China’s Fight on Daigou: from the Crackdown to a Market Opportunity

30/01/2019

To avoid import taxes, a phenomenon of people buying products abroad for Chinese customers has risen. Their name is Daigou and they represent China’s number one enemy since January 1st’s new law on cross-border e-commerce platforms

 

Simple, cheap and comfortable, the most popular way to buy luxury products in China, used to have a name: it was called Daigou, which in Chinese literally means “buy on behalf of third parties”. But the announcement of new laws on imported goods has changed the game’s rules last year and now Daigous have to rethink their job.

Buying luxury goods in China is more expensive than expected. Chinese taxes imposed on luxury items such as on watches, cosmetics, bags, and clothes are, in fact, increasing year after year making the purchases of high-end products the privilege of a few.

To circumvent the add-on and get products at a lower price, many Chinese are used to ask their compatriots abroad to buy certain items on their behalf. The entire transaction happens on the internet where the buyer chooses, order and pay what she or he wants turning common chat rooms into real e-commerce sites.

 

China's fight on Daigou - cross-border e-commerce - cifnews

© Unsplash. The top-purchased categories for cross-border e-commerce are health and beauty, baby products, luxury accessories and consumer electronics from the US, Japan, and South Korea.

 

Nevertheless, although Daigou is a recent phenomenon, the act of Chinese tourists going to the United States to buy products for family and friends has a long history. Indeed, the success of this system is due to the rising middle-class’ traditional distrust for “made in China” products.

In 2015, sales of luxury goods through the Daigou system amounted to around $ 8 million but it is difficult to find accurate statistics because of its informal nature. According to some studies, the estimated Chinese luxury spending in 2018 is about $ 90 billion and Daigou purchases accounted for half of that, making it an estimated $ 45-billion industry.

The success of Daigou goes hand in hand with the explosion of online commerce as the last Alibaba’s Single Day demonstrated.

 

With $ 50 billion total revenue, “Double 11” 2018 edition showed the Chinese e-commerce sector is on the rise while people now prefer to place their orders on online platforms rather than on offline stores.

 

It was born as students abroad’s phenomenon but it soon became a full-time job for Chinese people who had thousands of followers on Weibo and received many daily orders. Therefore, today, the Daigou system results in a great income tax loss for the PRC, which now tries to limit the damage by strengthening the controls on imported products.

The turning point for Chinese Daigous happened on September 28, 2018, at the Shanghai Pudong Airport. It is known as the 928 Daigou crackdown and it ended with a hundred people being searched and fined after returning from Seoul, South Korea.

Seoul has always been known for being a shopping destination where Daigous could buy brands at discount prices. Therefore, last September, all passengers returning from the Korean capital were stopped by Chinese customs for baggage inspection and more than 100 passengers from the same Seoul-Shanghai flight were found guilty of illegal imports.

 

China's fight on Daigou - airport repacking - cifnews

© Sohu.com. The Daigous usually repack the purchases of international duty-free brands before flying to China where the goods will be resold.

 

The airport customs’ search was every Daigou’s nightmare, but this particular search has turned the nightmare into every passenger’s worst fear while on WeChat the event’s message threads became viral. “I was live streaming in a duty-free shop during the day, but live streaming fine payment during the night,” wrote one of the Daigou returning from Seoul.

The 928 Daigou crackdown in Shanghai comes ahead of the launch of China’s new e-commerce law. Since Daigous operate in a legal grey area based on personal relationships and private transactions, both the customers and the government have a hard time verifying the authenticity of the product and its proper taxation.

Therefore, on August 31st, the Standing Committee of the National People’s Congress of the People’s Republic of China approved the first-ever e-commerce law to restrict and protect consumers’ rights on e-commerce platforms to be implemented since January 1st, 2019. The law specifically regulates the conducts of both the e-commerce platforms and the retailers or individual-run online stores.

Platforms now will be responsible for the sale of counterfeit items and have to set up systems to protect intellectual property and to control fake reviews. In addition, websites such as Taobao or WeChat will be prohibited from excluding or restricting competition as well as from imposing fees on merchants.

 

According to this new e-commerce law, now individual-run stores on WeChat and Taobao need to be registered with the State Administration for Industry and Commerce to receive an official business license and to file tax returns.

 

For what concerns individual-run online stores, instead, they now have to obtain a business license to operate with which they will also have to file tax returns. It means that individual selling accounts on platforms may have to register with the State Administration for Industry and Commerce and then give official tax receipts after every transaction.

E-commerce platforms, for their part, will also have to verify business licenses conducting identity checks on sellers and submitting tax information to the authorities.

Nevertheless, China’s Ministry of Finance will add 63 categories of products to the list of goods that are duty-free when purchased via cross-border e-commerce platforms covering 1,321 items in total. Further, the tax-free quota on single transactions will increase by 150% from $ 291.62 to $ 729 loosening the annual quota of individual consumers on cross-border e-commerce to $ 3,791.

In addition, China will extend cross-border e-commerce pilot zones to 22 more cities, including Beijing, Nanjing, and Shenyang, bringing the total to 35 cities thanks to which cross-border e-commerce companies will enjoy easier customs procedures and supportive policies.

 

China's fight on Daigou - harbin - pilot zone - cifnews

© Pixabay. Harbin, Heilongjiang. China’s northern city Harbin – famous for its famous ice festival – will be one of the further 22 cross-border e-commerce pilot zones together with Beijing and Nanjing.

 

Although this law will address especially smaller sellers that have often been difficult to control, the bigger cross-border e-commerce websites will be less affected by new rules as they are less likely to sell or be suspected of selling counterfeit products. For instance, Alibaba already employs about 2,000 people to fight fake products selling.

As a result, under the new law, Daigou will thus be required to register as e-commerce operators and acquire licenses in both China and the country where they shop, making their business subject to taxation otherwise, they will be subject to fines for illegal business and tax evasion.

Daigou will have to register and truthfully declare their imported items, and the increased cost will thus be passed on to their customers whose behavior will also change accordingly.

In fact, the new law and the 928 Daigou crackdown led to a global panic for both the Daigous and the customers. On one hand, the sellers are planning to trip one last time or already left the business because of the fear of facing the consequences. On the other hand, customers are afraid the imported products prices will arise next year and are thus trying to buy as much as possible before the prices change.

 

Although some individual sellers decided to quit the business, other Daigous have already taken an original approach to stay under the radar of authorities like posting hand-drawn pictures of the products they are selling instead of actual photos.

 

Nevertheless, some Daigous do not feel fear at all and already organized their business according to the emerging regulations. WeChat voice messages, foreign language ads as well as hand-drawn pictures and fake names are just some of the emerging Daigous’ strategies to avoid Chinese new regulations.

However, not only Daigous and customers now need to rethink their selling and buying strategies, but also international brands will lose a special gateway to Chinese luxury buyers. These third-party sellers, in fact, have always played a significantly important role in introducing brands and building brand awareness in the Chinese market.

Many Western companies worked directly with Daigous embracing this kind of doing business. However, this changing in direction may also bring new opportunities for foreign companies as their products will become more competitive for Chinese consumers.

Today, the image of the Daigou as a self-made businessman has fallen apart and since last September it drastically turned into that of an illegal importer. In fact, many Chinese customs have doubled down on their inspections of people at airports, and some merchants have already been imprisoned for tax evasion.

Therefore, due to the implementation of this e-commerce law, platforms such as WeChat and Taobao will surely work with authorities to avoid being held liable themselves. But legitimate sellers will surely benefit from preferential policies without the competition with counterfeiters or illegal competitors.

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