- Smart money uses a dual market entry strategy that takes advantage of the short term opportunities in the CBEC space while simultaneously channeling profits to buffer the expenses and time investment associated with full regulatory compliance.
- China’s 27 predesignated risk reduction health food labeling claims requires companies with existing products sold in other international markets to essentially reverse engineer their products to generate the data necessary for product registration in China. This is unfeasible, invariably leads to delays and failures and is part of the reason why we see an average of only 10-20 successful registrations from international companies per year in a market estimated to be worth 20+ billion US.
- Based on the previous point, an optimal (non-CBEC) market entry strategy would encompass an initial bespoke new product development step using Chinese health food national standards as the reference.
- Use of Chinese epidemiological data (gross mortality rate etc.) could be a useful approach to initial claim selection (think China’s problem with resistant H.Pylori, preponderance of GI and stomach cancers etc.). Once one of the 27 risk reduction claims are selected , active ingredient that are associated with this claim can be easily compiled and ranked in order of clinical significance, experimental quality, number of publications/trials etc. From this initial proof of principle phase, products can be developed to fit the claim and the standards rather than the problematic reverse engineering approach.
- Don’t forget beyond all the complexity of market entry the bread and butter practicalities of sales and marketing are still waiting.
Defining the scope: The best way to understand a health food
To begin this article it would be remiss of me not to define the scope of what is considered a "functional food" and "nutritional supplement" in China. First of all both functional foods and nutritional supplements are classified as “health foods” in China, which are a specific category of food clearly defined within China's Food Safety Law and regulated using Chinese national standards and a host of associated administrative measures. Health foods also fall under the umbrella category of “special food” which also includes infant formula and foods for special medical purposes (FSMPs). Health foods are subdivided into 2 broad categories namely health food proper and nutritional supplement (vitamin/mineral).
Health food proper (My own interpretation, not legal definition): A health food proper is a prepackaged foodstuff (active ingredient delivery method can vary from capsule, powder, liquid etc.) bearing a health food certification mark (Bluehat) and labeling claim which can alter human physiology in such a way as to reduce or improve specific risk factors (e.g. blood pressure, blood lipids, GI motility, blood sugars, bone density etc.) associated with the development of human diseases. NB – No specific mention or use of medical terminology showcasing utility in disease treatment can be made either indirectly, directly or through implication (avoid ambiguous terminology, misleading product names and misleading graphical representations). Premarket product authorization is necessary before a product can bear any functional labeling claims and the health food certification mark. Labeling claims are currently limited to 27 predesignated claims. Certification is contingent on a lengthy and costly review process by Chinese authorities (CFDA) in which scientific data supporting the use of the risk reduction labeling claim (preclinical and clinical) and supporting literature is compiled into a registration dossier. Testing involves stability, hygiene and toxicological testing. Data requirements and associated costs and timeline vary considerably based on the claim selected by applicants.
Nutritional Supplement: (my interpretation not legal definition) Nutritional supplements are prepackaged vitamin/mineral supplements (powdered capsules, liquids) bearing only content claims indicating the relative concentration of vitamin/minerals within the product and also bearing a health food certification mark (Bluehat). The permitted range and concentrations of nutrients are clearly defined within Chinese national standards. Products using nutrients or using relative nutrient concentrations outside of the scope specified in Chinese national standards are illegal. Products are also subject to premarket review and subsequent record filing by Chinese authorities prior to market authorization. Similar to health foods proper applicants must compile dossiers including supporting scientific data and literature, however the costs and associated timeline are considerably less than health foods proper however for nutrient supplements certain tests are not required under new regulations.
Classified as a special food, health foods in China are assigned particular importance in terms of development of legislation, supporting regulations and enforcement of national standards. From an administrative perspective “health foods” are earmarked for heightened inspection and supervision by authorities both at a premarket and post market level and particularly for health foods imported through traditional trade channels and sold through “bricks and mortar” retail outlets.
Market entry strategy is everything: Choosing your channel
CBEC vs Standard Trade Channels
Delving into the regulatory problems facing international enterprise looking to launch a health food product in China is senseless without first outlining that the massive differences in regulatory requirements between the two legal market entry channels available to international enterprise. The first of these, cross-border ecommerce (CBEC), is now a well-defined although still developing category of trade in China with specific administrative rules. The second, extremely regulated category involves the use of the aforementioned standard trade channels and requires premarket registration/filing and compliance with China’s food safety law, national standards and a host of other administrative requirements.
CBEC: Relatively speaking, importing functional foods or nutrient supplements via CBEC requires very little in the way of regulatory compliance. CBEC has particular administrative requirements mandating among other things the use of specific 3rd party ecommerce platform providers, the use of special bonded warehouses in special administrative zones and/or the use of a Chinese website hosted on Chinese servers staffed by Chinese customer service representatives. Beyond this at present the requirement to obtain a customs clearance certificate, health food certification mark and conduct extensive preclinical and clinical testing is not necessary.
CBEC markets are extremely volatile at the moment and the Chinese government has been notoriously fickle in terms of its commitment to regulate this area and has flip-flopped from plans to align regulatory standards with standard trade channels to allowing international functional foods enterprise to freely enter Chinese markets. An appreciation of the development and history of CBEC along with a sound understanding of the rationale and context of its development is wise before making considerable investments in what remains a risky proposition for international investors.
Traditional sales importation and retail channels:
Standard trade channels: Market entry requirements for both health food proper and nutritional supplements still present major technical barriers to trade for international enterprise despite large scale changes to regulatory requirements specifically designed to ease regulatory compliance. To begin with it is useful to understand the recent major changes to the regulatory framework.
1) Filing for nutritional supplements: Filing instead of registration will now be used for nutritional supplements. In practical terms this will translate to accelerated market entry and reduced regulatory compliance costs for nutritional supplements
2) Health food testing standards have been optimized to allow concurrent initial registration testing and reexamination (expected to shorten overall registration by as much as 2 months)
3) Release of the first positive inventory of approved active ingredients and auxiliary materials for nutrient supplements (also specifies permitted range of concentrations).
State of the Industry: Health Food Market Trends, Stumbling Blocks and Future Direction
Compared to its global peers China’s health food market is still backward both from a product differentiation perspective and a regulatory perspective. However the sheer scale of the market (20-30 billion USD) and the cultural context in which the market has developed has made China’s market a seriously enticing prospect for international stakeholders. Although the specific scope of what constitutes a health food is clearly defined in legislation and in regulation, in practical terms the market waters are muddied by a wide array of products and delivery forms which vary in a spectrum from fully compliant to glaringly illegal.
This uncertainty is further compounded by the often hazy boundaries between health foods and Chinese medicines. Regulation of health foods is currently based on a series of horizontal standards and associated inventories which apply to all foods and also on vertical standards which define the regulations specific to health foods. There are also inventories like the “list of ingredients which are considered foods and Chinese medicine” and the “list of new food raw materials” which span the boundaries between these two delineating concepts. China’s government is currently working on redefining the scope of what constitutes a health food by developing sets of inventories for both health food active ingredients and auxiliary materials used in processing which will clearly define the scope of what constitutes a health food, but until that plan is finished the industry is left at the mercy of unscientific regulations, inconsistent regulatory enforcement and a scarcity of reliable market entry and regulatory compliance guidance.
Chinese health food regulations are so bad it really beggars belief until you understand some of the true rationale for these regulations. Current provisions have been in place more or less unchanged for many years despite policymakers having had the luxury of being able to cherry-pick the best parts of more scientific regulatory frameworks like EFSA and Japan’s system. Although an explanation of Chinese trade policy is beyond the scope of this article it’s probably sufficient to mention that market protectionism is a hallmark of China’s regulation of special foods (IF, FSMP and Health Foods). As such excessive technical barriers to trade serve an important economic purpose beyond ensuring the health and safety of Chinese citizens. In the past regulations were designed to help buffer China’s backward domestic industry from the ravages of global competition. In more recent years the pressures of grey market importation of foreign brands has forced a different trade strategy by Chinese policymakers precipitating the growth of CBEC.
Regulations are also a response to a domestic industry ravaged by misleading claims and extremely unethical marketing campaigns often targeting Chinese society’s most vulnerable. It is good to keep this in mind too before being overly harsh in condemnation of Chinese policymakers. China’s markets are undergoing a very special transition at the moment. China is attempting to harness the forces of economic reform, EHS reforms, food safety reforms, trade policy reforms into a single cohesive strategy which is reshaping the country in a very dramatic way. From an investment perspective the low lying fruit is available in the CBEC sector, but I advise caution in this area and would urge investors to have a flexible exit strategy on hand when considering this option. In the long term the forecasters I trust are predicting sustained 6-7% growth in China’s economy. The food industry including the health food sector has witnessed successive years of double digit growth for the last several years. Given what I’m seeing on the ground I expect this to continue. Smart money uses a dual market entry strategy that takes advantages of short term opportunities in the CBEC space while simultaneously channeling profits to buffer the expenses and time investment associated with full regulatory compliance.
Disclaimer: the above is the author's personal opinion and is not the opinion or policy of Chemlinked.