The one-child policy in China has also made parents extremely careful about the food given to their babies. After a series of food safety crises, imported baby formula had became a popular choice among young parents in China.
A survey conducted in Beijing in 2011 showed that nearly 70 percent of Chinese consumers would not consider domestic baby formula for their children.
Besides food safety considerations, another reason that imported baby formulae are so popular in China is because Chinese consumers trust the quality and nutritional values of imported baby formula. In addition, they have increasing consumer purchasing power to buy imported products.
However, the price of imported baby formula has not been that attractive. Imported baby formula is at least 50-100 percent more expensive than domestic products and it can even be double or triple the price in China compared to the price in their country of origin.
The price difference is a result of import taxes, as well as other factors including costs spent on distribution channels and transportation, advertising and the huge demand.
Adam Davis, Birmingham, UK
Driven by the huge price gaps, the Chinese have started to turn to an alternative method of buying imported baby formula: ‘parallel imports’. There are mainly three routes for parallel importation of baby formula into China:
- The first is through overseas Chinese students, workers or travellers, who are asked by families and friends to carry or mail cans of baby formula back to China.
- The second is through small and medium organised groups, which purchase relatively large quantities of baby formula from retail stores and pharmacies in overseas countries and mail them to China.
- The third route is through the biggest sellers who buy products in bulk directly from health distributors and export them in bulk to China.
After the products enter China, the most popular route to sell them is through the internet using e-commerce platforms due to their low operation costs, the popularity of online shopping in China, and the lack of regulatory control on online market activities. In comparison, parallel imported baby formula sold online is generally 20-50 percent cheaper than officially imported products.
The parallel imported baby formulae are mainly sourced from the US, New Zealand and European countries such as the Netherlands, UK, Germany, Switzerland and France.
Apart from directly exporting baby formula to China from the sourcing countries, lots of parallel traders export products to Hong Kong first, where there is zero tariff and customs clearance is much simpler, before re-exporting them into mainland China under the less strict trade and customs policy between Hong Kong and mainland China.
In addition, because of the ease of travel across the border between the Mainland and Hong Kong, Mainland travellers have also largely contributed to the parallel exporting of baby formula from Hong Kong.
In 2012, Hong Kong imported a total of US$687 million worth of baby formula, which represented a 49 percent increase compared to 2011. Nevertheless, retail outlets in Hong Kong are still constantly facing empty shelves of baby formula.
The situation became worse during Chinese public holidays when more travellers went to Hong Kong and purchase baby formula for personal consumption or as gifts.
Facing the shortage of baby formula caused by parallel trading, governments and manufacturers in the sourcing countries and regions have had no choice but to limit purchase quantities in retail shops and an individual’s carriage of baby formula across the border.
The purchase restrictions first started in the US and spread to other sourcing countries and regions, such as Australia, New Zealand, Germany, the Netherlands, Hong Kong, Macau and the UK.
In most of the countries and regions, purchase restrictions have been regulated by the industry itself and the maximum purchase quantities are limited to one to 12 cans.
The strictest regulatory controls are seen in Hong Kong, where the government imposed a regulation effective from March 1, 2013, that permits individuals above the age of 16 to carry across the border a maximum of only two cans or 1.8 kg of formula for infants and young children under the age of three within 24 hours. Individuals violating the regulation will face a maximum fine of HK$500,000 (US$64,480) and two years in jail.
Other governments of baby formula exporting countries have also begun to react. The Dutch Ministry of Economic Affairs in May 2013 ordered an investigation into the persistent shortage of certain brands of baby formula, which was believed to be the result of unlawful exportation of the products to China.
The Dutch baby formula industry could be asked to submit business information to assist the government in collecting evidence to alert the Chinese authorities to unlawfully imported baby formula sold outside of the regulatory controls in China. At the same time, the industry has been working on ways to ensure enough products, such as increasing the production and restricting purchase quantities in retailing stores.
As it is difficult to control the baby formulae that are being imported and sold online through unofficial channels, some speculators have seized this opportunity to earn more profits under the regulatory loophole.
A media report in April 2013 revealed that an ‘imported’ baby formula sold in China was actually manufactured in China with expired milk powder and re-packaged into the particular brand’s boxes with the original expiry dates changed.
It was also reported later in May that some companies do not operate their own factories overseas, but have been using contract manufacturing plants in New Zealand to produce baby formula under different brands, solely to export their products to China for higher profit.
To protect the reputation of its dairy industry and exported products, the New Zealand Ministry of Primary Industry (MPI) in June 2013 introduced brand registration for baby formulae that were being exported to China. The MPI was also investigating mechanisms to better collaborate with the Chinese authorities on areas such as formulation and product labelling.
Food Safety Reform
Kate Ter Haar, Miami, US
Facing the challenges on the global baby formula supply and product safety issues, more countries will have to work closely together in the future to ensure a safer and more stable global supply of baby formula. China, being at the centre of these issues, will definitely have much more challenges to deal with. Following the government’s reorganisation to set up the China Food and Drug Administration (CFDA), the most extensive food safety reforms undertaken by the Chinese government have just started.
To ensure the quality and safety of imported food to China, the Chinese authorities have imposed stricter import regulations. China’s new Provision on the Administration and Registration of Overseas Food Manufacturers, effective since May 1, 2012, states that foreign manufacturers will constantly need export approval from China’s Certification and Accreditation Administration.
The provision has also given the authorities greater power to cancel a manufacturer’s registration number if their product quality is not up to China’s standards. The Provision on the Administration, Inspection, and Quarantine of Imported / Exported Dairy Products, effective on May 1, 2013, states that baby formula and other dairy products will require quarantine inspections on a batch-by-batch basis, where more than 30 microbiological, chemical and nutritional parameters have to be tested.
Consumers, conventional retailers and activists have also been pressuring the authorities to ban online sales of foods. Effective since April 1, 2013, the Beijing Food Safety Provision issued by the Beijing government requires all online retailers to obtain a business licence and a food product market circulation licence to be eligible to conduct online marketing for foods.
At the national level, the government has recently initiated regulatory enforcement campaigns on the online sales of drugs and general consumer products.
On May 31, the State Council Executive Meeting, chaired by Premier Li Keqiang, discussed plans to improve the nation’s baby formula product quality and safety. Following the central government meeting, the Ministry of Industry and Information Technology (MIIT) on June 4, 2013, issued the Work Plan on Improving Dairy Powder Quality and Improving Consumers Confidence to initiate the consolidation of the domestic dairy industry.
The MIIT subsequently drafted detailed policies on promoting the merging and restructuring of the domestic baby formula industry, pending approval by the State Council by end 2013. It is expected that according to the policy, the number of baby formula manufacturers will be significantly decreased in the next few years through merging and elimination, while the industry’s scale and production shall be enhanced.
On June 20, 2013, nine Ministries in China issued the Working Guidelines on Improving Baby Formula Quality and Safety. The guidelines suggested that baby formula should be sold only at designated sales counters and drug stores on a trial basis, in line with the central government’s plan to impose an administrative framework for baby formula similar to the control of medicines. The first trial of selling baby formula in drug stores and vending machines had been initiated in several cities since September.
In early August, the CFDA issued several draft regulations on the administration of baby formula production, with the purpose of a further implementation of the Working Guidelines on Improving Baby Formula Quality and Safety. These regulations will set stricter market-entry rules and increase government supervision on the production activities of domestic baby formula manufacturers.
Also underway is the amendment of the national Food Safety Law after its introduction in 2009. The aim of the new Chinese food safety legislation is to set up the ‘strictest-ever’ food safety controls to rebuild consumer confidence and the competitiveness of the Chinese food industry.
Tougher Regulatory Environment
|FOREIGN BABY FORMULA COMPANIES ARE FACING
A MORE CHALLENGING REGULATORY ENVIRONMENT IN CHINA.
While China is working hard to improve its domestic dairy industry, foreign baby formula companies, on the other hand, are facing a more challenging regulatory environment in China.
In early July 2013, the China National Development and Reform Commission (NDRC) initiated an anti-trust investigation on nine baby formula manufacturers and ingredient suppliers, mostly multi-national companies. These companies were charged with ‘price fixing and restricting the minimum prices for resale’ to their distributors, which was against the Chinese Anti-Monopoly Law. Six out of the nine companies were fined a total amount of US$110 million.
In early August, Fonterra warned several baby formula manufacturers that its whey protein ingredient manufactured in New Zealand was suspected to be contaminated by a vital bacteria, Clostridium botulinum, resulting in a series of considerable product recalls in several countries in Asia, with Dumex in China being the most affected.
Although the contamination was later found to be by the non-safety concerned clostridium sporogenes, the reputation of the company as a dairy supplier and the entire New Zealand dairy industry had been badly impacted. Even after several months following the crisis, the Chinese quarantine authority had not released the import restriction of New Zealand made dairy products.
On 16 September, a China Central Television (CCTV) report alleged that Dumex was paying nurses and doctors in Chinese hospitals to feed new-born babies with its infant formula in order to promote its products.
Following the report, it was also revealed that it had been a common practice in Chinese hospitals and the companies involved were mainly multi-national companies, including Abbott and Wyeth. The report suggested that such practice could be considered as bribery.
The National Health and Family Planning Commission (NHFPC) announced the nation’s policy on marketing infant formula the next day, including the country’s Administrative Measures on the Marketing of Breast Milk Substitutes, and urged hospitals to investigate the situation and stop promoting infant formula.
On September 28, 2013, the China Dairy Industry Association held a press conference to introduce six premium domestic baby formula brands, which were supported by the MIIT. The event was considered a step forward of the Chinese government’s effort in supporting and consolidating the domestic industry. In view of this, foreign companies will likely expect more competition in future from the domestic dairy industry in China.