China tightens watch on growing e-commerce sector

The law is beginning to catch up with the mainland online sector that has seen trade soar from US$3 billion to US$64 billion in three years

PUBLISHED : Monday, 27 January, 2014, 4:23am
UPDATED : Tuesday, 28 January, 2014, 2:45pm

E-commerce has been growing by leaps and bounds on the mainland but the laws regulating this sector are only just beginning to catch up.

In the space of just three years, online sales on the mainland soared from US$3 billion to US$64 billion in 2012, a figure that took the United States a decade to achieve.

The mainland became the world's second-largest online retail market last year, with business-to-consumer (B2C) growth expected to average up to 34 per cent over the next five years, according to forecasts.

In spite of the exponential growth, little has been done to regulate these transactions. However, the recent third plenum announced several laws that will take effect in less than two months.

Among the changes on March 15, consumers will be able to return goods within seven days without specifying a reason as long as they are in "good condition", with exceptions for custom-made products and perishables, among others.

Claudio de Bedin, a lawyer at the firm de Bedin & Lee, who advises European clients on entering the mainland market, said: "I think the law is extremely important because it affects things at a time when e-commerce is taking off in China. It's common to see working women shop at [their office computers] during lunch. It makes retailers more aware of the products they are selling, and ensure products don't negatively affect the health of customers. They wouldn't want to lose money when goods are returned."

The new law also requires online sellers to register their names and addresses, making it easier to pursue legal action against counterfeiters. If an online platform is unable to provide vendor contact information, consumers can seek compensation from the platform itself, placing a real burden on online marketplaces to verify that the businesses they work with are legitimate.

This could be problematic for businesses such as Taobao.com the leading B2C platform. While the e-commerce site has shown some commitment to fighting fakes on its platform (in 2011, Coach became the first luxury brand to list on Taobao with an assurance that the marketplace would work together with the brand to help identify and take down counterfeit listings), it is far from fake-free.

Jeweller Chow Tai Fook this month announced it was taking legal action against copycats of its popular Bao Bao products. It said the problem had "become increasingly serious" both in physical stores and online, naming Taobao as one of the platforms where replica Chow Tai Fook products were sold.

The new laws would help bring all online marketplaces up to the same standard, said Guang Tian, a senior business development manager with JD.com the second-largest B2C online site on the mainland. "Compared with our rivals, we have very strict entry requirements on certification. The brands we work with must be licensees … 100 per cent of our products we source are genuine. [Fake products] would never get onto the site."

For many foreign luxury brands that are popular targets of counterfeiters, it is a step in the right direction.

Chief executive Eraldo Poletto of Furla, a luxury Italian fashion brand that plans to launch a mainland e-commerce platform this autumn, said: "Trademark is a very important concept. Copies, at the end of day, damage the customer. So, besides protecting local or international brands, it's more about protecting the customer. I do not believe so much in protectionism. It's about protecting the customer."

Despite this, Andrea Fenn, the managing director of Fireworks, a mainland digital consultancy that works with fashion luxury brands including Armani, Ferragamo and Bulgari, does not expect a sweeping shift in consumer behaviour.

"I don't see a huge change but it's important in terms of regulation. Buying fake products is so embedded in the mind of the Chinese consumer. So yes, it's a change but I believe it will be game-changing when the mentality moves away from buying something that looks like a real product to only buying things with the best quality, and this is a trend that's happening," Fenn said.

The seven-day return policy could add pressure on foreign firms, he said. "On the one hand, consumer rights are strengthened," he said.

"It sounds like a good thing but this ends up favouring the local e-commerce providers and not the international ones. A seven-day return policy is complicated in that it adds pressure to provide flawless service. There are customs, taxes, and import restrictions for international retailers. It's increasing the burden on international retailers."

However, the law should evolve somewhat over time, said de Bedin.

"In China, the government usually issues a new law and lets it run for a while before issuing regulations to indicate how the law should be interpreted and to clarify the law. I foresee certain stages in the implementation of the law," he said.

"The first stage is that people will be returning everything. But that will die down. In the second stage, customers will become more sensible, and retailers will be more responsible to consumers and realise they can throw back anything they don't like. In the third stage, retailers in China will become more competitive and the companies that offer copy products won't be so widely available."