According to a Nielsen report, baby formula is one of the top "daigou" products in China. (Photo : Getty Images)
For years, foreign infant formula makers such as Danone and A2 Baby Milk have been benefiting from the China's gray e-commerce market. This situation could now be changed, thanks to the government's recent tightening of a tax loophole that previously made goods sold via websites operating outside the country to sell cheaper.
According to a Bloomberg report, starting this month, products purchased online will be levied with a tax increase of 11.9 percent. The move is part of China's efforts to foster its "e-commerce system that inadvertently gave some foreign companies a pricing edge over similar imported products available in China's domestic market."
In China, a practice called "daigou" has been popular. It is the habit of Chinese consumers living abroad to order products online on behalf of their mainland counterparts so as to avoid taxes.
With the new tax regulation, some foreign brands whose items are sold through overseas Web platforms may find it more challenging to reach Chinese consumers.
For analyst James Bascand of Forysth Barr Ltd., foreign firms now "need to move toward direct sales because of what the Chinese authorities are doing to quash the gray market."
Nonetheless, experts agree that companies may find it difficult to find suitable Chinese partners that are willing to distribute their goods.
UBS analyst Jordan Rogers remarked that the tax increase "makes it incrementally harder to profitably send infant formula into China," noting that the "transition will require additional marketing costs, and could be more difficult because of industrywide price reductions and the mid-end and premium segments becoming increasingly competitive."
An estimate by the UBS Group showed that previously A2 Milk had 55 percent of its infant formula sales coming from the Chinese gray market. While A2 Milk's stock tripled last year, another baby formula maker, Bellamy's, surged more than eight times.
In recent years, 15 percent of China's 55-billion-yuan baby formula industry came from purchases on overseas e-commerce sites, Bloomberg said.
