The Current State and Future Potential of Cross-Border E-Commerce. Key Considerations for Entry

Cross-border e-commerce, the online purchase of overseas goods and services across national and regional boundaries, has garnered significant attention in recent years due to the proliferation of IT infrastructure and the expansion of online consumption. However, for companies with no prior overseas transactions, entering cross-border e-commerce is not straightforward. When marketing products to other countries, it is necessary to design brand image and information delivery methods aligned with the target country's culture and business practices. Strategically, companies often face complex challenges that cannot be solved simply by "having an international sensibility." Furthermore, to gain the trust of overseas users, ensuring stable payment and logistics systems is essential, along with a deep understanding of e-commerce trends in each country.

This article provides an overview of the current cross-border e-commerce market and the position of Japanese companies, while also considering the future potential for e-commerce originating from Japan. We will also cover essential rules and fundamental points companies should know when entering cross-border e-commerce, including GDPR.

Cross-border e-commerce continues to expand. Why is it gaining attention now?

Cross-border e-commerce refers to electronic commerce conducted across national borders, specifically the business model of selling products to overseas customers through e-commerce sites. Amidst increasing e-commerce site usage driven by smartphone proliferation and the impact of the COVID-19 pandemic, cross-border e-commerce—which allows consumers to easily purchase attractive overseas products unavailable domestically online—is expanding globally as a new consumption option.
There are various approaches to cross-border e-commerce, but representative methods include the following:

1. Operating a Cross-Border E-Commerce Site Independently

This involves companies building their own dedicated cross-border e-commerce sites. Examples include localizing their existing domestic e-commerce site into multiple languages or utilizing specialized cross-border e-commerce services. If the company's products are already well-established in the target country or region, building a local site there can also be effective.

2. Opening a store on domestic/overseas e-commerce malls

This involves opening a store on a domestic mall that supports cross-border e-commerce or on a local overseas e-commerce mall that permits cross-border sales. Opening a store on a mall offers advantages like customer acquisition, but requires compliance with the mall's rules regarding fees, shipping methods, and other aspects.

3. Utilizing Sales Agency Services

This method involves an operational agency acting as an intermediary between the manufacturer and the consumer. By having a local agency purchase the products and ship them directly to the buyer, the company avoids the hassle of handling shipments itself or communicating with local users.

4. Utilizing Bonded Zones for Storefronts

Especially for cross-border e-commerce targeting China, setting up shop using bonded zones is a common strategy. Bonded zones are areas where goods imported from overseas can be stored without incurring duties or taxes. By storing products in a bonded zone warehouse and shipping directly to customers from there upon receiving orders via the e-commerce site, you can reduce delivery times and shipping costs.

Why Cross-Border E-Commerce is Gaining Attention

Why is cross-border e-commerce attracting such high attention globally, including in Japan? Let's examine the possible reasons.

1. Expanding Market Reach

The primary advantage of cross-border e-commerce is the ability to expand your market beyond domestic borders to overseas regions. With Japan facing concerns over future population decline, many companies are seeking to acquire customers in overseas markets, such as the populous Asian region and high-purchasing-power markets in Europe and America.

2. Low Start-up Costs

Another reason more companies are entering cross-border e-commerce is that it allows them to venture overseas at a relatively lower cost compared to opening physical stores abroad. Establishing a physical store requires substantial capital and takes considerable time for preparations like store applications and hiring local staff. In contrast, cross-border e-commerce involves setting up shop online, enabling companies to keep initial costs low and expand their sales channels into overseas markets more swiftly.

3. Widespread IT Infrastructure

IT infrastructure has become widespread globally. Internet access via mobile devices like smartphones is now commonplace, not only in developed nations but also in emerging economies. This ease of accessing overseas e-commerce sites, allowing consumers to compare products from their home country and purchase desired items, has significantly fueled the expansion of the cross-border e-commerce market.

4. Impact of the COVID-19 Pandemic

With travel restrictions imposed due to the pandemic and inbound consumption declining, many companies are finding new opportunities in cross-border e-commerce as an alternative.

The cross-border e-commerce market is expanding. Post-pandemic, synergistic effects with inbound tourism are also anticipated.

The cross-border e-commerce market continues to expand year after year. According to the Ministry of Economy, Trade and Industry's "Fiscal Year 2020 Industrial Economy Research Commissioned Project (Market Survey on Electronic Commerce)" report, the estimated global cross-border e-commerce market size in 2019 was US$780 billion, projected to reach US$4.82 trillion by 2026. The average annual growth rate during this period is estimated to be approximately 30%.

Looking at individual countries, China's presence as a cross-border e-commerce destination stands out significantly. China ranks as the top cross-border e-commerce destination for the United States, the United Kingdom, Germany, France, and others.

Japan's Position in Cross-Border E-Commerce

Examining Japan's current status in cross-border e-commerce reveals its strong influence in Asia: Japan ranks as the top destination for Chinese cross-border purchases and third for South Korean consumers. According to the aforementioned METI survey, Chinese consumers' cross-border B2C e-commerce purchases from Japan totaled ¥1.9499 trillion in 2020, a 17.8% year-on-year increase.

Meanwhile, cross-border e-commerce from outside Asia is also expanding. Purchases from the US to Japan via cross-border B2C e-commerce totaled ¥972.7 billion, a 7.7% increase year-on-year. Furthermore, in Europe, Japanese anime and games maintain enduring popularity, with related merchandise also performing well in cross-border e-commerce. According to the "BEENOS Cross-Border E-Commerce Global Hit Ranking 2020" by BEENOS Inc., a cross-border e-commerce support service provider, which investigated which Japanese products sell well globally, toys and games ranked first in popularity in Europe, followed by music and fashion-related items. Furthermore, products related to traditional Japanese culture, such as ukiyo-e prints, bonsai tools, and martial arts equipment, are also gaining popularity. Given the geographical distance from Japan, there seems to be a trend where consumers are willing to pay higher shipping costs and wait longer to acquire these highly sought-after, niche items.

While some companies may rush into starting cross-border e-commerce without clearly defining "what exactly to sell," it's crucial to reference such trend research to consider what would be most useful to sell for your own company or client companies. Should you focus on building a loyal fanbase over time with products emphasizing high quality and design, or prioritize speed by handling products that align with current trends and are consumed quickly? Rather than just considering which approach sells better, planning should center on "what is optimal for this brand to be sought after" across national borders. After identifying key points, challenges should be addressed systematically.

Will Cross-Border E-Commerce Continue to Thrive Post-COVID?

As e-commerce markets expand significantly across countries, cross-border e-commerce is expected to grow increasingly robust. The emergence of various platforms and agency services has lowered entry barriers, likely accelerating participation not only by large corporations but also by SMEs and D2C Inc. brands.

Furthermore, as we enter the post-pandemic era, increased international travel will likely revive inbound consumption. Japan already attracts many foreign visitors who express a desire to repurchase products they bought in Japan back home. Cross-border e-commerce, as an option that can meet this repeat purchase demand, is expected to see further growth in users.

Furthermore, technology continues to advance, overcoming barriers like language and currency differences. As systems evolve, enhancing e-commerce site security and simplifying payment methods will further improve convenience, potentially leading to the acquisition of new customers.

Moreover, building strong relationships with overseas customers and enhancing brand trust could increase the number of repeat buyers who purchase products consistently over the long term, potentially enabling further business expansion. For example, with clothing and daily necessities, as the value of the products becomes recognized by people overseas, repeat customers will increase. This will also accumulate various data on overseas customers. Consequently, similar to domestic e-commerce, businesses could use this data to offer services like customization, personalization, and bespoke items, fostering greater customer loyalty. This could eventually lead to developments like cross-border e-commerce subscriptions or recurring purchases. It may also be possible to reduce service disparities between domestic and international markets and maximize economies of scale.

To expand cross-border e-commerce business in this way, it is also necessary to understand each country's business practices and rules, as well as logistics traceability and regional circumstances. The following section introduces key points companies should know when entering cross-border e-commerce.

Understanding rules like GDPR is crucial when entering cross-border e-commerce

Cross-border e-commerce presents challenges beyond overseas business strategy, requiring country-specific approaches to sales procedures and transaction methods. Finally, let's review key points and considerations companies should be aware of when entering cross-border e-commerce.

Research overseas market needs

When launching cross-border e-commerce, it's vital to determine if your products or services meet demand in overseas markets. You can either enter product categories already popular in that country or target countries where there's demand for your specific offerings. Since social conditions and user preferences differ from Japan, meticulous research into local circumstances is essential. This requires developing a sales strategy even more detailed than your domestic approach.

Consider effective promotional methods locally

Successful promotional activities are key to generating profits in cross-border e-commerce. For example, leveraging popular local social media platforms or, in China, utilizing influential KOLs (Key Opinion Leaders) are effective approaches. Adopting promotional methods tailored to each country or region is advisable.

Build a profitable system by controlling logistics costs

One drawback of cross-border e-commerce is the high cost of shipping overseas. If the shipping fees customers bear become too high relative to the sales price, it becomes difficult to drive purchases. It is crucial to consider delivery methods that ensure profitability, such as whether to ship directly to customers or establish local logistics hubs.

Consider payment methods suited to local conditions

A common hurdle in cross-border e-commerce is the variation in payment methods across countries. To ensure users feel secure, implementing locally popular payment methods is essential. When building your own cross-border e-commerce site, using a platform that supports local payment methods is also effective.

Pay attention to the laws and regulations of the target country or region

Cross-border e-commerce requires compliance with the laws and regulations of the target countries or regions. Understand the host country's systems and necessary procedures in advance to establish your compliance strategy.

For example, the EU has the GDPR (General Data Protection Regulation), which governs personal data protection. This is a crucial law to understand for any global business operating within the EU, including cross-border e-commerce. The GDPR requires companies to properly handle personal information such as names, email addresses, and credit card numbers obtained within the European Economic Area (EEA), including the EU. It stipulates that when collecting such information, the purpose and handling methods must be clearly stated. This regulation may also apply when interacting with users residing in Europe through channels like e-commerce sites. Violations can result in penalties, so establishing a compliant operational environment is essential for businesses targeting Europe and other international markets.

Cross-border e-commerce, which enables expansion into vast overseas markets, is a promising and attractive business. Japanese products, in particular, enjoy strong global trust, and numerous latent needs likely remain untapped overseas. As part of a global strategy looking beyond the pandemic, it seems highly worthwhile for Japanese companies to consider entering this market.