When it comes to doing business in China, what are the latest issues? Jeff Crowther, the executive director of the U.S.-China Health Products Association (HPA), has some answers.
Crowther has more than 16 years of experience in the natural products industry, including retail sales and management, international business development and regulatory advocacy work. Prior to his association with HPA, Crowther worked full time in Beijing as the Natural Products Association’s China office director. He was responsible for working on industry matters that affect U.S.-based companies, coordinating the association’s ingredient testing and GMP certification programs in China as well as acting as a liaison for both American and Chinese companies.
Functional Ingredients: What's the overall picture for the Chinese market? Do have you any estimates for overall market size?
Jeff Crowther: China's dietary supplement industry continues to develop and find its footings. The market is estimated to be between $10-12 billion. However the fragmented nature of the industry makes it difficult to get an accurate figure. Ask 10 people in the government and you'll get five different answers and five that have no clue. It is safe to say it is growing.
The State Food and Drug Administration (SFDA) oversees the industry by requiring that dietary supplements (what they call Health Food Products) be registered and have the SFDA registration certificate on the bottle. Registration is arduous to say the least and requires huge investments of both time and money taking on average 24-36 months to complete and costing over $50,000. Registration requires animal and in some cases human trials. Although SFDA and Ministry of Health recognize some individual ingredients as being safe, they do not recognize the safety of products that contain more than one ingredient. So each company has to go through this process even if a competitor has the same formula.
The fragmented nature I mentioned earlier is brought about by the fact that many companies enter the products into China as food, not "Health Food Products.” Food imports are overseen by the Administration of Quality Supervision Inspection and Quarantine (AQSIQ) not SFDA. For example, in the market you have three types of calcium on the shelves: Food, Health Food and OTC. We also have Traditional Chinese Medicine products in the market that are both classified as drugs and sometimes as Health Food Products. It makes for a confusing regulatory and consumer environment.
Our association is working to encourage movement into one simplified open and transparent system. One more similar to that of DSHEA with structure function claims instead of the more medical health claims SFDA gives to products that bear the registration logo known as the "Blue Hat," so named for its resemblance to hat or crown.
FI: What are the growth prospects for dietary supplements and functional foods in the coming year?
JC: Sales prospects are in the area of an expanded health food store sales channel. China's dietary supplement industry is controlled in large part by the direct sales giants, which have approximately 50 percent of the market. The retail channels that are open are pharmacies and supermarkets. However, foreign products typically don't do well in these channels due to their higher price point.
There are however some high end supermarkets and shopping malls that cater to China's elite and here the products do better. In the U.S., of course, we have very well developed health food channel consisting of mom and pops as well as the industry chains like GNC, Vitamin Shoppe and Vitamin World, etc. This type of channel is just now seeing its first players slowly developing their business. The problem is lack of understanding of the industry and products by the average consumers.
In order for the market to move forward a shift in regulations needs to take place which will have a domino effect. Here is my domino list:
- Regulatory change towards a more open and transparent system
- Reg movement will attract more investment
- Investment will generate more health food stores and encourage R&D
- More stores will spread consumer education and increase demand.
What to consider when selling in China
FI: What impact are stricter regulations having in the Chinese supplements and functional foods markets?
JC: Because of the fragmented nature of the industry, regulation changes will have little effect on the market because a great majority of companies are not following SFDA regulations as it is. China has to consolidate the regs into one system that every one can follow and understand. They must create a separate distinct system that does not overlap with TCM or the pharma industry. This overlap continues to make regulating the industry difficult for SFDA and sends mixed messages to consumers.
FI: What is the perception of American products in China? Given the various issues/scandals with adulteration in Chinese food products (we're thinking melamine here) do American products have—for Chinese consumers—an aura of safety and quality that Chinese products might lack?
JC: Perception is high for imported products in general across a variety of industries. However, food related products are even more so sought after due to the obvious side effects of tainted products on health. If you buy a cheap quality DVD player and it breaks in six months you've only wasted some cash. If you drink or eat tainted food, you could be wasting your life a more serious way.
FI: What are the barriers to entry for American companies seeking to sell into the Chinese market? Are those barriers going up or are things getting easier?
JC: Large companies looking to do mass market business in China have to go through the SFDA's registration process because the products are "mass market" and highly visible. Smaller companies can normally fly below the radar so to speak and legally import themselves as food. This reality has created lots of gray areas with conflicting regs.
For a foreign company to obtain a registration from SFDA it costs lots of cash as mentioned above in the neighborhood of $50,000 per SKU. Most manufacturers typically have hundreds of products on offer in the U.S. At $50K a pop, that in itself is a barrier. From talking with some U.S. companies that have attempted the registration system, few have succeeded and some are still waiting to receive their registrations beyond the three-year mark.
It is said SFDA is attempting to move things in a better direction. However, they recently changed the number of approved health claims products can use from 27 to 18. They also are going to be requiring stronger scientific evidence and clinical trials. At some point, SFDA is supposed to allow for a notification type system for single ingredient products such as vitamins. However, if you have a product that contains Vitamin C and you add B-complex to it, it would then have to go through the entire registration process. Because this is only a verbally proposed change by SFDA, we can't really evaluate until the regulation is released in draft form.
FI: Are there any dribble-over issues with the American debt crisis for American products in the Chinese market? Or are the policies of and dysfunction of the American government and the perception of quality and the desirability of American products two totally separate issues in the mind of the Chinese consumer?
JC: Yes, these are separate issues and have no ill impact on the perception of U.S. products. Consumers typically equate U.S. products as safe and of high quality.