The Evolution of Chinese Sellers Dominating the E-Commerce Landscape

I started selling online in 2004. Reading forums, consuming information products, using basic shopping cart software – it was a wild ride and a hyperactive learning experience.

Looking into the future, I knew I needed to buy direct from Chinese factories to stay competitive in the long term – and by early 2006 we were making our first orders from China. By 2007 I was coming to China and the decision to make a long term move was due to my perspective in the change of the tides.

Product based business was moving to China. This is where the outsourced labor, manufacturing moulds, and flow was happening. During my trip I met Chinese traders who were doing big volumes on eBay and I knew time was not on my side. I had to keep ahead.

Ten years later, and I would say we are approaching a more mature Chinese e-commerce seller environment, and I want to “vent” a little bit today and hope to connect with some other in the comments section below and gain more perspectives.

A friend who I will keep nameless was doing decent business on eBay. He invested for a large container shipment of mp4 players to Los Angeles for a Christmas holiday. Discussing this with him over dinner, he said by the time the mp4 shipment arrived to port and reached his final warehouse, the same Chinese manufacturers (or traders?) were selling those same units on eBay for the same unit price he bought a container load for.

He got out of the ecommerce business. Now he’s doing SEO services and not looking back.

I don’t want to say this in a negative way. Go to any China town around the world, and you’ll see some of the most diligent work ethic. In university, my Chinese friends were the most serious students, working extra overtime until the school library had to kick them out at night.

More power to them, and these hard working Chinese are on Amazon, eBay, and more up and coming platforms studying how to master the process.

I’m all for equal opportunity for everyone around the world. So please don’t interpret my article today as a “hold down the Chinese from good opportunity” – but please read on and get some more perspective.

In a few of our podcasts in Global From Asia, we have been backtracking when Amazon exactly started to allow Chinese businesses to open Amazon USA marketplace accounts. It seems to be late 2013 or early 2014 timeframe.

Before this, I was in a Chinese E Commerce Association (Hero Meets Hero) and many of these e-commerce sellers were opening up US companies in order to tap into the power of Amazon and FBA. So they were getting on Amazon before this.

Yet, here is the unsettling part I have:

They don’t pay taxes in America. And they don’t even understand the concept of paying US taxes.

Sure, Amazon, eBay, they want more supply on their marketplace, and obviously the supply is in China. It’s the world’s factory – so in order to best tap into this huge factory, allowing factories and trading companies to list on your platform directly is the ultimate.

Now, anyone, even Chinese would say that it is hard to maintain smooth factory operations. Quality control, inventory management, cash flow.

On a regular basis I am meeting readers of this very blog who live overseas. They are having issues finding the supplier, managing supply chain, etc. It is a huge struggle for them, and I totally understand that struggle. It is a reason I moved here in the first place.

Discussing my concerns of a dominant e-commerce world of Chinese factory sellers, they also see this perspective. These non-Chinese sellers see themselves as an extension of the supply chain as a marketing company.

Sure, brand is valuable, but you need to be a master of your product and your supply chain. That is critical in a product based business and e-commerce business.

Ok, so let’s skip past this and say you got all the manufacturing, supply chain, and cash flow in order. You still are in a much tougher spot for global tax. Western countries aren’t as flexible about taxes as China is. Let’s get to that next.

So, this is a secret to many outside of China, but used on a mass level here in Mainland China. Getting payments into a personal Chinese bank account. For some reason, the Chinese government doesn’t tax money that goes into a personal bank account.

If the money enters into a Chinese company business bank account, it is immediately subject to taxes.

So, when money is transferred from overseas – say Amazon US, and into a Chinese sellers account – do you think that is going into their company account? Probably not.

Discussing this with Chinese sellers, their defense is that this is how all Chinese companies do it. The whole supply chain is using personal bank accounts for a significant percentage of their sales. That there is “guanxi” with the local tax authorities to allow this.

Pushing them a bit harder, they will say “if we had to pay tax the completely above-board way, we would be losing money as a business, all these companies would go bankrupt”.

So, seems like these “factory direct” Amazon sellers are leveraging tax loopholes in order to drive prices lower for American consumers.

Chinese dream to be US citizens. Many of my Chinese factory friends cannot believe I choose to live in Mainland China. They see the US education system, the American dream, as the ultimate achievement.

Yet most of them have no idea what some of the real repercussions of it are. Sure, there are amazing things about being an American, but we can’t just look at the good and not notice the bad.

So many Americans abroad run into tax issues in America. We need to file each year. That money going into a personal bank account – yea, that is tracked and needs to be accounted for each year (unlike our Chinese friend’s personal bank accounts).

Filed your taxes and all done? Nope, expect to get questions from the IRS on your taxes months or years later. Asking questions about transactions or your business.

Seems Chinese do not need to think about previous tax years coming back to them and asking questions.

Now, as many expand past Amazon FBA – they need to build up a US company. They then need to apply for accounts with an EIN (Employee Identification number) and then use that in new platforms.

When I discuss with them how they will or are filing their US taxes, they often are not too sure. But most of the time they feel if they make a million us dollars in sales, they would wire transfer the full million back to China and report zero earnings in America.

And you want to guess where some of those millions go? To personal Chinese bank accounts. Yup, that means no taxes in America or in China.

Insane.

Is this sustainable? Then you wonder why it puts pressure on American e-commerce sellers. As the timeframe widens, and these tax savings and lower cost of operations in factory cities in China add up – it is a bigger and bigger competitive advantage.

Because, let’s face it – e-commerce sellers are inventory buyers. I did it for 8 years. You are buying inventory, selling it, and buying more. The best sellers are those who have a steady flow of inventory with zero back orders. If you can build up a treasure chest of cash and use that to have a good buffer of inventory – you can grow very smooth.

Like the Chinese businessman envious of our US passports, the US government is also curious why we wouldn’t want to stay in America.

When I make trips back to America, I always worry what the US customs will ask me. There have been cases where I have questioned why I have been outside of America so long, as they are flipping through my page after page of Hong Kong and China exit/entry stamps in my passport. Is there something wrong about living overseas as an American?

Honestly, my mission has always been trying to help business owners do business in China and Asia more easily. One of the challenging (and fascinating) places to do business, if I can make it just a little bit easier, level the playing field just a little bit, I’d feel I have achieved my goal.

I wish the US government would see it that way. I wish my mom would see it that way. She has had emotional calls with me where she says

“you want to keep helping chinese sell stuff in America, you want to go to jail?! Huh, is that what you want, to go to jail?”

Ya, challenging times.

So as Chinese sellers grow around the world, they know how to do more and more skills on their own. No longer needing “middle men” like agents and distributors in end markets, there are little jobs left for those locals.

But, one thing has still come up time and time again. A foreign face. Someone in the local market that the local consumer can trust.

This comes in a couple forms.

Is this the last value I have as an American? A local tax number and a face?

Isn’t that scary and sad at the same time. Not sure how you feel about that, but I get pretty offended when that is the only thing a business owner thinks I can provide them value with.

Sure, Americans, or “Foreigners” (I’ve been in China too long) still have a lot of advantages. We know the local market, the mindset of the consumer, more advanced marketing strategies.

But over the long term, the way to win is have a quality product that is in constant supply when a consumer orders it. And to have a steady order flow, you need to have a decent amount of inventory – and that comes down to having constant cash in the bank, or a Chinese factory that has your back.

I am all about a level playing field around the world. But that is just it:

A LEVEL PLAYING FIELD.

When some people can dodge a massive tax burden, that gives them a huge advantage in a cash intensive business like e-commerce. Marketing and branding can be improved over time, as the cash pile builds up.

I’ll wrap up my rant, but I hope some of you give me some of your perspective in the comment section below. Am I totally off base here and a “sore loser”? I exited e-commerce in 2012 and started a mobile app startup in China instead. Inventory, cashflow, and this long term vision I had that seems to be coming true was a major factor in my decision to sell the assets and move on.

So – what do you think? Will the world all be buying online from Chinese owned e-commerce companies?