Food scares: a great business opportunity - Shaun Rein

Shaun Rein

China's consumers do not trust the food produced in their own country, after many food scandals. That could also be a great business opportunity, says business analyst Shaun Rein in Barfblog, who looked at Weinberg's Inscatech — a global network of food spies.

Barfblog:

Weinberg’s company is developing molecular markers and genetic fingerprints to help authenticate natural products and sort genuine foodstuffs from the fakes. Another approach companies are pursuing uses digital technology to track and record the provenance of food from farm to plate. “Consumers want to know where products are from,” said Shaun Rein, managing director of China Market Research Group, citing surveys the Shanghai-based consultancy conducted with consumers and supermarket operators. 

Services that help companies mitigate the reputational risk that food-fraud poses is a “big growth area,” according to Rein. “It’s a great business opportunity,” he said. “It’s going to be important not just as a China play, but as a global play, because Chinese food companies are becoming part of the whole global supply chain.” 

Some of the biggest food companies are backing technology that grew out of the anarchic world of crypto-currencies. It’s called blockchain, essentially a shared, cryptographically secure ledger of transactions.

More in Barfblog.

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Baidu has been attacked unfairly - Kaiser Kuo

Kaiser Kuo

Internet giant Baidu has been under attack by Chinese internet users for medical ads. Former Baidu communication director Kaiser Kuo, defends his former company and says criticism has been unfair. Main Baidu problem: failing sales, he tells TechNode.

TechNode:

China’s internet exploded with outrage over the company’s perceived lack of supervision over sales of medical ads. Chinese state media joined the chorus, while authorities formed a task force to investigate the case bringing in Baidu’s CEO Robin Li for a talk. 

“In this case, to me, it was obvious that the anger that was directed at Baidu was out of proportion with Baidu’s crime,” said Baidu’s former communications officer Kaiser Kuo during a recent episode of the China Tech Talk podcast. 

Kuo, who spent six years with the company, believes that Baidu was scapegoated by authorities to avoid lashing out on China’s scandal-ridden health care system. The incident, however, can also be viewed as a tragic culmination of a series of controversies related to medical and health care ads which used to comprise 20 to 30 percent of the company’s search revenue. 

Baidu’s health troubles started in 2010 when it was accused of promoting counterfeit drugsthrough its search engine. Four years later, the company was sued by a man who used the search engine to seek out a cure for his homosexuality but ended up traumatized by an electroshock therapy in a conversion clinic. The company was acquitted but was warned against advertising dubious medical practices... 

It is not surprising then that in 2010 when Google announced its departure from China because of government mandated information filtering, doubts rose over Baidu’s involvement. At that point, for many Chinese internet users, Google’s “Don’t be evil” slogan and their decision to withdraw stood in contrast to Baidu’s pragmatism–and so Baidu became “evil.” 

“There is a kind of psychological habit that we have that when you have a narrative that casts one character as an obvious protagonist of the story,” said Kuo. “The narrative wasn’t exactly fair. There was never any evidence and it just wasn’t true that Baidu had something to do at all with Google’s decision to decamp from China. They were certainly the beneficiary of it but there was nothing sinister going on.” 

However, Baidu’s questionable business practices, such as enabling piracy, copyright infringement, plagiarizing Wikipedia, and cheating on AI tests have not helped its case. Neither has the incident in which Baidu employees accepted bribes for deleting negative comments behind the company’s back, nor the lawsuit over censorship by US-based pro-democracy activists. 

For Kuo, Baidu is a company of great technology, but one in which sales are often done ineptly. PR has also been the company’s weak point. Baidu’s poor response over the death of young Wei Zixi coupled with failed opportunities to capitalize on several major tech trends has left experts wondering about its future. After the incident, Baidu was ordered to revise its medical ads policy at a time when web search ad revenues have already been shrinking.

More at TechNode.

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Why McDonald's teams up with Evergrande - Shaun Rein

Shaun Rein

Fast food chain McDonald's faces decline worldwide, but wants to counter that trend by doubling the number of stores in China. Its alliance with property giant Evergrande makes sense for this strategy, explains business advisor Shaun Rein to the South China Morning Post.

The South China Morning Post:

The fast-food chain is now aiming to have 45 per cent of its 4,500 mainland China stores located in third- and fourth-tier cities, and more than 75 per cent of those will offer a delivery service. 

The ownership by China Evergrande Group of some 700 property projects in 240 mainland – mostly lower-tier – cities, appears consistent with McDonald’s strategy.

“It’s increasingly hard for McDonald’s to find good locations in China. Developers and mall operators don’t want McDonald’s anymore, they now want more Starbucks, as McDonald’s attracts the wrong crowd who look for cheaper stuff,” said Shaun Rein, founder of China Market Research Group and author of the forthcoming book The War for China’s Wallet. 

Different from most other major economies, the McDonald’s Chinese business has long been in the shadow of KFC, which entered the mainland China three years earlier in 1987 and boasts better consumer recognition. 

What’s more, unlike in the US, most McDonald’s stores in China are franchisee-operated so the company doesn’t own a lot of properties on the mainland. This means a strong partnership with a big developer could be a short-cut to achieve its five-year growth plan, Rein said.

More in the South China Morning Post.

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Credit score: next in the Tencent, Alibaba fight - Matthew Brennan

Matthew Brennan

Alibaba's Ant Financial has been leading the charge in online financial transactions, but Tencent wants to gain back market share by setting up its own credit sharing system. A much needed move, says fintech expert Matthew Brennan to Pymnts.

Pymnts:

The main concern is that Tencent may have ceded too large a lead in the race to Ant Financial, whose Sesame Credit has had 2.5 years to gain ground in the marketplace, particularly since Alibaba is the bigger player — with 53.7 percent of China’s mobile payments market to Tencent’s 39.5 percent. 

But Tencent, whose payments services have until now been largely limited to small transactions in convenience stores and peer-to-peer lending, has spent much of the last 12 months upping the level of its game and has signed up many new retailers to its payments platform, including Starbucks. 

Matthew Brennan, co-founder of tech consultancy China Channel, says the credit scoring play is the next natural move if Tencent wants to continue to bring the competition to Ant Financial and its leadership position. 

“Tencent obviously wants to change that, and they need to build up infrastructure to compete with Alipay’s more mature offering,” he said. “Credit scoring is an essential part of that.”

More in Pymnts.

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China is a source of business models, not an easy market - William Bao Bean

William Bao Bean

China is, as the second largest economy, becoming an attractive source of new business ideas, says Shanghai-based VC William Bao Bean. Although the China market itself is a hard one to crack, for startups and larger companies, he tells in WebinTravel.

WebinTravel:

William Bao Bean, who runs SOSV Accelarator which runs China Accelerator and MOX Accelerator, said that Facebook is copying WeChat and the question is, who can crack the global market first? “Chinese companies have gone to the US and failed, WeChat tried – spent US$120,000 a day on marketing,” he said. 

Chinese companies are now turning to Southeast Asia which he said “is turning into a Chinese colony. Leaders by sectors are being taken out by the Chinese. If you’re building a business, say a family-owned bank, you have to ask what’s the future because Alibaba and Tencent are coming. Riches to rags in three generations?” 

“In China, the big got bigger and the small got crushed"... 

As for startups who want to enter China, Bao Bean said, “99% of you should not go to China. Look at all the big boys – how many of them have been successful? Uber spent $2b, Didi shut them down. Uber was a company that broke the rules and that works in China but still …” 

His thinking is you need an unfair advantage to compete. “We focus on fintech, AI, machine learning and education.”

More in WebinTravel.

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Expect no conciliatory tone from China - Victor Shih

Victor Shih

Pressure is up on US president Trump to act against China in trade issues. Trump has been avoiding harsh action up to now, and political analyst Victor Shih warns that with a major political conference ahead, moderation will not be high on the country's agenda, he tells Bloomberg.

Bloomberg:

After sending warm signals toward China early in his presidency, Trump appears to be dialing up pressure on the Chinese government to change its ways. At the same time, he has been reluctant to pull the trigger on steep import tariffs or quotas that would risk retaliation. Trump recently backed away from threats to slap tariffs on foreign steel, after he took heat from Group of 20 nations and U.S. businesses that said the move would raise costs. 

From China’s point of view, a more aggressive stance from the U.S. will be met in kind as the government gears up for a vital leadership transition at the 19th Party Congress later this year, according to Victor Shih, a professor at the University of California in San Diego. 

"One can basically expect tit-for-tat behavior from China through the congress," Shih said. "Perhaps China will begin a national security or cyber-security investigation on U.S.-made high-tech products. Perhaps even more."

More in Bloomberg.

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Trying something new is hot in China - Jeffrey Towson

Jeffrey Towson

The rest of the world looks with amazement at the crazy, booming sharing economy in China, and wonder whether the rest of the world might follow. One of the reasons, people here like to jump in when something is new, says Peking University professor Jeffrey Towson at CBS.

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Why property will remain a safe investment - Sam Crispin

Sam Crispin

The Chinese government tries to curtail irrational investments, but domestic real estate is certainly not at the hackblock, says real estate expert Sam Crispin in Knowledge GKGSB. The government cannot afford to kill the goose laying golden eggs, he says.

Knowledge GKGSB:

Driving the rapid price increase are investors piling into the market. A dramatic stock market rout in 2015 in particular left many seeing property as one of the few secure investment options available on the Chinese mainland. 

“There are few investments products that offer the same degree of security as real estate,” says Sam Crispin, CEO of ABP Investment Management in Hong Kong. China’s banks also see property as a secure bet. 

About half of all new lending in 2016 went into real estate, largely through mortgages with bank loans to developers and homebuyers totaling RMB 26.68 trillion ($3.87 trillion). This was up 27% from 2015, according to data from China’s central bank. Agricultural Bank of China, the country’s third-largest lender by assets, had 82% of its new loans go to housing... 

Property development and apartment sales are also key sources of revenue for local governments, so they have an incentive to keep land sales going. According to the Chinese business magazine Caixin, income from the sale of land-use rights totaled RMB 3.75 trillion ($551 billion) in 2016, nearly 30% of the combined annual income of local governments, with some areas depending on sales for as much as 50% of their revenue. 

“Property is the goose that lays the golden egg,” says Crispin. “They (governments) are dependent on that revenue stream—if they lose it what will take its place?” 

A tense standoff lasted for months as the government grappled with a precedent that had national implications. In late December, it was announced that the Wenzhou leases would be rolled over free of charge, which kicked the issue down the road but left the core issue of ownership rights unclear. 

Such uncertainty, long-term, is a destabilizing factor. “[A bursting bubble] would be catastrophic for the Chinese state,” says Crispin. “The government is in control of land sales, the government is in control of construction, the government basically sets prices by approving the pricing of sales… so it’s the government’s fault if it goes wrong. They have no mechanism to cope with [a crisis].” 

Measures implemented in recent years have tried to cool down the market. These include raising minimum downpayments, which can be up to 80% in major cities, and outright restrictions on home purchasing, for example by making it illegal in some places to buy a second apartment.

More at Knowledge GKGSB.

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How China will execute its VPN ban - Matthew Brennan

Matthew Brennan

Can the Chinese censors funnel almost all internet traffic through government-approved VPN's? Yes, says social media expert Matthew Brennan to the Beijinger. The often-heard assumption China cannot afford a fully controlled internet might be wrong, he says. Apple pulling the plug on VPN's might only be the start.

The Beijinger:

"People who had the app before or people with the ability to switch and download from non-Chinese app store are not affected," the anonymous proxy source says, before elaborating on a far more grave aspect: "Switching is a pain and only possible with foreign credit cards, which most Chinese won't have. I mean, it is possible to change stores without a credit card, but that only goes for free apps. The apps that support our proxy are not free." 

Noted tech commentator Matthew Brennan went on to cite even broader concerns. While he has spoken to many experts who insist a complete block of VPNs is impossible – because plenty of talented programmers will always find ways to circumvent such hurdles – the authorities' greater aggression can't be dismissed outright. 

"Their goal is to make it so it's impossible to use non-government authorized VPNs," Brennan says. "On a technical level, several people have told me that's impossible. But I see it as this: All they really need to achieve is making it very troublesome for normal, non-technical people to use VPN services and they will effectively achieve their goal."

More in the Beijinger. 

Matthew Brennan is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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How to enter the China market - William Bao Bean

William Bao Bean

Innovation expert William Bao Bean, managing Director of SOSV’s Chinaccelerator, discusses entering the China market is tough, if not impossible for foreign players in many industries. In the Hutong podcast, William  looks at the way he trains Chinese startups for a global play, and foreign startups for the China market.

William: "China is the #2 economy in the world and thus on everyone's list but penetrating it is elusive for global Internet leaders - Uber did the best spending usd2bn to get a usd7bn stake in Didi Chuxing 滴滴出行 after which their service was basically shuttered." (Key points of the podcast below).

William Bao Bean is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more innovation experts at the China Speakers Bureau? Do check out this list. Key points at the podcast: 0:00 William’s background and introduction to Chinaccelerator. 4:52: How has the investment thesis differed amongst Softbank China, Singtel and SOSV? 11:00 What are the differences between Chinese consumers and SE Asia consumers? 14:10 How to do social commerce in China? 16:50 Why does SOSV only invest in startups going through its accelerators? 17:40 Chinaccelerator invests in convertible notes. What are differences in convertible note terms between China and the West? 20:10 Have there been any issues working with local Chinese investors and how to resolve them? 25:40 What is a portfolio company that has succeeded and why? 30:24 What are examples of companies or sectors where things did not go well? 32:23 Chinese B2C startups prioritise market share. Is burning cash for market share a necessary first step? How has that changed recently? 36:46: As China market matures, how has SOSV’s investment thesis changed? 45:05: What is the one most absurd investment term William has come across?

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Crossing boundaries: tough for all tech companies - Jeffrey Towson

Jeffrey Towson

Foreign tech firms have a tough time entering the Chinese market, but Chinese tech companies going global have an equally hard time, despite increased financial firepower. Peking University business professor Jeffrey Towson discusses the international development of the tech market at CGTN. Even his mum in California knows now Alibaba's Jack Ma, but it does not mean she uses his products, yet.

CGTN:

A large population used to drive China’s economy through cheap labor. But it is now benefiting the country’s technology in a particular way. 

Jeffrey Towson, professor of investment from Peking University, believes China’s tech giants can beat US companies “fair and square,” both within the domestic market and abroad. 

Supporting his view is the large scale of native tech companies and consumers.

“When a company like Huawei, which has 170,000 employees and 70,000 of them are in R&D, that’s bigger than Cisco (a world leading IT company based in the US), which has 70,000 for the whole company, that’s incredibly difficult to compete with,” Towson said... 

New groups of labor and expertise have also helped China’s tech industry thrive.

“If we talk about gaming, we’d also be talking about artists, people coming from design schools and animation schools, of which there are a lot now. So there's population migration on top of government action – sometimes things just happen,” Towson said.

Let’s now argue against that opinion from The Economist – if the Chinese government drops censorship and restrictions on foreign tech companies, will they win?

More (including two videos) at CGTN.

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Winners in luxury: property, baijiu and Tesla - Rupert Hoogewerf

Rupert Hoogewerf

Spending on luxury in China went up over 80 percent over the past ten years, reveals the Luxury Consumer Price Index (LCPI). HuRun chief researcher Rupert Hoogewerf points in ECNS at three major winners: property, baijiu and Tesla.

ECNS:

The gauge represents a basket of 116 high-end goods and services, 20 percent of which are imported. It is the 11th of this kind issued by HuRun research institute, which tracks changes among China's high-net-worth individuals. 

The index compares the price level from June 2016 to June 2017, while noting that the LCPI rose by 3.6 percent so far this year, outpacing a 1.5 percent increase in CPI. 

"What impresses me most this year is the increase in property prices, baijiu (a Chinese alcohol), and Tesla cars, which drive the general luxury consumer price up," said Rupert Hoogewerf, chairman and chief researcher of the institute. 

Of the 11 categories measured by HuRun, luxury housing price led the upward trend, up 16.6 percent from the previous year. And baijiu recorded huge price surge, with Wuliangye, one of China's most famous high-end Baijiu brands, rising as high as 30.5 percent. 

The LCPI report attributed more expensive luxury houses and imports to the depreciation of yuan, as many foreign currencies became stronger, with exchange rate of US dollar against renminbi up 3.6 percent year-on-year as of June 9. 

Gold and diamond maintained momentum, up 9.6 percent and 3.3 percent respectively. And Tesla electric cars increased by 4.5 percent, thank to favorable policies in China to support electric car development, the report noted. 

However, wedding and healthcare markets witnessed a decline for the first time, dropping 3.6 percent and 3.5 percent respectively.

More at ECNS.

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Ownership companies mostly remains opaque - Victor Shih

Victor Shih

HNA was the last in a row of Chinese conglomerates, losing support from their most important financial backers. In the slipstream details emerged about the hidden ownership structure behind HNA. But most of these ownership relations remain opaque says political analyst Victor Shih to Fortune.

Fortune:

Yet HNA has not chosen previously to open its books on the group's ownership structure. That left others to discern that high-level political connections have allowed HNA to borrow freely and expand rapidly, at a time when others have faced hurdles doing so. 

"A company cannot obtain lines of credit without either being a state-owned enterprise or high-level connections with the political elites," says Victor Shih, associate professor of political economy at the University of California at San Diego. "There are hundreds of Chinese companies trying to borrow billions overseas, and only a few obtain these large lines of credit." 

Also under increasing scrutiny is HNA's debt load to state-owned Chinese banks. In December, for example, it bought Ingram Micro for $6 billion—in cash—in a deal partly financed by the Agricultural Bank of China, China Construction Bank, Bank of China, and others, according to information given earlier this month to Fortune. In the minds of some, HNA—a privately held company—is increasingly tied to China's government, through its heavy debt... 

Untangling fine details over HNA's ownership structure is highly difficult, say analysts, who caution that much of the details are inaccessible, through a web of different companies. "The [Chinese] elites are very practiced at using dozens of shell companies to conceal ownership," says Shih.

More in Fortune.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form. Are you looking for more political analysts at the China Speakers Bureau? Do check out this list.  

China develops rules for self-driving cars - Mark Schaub

Mark Schaub

China is moving fast in developing self-driving cars, but also authorities move fast in paving the legal roads for those cars by developing Draft Guidelines, says Shanghai-based lawyer Mark Schaub in Lexology. The ambitious approach is in line with the technological improvements, the government is having on its agenda.

Mark Schaub:

Most of the standards to be established under the Draft Guidelines are recommended (not mandatory) national standards with few exceptions. There are 95 standards to be established under the Draft Guidelines – 11 for Foundation, 28 for General Specification, 47 for Product and Technology Application and 9 for Relevant Standards. 

The Draft Guidelines also reveal that there are 21 standards that are planned to be worked out in next 2-3 years, which includes Advanced Driver Assistance System (ADAS), automatic emergency brakes (AEB), definition of levels of driving automation and in-car T-BOX, and some of them have been in the process of project approval. 

What is Next?The MIIT and SAC have set one month for public comment on the Draft Guidelines which will expire by 12 July 2017. Similar draft guidelines have been prepared by MIIT and SAC and circulated to limited groups for comment in 2016. It is currently anticipated that the Draft Guidelines will be officially issued within the next few months.The Draft Guidelines indicate that a sub technology committee for ICV is under way of formation under the National Technical Committee of Auto Standardization[2] to coordinate the establishment of the standards system of ICV. 

In addition, just one day before the issuance of the Draft Guidelines, i.e., on 12 June 2017, an Industry Innovation Alliance of China Intelligent & Connected Vehicles (“Alliance”) was formed with the guidance of MIIT to facilitate the strategic development of the ICV industry of China. 

Mr. Miao Wei, the current minister of MIIT revealed on the same day when the Alliance was formed that ICV is a high ground whereby China can strategically seize the future of the auto industry and is an important opportunity to upgrade China’s auto industry from merely big to also being strong. The minister also indicated that China is formulating the overall development plan for ICV and is drafting regulations on ICV testing on public roads. 

Recently, more developed countries have facilitated their legislation for automated driving. For example, on 12 May 2017, the German parliament (the Bundestag, the lower house and the Bundesrat, the upper chamber) has approved the amendments of German Road Traffic Act (Straßenverkehrsgesetz, StVG) to allow automated driving. Australia and Japan also issued guidelines and regulations for road testing of automated driving in June 2017. In the market, traditional and new car makers and technology companies are accelerating their investment and products development in automated driving. 

It is clear that the China government is keen to avoid lagging behind the competition in respect of automated driving. Based on the regulations it appears that China sees the development of ICV as a good opportunity to overtake incumbents in China’s auto industry. It is anticipated that more guidelines and regulations will be in place in China soon to further boost the development of ICV.

Many more details on Lexology.

Mark Schaub is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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Related articles

• China moves to become a leading innovator - Shaun Rein

Investors need to be political experts too - Shaun Rein

Shaun Rein

After record-breaking Chinese investments in 2016, the Chinese government started to pull their financial reins, ahead of a major political decision making conference this Autumn. For investors reading political tea leaves has become as important as analyzing the stock markets, says business analyst Shaun Rein in the South China Morning Post.

The South China Morning Post:

While there’s no suggestion of wrongdoing, the heightened scrutiny of the companies underscores Beijing’s new attitude towards overseas mergers and acquisitions by private companies. 

The number of major overseas asset purchases by mainland companies plunged by 80 per cent in the first quarter, as Beijing tightened controls on capital outflows and ratcheted up scrutiny into deal funding. 

“Investors right now have to be political experts as much as valuation and financial ones – the political risk now is the highest I’ve seen in the 20 years I’ve been in China,” said Shaun Rein, founder of China consultancy Market Research Group, based in Shanghai. 

China experts said the latest administrative measures pointed to the Beijing’s commitment to reduce financial risks ahead of an important political meeting this autumn.

More in the South China Morning Post.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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China: bound to be the first cashless society - Ben Cavender

Ben Cavender

A decade ago, in China cash was king. But in less than another decade, the same country could be the first fully cashless society, says business analyst Ben Cavender to AFP. Cavender estimates China's mobile payment market is already 40-50 times larger than the United States.

AFP:

China was the first country in the world to use paper money but centuries later the soaring popularity of mobile payment has some analysts forecasting it could be the first to stop. 

The gross merchandise value of third party mobile payment rose more than 200 percent to 38 trillion yuan (about $5.6 trillion) in 2016 from a year earlier, according to China-based iResearch. 

The growth of the cash-free system has been supported by China's rapidly expanding e-commerce market as Chinese shoppers increasingly shun bricks and mortar stores. "I think it's really very possible that China becomes the first or one of the first cashless societies in the next decade," said Ben Cavender, a director at China Market Research Group. 

Cavender estimates China's mobile payment market is already 40-50 times larger than the United States. 

Alipay, started by e-commerce giant Alibaba and now owned by its affiliate Ant Financial, and WeChat Pay, which is built into Tencent's popular messaging service, have hundreds of millions of users between them and are China's dominant payment platforms. In Beijing it is hard to find a product or a service that cannot be purchased with a mobile.

More in AFP.

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Apple: a ripple in China's fintech markets - Matthew Brennan

Matthew Brennan

Online payments have gained market share in China very fast, but that market is dominated by domestic players like Tencent and Alibaba, while foreign ones like Apple are less than a ripple, says fintech expert Matthew Brennan at Pymnts.

Pymnts:

Ant Financial and Tencent could both potentially  surpass credit card companies like Visa and Mastercard in total global transactions per day in the coming year, as they offer merchants a cheaper and more accessible QR-based option that is more desirable than a more costly upgrade to payments terminals for cards. 

That nearly ubiquitous presence among merchants online and off in China’s major retail sector has lead to an incredibly mobile-dominated marketplace full of some very loyal customers. 

At present, according to analyst Matthew Brennan, Alipay and WeChat Pay collectively control some 67 percent of the Chinese payments market in major cities — compared to Union Pay’s 22 percent and cash’s 11 percent. 

Apple Pay, which launched in China over a year ago? Less than 1 percent. And not for lack of trying or interest. Apple went into the market with an alliance with Union Pay — the nation’s only state-backed issuer of six billion cards that are accepted at major retail stores all over China. They also enlisted participation from 19 Chinese banks, including its four largest. They even managed to get three million customers to link their cards to an Apple Pay account within the first two days the service was available. 

Full speed ahead? Not so much — it didn’t even make so much as a ripple in the marketplace. According to Brennan’s data, 67 percent of store clerks have no idea how the service even works — and built in, smartphone-based payments tools are an order of magnitude less popular among Chinese consumers than app-based systems that use the more understandable and accessible QR codes.

More at Pymnts.

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Legal challenges of network marketing - Mark Schaub

Mark Schaub

China has become the testing ground of many international network marketing companies, as many Chinese consumers prefer foreign brands. But apart from opportunities, Shanghai-based lawyer Mark Schaub also sees legal challenges of operating in this new promised land, he writes in Lexology.

Mark Schaub:

However, it is very important to note that despite this opportunity network marketers do face real and serious challenges in China: 

Pyramid selling or selling via multi-level marketing (MLM) is illegal in China. 

If Network Marketing companies wish to operate within China it is crucial that they adjust their business in order to operate legally. The main restrictions are that a distributor cannot earn compensation based on sales of products to distributors lower down the hierarchy or “down-line” in the same network. 

Non-compliance can have very serious repercussions: companies branded as being illegal pyramid schemes will face official investigation which will often result in the arrest of person-in-charge of affiliates within China and company executives who travel to China. In addition, the non-compliant company will quickly find out how fragile its business in China is – the Chinese authorities can quickly move to shut down the company’s website and all social media channels – given the importance of social media and the internet in most network marketing companies this will effectively shut down a company’s operations overnight. 

Many international Network Marketing companies are currently using cross-border e-commerce as a means to circumvent regulatory restrictions on MLM. Basically, international Network Marketing companies operate by selling offshore products or services into China and having the business operate offshore to the maximum extent possible. Many of these companies have been very successful in generating revenue and profit in China; some extremely so – indeed China has become the main market for a number of these companies as they abandon less lucrative markets. 

However, these “offshore” Network Marketing companies often fail to take into account the potential fragility of their business in China. They prefer to believe (or possibly pretend to believe) that their offshore model allows them to avoid the PRC’s legal restrictions on Network Marketing. Nothing could be further from the truth. If your business is operating in China then you are required to be compliant in China or risk the serious consequences of non-compliance outlined above. In some cases this will involve obtaining a Direct Sales License in other cases it may involve a fundamental revamping of the business model.

More issues on compliance in Lexology.

Mark Schaub is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more strategic experts at the China Speakers Bureau? Do check out this list.