Are you an e-commerce junkie? Doing big volumes by drop shipping products from suppliers around the world? Or maybe purely focused on drop shippers in China.
Hong Kong business structure seems perfect for you! Today we will dig into the business practices, tools, and see if you should incorporate your dropship business in Hong Kong or not!
What Does a Drop Ship E-Commerce Business Involve?
You are in the internet marketing space, but not too familiar with e-commerce. Maybe you’ve heard the word drop ship – but want to know more.
Drop ship is the concept that you list and sell your product on your own website or shopping cart, and when a customer buys the product, they pay you and you are the seller. The difference is, from traditional e-commerce, is that you don’t have the product in your own warehouse! You have an agreement with a supplier or wholesaler who will ship the product directly to that buyer on your behalf. Since you have a pre-established relationship here, you get a lower price. Pay the supplier that lower price, and you keep the difference (profit margin) as your cut.
People love this drop ship model because they don’t need to invest in inventory. Its not just the capital requirement of paying for the stock, but also the risk that this product may not sell! You can test the market, see what products consumers want, and focus on those!
Ok, so what does a drop shipper need?
- Website with a shopping cart
The main difference with a drop shipper and an affiliate (next week’s blog covers affiliate marketing from Hong Kong, check the blog for updates ) is that the customer pays you first in this model. Then you need to payout to the supplier.
You’ll need to have at least 1 place you get your products from! Or you’ll have nothing to sell. You may leverage Mainland China factories or wholesalers and they may also have a Hong Kong company, to make things super easy and smooth.
- Marketing Channels, online
This is online, so you’ll need some kind of channels to sell the products. Maybe content marketing, maybe paid advertising on Google or Facebook.
- Marketplace accounts (Amazon, eBay)
Similar to marketing channels above, but I’ll call this marketplaces. Tons of people are making a good living off Amazon these days. So you’ll need to establish an account with them in order to access the massive amount of buyers in their network. eBay is still there, but less and less relevant.
so once you start selling the goods, you’ll need to pay back the suppliers for those orders. Each relationship can vary, some are willing to give you credit terms and invoice you monthly. That is pretty sweet. Others want you to pay immediately for the goods in order for them to ship out. You may pay them by credit card, or by bank transfer. Sometimes even Paypal. Anything goes here, and if you’re a big enough drop shipper, you may be able to negotiate better terms and payment methods with the supplier. It’s all about volume in this though.
So that about covers it. The main idea is, you find a source who will ship on-demand to your end buyer, and then you sell those goods, get paid from the buyer, and pay back the supplier (immediately or on terms).
Benefits of Drop Ship E-Commerce in Hong Kong
So now, why Hong Kong? Here are some cases
What You’ll Use With This HK Drop Ship Company
- Your drop ship suppliers are in Mainland China – A ton of e-commerce is done out of China these days. You want to be closer to the action and be a more favorable client to a certain dropship supplier you’ve been doing business with. Having a hong Kong company, they most likely will have one too and you can pay them fast and easily, and free. But even if they don’t, you can pay into Mainland China almost as easily. If you want, it can be in Chinese Yuan.
- Operate in Chinese Yuan (RMB) currency – Here’s a big advantage for HK. It’s the only place (besides Mainland China of course) that is allowed to hold the Chinese currency – RMB. You can keep some RMB in your business bank account and pay out the suppliers in their home currency. Often times they don’t like this, as they are maybe making some extra margins in the currency exchange. But sometimes they prefer it, and don’t need to deal with the hassles of currency exchange in their Chinese bank.
- Southeast Asia is booming – I’ve talked to more and more people sourcing products in Southeast Asia – such as Vietnam, Philippines, and Thailand. Hong Kong is no stranger to these places, and you can pay out to them quick and easy too. And, if you’re lucky, these factories and suppliers might also have a HK company and bank – making it like doing business with your neighbor!
- You’ll Be Seen As more “Direct” from customers – Depending on your branding and marketing message, you may want to use Hong Kong to your advantage. If you’re trying to be “Factory direct” and competing on price in the market – you can leverage HK as the direct best place to get low prices. Which is true! If you’re drop shipping Chinese goods, often these suppliers give you better prices than the consumer can find anywhere else. As a creative internet marketer, I think you can see how you can use this to your advantage. Put your company office address right on your contact page and have the story about how you are committed to giving the best price to your customers.
- Favorable (or Zero) Tax Rate – We’ve discussed this on previous posts, but you can get an advantage in your business from the corporate tax rate. The base is 16.5% but you can even qualify for 0% if you go for the offshore elect. Be a bit careful here, the IRD (internal revenue department) wants you to pass the physical presence test. We will cover this in future guides, but even at the 16.5% tax rate in HK, you’re way better off than most locations in the world.
So convinced for Hong Kong? Let’s see what you’ll need.
Goes without saying, once the company is set up, first thing is to apply for a business bank account. Its how you’ll operate your company, you sales income and paying out your expenses.
Probably if you’re selling online, you’ll need to offer Paypal as a payment method.
We haven’t talked about this on previous guides – as affiliates and B2B sellers don’t normally need it. But if you have a shopping cart, you’ll want to get paid by credit card. Your customer may be expecting it. Heck, probably if you don’t accept credit cards (only having Paypal) you’ll be losing out on sales. There are a lot of merchant account options, and we cover them in the Merchant Account comparison page. Check that out for sure.
When you get the bank account, ensure that you’ll be allowed to carry Chinese Yuan (RMB). That is, if you’ll be dealing with Chinese suppliers. While of course they can take USD, you may get better deals. Plus you’ll seem much more local to them.
If you’re selling on Amazon, you may need Payoneer to get the sales put into your Hong Kong bank. We had a good podcast with Wilson Blues discussing how to sell on Amazon from overseas (outside of USA).
You’ll need this to pay for online services, maybe your suppliers want you to pay them by card. How much balance you’ll need? Can get pretty high if your volume goes up and up. May want to pay suppliers by bank transfer to keep things smooth.
That really covers it. Missing anything? I’d love to hear it in the comments below.
Operating this Drop Ship Business
So now let’s say you have all these accounts setup. Here is a daily workflow, you have your e-commerce website up and running. You’ve uploaded the product details and photos of the products from your drop ship supplier. You’re advertising on Google Adwords. Nice, a customer buys! They check out on your website and pay you by Paypal.
You don’t have credit terms with your supplier, so you go to their backend drop ship system and place the order. You use your business credit card to buy the product and ship it directly to the customer. You keep the 25 USD between the retail price and your dropship price.
Your sales grow, and you negotiate with a Chinese wholesaler to pay by Chinese Yuan every 2 weeks. They give you a super lower price than the USD pricing on their drop ship site, and you’re amazed. Your sales increase and you’re receiving money by Paypal and Credit Card. The first 2 weeks past and the account rep at the wholesaler in China emails you an invoice by PDF. You login to your HSBC HK online banking and transfer them RMB from your RMB savings account. The fee is about 13 usd, and your margins have been improving.
You find more Chinese wholesalers who can dropship, and you expand your product offering. Your website gets more traffic, more sales – and you push down prices and expand your credit terms with suppliers. Life is good, business rocks! And you don’t have any products in your own warehouse or office.
Drop Shipping Branded Items such as Xiaomi
We have gotten more requests from readers about how to drop ship brand items such as the hot brand Xiaomi. This is a tricky subject, as you need to make sure that the supplier you deal with is selling authentic branded items. We all know the stereotype China has picked up for selling fake goods, and you don’t want to risk your business on selling knock offs!
The best way is to see if the drop shipper has these branded items, and then being frank with them and asking for proof they are real. They should have some authorization forms from the brand (such as Xiaomi) authorizing them to be a reseller. An even more sure fire way is to ask the brand themselves- either from their website or maybe Linkedin. Ask them if the company you are looking to open a drop shipping account is an authorized distributor of their goods, and explain you want to build a long term relationship.
Something funny may even happen – the brand themselves may let you be their distributor! You should show them that you have a viable business plan and a good distribution reach, but many times, especially budding Chinese brands, they are very eager to find overseas distributors.