2017 A Year of Reform for Chinese Infant Formula Market

Insights for 2017:

Infant formula registration has turned out to be more complicated and time consuming than anyone expected.
More stringent inspection will be implemented by competent authorities for both domestic and imported infant formula products.
Smaller infant formula brands will continue to be forced out of the market in 2017.
It can be expected that in the second half of 2017, many Chinese importers will try to stockpile infant formula in expectation of a supply vacuum in early 2018.
With smaller Chinese domestic infant formula brands forced out of the market, there are great market opportunities for qualified brands especially in tier-3 and tier-4 cities.

In 2016, 10 policies and notices were released to strengthen regulation of infant formula in China. The most significant change was the release of infant formula recipe registration and its supplementary documents (dossier preparation and on-site inspection), which were all finalized in 2016. Supplementary measures to support preparation of registration, establishment of a traceability system and standardization of infant formula labels were also released. The CFDA also plans to increase inspection frequency and stringency.

Key timelines for infant formula registration

A grace period for formula registration has been granted. Infant formula manufacturers intending to sell their infant formula to China should obtain a CFDA approval certificate form January 1^st of 2018. Products exported to China before the deadline can be sold until the production expiration dates.

More stringent inspection in 2017

Since January of 2016, CFDA conducts a monthly spot check on infant formula circulating in the market (see CL news on 27 Jan. 2016), which focuses on assessing product quality. The total number of batches sampled also doubled and now exceeds 1000 batches every month. At the end of 2016, CFDA began to require manufacturers to conduct self-inspection of product labels (see CL news on 12 Dec. 2016). Provincial and municipal CFDAs will soon release inspection details on labels and conduct spot checks from early 2017.

According to the 2017 Food Safety Spot Check Plan and Requirement issued on January 4^th of 2017, CFDA will not only inspect infant formula products, but also conduct monthly spot check on all infant formula manufacturing plants. Imported infant formula must undergo complete inspection either at port of entry or during market circulation, as required by the revised Implementation Rules of Food Safety Law (see CL Expert Article on 9 Nov. 2016). CIQ will conduct full inspection at the port of entry, batch by batch. CFDA and its provincial and municipal branches will spot check infant formulas sold both online and offline and inspection results will be publicized. Failure to comply with requirements can result in a subsequent increase in inspection frequency.

To ensure compliance, ChemLinked strongly suggest manufacturers to conduct self-inspections on product quality and labelling against corresponding standards batch by batch.

Potential registration difficulties

One year remains to complete IF registration. Many infant formula enterprises started to prepare recipe registration in 2015 and some have already tried to submit the application. However, as far as we know, by now no company has successfully submitted the application yet. The preparation process seems to be more difficult than most manufacturers expected.

When preparing the dossier, the most difficult part is the R&D report; it is time consuming and requires extensive scientific data and a comprehensive literature review. Another element that many applicants may ignore is the translation. For overseas applicants, the original English dossier should be translated into Chinese accurately. Once the registration is approved a registration number should be printed on the product package and label.

CFDA requires applicants to submit the paper dossier to their Beijing office in person and they will check the completeness and format of the dossier immediately. In case of an unqualified dossier, applicants will be required to rectify the dossier and re-submit once ready.

Stockpiles, Supply Vacuums and Transient Increase in Demand in 2017

Considering the average IF registration dossier review period is 3 to 4 months and additional requirements to produce compliant labels, the deadline for IF registration is very tight. Few infant formula manufacturers will be able to bring fully certified products to China by January 1st of 2018. Consequently, it can be expected that in the second half of 2017, many importers will try to stockpile a large amount of infant formula in expectation of a supply vacuum beginning in 2018

CBEC channel for Infant formula

Many overseas infant formula companies were able to take advantage of CBEC in 2015. In 2016, a tax reform policy (see CL news on 25 Mar. 2016) and positive list policy (see CL news on 8 Apr. 2016) were issued. Products imported via CBEC are subject to CBEC tax, and only products on the positive list can be imported via the CBEC channel. Infant formula and most dairy food are on the positive list. As the implementation details for inspection and quarantine have not been established, a grace period for implementation of the positive list has been granted until January of 2018. On the whole the regulatory requirements for offline and CBEC bonded warehouse will be the same. Infant formula traded through CBEC will have to comply with requirements like manufacturer registration, product recipe registration, Chinese labelling and strict compliance with content and functional claim prohibitions. In the next few years, traceability will be promoted to effectively prevent the distribution of fake infant formula products. However the direct shipping model will be exempt from recipe registration and has already lead many CBEC platforms to setup overseas warehouses and establish direct cooperation with manufacturers.

Survival of the fittest: Chinese SME Herd Culled by Regulatory Selective Pressures

Due to product line quantity limitations stipulated in the registration policy the current 3000 domestic brands in China market will decrease by 60%. In 2017, smaller domestic SMEs will be forced form China’s infant formula market.

Actually, most SMEs are already ill equipped to deal with the intensive inspection and the public disclosure of inspection results and compliance violations to the public. Take the Chinese brand Yabais as an example. Yabais is a Chinese domestic infant formula manufacturer which has been manufacturing for more than 8 years and has over 100 employees. Yabais selling point is that it claims to be an “Australian infant formula”, as all the base powders are imported from Australia. However, a recent scandal forced Yabais to shut down its factory.

In June’s random inspection of infant formula products, CFDA found that 10 quality and nutritional indexes as outlined in GB 10765-2010 in a batch of Yabais’s products were outside of standardized ranges.
On 19 July, 2016, CFDA criticized Yabais seriously and disclosed the inspection results to the public.
In August, CFDA again conducted field inspection of Yabais’s factory. 19 noncompliance items were found and Guangdong FDA even started an investigation on Yabais. The field inspection result was disclosed on December 30 of 2016.
On January 5 of 2017, the Yabais was shut down.

Based on CFDA’s publication, in 2016, the average qualification rate was 99% .14 domestic brands were found noncompliant during inspection. Regarding the current stringent supervision of infant formula manufacturers, those with a history of unqualified products may find it more difficult to obtain the recipe registration certificate.

Opportunities in Tier-3 and Tier-4 cities

Among the existing 3000 domestic infant formula brands, most are owned by small or medium infant formula manufacturers. Their products are geared towards China’s less developed cities where consumers have less brand awareness and prefer cheaper prices. The main distribution channels of infant formulas in these cities are mother and children stores and supermarket. In the past infant formula manufacturers have even produced customized products for those cities, stores and sometimes supermarkets. For domestic enterprise pure OEM operations are no longer allowed. With smaller manufacturers forced out of the infant formula market, this may be a great opportunity to exploit China’s IF demand without going head to head with larger multinational in the highly competitive first and 2^nd tier city markets.

2017 A Year of Reform for Chinese Infant Formula Market

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