December 5, 2018 – This post was written by Eric Johnson, Engagement Manager, and Sunny Xu, Senior Analyst.
Recent events in China have left the country’s fastest-growing e-commerce pillar, daigous, in a state of confusion. Impending regulations, a crackdown at the Shanghai airport, and a sharp drop in stock prices for luxury clothing and cosmetics brands may make it seem like the end is approaching for China’s 6,000+ active daigous. However, for those who can evolve with the new regulations and changing landscape, there are still opportunities for growth. The same goes for multinational corporations who can establish and maintain a new e-commerce strategy.
New regulations crack down on daigous
On August 31, the National People’s Congress Standing Committee passed a new e-commerce law that has been in the works for around two years and is set to take effect on January 1, 2019. This law, according to the state-run news agency Xinhua, is meant to “protect legal rights and interests of all parties,” “maintain the market order,” and “protect consumers’ rights and interests” in e-commerce.
The law focuses on three groups of e-commerce participants: platforms (e.g., Taobao, JD, TMall), operators (e.g., flagship stores of local and international brands), and other businesses (e.g., daigous). The law codifies three basic business requirements for daigous:
- Registration: All daigous, regardless of their size or level of sophistication, are required to complete the standard business registration process, which typically takes around 20 days to complete, according to the World Bank
- Taxation: Daigous are now officially required to file tax returns and pay import duties on products purchased overseas and brought into China
- Compliance: While this was the case previously to some degree, daigous will now be under increased surveillance from the government and e-commerce platforms to prevent counterfeits and fraud
Enforcement sends stock prices plummeting
After the release of the law, the industry sat waiting to see how things would unfold. Then on September 28, photographs and stories of a crackdown at the Shanghai airport began to spread like wildfire across WeChat and other social media platforms. One daigou returning from Seoul posted a photo showing a fine of CNY 17,000 (US$ 2,475) after airport security found 31 undeclared cosmetic products in her luggage. Additional photos showed customs officials inspecting the suitcases of daigous returning from abroad. Furthermore, the state-run radio broadcasting network China National Radio stated that 100 people were arrested on a single flight arriving at Shanghai, presumably due to exceeding the limit of CNY 5,000 (US$ 728) for duty-free goods.
As the stories and photos reached official news outlets, stock prices of luxury clothing and cosmetics brands dropped sharply. Share prices of LVMH (luxury goods conglomerate with brands including Louis Vuitton, Christian Dior, and TAG Heuer), Shiseido and Kao (Japanese cosmetic companies), Tiffany & Co., and others fell by 5% to 10% as investors saw the crackdown as signaling the disappearance of an informal, yet vital channel to reach Chinese customers. On October 10, the CFO of LVMH confirmed the border crackdowns on undeclared imports and stated that LVMH welcomed the crackdown on daigou. Following the statement, LVMH’s share prices dropped by a further 7% as investors continued to express their concern about LVMH’s access to the Chinese market.
Conclusion
In the coming weeks, we will publish two follow-up blog posts. The first will focus on the likely impact the new legislation will have on the daigou industry, including the perspectives of a few daigous within our network and how they intend to react. The second will provide insight into how multinational executives should respond to stay ahead of the curve by adapting existing approaches and implementing new strategies.
For more about this growing e-commerce channel in China, see our earlier series on daigous (part 1 and part 2).