Another way of importing to China ... Comentario de / Comment of Wines Inform Assessors

Another way of importing to China

Any producer who wants to enter the Chinese market knows about the painful ‘tax thing’. Before sending any bottle to China, 48.2% tax – which includes VAT, sales tax and tariff – must be paid to the government, unless the producer happens to be one of the few lucky ones from either Oceania or Chile. Thanks to free trade agreements, wines from Chile and New Zealand currently enjoy zero tariff, a benefit Australian wines are expected to enjoy by 2019.
 

Some very interesting things are happening to distribution in China, however, and happening fast. Many retailers in China are now experimenting with a new scheme that allows them to sell imported wine subject to a 21% tax instead of the usual 48.2%. This is not by smuggling or parallel importation, but by utilising a government-sanctioned ‘cross-border scheme’.

 

Another way to import

People who are not familiar with China may not be aware of the enthusiasm Chinese consumers have for overseas goods, whether it’s milk powder from Australia and New Zealand, health supplements from the US, or luxury bags and shoes from France and Italy. It is estimated that during 2016, 900bn RMB ($130bn) was spent by Chinese consumers on ‘overseas purchasing’, a 38.5% increase on 2015. In light of this, the Chinese government launched a new initiative called ‘Cross-Border E-Commerce’, which targets Chinese consumers buying directly from foreign producers or retailers.

 

The latest version of this scheme, ‘The circular of the Customs Tariff Commission of the State Council on issues pertaining to the adjustment of import tax for imported articles’, came into effect on 8 April 2016. This regulation is effectively a ‘white list’ for goods eligible for this scheme. According to the list, all still wine in packaging of under 2 L qualifies, which rules out any wine in larger-than-magnum-sized bottles and all sparkling wines. Stated simply, 21% overall tax need to be paid on the retail price of the wine rather than the normal 48.2% on the cost, insurance and freight (CIF) cost. This policy was supposed to be revised again on 8 April 2017, but no major change is expected until the end of 2017 according to industry professionals.

 

Cross-border e-commerce is not a recent practice for other products, but its use for wine is novel. Indeed, most dedicated retailing platforms specialising in cross-border e-commerce for wine are only a couple months old. More comprehensive retail platforms such as JD.hk, Tmall.com and Kaola.com have been operating for a little longer. Most platforms focus on Grand Cru Classé wines from Bordeaux, while more-specialised ones may work with some Burgundy and Australian wine. For example, JD.hk offered a bottle of 2007 Château Coutet at $45.65 including tax – significantly less than the $58.00 that Wine-Searcher suggests as an average global price.

 

The catch

There is quite a long list of catches. First, the amount of money anyone can spend on cross-border goods is limited to 2,000RMB for a single order, and an annual total of 20,000RMB for any individual. This ceiling enables these platforms to distribute premium – but maybe not ultra-premium – wines. Also, the 21% is based on the retail price of the wine instead of on the CIF tax. Profit margins today in China are far less handsome than they were during the boom years of 2008 to 2010, and basing a tax on a retail price effectively sets another limit on the maximum margin retailers can earn. Most set a gross margin of between 5% to 40%, depending on the wine. It is also worth noting that, unlike the bottles on retail shelves, wines sold in this way do not come with Chinese government-imposed back labels. This means that anyone wanting to take advantage of China’s secondary market for wine would be prohibited from selling them.

 

One undeniable advantage of the cross-border scheme is the need for less documentation. Although in practice, the officials in one port may apply different rules than those in another, and the only documents a producer needs are the ‘Certificate of Origin’ and ‘Sanitary Certificate’ prior to collection of the wine, and a ‘Certificate of Bottling’ for custom clearance. In the real world, exploiting the cross-border scheme for direct-to-consumer wine sales is slightly more complicated than this, and models for other products also differ. However, it is possible for the entire process – from the collection of the wine from the producer to the moment the consumer receives the bottle – can be handled in around three weeks provided the shipment is done by air.

 

How it works

1. The distributor in China places an order and agrees payment terms, and arranges the collection of the wine and the required documentation.

 

2. The wines are shipped to the Chinese port eligible for cross-border e-commerce, using ocean or air freight.

 

3. The cross-border warehouse receives and records the wines.

 

4. The distributor starts to sell the wines and take orders. Once payment is confirmed from the consumer, the order and payment information are transferred to the customs agent equipped to handle cross-border e-commerce and the customs office.

 

5. The customs officers vet the payment information to verify whether it exceeds the buyer’s annual limit.

 

6. The agent notifies the cross-border warehouse to arrange the simultaneous shipping and custom clearance of the wine. At this point there is another possible catch. There is a very small chance (no more than 2%, even in extreme cases) the wine may be chosen for inspection by the customs officer, which could delay delivery for several days.

 

7. The consumer receives the bottle(s).

 

At the moment, some distributors – including a few from Shenzhen – hold stock in Hong Kong, and it would not be surprising if others followed suit. But given the fact that Hong Kong and more than 10 Chinese ports all share the same tax-free status, there is no reason to favour the former British colony. At present, Ningbo, Shenzhen and Tianjin are among the most popular of these ports, and each has several cross-border e-commerce customs agents. As one in Ningbo says, “This port offers the best policy, and that’s why a lot of our clients, including Tmall, JD, Kaola, choose to work with us.”

 

It needs to be noted that upon arriving at the port, the goods are stored in a specialised facility called a ‘cross-border warehouse’, which is closely monitored by the Chinese customs office. According to the regulations, goods, once received into the warehouse, can be transferred to a regular storage facility if the importer decides not to sell them directly to the consumer. The reverse, however, is not allowed. In other words, if a distributor is unable to sell the wine using the cross-border scheme, they can still opt for a traditional retail route to market. To do so,

would, of course, incur the higher tax rate.

 

The cost

Although shipment by sea remains a strong option, many distributors will choose air freight. Normally, for shipments of over 300 bottles, this method of shipping would cost around 30RMB per bottle compared to as little as 2RMB per bottle shipped by boat. Inevitably, this has implications for the kinds of wine that will be appropriate for this route to market. It probably wouldn’t be worth a distributor shipping a wine with an ex-cellar price below $23.50 per bottle for sale through cross-border e-commerce. Bottles with a lower price will need to be shipped by sea. As for the priciest wine that could be sold in this way, even if the distributor were to work with a zero gross margin, the most they could pay without the consumer exceeding the 2,000RMB per order limit would be around $223.00.
 

At this point, producers reading this must be wondering how they can participate in this programme. Who should they talk to? What kind of wine should they offer to consumers? Would this be a good option for expensive-but-slowing-moving bottles?

Price isn’t everything. There are a number of factors that explain why a certain wine is popular or not. Mindlessly pushing all the expensive or slow-moving ones is not going to work. Talk to your importer, choose the right product that offers a good discount compared to the normal import price, and choose the kind of product that doesn’t affect the pricing structure of the entire brand. Overseas fine wine retailers can also take advantage of this programme given that they have all the documents on hand. 

Olvier Zhou

 

Comentario de / Comment of Wines Inform Assessors:

Las complejidades del comercio y de las regulaciones estatales, tan arbitrarias en muchos casos, quedan plasmadas en esta información.

La confianza y el conocimiento entre las partes de las relaciones comerciales está claro que facilita todo el proceso complejo de mover mercaderías

Wines Inform Assessors

.............

The complexities of trade and state regulations, so arbitrary in many cases, are reflected in this information.

Trust and knowledge between the parties to trade relations is clearly facilitating the whole complex process of moving goods

Wines Inform Assessors

............

Origin information: Meininger's