website; Sinosure products includes mid/long tern export credit insurance, overseas investment insurance, trade insurance etc.]

Sinosure is a Chinese credit insurance company founded in 2001.

By providing insurance for foreign trade and foreign investment cooperations, Sinosure promotes the development of economics and trade, and focuses on supporting the export of goods, technology and services, especially high-tech, high-value mechanical and electrical products and other goods, to promote economic growth, employment and balance of payments. The main products and services include: medium and long-term export credit insurance, overseas investment insurance in China, short-term export credit insurance, domestic credit insurance, credit guarantee and reinsurance related to export credit insurance, accounts receivable management, business account collection, information consulting and other export credit insurance services.

By end of 2018, Sinosure has accumulatively invested more than 4000 billion USD and provided export credit insurance for more than 1.1 million companies. Sinosure accumulated payments of $ 12.79 billion USD to companies and accumulated more than 3.3 trillion yuan for 200 banks in financing export companies. According to statistics from the International Berne Association, the total scale of China’s credit insurance business has ranked first among global peers since 2015.

As a policy-oriented financial institution established to meet the needs of economic globalization and China’s foreign economic and trade development, China Credit Insurance will closely focus on serving the country’s strategic goals. Sinosure will take policy as the guide, and take customers as the center to build the company into a responsible, trustworthy credit risk management institutions with global influence.

Credit Sales Insurance

Domestic credit insurance company: CPIC

[Source: CPIC official website]

CPIC has a credit sales insurance named Domestic Specific business contract credit insurance. This insurance product is for loss of collections due to the buyer’s bankruptcy, inability to pay debts or long-term default. The maximum payment period is not more than 3 years and the insurance product is only suitable for companies that registered in mainland China.

There are several unique selling points in CPIC credit sales insurance. CPIC credit sales insurance will help the beneficiary company with better risk management and control, easier access to capital and improve financial portfolio. CPIC also provides more flexible payment terms, which allow the company to be more competitive in cash flow. The insurance terms can customize based on different companies risk and finance situations, and set risk controls accordingly.

The insurance process is rather simple and straightforward. The company that wish to be insured need to submit to CPIC and CPIC will do the necessary background research and review before approval and passing the contracts.

International Competitors

Euler Hermes

[Source: Euler Hermes official website. Euler Hermes credit insurance is not only suitable for multi-national companies but also small and medium companies]

Euler Hermes is a credit insurance company that offers a wide range of bonding, guarantees and collection services for the management of business-to-business trade receivables. Euler Hermes(EH) is a subsidiary of Allianz SE. it is rated as AA by standard and Poor’s. The group posted a consolidated turnover of 2.7 billion euros in 2018. EH employs more than 5,000 employees in over 50 countries and insured global business transactions for 962 billion euros in exposure at the end of 2018.

However, large-scale projects face multiple risks such as contract disruptions, chargebacks, forfeiture, or political risk. Transaction protection guarantees a single policy with up to eight years of irrevocable limits (up to 100 million euros), which will bring all the benefits of safer financing to financial institutions, investors, exporters and companies conducting international trade. The terms are tailored to each project and contract, to align with customers’ business goals, including structured transactions and single transactions.

Moreover, Trade credit insurance covers accounts receivable due within 12 months to protect your cash flow. EH track the financial status of your customers, and update information at any time, so that customers have confidence in doing business with them. In the event of a bankruptcy or long-term default, customers will be compensated for the goods and services you have delivered.

Loan Credit Insurance Companies in China

International competitor – AIG

AIG provides several basic credit insurance such as trade credit insurance whereby receivables arising from underwriting sales of credit between the insured and its buyers, including the buyer’s bankruptcy or insolvency and long-term default. Pre-shipment financing credit insurance whereby loss caused by the insured debtor failing to deliver the insured goods according to the contract and the debtor failing to pay the insured any unpaid balance of the pre-shipment financing during the waiting period. Factoring credit insurance whereby underwriting the buyer’s credit risk due to arrears or bankruptcy resulting in losses to the investor.

AIG have several unique selling points such as fast and quality service provided to customer. AIG can approve buyer limits in a relatively shorter lead-time. AIG also share a strong support from its business partners. Its service network is prominent in global major markets. AIG have easy access to loan services due to its high financial credibility over the years and strong financial portfolio, many foreign-invested banks are willing to provide loans to AIG. The insurance process is also clear and straightforward. Meanwhile, there is no need to declare each cases during the insurance period. AIG has a strong underwriting capacity, adequate underwriting limits, extensive international reinsurance support, and more than 30 years of credit risk underwriting experience. Companies who choose AIG can enjoy flexible underwriting methods and fair rates as AIG formulates rates based on international market levels, making it more competitive. Moreover, AIG is using XOL model of underwriting, and is the only insurance company on the market that provides non-cancellable credit limits.

Domestic Competitor- Ping An 中国平安

Company loan credit insurance does not need mortgage nor guarantees. Ping An provides simple procedures, flexible terms, fast approvals and rapid loan disbursement. The loan will help to expand company’s working capital for enterprises and to help them expand their domestic and international business loans.

There are some criteria that a company must fulfill before Ping An can approve the loan credit insurance. The company must be established for 2 years, has a bill nearly half a year that is approximately 1.2 million, has a value-added tax invoice and two years of annual statements, the most recent monthly statement, and the most recent six months of invoices; more importantly, applying for corporate credit The personal loan of a corporate applicant in the past three months cannot be overdue, and the corporate debt ratio cannot exceed 60-70%.

Learn more about the non-life insurance market in China

Auto insurance makes up a majority of China’s non-life insurance market, learn more about China’s auto insurance market from our report below.

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Doing business in China has become easier in the last year mostly due to eight business reforms carried out by the central government. These Chinese business reforms can be broken down into a few categories, notably getting permits, taxation and access to utilities. Reforms implemented this year are part of a larger series of reforms that the central government has implemented over the past decade to improve the ease of doing business in China, which scored dismally low as recently as 2006, when the country was ranked 91^st. Now however, Chinese business reforms have catapulted the country to the 31^st spot on the list.

This improved ease of doing business in China as laid out in “Doing Business 2020”, an official report by the World Bank, is good news for foreign businesses. With a reputable organization behind it, the report illustrates how easy it is to do business nation by nation, while providing an explanation of how national governments have improved or worsened over time.

[The ease of doing business in China is the highest among the top ten improved economies ranked in the Ease of Doing Business Report and now ranks 31^st in the world, no easy achievement for an economy that ranked 91^st as recently as 2006.]

How the implementation of Chinese business reforms increased the ease of doing business in China in the past year

Construction permits are now easier to obtain

One improvement increasing the ease of doing business in China is in the process of obtaining construction permits. According to the report, it now takes 111 days to obtain construction permits in China, as compared to 132 days in the East Asia and Pacific region. The increased ease of obtaining construction permits in China during the past year has carried large weight in the overall improvement on this year’s ease of doing business report.

 A new one-stop shop for business registration

Another notable area of Chinese business reforms is the advent of a one-stop shop for business registration for issuing company seals. This policy aids in the overall flow of registration and makes it quicker and more efficient for companies to carry out registration procedures.

Utility connection in China is twice as fast as the regional average

When it comes to utilities, certain Chinese business reforms  reduce the time it takes to connect water and drainage connections, mostly in conjunction with low-risk construction projects. Chinese business reforms have also made progress in streamlining the process of obtaining electricity and have worked to make electricity prices more transparent. These improvements have made doing business in China easier, as it now only takes an average of 32 days to get electricity in China, as compared to 63 for the regional average. According to this year’s ease of doing business report, China ranks 12^th in world when it comes to obtaining electricity.

[Visual showing where the ease of doing business in China is most improved and where it needs more work. Worth noting in the visual is China’s high rating when it comes to enforcing contracts and getting electricity. Source: World Bank]

Preferential tax treatment for small enterprises

China implemented tax policies this year that also helped the country move up the rankings. Chinese business reforms implemented in 2019 related to tax include a preferential tax treatment for small enterprises and another aimed at decreasing the value-added tax in certain industries.

Strengthened protection of minority investors

Another Chinese business reform is a policy that aims to strengthen the protection of minority investors. The policy aims to do this by transferring liability to controlled shareholders. In addition, it aims to clarify ownership and control structure within this sector. The report highlights how Chinese business reforms in this category raised China to the 28^th highest ranking for minority investor mechanisms. This is in stark comparison to an average of 99^th in Asia and Pacific region and 48^th for OECD countries.  

Optimization of customs administration ease trade in China

China also moved up the rankings in the category of trading. Policies aimed at simplifying the process of exporting and importing was able to help in this regard. Also helpful was the optimization of customs administration and the publication of fee schedules. Improved to port infrastructure also helped in increasing the ease of trading with China.

China ranks first in judicial administration

Finally, Chinese business reforms aimed at contract enforcement helped move the country ahead in rankings. Policies were able to do this by “regulating the maximum number of adjournments that can be granted and limiting adjournments to unforeseen and exceptional circumstances,” according to the report. These reforms now help China rank as one of the most efficient countries in regards to contract enforcement and judicial administration. According to the report, no other country scores as high as China when it comes to judicial administration.

What a high ease of doing business means for China

The eight Chinese business reforms that the government has worked hard to implement during 2019 have had a large impact on investment and business in the country. Chinese business reforms from previous years have already shown tangible results.

A study by Santander found that between 2016 and 2018, foreign direct investment in China increased from USD 133 billion to USD 139 billion. During the same period, foreign direct investment stock in China increased from USD 1.35 trillion to USD 1.63 trillion. The report also shows that the number of greenfield investments rose from 798 in 2016 to 871 in 2018.

During the first three quarters of this year, foreign direct investment in China rose by 6.5% in yuan terms. The main sources of investment were Hong Kong, Macau, Singapore, South Korea and Japan. A report from 2018 shows that during 2018, investment from Germany increased by about 80%, while that from the US increased by about 8%. The steady increase of investment into China reflected in these statistic shows the effect of these business reforms on the ease of doing business in China.

[Map showing the ease of doing business report’s statistics for 2017. At the time, the ease of doing business China was ranked 78^th, but has since moved to 31^st, among the highest in the world. Source – Wikimedia Commons ]

What the increased ease in doing business in China means for foreign companies

According to Martin Raiser, the World Bank Country Director for China, “China has undertaken substantial efforts to improve the domestic business climate for small and medium-size enterprises, maintaining an active pace of reforms.” This active pace of reforms has greatly helped to improve the ease of doing business in China during the past few years, especially this year.

Companies looking to expand into China can be comforted by the report. Chinese business reforms in key areas such as taxing, permits, utilities and trade have not only helped the country move up the rankings, but have also helped the companies have an easier time doing business there. 

Despite the improvements laid out in this year’s ease of doing business report, there are still areas that foreign companies will encounter issues. China still has work to do in regards to tax compliance, getting credit and cross-border trade, as it still ranks 105^th, 80^th and 56^th in these categories, respectively. According to the report, companies in China must spend an average of 138 days annually when complying with fiscal requirements, which is more than double the amount of time it takes in Singapore.

[View over Taikoo Li Center in central Chengdu. Opened in 2015 and now containing more than 300 tenants, many of which are foreign companies. The shopping center and its foreign occupants epitomize the ease of doing business in China.  Source – 睿睿]

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Market demand for traditional Chinese art

Traditional Chinese art has become one of the most popular categories of art. First, it is important to know what is considered Chinese traditional painting, because there is some room for confusion over its definition. The art in this category includes classical paintings from before the 20^th century as well as contemporary paintings. What define them is a common painting style that involve ancestral themes, materials and techniques. Artists use water-based ink and color on paper or silk, most often representing landscapes and continuing the themes of earlier compositions, thus creating a thematic series.

The Chinese antique market has also experienced a recent boom. It is partly explained by its fluidity: the demand of certain periods often change. While once it was pieces from the 15^th century that were popular, it is now the 18^th and 19^th century’s artworks that are in demand. There is also an increasing flow of 19^th century Chinese porcelain coming back to China, repatriated by Chinese art buyers from America and Europe.

According to The Telegraph, China has now established itself as the world’s largest antiques market, relegating America into second place, and this position benefits positively the popularity of the Chinese art, particularly of traditional style.

Recent growing interest in art in China

Thanks to China’s long history, the country is in a position to offer a huge legacy of art. The Chinese market is particularly self-contained: the great majority of pieces of art in China are bought and sold within the country itself rather than internationally.

“China is creating new collectors every day, and when a mainland Chinese begins collecting, he always collects Chinese art”, said James Lally, a New York dealer who in 2015 sold 40 percent of his traditional Chinese art to Chinese art buyers from the mainland.

Chinese collectors of art are actively repatriating Chinese antiques and traditional art, which has given the Chinese art market a boost. Hoping to benefit from this wave, western art owners are increasingly selling art in China, and major auction houses are moving towards Asia and particularly in Hong Kong. Staying in Hong Kong can be beneficial in avoiding taxes and issues with Chinese customs while staying close to mainland Chinese art buyers. However, international auction houses in mainland China have their advantages, mostly due to payment regulations.

Demand for high-value art in China: pushing exorbitant prices

On 18 December 2017, a landscape collection by Chinese artist Qi Baishi sold for $141 million at a Poly International auction in Beijing, setting a record for Chinese artwork sold at an auction worldwide. Top-quality artworks by master painters create tension in bidding salesrooms in China. The Chinese fine art auction in 2017 has seen a success specially after improving lots quality in the continuous offering high-end and high-value lots. Throughout the year, top-quality artworks have created some tension in bidding rooms in China. Even if the sold lots rate dropped a little in 2017, the turnover of Chinese fine art auction actually reached a new high at $5.103 billion, according to Art Price.

Imports of foreign art are down by around a fifth, and Qi Baishi was not the only Chinese artist with skyrocketing prices. “The Goddess of Cloud and the God of Longevity” by Fu Baoshi, who died in 1965, made more than $35 million in 2016, and China’s most expensive living artist is Cui Ruzhuo, with his “The Grand Snowing Mountains” painting reaching $39 million in 2015.

Chinese are more and more willing to pay eight or even nine figures price on true masterpieces, notably in the high-end and ultra-high-end market (lots above $14 million -or 100 million Yuan). In 2017, 38 lots sold in this bracket, more than double the number reported in 2016, according to Artnet’s report of 2017.

The returns on high-quality art in China

The exceptional performance of the Chinese art market in 2017 is positively related to the slower economic growth of the country: due to uncertainties in real estate and stock markets, more cash flowed into high-quality and authentic works of art that are considered to have a steady investment return. At the same time, the market considers purchasing art and antiques as an advantageous opportunity for long-term investment, and Chinese collectors of art and investors are returning to traditional Chinese works of art.

The wave of new buyers in China: investors turned into collectors

China may no longer be overrun by speculative collectors who neither know nor care about the works they’re buying. The new generation of Chinese art collectors are enthusiasts that don’t just venerate the art by its monetary value, but they understand the history and cultural significance of the works they collect. They are a small but influential group coming from the enormous growth of “new money” in China. With their passion for Chinese art – both classical and contemporary-, their influence goes beyond the simple purchasing of pieces: they are pursuing memberships in powerful art organizations, setting up foundations, and building new museums, thus boosting the market.

Taxi driver-turned billionaire, the story of an art collector in China

Liu Yiqian was once a taxi driver in the Chinese port city of Shenzhen. He became a millionaire by buying shares from state-owned companies before reaching a small fortune, which was enough to start investing in art.

Liu Yiqian and Wang Wei are one of Asia’s most world-renowned collecting power couples. They spend on high-profile Chinese antiques, but their purchases are not made for speculative purposes. The have established the Long Museum, which has two Shanghai branches that collectively house China’s largest private collection of art. Thanks to this influential group of collectors like Liu Yiqian and his wife, China has been experiencing a boom in art museums.

The slowdown of 2018 in the Chinese art market

Are reports predicting an end to the booming art market in China?

Released in 2018, the Claire McAndrew’s annual report on the global art scene, produced for Art Basel and UBS presents some discouraging results for the art market in China. There has been a “contraction in supply of high-value art in China and cautious buying, as trade and debt crises loomed”. Sales through the mainland’s dominant auction sector fell by 6 percent over the year and China’s art market share was of 28.96 percent of the global total, a 5.21 percent reduction compared to 2017.

One of the two items that sold for over $50 million was Zao Wou-Ki’s Juin-Octobre 1985, auctioned by Sotheby’s Hong Kong for $67,5 million.

With increasing debt crisis and slower economic growth in China, buyers have been more cautious in 2018. Lower-risk contemporary paintings have seen a larger success than in the previous years, influencing the market confidence on Chinese art.

What is over the horizon for China’s art market in 2019?

As China is said to be the world’s biggest economy by 2020, major Chinese cities such as Guangzhou and Chengdu are hailed as the next great wealth spots and home to the growing multibillionaire class. However, the new elite of Chinese collectors seem to have developed a strong interest in international contemporary art, partly because of Western galleries and fairs’ efforts in promoting Western Art. International galleries have been opening spaces at an increasing pace this last year, mostly in Shanghai and Hong Kong.

China’s share of Western art’s revenue is growing rapidly, with an increasing number of Chinese buyers of western art and of Chinese auction houses selling it. Competition among top auction houses from London, New York, Hong Kong and Beijing has become stiffer than ever.

Selection of top 5 international artists in 2018

At the same time, the restructuring of the Chinese art market that started in 2015 continues with the country’s auctioneers currently trying to reduce their unsold rates, according to Art Price.

Risks around the art market in China

Throughout 2018, the downturn in sales in the art market in China  was influencedby many factors, such as the government’s ban on selling Chinese antiques, the difficulties of extracting large amounts of money from China, and the increasing default on payments.

Constraints for Chinese collectors of art and International auction houses

One of the reasons of the Chinese art market’s slowdown in 2018 is the obstructive legal environment around the art industry in China: overseas auction houses cannot sell certain “cultural relics”, which includes Chineseartwork from before 1949. It does not come as a surprise that the cultural relics are the most profitable sales today in China.

 This is partly explained by the fact that China seeks the return of its own heritage. To benefit from the return, it won’t permit foreign firms to sell these antiquities in China. At the same time, foreign firms cannot auction Western antiques in China (from before 1949) either. Only Christie’s has been approved to conduct auctions in China, and Sotheby’s has been forced to collaborate with a state-owned multimedia company in Beijing in order to carry out some of its sales.

With the growing demands of the new Chinese collectors of traditional Chinese art, these regulations limit prestigious foreign auction houses to serve the domestic market, resulting on a visible slowdown in the market.

Difficulties on extracting money from China

In addition, a government banking policy states that Chinese citizens from the mainland are limited to taking out only $50,000 per person per year, including transfer to Hong Kong, Macau and Taiwan. Immediate payment by credit card is possible, but usually the money is transferred from Hong Kong even if the client is from mainland China. Even if clients are well-capitalized, delay payments still persist, which slows down sales in auctions. 

Defaulting on bids and payment in the Chinese art market

In the latest Art Basel report, Claire McAndrew warned that non-payment by Chinese art buyers is getting worse. It is partly due to problems about the authenticity and provenance of the artwork. Among all lots sold in 2017, only 49 percent of total sales were paid, and the nonpayment rate is even greater with lots over 10 million Yuan – $1,5 million-  for which only 28 percent of the value had been paid.

In 2016, Sotheby’s Hong Kong took bid winner Yu Kin-po to court accused of nonpayment.

At the same time, there was a lawsuit in a Manhattan courtroom concerning a $24 million Richter painting which a Chinese bidder, Zhang Chang, who did not pay up. There are many nonpayment case among lower prices than the multimillions, but such cases rarely reach the courtroom as the costs of taking legal action are just too great.

Another potential reason, McAndrew wrote, is a historic cultural difference: “In China, bidding is not always perceived as a legal obligation”, seen as the start of a misunderstanding that has caught out action houses in the West and in China.

In some cases, dealers find themselves locked in a chain, waiting for payment of an artwork sold to pay for the new one on which they had bid. In others, owners attempt to bid up their own pieces and dealers bid wildly to increase prices. In any case, speculation forces dealers to purchase items only hoping to find buyers after the event.

Fortunately, the restructuring of the Chinese art market should benefit Western auction houses, with a new legal framework aiming to eliminate unpaid and forces to an immediate payment for purchases of artworks.

Future speculations on the future of the art market in China

The Chinese art market has developed rapidly over the past few years, and most people still treat it as an investment. With a larger market share in China, Chinese art in general and particularly from the high quality and traditional end is known to have profitable returns on investment.

The year 2018 has seen a slowdown in the Chinese art market, and experts’ predictions on the future are varied. Some of them expect to see growth in the market, with Chinese art gaining popularity in auction salesrooms across continents. Sales growth will be expected as well in Mainland China, thanks to a return to Chinese culture by repatriating antiques and investing in Chinese traditional-style art.

However, a new generation of millionaire Chinese collectors with a real love for art is increasingly interested in international contemporary art. Art experts then predict an end to the boom in the Chinese art market while spending on art in China is growing steadily.

International auction houses should be aware of the limitations and risks on selling art in China or to Chinese buyers. Currency restrictions and defaulting on payment are bound to negatively affect the art market in China if the government does not rush into regulation reforms.

Author: Ines Beneyto Brunet

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Full transcript below:

Matthieu: Hello, everyone. I am Matthieu David, the founder of Daxue Consulting, and this China marketing podcast, China Paradigm. Today, I am with Annie Guo. So, we found out about your business online through LinkedIn. I think someone shared about what you were doing in Paris—I guess in Europe now, because you have an office in Barcelona if I am guessing correctly. So, we looked into your business about Chinese mobile payment. So, there’s a company called Silkpay, and you are the founder or co-founder. You may tell us more about it later on. And this business is helping companies to monetize with the Chinese tourists in Europe.

So, when Chinese are traveling overseas, most businesses have difficulties actually to make them pay. And actually, because China uses QR Code. And that’s what you are doing. You’re helping foreign businesses from Europe and from, maybe, US—you will tell us more about that—to be able to sell to Chinese when they’re traveling overseas. So, you founded the company in January 2016. The third anniversary was like three months ago. You have also developed services to support the marketing of this company. That’s something we may talk a bit slightly about later on. But first of all, thank you very much for being with us on a Saturday morning. So, it’s 8 am French time and 2 pm China time. And so, what about the introduction? Was it correct?

Annie Guo: Yes, I’m so surprised about how much information you can get out from Internet searching. And yes, it’s exactly correct about our company. So, I want to start by introducing myself and how I came up with the idea of SilkPay. My name is Annie Guo. I originally came from China. I did my study in Paris in 2001 in a business school called HEC. And then afterward, I moved to London to work in the banking industry. During a personal trip in 2015 to Beijing, I found out that, I became a stranger to my own country in the sense that everywhere, people were paying with their mobile phone, without a wallet, a real wallet. But for example, when I took a taxi in Beijing, the taxi driver refused me paying him in cash in RMB. I was so surprised. He insisted that I used my e-wallet on my phone to pay him by Alipay or WeChat Pay like everyone else in China. 

So suddenly, I realized I had become a stranger in China, in my own country. And I can feel the pain that the Chinese tourists in Europe can feel, not just because of the language barrier, but also, they can no longer use their favorite way of paying in Paris or anywhere else in Europe. So that’s is why I came up with the idea of creating SilkPay and to be a partner of AliPay and WeChat Pay to educate the European merchants about this new way of paying, a new way of life actually. 

Matthieu: For the audience to be able to spell it, silk is spelled S I L K and pay afterward. So, you are helping those Chinese tourists in Europe to be able to continue to use the same system which is exclusively AliPay and WePay in Europe mainly. But first of all, could you tell us now what is the size of your business? If you could share some numbers about the revenues, about the number of payments which went through your system, the number of people in your company, and the number of clients for the people who are listening to us to know where you are in development? 

Annie Guo: Okay. Sure. So, as you said, the name is SilkPay. The silk comes from The Silk road. That’s the ancient road that links China to the rest of the world to enable the trade between China and Europe and the rest of the world. That is also SilkPay’s, our company, mission. It’s to enable and facilitate the payment and the trade between China and Europe. The project took off in 2016, and the company was really created in July 2017. So, it has been a little bit over two years. And now, our headquarters is based in Central Paris. 

We have a team of 15 people based in Paris. We are now present in 11 countries across Europe. In terms of our clients’ presence, we have roughly 500 merchants in France.

Matthieu: I see.

Annie Guo: Yeah. We have roughly 500 merchants in France. We have served 250,000 Chinese tourists in Europe. For example, a number that we can say is the monthly volume of payment that we process is above €5M in value. So, we are quite happy about the speed of how things are developing. We have been increasing our customer base by 15% monthly since our creation. And also, we have been able to find investors to fund the development of our company. We did a round of fundraising in January 2018 with some local business angels, French business angels. And we raised about a €565,000 with those angels.

Matthieu: I see. Thank you very much for all the numbers. I think that the question that people are going to ask themselves when they listen to the volume you are managing—like €5M monthly of the transaction is what’s your business model? How do you charge your clients? 

Annie Guo: Our business model is quite simple for the merchants. Basically, we only charge the commission fees. We don’t have any installation or maintenance fee. Everything is free. They can choose one solution to another. There are no incremental charges. We only charge a percentage based on the transaction volume that we process for the merchants. So, it’s quite easy for the merchant to adopt our solution because if they don’t use it, if they don’t have any Chinese tourists in Europe come to pay, then it is free for them. Completely free. 

Matthieu: Could you share with us the numbers in terms of percentage? For instance, we know Amazon is taking 15% as the marketplace. For instance, we know T-Mall is taking 6-10% as the marketplace. What are the numbers for WeChat Pay, Alipay, and your service? I think that people need to know that we are not talking about payment within China. So, we are talking about the cross-border payment, which is more sophisticated. And as far as I understand, there are some third-party players even in China which are helping businesses to be able to invoice and to make Chinese clients pay. We know other players. Could you share the cost of going through your platform? 

Annie Guo: Yes. We have a single flat fee, which is 1.6%. That is a number that we’re going to deduct from the final amount that we are going to transfer to our merchants’ account. 

Matthieu: It’s very low. 

Annie Guo: Yes.

Matthieu: It’s very low. It’s very low. You need a lot of volumes to make a sizable amount of money, right? 

Annie Guo: Yes. That’s why we also provide digital marketing services to our merchants. And we believe that that is the added value to our merchants. So, we not only process the payment, but we also have this digital marketing service to help the merchants to increase their visibility in front of the Chinese tourists in Europe and help them to make the Chinese tourists loyal to their shops. 

Matthieu: Yeah, retention is a big topic. We may come back to that later on.  They can still buy the product from the shop back to China. I think that’s a very, very big topic. Going back to your model you said you’re offering, why is it so complicated for shops to do that by themselves? It’s a payment system that even the coffee shop can do it in China. Even the beggars can do it. Even the street artists use the QR Code technology in China to get paid. Why it so complicated for foreign businesses to do it?

Annie Guo:  The reason is that they can’t do it directly because there are two systems. There are two ways of working in China and the rest of the world. That is how the system of AliPay and WeChat Pay works because there is one which talks about Chinese mobile payments in Europe or the US or anywhere else in the world. It’s a different system. It’s a cross-border payment. It involves a change in RMB, which is the local Chinese currency to the local currency of the merchants. And if we talk about Europe, that will be Europe. So, there is a foreign exchange involved. That makes the matter a little bit more complicated, the trade between China and Europe complicated, considering the Chinese government has a very tight control in terms of how the money flows in and out of China. 

Matthieu: Great.

Annie Guo: So, it’s a different scenario. And that adds a little bit more layer of complexity to the payment solutions in China. So, in essence, the merchants in Europe cannot just talk directly to Alipay or WeChat Pay and say, “I want to install those payment solutions at my shops.” They have to go through a third-party partner of Alipay and WeChat Pay such as SilkPay. For example, if you think about Visa and MasterCard, they are actually large groups, and a coffee shop just can’t go directly to Visa or MasterCard and say that “I want to accept your payment means in my shop.” That is not possible. They have to go to a local bank or a local payment company and ask them to install Visa or MasterCard acceptance in their shops. It’s exactly the same way for Alipay and WeChat pay. You need to go to your local bank or to a third party like myself to accept those payment means.

Matthieu: I see. I see. Visa and MasterCard have not penetrated the very low little payment. Like if you go to a coffee shop in France and you spend less than a €10, they will ask you to pay in cash. In some way, for Chinese tourists in Europe, it may be easier to pay for small transactions with your solution than for French people. That could be the same. You said 1.6%. I understand now more about the complexity of foreign businesses invoicing Chinese clients. Does 1.6% include condition rates? Does it include all the fees or there are other fees to consider? 

Annie Guo: As for the payment part, there are no fees to consider. Everything is in quotas actually. So, it’s an amount to the fees that the merchant might pay to Visa and Mastercard. We have to be positive as of payment means because otherwise, the merchant will just prefer to ask for the Chinese customer to pay in cash or pay in cards. 

Matthieu: Yeah. Yeah. So how does it work? The Chinese client needs to pay with WeChat or Alipay. The money is going to be taken out of the bank account in China in RMB. And it’s going to arrive in the bank account of the shop. Let’s take a small shop like a drugstore or a pharmacy in France. They are going to receive in Euros. Am I correct?

Annie Guo: Yes.

Matthieu: The shop is going to get the money in Euros and deducted by 1.6%. How much time does it take? 

Annie Guo: It depends. In some cases, it’s two days. Sometimes three days. Depends on if it falls on the weekend or a bank holiday or not. Yes. So, it’s two to three days. 

Matthieu: I see. I see. What technology have you developed in order to offer this service? Have you been able to develop a specific technology with the API WeChat or Alipay or you are leveraging existing technology and making it more known within the European market? I feel you are filling two gaps. You are filling a knowledge gap—those who don’t know that Chinese consumers are using WeChat and Alipay. That’s what you provide to those… it’s a knowledge gap. And you are also filling a technological gap. I fully understand the knowledge gap, and I think it’s been very easy to understand. But with the technological gap, what are you offering on top of the existing solutions in China. Have you had to develop something?

Annie Guo: We have to develop to adapt to the local market needs. We have to think about the French market, for example. 80% of transactions are paid by cards—bank cards. So, every shop is equipped with the facility to accept a payment made by card. But this is a completely different technology because the Chinese e-wallets such as Alipay and WeChat Pay are based on the QR Code technology in China which nobody actually uses in Europe because they prefer the other way which is a non-touch technology. So basically, they just use the e-wallet or the card to touch the reader to make the payment. That’s the most popular technology in Europe then. So, we are introducing the solution adapted to the QR Code technology in China which is used by all the Chinese mobile payment companies.

Matthieu: So, what you are offering them is for free. So, I guess you are asking them for exclusivity to be the exclusive partner for Chinese buyers. And then you help them to connect with AliPay and WeChat Pay plus creating what you call a static QR code because QR codes can change all the time. They link to the same identity, but they can change all the time. So, you’re creating a static QR code which is not changing. That’s what you are offering to them; connecting to the platform plus helping them to use the QR code technology in China, but in Europe.  

Annie Guo: Yes. As a part of our service, we actually offer six different ways of accepting AliPay and WeChat Pay in their shop. It depends on the situation of the merchants. The static QR code is the most widely used one among our clients purely because of the simplicity of the same method. So once the client’s account is opened, we just need to email them the image of their QR code. They print it out on a color printer, and that’s it. They’re ready to go. But other solutions will involve… for example; we can give them a scanner machine which we have to train them about how to use this scanner machine. And with a scanner machine, they can generate…with the pass machine; you can generate an image of a dynamic QR code which can change transaction by transaction. And also, they can use a machine to scan the phones of Chinese users. So, the shops don’t really have this kind of machine. And we can equip them with the machine to enable them to accept Chinese mobile payments. 

And there are other solutions. For example, we can integrate our solutions into their cashier system. It is compulsory in France for the retailers to be equipped with a cashier system which will register all the transactions that pass through the shop for fiscal reasons. And also, we can integrate our solutions into this cashier machines, and the shop owner can simply use their scanner attached to their cashier machine to scan the telephones of Chinese tourists in Europe. They already have those systems or hardware in their shop. They can just use our software, our API, to enable those acceptance solutions.

Matthieu: Have you created your own API?

Annie Guo: Oh, yes. We do have our own API. Yes.

Matthieu: Okay. And this API is connecting them to Salesforce and other solutions which are prevalent in Europe, in France. 

Annie Guo: Well, the shops actually use different cashier systems. There are about a thousand of them in France. 

Matthieu: I see.

Annie Guo: Yes. So, there isn’t predominant used ones. No. So it is, uh, a meta, case by case. 10 shops can have 10 completely different systems. 

Matthieu: I understand. So, it’s even more than the payment system that you are connecting with the CRM. You also make it compliant and legal for them to use it because as you said, there is a legal challenge with the cashier to connect the taxes which is actually very established already in China with the payment system. I see. So, it’s much more than the payment system only. You mentioned that you are also on your website. Before we started, I mentioned to you that it’s on your website. It’s mentioned that you are also providing marketing services, managing Weibo, WeChat, and so on. I feel now that it was very natural for you to begin to push your clients to use those marketing tools. Maybe not doing that yourself, but at least to work with partners and all the people that you provide the system. Because first, when you receive the payment of someone, you can get the WeChat identity. So, you can push them to follow you.

Secondly, when someone is buying a product in Paris, you may want to continue to sell when they are back to China. Let’s talk about WeChat. WeChat is so involved in the daily life of everyone that it would actually be on a daily basis. So, I see the interest in offering marketing services. Can you tell us more about what you feel is necessary and the most attractive for those businesses in order to continue to sell to their clients in China? 

Annie Guo: Yes. I think what you said is very important because, from the European merchants’ perspective, they think the Chinese market is so far away. It’s so difficult to understand and to penetrate. But actually, there are some existing solutions which are very easy to use. They don’t cost a really huge budget. You just need to be smart about it and not be afraid of using them. And then you can convert all these Chinese visitors into repetitive visitors of your e-shop.

So, it is really a virtual cycle that, by adopting WeChat Pay in the shops, you can convert all the Chinese users into loyal customers of the e-shop of the same brand. So basically, we provide these marketing tools. For example, we can help the brand to create the e-shop based on WeChat and then the Chinese tourists in Europe who have paid with WeChat will become members of this e-shop. They will continue to follow the official WeChat account of the shop or the brand. And they can continue to buy, to make the purchase, through the WeChat e-shop that the brand will connect to their official WeChat official account. 

Matthieu: I thought that you could not open an official account if you didn’t have a Chinese company.

Annie Guo: It’s no longer the situation. 

Matthieu: Okay. Okay. So, any foreign business in China with a foreign license can open a WeChat page or official account. 

Annie Guo: Yes. Because WeChat actually is a constantly changing company, their way of doing business and functionalities they provide change on a month-on-month basis. So that is not possible until September last year. But since then, things have changed. Now they are adding more foreign countries where the foreign companies can directly own a Chinese official account. And that enables consumers based in China to buy directly from their e-shop. That is possible right now. So, we help our French merchants to open a WeChat official account, then attach an e-shop on that and then convert all the travelers into frequent buyers of these e-shops. 

Matthieu: I see. Could you tell us about, in this case, if the Chinese consumer or client is back to China and needs to get the product delivered because I guess it’s most of the time product and services, what are the taxes? What are the legal restrictions and taxes you have to apply? 

Annie Guo: Well, since January 2019, the Chinese government has issued a new law to regulate exactly the cross-border e-commerce activities and trade between China and Europe and the rest of the world. With this new law, it says that… there are a lot of details about the law, but essentially, the cross-border entities like the French shops can legally sell things cross-border to China and by paying the customs fees. And the customs fee is actually quite reasonable. For example, if we take a very popular French food, which is the red wine made in Bordeaux, the taxes applied to it for the cross-border trade is only 20%. 

Matthieu: Including VAT, right? No other tax? 

Annie Guo: Yeah, but actually, VAT is only applicable when it’s a sale in Europe in the same VAT zone. And if you sell it to China, I don’t think we need to apply for the VAT. That’s the idea of tax-free shopping because the Chinese consumers don’t have to pay the VAT applied to European consumers. So, if I take the example of a couple of bottles of Bordeaux wine directly delivered from a Bordeaux producer to the doorframe of the Chinese consumer, what basically the Chinese consumer will be charged is 20% of the customers’ taxes plus and the delivery fees. And the delivery fee is quite reasonable actually based on the volume and the weight of the goods. But in the case of a couple of bottles of wine, it is somewhere between €13-20 euro which makes the total bill to be something around €20-30 Europe. And if we compare the price that they purchase those bottles of wine directly from the producer, it is much lower than the price they can find for the equivalent products in China. And also, what is very important is that the authenticity of the product is nearly guaranteed because you buy directly from the producer. But we all know that in China, there is a huge problem with counterfeit goods. So, you’re never sure that what you buy is really what you want to buy. 

Matthieu: It’s very interesting. I think, actually, it’s raising a lot of other questions; the first question being that why is the Chinese government helping foreign businesses to actually be more competitive than local importers and local distributor who have to apply, I think, a total of 48% on a bottle of wine including VAT? So that’s a question I don’t have an understanding of how to explain why the Chinese government is…

Annie Guo: I think I have a few ideas about why the Chinese government is helping foreign businesses to do business with China. One thing is that they can’t stop them. Whatever they do, foreign businesses will consider…. the Chinese consumer market is one of the most important ones in the world. And all foreign businesses will try to do business with Chinese consumers anyway. If they don’t have this transparent and quite favorite taxing system, then that will be Daigou. You know, the personal shoppers. If I want to explain the Daigou that actually are the Chinese who are actually not paying any taxes at all. So instead of encouraging the Daigou, the Chinese government just issued this new law which will encourage a business to do things in a very transparent and legal way. And to encourage that, the taxes applied to this new cross-border business is not very high. So, people will not really risk the sanctions to do the Diagou, which is an illegal business. 

Matthieu: Oh, I see. I see. It’s a bit pragmatic. The market forces are too strong. I see. You were talking about being able to continue to sell to a Chinese client when they are back to China. So, you pretty well explained the case of wine. Wine, I feel, doesn’t require too much regulation. You can send wine. You don’t have to do tests and so on. But that is a case of cosmetics. What about products which are a bit more touchy? I’m thinking about food. I am thinking about infant formula. I’m thinking about cosmetics in China. I am even thinking about drugs about medicine. Do you have restrictions? 

Annie Guo: And the second point is with logistics. When you send wine, you have to pretty careful on the temperature or the humidity level and so on. 

Matthieu David: Those two questions are both in terms of regulation and terms of conditions of logistics. How do you work on this?

Annie Guo: In terms of this new cross-border law, if you send small quantities across by post, actually, you don’t really have to be compliant to the Chinese food and safety regulations. You don’t really have to register with those Chinese ministries, which is very… I mean a lot of French cosmetic brands are relieved because it is really costly to pass those tests. For example, if you take a brand like Lanvin, they have thousands of SKU. So, each SKU has to be examined in a Chinese laboratory. And every time they change the formula or the ingredients of their cosmetic products, they have to re-pass those tests. It’s really costly and time-consuming. And the Chinese government will ban certain ingredients which are quite widely used in Europe. So, by using this new system, we can send things with parcels. The cosmetic brands will not really have to pass those laboratory tests and register with the Chinese ministries. 

Matthieu David: Yeah. Again, I think for European leaders, it sounds so surprising when you listen to the government saying Google has to pay taxes, pay taxes in France, and the Chinese government is saying, “Pay a lower tax. Sell from overseas. Don’t follow exactly the same rules because anyway, the market is working this way. So, we are going to take off the taxes we can get out of it”. I feel that that is the idea. And we are going to achieve it by different rules. But that sounds a little bit surprising, isn’t it? 

Annie Guo: Yes. But I think behind it, there are some political reasons as well. Like all these things will contribute to building Chinese power globally. Imagine that by encouraging foreign businesses to sell directly to China. That basically just closely link foreign businesses to the Chinese interest. And even the small producer of Bordeaux wine or a biscuit shop in Paris can feel the importance of China and the economic power behind it that they couldn’t feel before. Now they sense it, and if there are some problems between Europe and China, the businesses in Europe will feel so much pain. That is actually a political pressure on it. 

Matthieu David: Yeah, we saw that with actually the solar panel and the wine industry. Solar panels were banned from China to export to Europe, I think, a few years ago. And China reacted by putting a restriction on wine affecting many in France. So, I think it was a bit painful for wine producers. So yeah, that makes a lot of sense. 

I interviewed a couple of companies working, especially with influences, KOL (Key Opinion Leaders). It could be with live streaming. I interviewed Lauren Hallanan yesterday. But also with platforms within China like Xiaohongshu or with the platforms dedicated for finding KOL like ParkLu, do you think that the people who are buying in France from the shops could be converted once they are back to China as a KOL or influencer and being able actually to create evangelists of the brand or the product? 

Have you worked on the product, or have you pushed your clients to do that with their existing database? 

Annie Guo: Yes, it is a very controversial issue. I feel that we sense that more and more… the influencers on Xiaohongshu and those kinds of platforms dominate the voices, the images, and the messages that a brand can send to the Chinese consumers. Those are the most efficient ways for the brands to communicate with Chinese consumers, but every French business that I speak to find that the pricing charged by the Chinese influencers is so many times more than the equivalent that stars or influencers will charge in Europe. So, it is not really within everybody’s budget to communicate through the Chinese KOLs. And only the big businesses in Europe or the luxury industries with a high margin will be able to afford it. For a lot of our customers, just because their margin is so thin sin that they cannot possibly use these kinds of tools to communicate and to build their image with the Chinese consumers, which is a quite a shame. 

And I think that with technology developing, the knowledge gap between the Chinese consumers and the rest of the world is actually narrowing quite rapidly. And one day, we wouldn’t really need to depend on the influencers to be the advocate of the brands or products made in Europe. Just by virtue of these products, it will speak for themselves. And through different channels, the Chinese customers can acquire as much knowledge and information about these products as European consumers. But today, because of the language barrier, because of lack of active channels, the Chinese consumers cannot get the right and enough information about what the real products and services are in Europe. So that will play a very big role now for the moment. 

Matthieu David: I see. Yeah. So, have you worked with companies or have you thought about developing a system so that your clients you have in France from the drugstore could actually resell or could advertise on the product they build like you invite your friends so you’ll get the discount from them. I feel that something you tell you has thought about in order to scale a bit more those companies in China without being present physically. Have you already worked on it? Have you thought about it? 

Annie Guo: Yeah, we need to understand that the gap between what the Chinese consumers want, their behavior, and what the European market, the merchants… the European merchants are more concentrated on their offering and their image and the positioning of their brand than doing discounts to increase the sales. What we can see in the Chinese market is that without the discount, without promotions, you can’t sell anything. When it’s a full price, nobody is going to buy it. Everybody will wait for the single day or another offering, and they always wait for the promotion campaigns to come. They know they will come in. But it’s not the case in Europe. There are so many brands. The luxury brands don’t sell on promotions. They never do promotions actually. And a lot of European businesses and brands think that way. They think a promotion is bad. It’s damaging their image. So, we still need to do the education. One or another, there is not a right answer, but we need to narrow the gap to make sure the two of them enmesh somehow.

Matthieu David: Getting more bundles. Getting more clients and expanding the database of each client. And expanding the database of each client necessarily is a China topic. Within China, there are returning clients. There’s a client who could come from the returning clients and so on and getting more client for you. It’s a European business, but then to get returning consumers for Europe than, it’s going to be a big China business.

I was asking a question on how you can create a snowball creating more and more followers, more audience for all those businesses — one question about your location. You are in Paris. I understand you worked some time a long time with HSBC. That’s something I would like to go back to later on. And Barcelona. So, could you explain why these locations? 

Annie Guo: Actually, we have an office in Venice. The location is actually based on the frequency of Chinese tourists in Europe and the strategic importance of the market. Barcelona is one of the most visited cities in Europe. Lyon is the second largest city in France. And Venice is simply because it’s one of the favorite destinations of Chinese tourists in Europe. And our single number will increase. In terms of Chinese travelers, the most important country in Europe is France. 2.2 million Chinese travelers visited France last year. With the ‘gilets Jaunes’ or the social movement that disturbed the business in Paris every Saturday, the number of Chinese visitors has decreased because of the fear of safety, but we hope that they will resolve this kind of social issues and the Chinese travelers will still come back to Paris. 

Matthieu David: For those who are listening to us who don’t speak French, the ‘gilets Jaunes’ is a yellow jacket. It’s a movement of protests in France which is happening every Saturday, which is a bit surprising, but that’s the way it works. And they actually are on major news or stories. And there had been a lot of damages on some Saturdays. It has been on every TV in the world, so some Chinese, I guess, have been a bit scared and at least puzzled by what’s going on. 

So, you were saying that it has decreased a little bit, but still, I guess it’s a major force within the tourism industry and Chinese tourists in Europe. 

Annie Guo: Yes. 

Matthieu David: You talked about Lyon, but Nice seems to be one of the biggest…. if I had to say which city Chinese tourists in Europe like most, I wouldn’t have thought about Lyon, to be honest. 

Annie Guo: Yes, but Lyon actually is also because it is very close to Switzerland. It’s actually convenient to go to Switzerland. Our Lyon office also covers the Switzerland market. Switzerland is a very interesting market because there are 1 million Chinese visitors every year visiting Switzerland. That is a huge number. They are not just leisure travelers, but also business travelers. We can consider there are two Chinese ambassadors in Switzerland. I don’t know any other European countries that have full Chinese ambassadors. It’s because there is one ambassador to the country in Bern, which is the capital of Switzerland. And there are like three of them based in Geneva because Geneva is a diplomatic position. There is the UN etc. There are organizations and the Chinese send ambassadors to them. So, there are many business and political travelers to Switzerland, and they are very high spending consumers. The top products that Switzerland sells are watches. So, it is a very important market for people like us who facilitate cross-border transactions. So that’s why we are in Lyon. 

Matthieu David: I see. Before we started, we talked about the need of getting a license in Europe? You talked to a journalist online. I mean, I saw the article when preparing the interview. You were thinking, or you were getting, or you just got… I don’t know… maybe, that’s some news about it… a license to be more independent. Can you tell us more about what license and why you need that? 

Annie Guo: Yeah. Payment businesses are regulated by the European Union. Every payment company has to have a payment license. Every country issues its own payment license. But if you get one in one country, you can passport it across 26 countries across Europe. So that is why we don’t have a payment license yet. We are in the process of getting one, and hopefully, we will get it by the end of this year. Now, how do we do our business? We are agents of the payment company with a European license which allows us to do business already without getting our license ourselves. 

Matthieu David: What is the payment company? Could you give some names?

Annie Guo: Yes, there are so many of them, and we work with a number of them so that we can cover all the geographies. For example, we work with the Accor Hotel Group, and they had 4,000 hotels last year. Now they have more across the world. So, we work with different payment companies in the US, in Australia, in Asia, and in Europe, so that we can enable Accor Hotel Group to get AliPay and WeChat Pay in all the countries they cover. I don’t remember the number, but they cover like 60 or 80 countries across the world or some of the African countries never heard of. And then we need to cover Alipay and WeChat Pay in those hotels as well. That’s why we work with several payment companies across the world.

Matthieu David: With the payment company license, is it what Visa and MasterCard have? Is it what PayPal or Stripe has? I don’t really get why the license system would be helpful for you to use it. Is it going to lower your fees? Is it going to make it possible for you to…

Annie Guo: Yeah. It won’t lower my fees, but it will increase my margin. Because now we are agents of other payment companies, so we depend on their system, and we need to pay them for using their service. And once we become a payment company ourselves, we will save money on the payment we make to those payment services companies. So that will increase our margin. 

Matthieu David: I think I am beginning to get it. So, does it mean that you would not have to go through a third party when transferring from a Chinese bank account to a French bank account? Does it mean that this transfer will be fully processed by you instead of going through those third parties like maybe every bank has one of them, and they charge you? You wouldn’t have to do that anymore. 

Annie Guo: Exactly. Yes, we will save money on the fees. Yeah. And the finance sector is very regulated. It is very tightly regulated in Europe. So that is why the payment service industry is regulated as well. And so, to do business independently, we need to have this payment license within the European Union. 

Matthieu David: What it means is it’s difficult to get. What do you need to do? Do you need to pay? Do you need to show a lot of documents? Do you need to comply with a lot of other elements? 

Annie Guo: Yeah, the entry barrier is actually quite high. Otherwise, everybody will be able to become a payment company. The laws are very strict, and they will look at your company’s structure. They will look at how you do business and your procedure. You have to document every single thing you do throughout the day. You have to ask for a lot of documents from your customer. And that is what we call the KYC (Know Your Customer) which means that the merchants that we send with have to provide us with several documents to prove their business and to prove who is the real owner behind these businesses. And that actually caused a lot of questions and oppositions from the merchants because they don’t understand why they need to give me, for example, their passport and the proof of address of their owner. Sometimes, for the big companies, the owner doesn’t want us to know he’s the real owner behind the business. So, we are asked by the regulators to do that, and we have to do that. We understand why they want us to do it. But to enforce it is quite a difficult task. 

Matthieu David: I see. Last question before we end. You had been Vice-President of HSBC for the M&A Department. How is it to transit from being in a very nice office, from a very big company, and having a lot of comforts to actually starting from zero? Could you share the motivation behind this with me? 

Annie Guo: I think that the investment banking industry is a very good experience and it’s very interesting. I have been working with very interesting people and had some deals that were in the newspapers, but I think that that working for other people is to realize how can others realize their own dreams. Actually, at a certain age, I wanted to start realizing my own dream. And I think I have something to say and some opinions to express. I can only do it by starting my own outlet, which is why I started to create my own business. Chinese mobile payments can have in the European market because now the market share of mobile payments is so small. And then, it can only increase in the future. 

Matthieu David: I talked with another entrepreneur in China who used to work in investment banking and dropped it because she wanted to start a business but also to be able to work more with China and her investment bank was not allowing her to work with China. And she was seeing not being able actually to leverage it. So, I feel there’s a lot of Chinese tourists in Europe and not exposed enough to China. So, they want to actually do the things themselves. What about the next step for you? You want the license to be more independent. What is the next development for SilkPay? 

Annie Guo: We are always in the process of acquiring more merchants, and we will cover more territories in Europe or outside of  Europe. We’re looking for partners to accelerate our development in different countries. And we are also in the process of doing another round of fundraising because this is like the gun powder that will enable us to accelerate our development. So, yeah, those are the main things we are doing; fundraising and going to different countries.

Matthieu David: Okay. Congratulations for all you’ve done in such a short time. It’s not even three years since you officially started. So, congrats for everything you’ve done. And hopefully, you enjoyed participated in this episode of our China podcast, China Paradigm, and all the listeners enjoyed it. Thank you very much for your time. 

Annie Guo: Thank you, Matthieu. Thank you for having invited me to China Paradigm. Bye-bye. 

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

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This article Podcast transcript #25: How to leverage Chinese mobile payment overseas is the first one to appear on Daxue Consulting - Market Research China.