China Infant Formula Sector Today: China's Phase 2 Plans

We can consider the period beginning in 2013 and ending at the beginning of 2018 as the first phase of China's dairy sector/IF sector reform. Phase 1 was initially unveiled through vague rhetoric expounded by China's State Council in the 12th 5-year Plan and further expanded on during the 12th NPC sessions running from 2013 - 2018. At the beginning of 2013, China realized large-scale structural reform by disbanding several regulatory authorities, forming new more powerful authorities in their place, centralizing regulatory authority and reducing redundancy in its food regulatory administration. We saw the formation and elevation of the CFDA, NHFPC etc. In the years that followed, we saw significantly beefed up pre- and post-market regulation and and supervision including: CNCA manufacturer audit/registration requirements, new products standards, new stringent product testing and sampling ratios, stringent post-market supervision, development of new trade channels, product registration and a host of other technical barriers to trade and regulations all of which significantly impacted market access requirements.

In phase 1 we saw China realize a mass culling of its domestic infant formula manufacturers from hundreds down to just a little over one hundred (108) using the regulatory selective pressures strategy I mentioned in previous articles.
A similar strategy as above was used for international manufacturers (now just 94 CNCA accredited IF manufacturers).

The culmination of the first phase of China's plan saw a domestic infant formula product safety/quality index of 99.7% in 2017. The highest in recorded history. In contrast for international manufacturers, there were a slew of high profile scalps taken by Chinese IF regulatory authorities resulting in the revocation of CNCA registration status and the imposition of bans on the further export of IF to China. During 2017 CNCA suspended the China export accreditation of 3 overseas infant formula manufacturers included Camperdown Powder Proprietary Limited (Australia) (reinstated - Aug.9, 2018), Hochdorf Swiss Nutrition Ltd (Swiss) (reinstated - Jan.11, 2018) CELIA-LAITERIE DE CRAON (France) (suspended since Dec.5, 2017). Agrana Stärke GmbH from Austria and Töpfer GmbH from Germany have been suspended since June 2016.

The impact of China's product registration was also a hugely significant tool in China's Phase 1 plans. So far 148 enterprises have registered 1138 formulae (excluding foods for special medical purposes) (check all in our F-lists). 102 domestic manufacturers (almost all of them) have successfully registered products while only 46 (out of 94) international manufacturers have managed this feat. 76%:24% (Domestic to International ratio).

Going forward we have seen CNCA allude to an increase in standards and compliance requirements for CNCA registered manufacturers. Most international CNCA registered manufacturers will have to renew their China export license within the next year and we can expect some manufacturers to be hit by a more stringent implementation of regulatory requirements.

Phase 2 of China's reform plan will run from 2018-2023. It would be wise to carefully study the seemingly innocuous wordings of all dairy sector policy rhetoric expounded by the State Council in the 13th 5 year plan (2016) and during NPC sessions (March 2018 onwards) as important clues are provided about China's upcoming plans for Phase 2 of its dairy and infant formula sector reform plan.

Interestingly China's Phase 2 will begin in a similar fashion to Phase 1. We have already seen the government plan infrastructural reform targeting China's major regulatory authorities in an effort to further centralize control and streamline supply chain management. Just 5 years after formation the likes of CFDA and NHFPC (AQSIQ too) will be disbanded and replaced by a new super-super authority called the National Market Supervision and Administration Bureau (NMSAB).

From a domestic standpoint, we can expect China's larger manufacturers to start throwing their weight around. Supply chain integration/consolidation can be expected. Product lifecycle and supply chain management will be streamlined and centralized industry control by the bigger players of all upstream and downstream links in the supply chain/product lifecycle is something that will be worked towards. Improvements in domestic raw material quality is also a big goal for the next 5 years. In addition, the industry will offer grants and greater technical support at a grassroots level to improve milk supply and ensure more meaningful contributions from smaller farmers and bridge the quality and safety gap between larger domestic players and their suppliers.

From an international side, we can expect more of what happened in Phase 1 and then some. I'd guess traceability (maybe QR labelling/traceability requirements), new product standards, refinements to CNCA audit standards. The food safety implementation rules will also be finalized soon so that will tell a lot about whats in store for the industry.

Growth in e-commerce sales will continue its remarkable upward trajectory. However, there is no doubt in my mind that trade of unregistered infant formula through CBEC channels will be brought to an end sooner or later.