The biggest news this week for China food importers, among others, was the Ministry of Finance’s announcement that it will cut import tariffs on nearly 200 consumer goods, effective almost immediately. Starting on Friday December 1, tariffs will come down an average of more than 50% for 187 items ranging from avocados to macadamia nuts. The majority of the items are not related to food and beverage products, but nearly one full page of cuts is potentially relevant for our clients overseas looking to generate sales in China, and we have taken the initiative to translate those items and the change in tariffs for you, below.
[ABOVE: China food import tariff cuts starting December 1, 2017. Translation by TSI]
Several things jump out to us when we look at these cuts. The first is that the amount of the cuts varies significantly. The biggest gains are for vermouth, which was previously taxed at 65% but will now be taxed at just 14%. Also in the beverage category, mineral water will see its tariff slashed from 20% to 10%, while the tariff on whiskey will drop from 10% to 5%. This is no doubt good news for imported water brands such as Evian and Perrier and for all alcohol importers. Whether the gains will be felt by consumers is a looming question, but the sentiment is moving in the right direction.
A second point worth mentioning is that these cuts appear to favor specialist importers, and present an opportunity for those brands who have found or are searching for their niche in China. A cut to a particular type of lactose-free baby formula, from 20% down to 0%, is a case in point. This won’t affect Nestle, who manufactures 95% of their products domestically anyhow, but for the right distributor and right importer, this is welcome news. We see this trend echoed again in the tariff cuts on certain types of cheese (temporary and now rescinded cheese ban be damned), with cheese tariffs falling to a normalized 8%.
[ABOVE: China cutting import tariffs to help spur spending and economic growth. Photo: AFP/GETTY images]
Another way to look at this round of tariff cuts, the biggest in China since 2015, which were mostly focused on clothing, is that China is stepping up it’s battle on the daigou industry. Daigou are relatively small-scale importers who use the postal system for logistics and often skirt the tax laws. They have been incredibly active in Australia in particular and a big talking point for the consumer goods industry down under. At TSI we have always felt that this is a classic case of short-termism and eventually the government would find a way to clamp-down. “The tax cuts will add to the advantage of e-commerce operations over the online shopping agents,” Cao Lei, director of Hangzhou-based China Electronic Commerce Research Centre told the South China Morning Post. “Imports through general trade are much safer in terms of customs clearance, quarantine and warehousing.”
About 42 million Chinese bought foreign products via cross-border e-commerce platforms last year, spending about 1.2 trillion yuan (US$281 billion), according to the research centre. That number is expected to reach 59 million shoppers this year, with a purchase value of 1.85 trillion yuan. This isn’t the first time the government has moved against daigou. In spring 2016, a new postal tax came into effect, squeezing the margins of small-scale, informal importers even more, and just this month came news that a new draft law is under consideration to require online vendors to pay tax and register with the government.
Finally, it’s possible to see the government spurring on competition between local brands and foreign imports with this new move, as everyone competes for the ever-growing middle class and consumer confidence is at an all-time high. According to a July report, China imported about 39 million tons of foreign food in 2016 from 187 countries and regions, which amounted to $47 billion in sales.
At TSI we can see a shift in the market occurring right now with more and more foreign brands (particuarly American) bringing their A Teams into China to shake things up with local partners or local teams. Local food and beverage brands have indeed done well over the last five years but there continues to be a lot of ‘fad’ innovation with no real breakthrough innovation coming out of brand teams in the food and beverage space. We see the government tariff reduction as one certain way to put added pressure on local brand owners to now really lift their game to achieve the China dream of becoming an innovation nation.
Though it may be incremental, and barriers remain – particularly the VAT tax – The Silk Initiative sees this round of tariff adjustments as a net positive and an opportunity for brands across these categories to really take stock of what they are sitting on back home and think much more seriously about making a move to China. We’re expecting 2019-2020 to be bullish years for new brand entrants to China. The advice is simple. Move now or forever be forgotten as the market starts to tighten up with crowded categories that will make it that much harder to see your brand make its way into consumers’ homes in China.
TSI has expert solutions designed specifically for brands looking to enter the China market. We help clients across 3 broad areas; (1) IDENTIFY the opportunity in China, (2) DEVELOP the brand, product and pack offer and (3) see it GROW in-market.
TSI’s ‘SPACE DEFINER’ (“Identifying White Space For Your Brand Expansion in The Chinese Market”) is the perfect solution for the first step of any brand’s journey into China.
Email our CEO today to find out more: email@example.com