China is cheaper, but should you do business there?

China is cheaper, but should you do business there?

Labor? Cheaper. Ingredient costs? Cheaper. Yes, sourcing nutritional ingredients from China can save you lots of money, but other "costs" should be considered—otherwise it could cost you big time down the road.

The recent news that China likely will surpass the United States as the world's biggest economy in 2016, some years earlier than previously predicted, was greeted by consternation in some quarters.

But it's old news in the world of dietary supplements and functional foods. China has been a major player in the ingredients world for decades, and owns the market in some sectors such as vitamins. The cost differential has been such that the question for many in the business is not whether to do business with China (and, by extension, the rest of Asia), but how?

Fast boat from ChinaThe issue with melamine contamination really had people sit up and take notice of how ingredients coming out of China had woven their way into the fabric of the North American food and supplements system. Melamine, an adulterant used to give a falsely high protein reading on a test, is not highly toxic at low doses. But the problem showed up first in the U.S. in pet food, when pets started dying in 2007 after consuming melamine-laced food. And babies died in China in 2008 after consuming adulterated formula. In both cases the adulterated product made up the lion's share of the food consumed.

"It was a clear case of economically motivated adulteration," said Frank Jaksch, CEO of scientific consulting firm Chromadex.

The Chinese government finally was forced to move after the infant-formula tragedy.  But the fact that it took the Chinese government more than a year to take action is part of the problem, Jaksch said.

"I have never seen real action by the Chinese government to go after, or regulate in any way, manufactured ingredients that are exported for foods, beverages or dietary supplements," he said.

Economic adulteration

The risk of economic adulteration looms large in the calculus of whether it makes sense to source ingredients in China or elsewhere. In some ingredients sectors, there is little choice: China owns the market in vitamin C, for example, with almost the entire world supply being manufactured in that country.

Some in the industry, though, see focusing on China per se as a nonissue, or a red herring at best.

George Pontiakos, CEO of BI Nutraceuticals, is one. Whether a supplier chooses to adulterate a product, or whether a buyer chooses to collude in that process is a moral issue, he has long maintained, and has little to do with where the business is being conducted.

"Companies of a similar culture tend to come together," he said.

Larry Kolb, president of U.S. operations for TSI Health Sciences, agreed. "Economic adulteration exists everywhere, not just in China, Europe, the U.S. and in India. More specifically to the issues in China,  the adulteration is severe with products like ginkgo and chondroitin sulfate. Both are commonly adulterated in China and this is a primary reason TSI owns the facilities that make these ingredients for our global client base.

"The reason these products are economically adulterated is the market pricing for these commodities has been driven down so low, due to aggressive competition in the U.S. mass market, [that] the only way to really service the mass pricing demand is to cheat," he said.

Sourcing responsibly

That being said, there are some significant hurdles to jump through if a U.S. company is committed to doing business in Asia the right way. Supply-chain transparency demands that suppliers and manufacturers be absolutely certain of where an ingredient came from, how it was produced and under what quality conditions, and where the raw material came from. How best to do that in a country like China or India?

As the U.S. has found in its fight against global terrorism, there is little substitute for boots on the ground. A robust documentation stream is a good start, but it's a slender reed to lean on without actually seeing the facility where the ingredients are made and talking with the people who made the ingredients and generated the documents.

"You would have to get in there and kick the tires hard rather than do a precursory walk around," said Jaksch.

"The days are gone when you just looked at the [Certificate of Analysis] and approved a product," said Shaheen Majeed, marketing director of Sabinsa.

A major issue in vetting a facility or documentation relating to the manufacture is simply the language barrier. Many facilities are located in the interior of China, where there are few English speakers. And even for those conversant in spoken Mandarin (or Cantonese, the primary language in the southeast), deciphering the written language is another level of difficulty.

"If you send over a U.S. auditor who speaks only English, who knows what you're going to get?" said Ed Wyszumiala of certification consultant NSF International. "It is essential that you have someone who understands the local market.

"A lot of time we see consultants from the U.S. [working in China]," he said. "I don't know what they are doing. I don't know how you would review the written documentation properly. You could probably get away with an English-speaking auditor in India or some of the southeast Asian countries. But in China it's going to be very difficult."

So contracting with a company like NSF can be a reassuring way to maintain supply chain security while dealing in China. And NSF has recently opened a testing facility in Shanghai to keep up with the demand for its services there.

"The advantage was we could do testing on the ground at a quicker rate if you're looking to qualify a new supplier," Wyszumiala said. "The other piece that was interesting, too, was that clients may have us go out and do a sample collection, so we are getting independent samples from that facility."

What price paradise?

But it's not a panacea.

"I think third-party GMP audits have merit. There are many good third-party auditors out there that provide a good service," said TSI's Kolb. He stressed, though, that such audits can only go so far; there have been instances of facilities using a successful GMP audit as an umbrella under which they harbor material obtained from a subcontractor whose facilities may not be audited and whose ingredients might be adulterated.  These ingredients are then being marketed with a GMP brand. "Face-to-face interaction is the most important activity for a company's protection," he said.

In the end, cost, and especially labor cost, is the key motivation for sourcing and manufacturing ingredients in China, and the savings can be significant. But to do things right, some quality assurance costs must be borne in the supply chain no matter where a company does business.

Brokers: evolve or die

There is increasing pressure from regulators for supply-chain transparency. And being transparent in this way may even become a marketing tool, with some finished-product manufacturers now including interactive features on labels that allow consumers to trace the ingredients in the product back to the source if they are so motivated.

It's a situation that many in the industry say is putting pressure on the traditional broker model, in which the broker guards his supply sources and market insights as trade secrets. Is this type of broker becoming an endangered species?

"In today's world the broker's value is negligible at best, especially if the broker inhibits transparency between the manufacturer and the end user of the ingredient," said Larry Kolb of TSI Health Sciences.

To survive, experts say, brokers will have to evolve to meet new expectations. A broker who steps beyond merely providing product to facilitate transparency, aids in the collection and vetting of documents, and helps smooth relations with overseas government regulators could thrive in the new environment.

"Some brokers are stepping up, saying we're going to be your liaison, we're going to make sure you have the documentation you need," said Shaheen Majeed of Sabinsa. "I'm sure it's made it more difficult to be a broker, but I'm sure it's made it more powerful if you can sustain it," he said.

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