In recent years, Chinese e-commerce platforms like Shein and Temu have surged in global markets, showing incredible growth. But what you might not know is that these "going global" giants often don't directly use their domestic Chinese entities for their primary overseas operations.

Why is this the case? Can't they just operate under a single umbrella? Today, let's delve deep into the multi-faceted reasons and considerations behind this strategy, primarily involving legal, tax, operational efficiency, and brand image, with a special focus on the crucial aspect of data compliance.

1. Legal Compliance: The "Sword of Damocles" of Cross-Border Jurisdiction

Imagine if a Chinese company were to operate directly across dozens or even hundreds of countries and regions, each with its own distinct legal system. Navigating the sheer complexity of legal risk avoidance alone is often enough for cross-border platforms to opt for localized operating entities.

• Challenges of Territorial Jurisdiction: Most countries and regions, such as the EU's GDPR (General Data Protection Regulation) , the US's CCPA (California Consumer Privacy Act) , and Brazil's LGPD (General Data Protection Law), have strict regulations governing the collection and processing of data within their territories. If a Chinese entity were to operate directly, it would mean the Chinese entity directly confronting and complying with these overseas laws, which is operationally complex and extremely costly.

• "Long-Arm Jurisdiction" Risk: Even if data processing occurs within China, if business activities target overseas users, overseas regulatory bodies might still pursue legal responsibility against the Chinese entity through "long-arm jurisdiction" principles. Establishing a local entity helps localize compliance responsibilities, avoiding more complex cross-border judicial assistance and enforcement issues.

2. Data Security and Privacy Protection: A "Lifeline" Under Global Regulations

Data is the lifeblood of e-commerce, and data compliance is a "lifeline" for companies going global. The unprecedented emphasis on data security and privacy protection worldwide directly impacts a platform's survival and development.

• Data Localization Requirements: Many countries, for reasons of national security and personal privacy protection, require specific types of data (especially sensitive personal data) to be stored within their borders, a concept known as "data localization" or "data residency." For instance, countries like Russia, India, and Vietnam have similar regulations. If a domestic entity operates overseas, data might default to being stored in China, directly violating these countries' laws. By establishing a local entity, data flow can be better planned and controlled, using local servers for storage, thereby reducing the complexity and compliance costs of cross-border transfers.

• Cross-Border Data Transfer Restrictions: Even without strict localization requirements, cross-border data transfers are subject to tight restrictions. GDPR, for example, requires "appropriate safeguards" for transferring personal data outside the EU, such as Standard Contractual Clauses (SCCs) or Binding Corporate Rules (BCRs). China's Personal Information Protection Law also has similar provisions, but cross-border platforms must simultaneously meet the data export requirements of the destination country. Through a local entity, platforms can better plan and control data flows, using local servers for storage, thus reducing the complexity and compliance costs of cross-border data transfers.

3. User Data Rights: The Challenge of "Localization" in Response Mechanisms

Many overseas data protection laws grant users extensive data rights, including:

• Rights of access, rectification, erasure ("right to be forgotten"), data portability, and the right to object to automated decision-making. GDPR and CCPA, for example, explicitly define these rights.

• Designating a Local Representative: Some regulations (like GDPR) may require non-EU companies to designate a representative within the EU to serve as a contact point for regulatory authorities and data subjects. Establishing a local entity can directly fulfill this requirement.

A local entity means closer proximity to users in terms of law, language, and operations, allowing for more direct and efficient responses to local users' data rights requests and fulfilling local representation requirements.

4. Data Breaches: High Fines and Reputational Crises

Data breaches are a nightmare for businesses. Data protection laws worldwide typically impose strict notification obligations and penalties for breach incidents:

• Strict Notification Obligations: In the event of a data breach, countries usually have strict notification obligations, requiring notification to regulatory authorities and affected data subjects within a specific timeframe (e.g., 72 hours under GDPR). A local entity can more quickly identify breaches, initiate emergency response plans, and issue compliant notifications, avoiding hefty fines and reputational damage due to slow responses.

• High Fines: Global data protection regulations, especially GDPR and CCPA, stipulate enormous fines for violations. For instance, GDPR fines can be up to 4% of global annual turnover or 20 million Euros (whichever is higher). Ensuring compliance through a local entity can effectively mitigate such risks.

5. Consumer Trust and Brand Reputation: A Battle of Soft Power

• Localized Privacy Policies: Local entities can better formulate privacy policies that align with local cultural norms and legal requirements, expressed clearly in the local language, thereby enhancing user trust.

• Increased Data Transparency: Actively complying with local data compliance requirements allows businesses to demonstrate their commitment to data privacy to consumers, thus boosting brand reputation and market competitiveness in the local region.

Conclusion: A "Smart Choice" in Globalization

In summary, Chinese cross-border e-commerce platforms' decision to establish overseas operating entities is not merely a change of registered address. Instead, it is about:

• Addressing complex and evolving global data compliance challenges

• Mitigating cross-border legal risks

• Optimizing data management processes

• Enhancing user trust

• Ensuring long-term stable operations in global markets

This represents a necessary and strategically wise choice for Chinese e-commerce giants in the wave of globalization, aiming for more efficient, compliant, and competitive development overseas.