Does a company need to operate overseas offices to be considered "global"? The rapid development of China-US e-commerce is challenging traditional assumptions about how international business is conducted, as cross-border e-commerce allows American retailers and entrepreneurs to sell products directly to Chinese consumers online.

This burgeoning market is expected to increase from $40 billion in 2014 to more than $240 billion in 2020. Fascinating dynamics are at play through the Chinese diaspora's active participation in this market, along with international companies that may be competing with their existing local outlets in China through a legalized "gray market". How did this multi-billion-dollar market emerge in the first place?

Chinese consumers have long been accustomed to buying foreign products within the country. Many used a common practice known as daigou. Daigou describes the phenomenon when a Chinese consumer pays a friend traveling overseas or an international agent to purchase products on his/her behalf. These "personal buyers" use individual mail or personal baggage to avoid hefty import duties. Traditional daigou is illegal, when the items being purchased are not for the bearer's own use.

All of this changed in September 2013 when China launched the first Free Trade Zone in Shanghai. This opened the door for global companies and individuals to sell directly to Chinese consumers online at significantly reduced costs - and 100 percent legally. A crop of new Chinese businesses has emerged to take advantage of this market, and almost all of them employ models similar to Amazon or eBay.

The cross-border e-commerce market, however, remains fairly underdeveloped, in large part, because of the relatively recent emergence of the drivers necessary to fuel the trade: development of FTZs, establishment of Chinese cross-border marketplaces and increase in the number of foreign brands willing to participate. As a result, Chinese e-commerce companies are fighting fiercely to expand to capture a bigger share of the market. In 2014, Alibaba launched its cross-border e-commerce website called Tmall Global. JD.com began a competing service, called JD Worldwide, in April 2015. And relatively unknown companies like LightInTheBox, Ymatou.com and Metao are competing equally fiercely on this new e-commerce frontier.

Yet all Chinese e-commerce companies operating outside of China face major obstacles. There is a lack of understanding among foreign brands and retailers about what cross-border e-commerce is and how they can leverage it to sell their products to Chinese consumers. This is in contrast to the demand side, where Chinese consumers have long been accustomed to shopping online for foreign goods.

The success of Alibaba's Tmall Global so far has been below expectations, because it has depended on signing up big brands like Calvin Klein, Philips and Disney. Many of these brands are worried about "channel conflict" since they already sell in China through distributors or their own sales forces. To raise awareness about the benefits of cross-border e-commerce, Alibaba had Jack Ma travel to New York and Chicago in June to argue that cross-border e-commerce can support global trade and increase jobs in the US. Ymatou.com has taken a different approach, focusing on individual Chinese diaspora buyers to supply overseas products for their marketplace, as well as building its own international logistics capabilities.

Despite the challenges faced by Chinese companies, cross-border e-commerce between China and the world is set to increase dramatically. In addition to private sector efforts to develop this market, the Chinese government is also implementing policies to support its development as a means to stimulate domestic consumption.

The potential benefits to American businesses and the US economy are also significant. For the first time, American businesses can sell their products in China from the US with fairly limited upfront costs and significantly lower risk than opening a wholly owned local subsidiary in China.

The cross-border e-commerce phenomenon is just the latest example of how an increasingly globalized China is changing the traditional landscape of international business. As its companies, people and commercial policy continue to go global, and as technologies like e-commerce continue to evolve, it will change how we do business on both sides of the Pacific.

The author is associate vice-president, Frontier Strategy Group.

Courtesy: China & US Focus