SMEs and Cross-border E-commerce Zones

Cross-border e-commerce zones have become the rage in digital trade circles. China has already launched 12 of them. The World SME Forum is supporting the creation of one in Turkey as part of a China-Turkey E-Commerce Pilot Project. And other countries are starting to look at this experiment as a possible recipe to unleash SMEs’ growth potential, and economic growth. But how much is it really known about this model? Does it make sense to look for a “spatial solution” when dealing with digital trade? Is there any proof of positive impact on SMEs?

The “e” is only the fashionable tip of the “eTrade” iceberg: most of the activities needed to fulfill orders and ship them to destination are “brick and mortar”. Cross-border ecommerce experimental zones aim at making all of that easier. By combining the advantages of e-commerce and bonded warehousing, these zones basically offer efficient import processing and logistics. The conceptual basis of the bonded warehouse system has been around since the 1800’s. It was created to remove the inconvenience of the requirement for payment at the time of import by allowing the importer to give “bonds” or promise for payment of duties when the goods were removed from the warehouse in the future. What is new is that ecommerce zones leverage ICT solutions to combine services with manufacturing, packaging and online shop registration capabilities, aiming for faster and standardized processing of orders, logistics, customs clearance, tax and exchange settlement.

China is the uncontested first-mover in setting up cross-border e-commerce zones. Starting in October 2013, the Chinese Customs Department has selected seven pilot cities to establish “Cross Border E-Commerce Zones” (CBEC), and subsequently expanded to include 12 cities in total. The first pilot project was approved in March 2015 in Hangzhou, home to Alibaba. According to an official statement from authorities, the pilot’s goals was to “build complete industrial chains and provide experience that can be used by the sector across the country and will help create jobs, expand the market and bring new energy to the Chinese economy”

The first results are promising: As it happened in the early 80’s during China’s opening up, Shenzhen is one of the pilot cities for this new breed of special economic zones. Shenzhen’s zone was up and running with exports and imports within a year from September 2013, registering cross-border e-commerce trade volumes of about $133 million in the first 10 months of 2015, quadrupling from the year before. According to authorities, the import procedures have been minimized to 1 working day.

There is a chicken and egg relationship between e-commerce and special zones’ growth. And it seems to be working. Establishment of “e-commerce special zones” brought robust growth of e-commerce in China, and there seems to be strong correlation between establishment of e-commerce special zones and economic and trade growth in the relevant regions; at the same time, new zones are being established in places where e-commerce is already flourishing. Taking this fruitful relationship into consideration, e-commerce giants are more and more interested in benefiting from these special zones. For example, VIPshop, one of China’s prominent online discount retailers, has signed an agreement with the Guangzhou Zone; Alibaba’s B2C trading platform Tmall Global has signed an agreement with the Hangzhou Zone, and DHgate has established partnership with Chongqing e-commerce zone.

So, are there real benefits for SMEs?

While we are still missing a rigorous assessment that would allow policy makers to identify the characteristics of the businesses that benefit the most, and how this can be expanded to more SMEs, anecdotal and inferential evidence suggests that SMEs broadly benefit from cross-border e-commerce zones.

The zones currently being implemented in China usually provide information sharing systems for companies, financial institutions and government agencies; a one-stop-shop for online financial services; an intelligent logistics system; an e-commerce credit system (including a credit evaluation system, electronic business enterprise credit database etc.); a data monitoring system; a risk management system. These services are incredibly helpful for all companies, but they end up being more beneficial for SMEs than for large companies in terms of cost reduction and resource management.

As a concrete example, let us take logistics costs. Given that SMEs trade smaller quantities than big enterprises, they are often forced to trade “under-container”, hence increasing their logistics costs. These costs can add up to more than 42 % of total sales, as compared to 15-18 % for large firms. Consolidation of cargo at cross-border ecommerce zones is hence an example of a unique cost reduction opportunity for SMEs who can’t reach a full container export volume.

Is anybody emulating this model?

As the project is fairly new in China itself, there is not a lot of evidence of adoption going on globally, but there are examples. Seven days after the implementation of the free trade agreement between China and South Korea in February 2015, a Chinese agricultural products company opened a cross-border e-commerce business in one of Korea’s eight free economic zones – Incheon. Recently, Jack Ma, founder and chairman of e-commerce giant Alibaba Group, proposed the establishment of “digital free trade zones” for small businesses and called for Russia to become an e-hub intersection connecting Asia and Europe.

In conclusion, the debate is raging, but there seems to be little doubt that cross-border e-commerce will expand globally, especially to countries that are China’s trade partners. What remains to be seen is how these countries will adapt the model to serve best the local needs of their SMEs.

Stefano Negri is Associate Director at the World SME Forum

Tugba Kara is Advisor to World SME Forum

Semiray Kasoolu is Intern at the World SME Forum