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Opening the door to China

With a population of 1.3 billion people, China is the world?s largest market — and to Western manufacturers, one of the most enigmatic. Sheldon Habiger shares five steps for successfully navigating China?s unique regulatory environment, as well as advice on how to avoid the most common pitfalls to entry

China?s markets are opening, and now is the time to take advantage of these newly forming opportunities in the health and nutrition industry. Now is the time to be one of the first in the market gathering market share, ready to drive a new segment focusing on healthy lifestyle choices, and situated to take advantage of the growing middle class, with its ever-increasing level of disposable income.

As much as China has to offer, and for as much of a ?first mover? advantage there is to entering this market, the challenges involved in becoming a first mover loom large. Among the most pressing questions include: How can this be done? Where do we start? Who should we talk to?

The most common pitfalls associated with entering the Chinese market result in delayed schedules and budgets blown way out of proportion. These are often jokingly referred to as the ?China Education Fees.? To avoid them, five key strategies should be kept in mind.

They are: 1) registration and regulations, 2) distribution channels, 3) exporting and entry, 4) advertising/marketing, and 5) know your consumer.

These points need to be considered not independently but rather as integrated, as one is related to and affects the other. If not viewed in that fashion, the pitfalls have already begun.

China?s registration and regulatory environment for products in the health and nutrition industry have experienced a great amount of change in the past two years in a direct and indirect environment. The processes have now been streamlined and simplified, industries opened up and new types of retail formats were created.

In the past two years, we have seen changes in the classification of products, consolidation of government offices for ease in the application process and the creation of a new multilevel marketing law. Despite all these positive changes, the regulations leave a lot to interpretion and can be considered very expensive unless you have experience navigating the regulatory process and understand what you are and are not allowed to do.

For example, the registrations of dietary supplements with a health claim range from $75,000-150,000 and take one year, while functional foods can range from $2,500?10,000 and can be registered in up to six months.

Distribution Channels
With the opening up of the retail and distribution industries to foreign businesses in late 2004, China is experiencing a great amount of capital investment into these two sectors. The retail channel is highly underdeveloped and currently going through a phase of expansion and consolidation. This is reflected in the sales of dietary supplements at 90 per cent-plus in pharmacies and less than 10 per cent in other retail formats.

With that said, new retail channels are opening with the speciality stores and niche retailers taking advantage of the new regulatory changes. China also offers other strong channels in the form of home delivery, TV shopping, Internet purchases and multilevel marketing. The link that is often overlooked or not understood in China is the one between how a product is registered and what channels are open to that type of registered product.

Export and Entry into China
As tariffs have been reduced due to China?s entry into the World Trade Organization, many companies are taking advantage of this benefit and importing bulk items into China. Depending on a company?s needs and situation, several advantages can be found by importing bulk and packaging in China. These advantages are not only in lower tariffs, but in the cost of goods, as well as the registration process of the product.

Regardless of whether the product is in bulk or finished format, every imported product must receive import approval from the Chinese government prior to shipment, if the product does not enter through Chinese customs.

As we saw the centralization of the registration and regulatory issues, we have seen the decentralization of advertising and mass marketing approval to the provincial level. How a product is registered will be a defining element in the scope of claims and statements a company can make in the advertising and marketing of its product. It is important to understand how to effectively and efficiently market and advertise your product in China based on the type of registration received. Print advertising is incredibly expensive and usually a major expenditure with very little returns. But because China is new to the marketing world, it is not in a structured rut, and there are many creative new channels not available in a developed economy for a company to promote, market and advertise their products.

These new channels are often more cost effective and efficient with a high return on the investment and include such things as: focused promotions with free samples, loyalty programs, Internet, cell phone short-message systems and the use of other new technologies.

Know Your Consumer
It might make sense to begin the process of entry into China with the first step — registration and regulatory issues ? but unless you guess correctly and hit a home run, you will have already started down the road of wasted time and money. To get started, it?s important to begin thinking outside the box and understand how and why China operates the way it does, and that actually means starting with this step, Step 5, of knowing your consumer, before you begin navigating the regulatory world.

The reason this is true is pretty simple: when a finished product is registered, that product will not be allowed any modifications regarding the formulation, labelling or packaging. In other words, if a company registers a multivitamin and finds out that the package or quantity is too big and consumers want a smaller package with lesser quantity, the product will have to be registered again. Thus, it is important to understand what your customers want (such as localization of the product) as well as what the channels want (shelf space for bulk products are very scarce and expensive, for example, and retail and distribution channels want smaller-sized items due to limited space and the high cost of real estate).

Thus, it is essential to first make sure your product is within the legal framework of the Chinese registration and regulation policies and that you know what retail and distribution channels will require, as well as what the consumer is interested in purchasing. This can be done by allocating a percentage of the budget to properly performing registration and consumer market research.

I have seen many companies guess, and waste a lot of time and money learning, while others are sitting on the sidelines watching and learning for free from the first-movers? disadvantage!

Be Patient and Pro-active
Entry into China can be successful if there is an understanding of how to enter without making the common errors identified above. If a company is not sure about entering the China market and wants to just ?risk it? with a shotgun approach, a situation of first-mover disadvantage is created, while time is wasted and budgets balloon.

Remember, it is necessary to be patient yet aggressive in the learning processes because this will help place your company in the best possible position to succeed in the world?s largest marketplace.

A hands-on guide to entering the market

Regulatory environment

China?s regulatory environment is written and designed to be confusing. It is recommended you find a partner who knows how to navigate the process.

    You must minimize risk through protection of your intellectual property by:
  • Registering trademarks before you start.
  • Performing due diligence on the registration of your product.
  • Making sure your home country registration meets the legal requirements of registration in China.

Regulations are designed to:

  • Make the playing field more level for foreign investors and products.
  • Clean up a messy industry to create social stability and long-term growth.

Regulatory changes are driven by:

  • China?s entry into the World Trade Organization.
  • Quality problems both for domestic and export markets.
  • The government?s view that the industry is perceived as a hot sector.

The regulatory environment has experienced a considerable amount of change in the past 2 years.

Regulatory changes include:

  • Merging of the State Food and Drug Administration (SFDA) and the Ministry of Health, addressing local quality problems that have undermined social stability.
  • Engagement of new laws for the application of Health and Nutrition Products (both domestic and imported) in July 2005.
  • Decentralization of advertising and marketing approvals for the health and nutrition industry in early 2005.
  • Changing of the labeling law and what can be claimed on an imported/ domestic product in October 2005.
  • Multilevel marketing became legal in September 2005, with very high barriers for entry.

Indirect regulatory changes:

  • An opening up of the retail and distribution industries to foreign investment.
  • Companies are able to receive approval for the retail industry, but are finding it difficult for approval in the distribution industry.
  • A new franchising law allows for quick expansion in the retail sector.

Common pitfalls

  • A lack of understanding of why and how China operates from the beginning of the business process (the government), to the end, (the consumer).
  • A blind shot-gun approach will not work — unless you are lucky.
  • It is necessary to see all the steps in the business process as integrated and not independent of one another(easy to say; hard to implement).
  • Take your time. Learn and don?t say ?yes? until you are confident. A good ?no? is better than a bad ?yes?.

The China marketplace
Shanghai: one of the largest single markets

  • Largest middle class with large disposable incomes
  • Highly educated populace
  • City?s GDP exceeded $73 billion in 2004
  • Population is growing, now estimated at 20 million
  • Per capita income increased by 12 per cent in 2004
  • Shanghai is the world?s largest container port
  • Shanghai and its neighboring provinces account for one third of mainland China?s GDP

Hot product categories
The only mature product category in China is supplements in the form of vitamins and minerals, and speciality products for weight loss.

  • Imported brands
  • Fresh foods
  • Functional foods ? healthy snack products
  • Beauty products: personal/body/cosmetic
  • Speciality supplements with a specific focus: ie, anti-ageing, cholesterol lowering, weight loss
  • Topicals

Understanding the culture
Be patient, persevere, get to know them and establish mutual trust before expecting to do any deals. Many have come home very disappointed and even puzzled after trying to deal ?the American way?. This has worked well for us over 16 years in building strong and rewarding relationships with our Chinese partners.?

—Ken Gazzola, McGraw-Hill

  • Be respectful of and inquisitive about cultural differences, but don?t get overwhelmed to the point that your common sense is disabled. Like the laws of physics, common business sense is not country specific.
  • Having a translator is important for language and cultural nuance, as is asking questions until you are satisfied with the answers.
  • Many Chinese are fairly well informed about America. Apart from doing the best you can to get better informed about China before your trip, show interest and curiosity during your visit. This goes a long way toward building goodwill.
  • Americans and the Chinese have a fairly compatible sense of humor. That said, hold off on political jokes and sexual innuendo.
  • Be as adventurous about food as you can, but don?t be afraid to draw the line.
  • Most Americans negotiate occasionally, unlike the Chinese for whom negotiation is a daily-use skill. Be prepared to negotiate for as long as it takes, and get into the spirit of it.
  • Be wary of externally imposed deadlines that arise suddenly in the middle of a negotiation and that suggest a ?do or die? date by which the deal must be signed. Push back to ensure that it isn?t just a tactic.
  • You will hear and read a lot about relationships in Chinese culture, their importance and complexity. Some aspects are very different from American and other Western cultures. One common ground, however, is ?clout? and people who have it, or don?t, whether in a political or business sense.
  • You may or may not need an equity partner, but if you do, take sufficient time to develop mutual knowledge and trust. Be explicit about mutual expectations, and don?t shy away from difficult questions ? just ask them in a respectful and diplomatic manner.

Hot distribution channels
Retail channels:

  • The retail channels in China are underdeveloped and going through a large phase of capital investment both locally and foreign. Foreign investors can now wholly own their own retail stores.
  • Ninety per cent of dietary supplements are purchased in pharmacies and 10 per cent in traditional retail formats.

Speciality retail outlets:

  • Franchise pharmacies
  • Natural/organic grocery stores
  • Convenient style outlets focusing on ?fresh and healthy? themes
  • Fitness centres strong

Alternative channels:

  • Internet: Banking regulation and the use of credit card payments on the Internet are opening up e-commerce.
  • Home delivery: Highly successful in highly condensed urban cities, where many people do not have an automobile.
  • TV: Incredibly successful as the Chinese love their television and love to shop.
  • Multi-level marketing: The success of Amway, Nuskin and Herbalife have driven positive regulatory changes in this channel.

Government has made major strides in improving quality standards in botanicals:
1998 Started looking at quality issues for botanical raw materials
2000 Began implementing new GMPs in test manufacturing facilities
2001 Model test farms received first GMP certification
2001 First GMP-certified facilities on line
2002 Mandate for GAP/GMP compliance by 2003

With strict EU regulations, growers are gaining awareness of organics? value

  • Green product certification growing
  • Organic production in northern China growing

Sheldon Habiger is the founder of China Natural and Organic Products Co Ltd, which focuses on the nutrition and health industry in China. CNOP works with companies focusing on market entry into China, as well as with international companies on market and product research.

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