Daigou and direct-selling clampdown in China 'growing pains', but market will still thrive: HPA

08-Apr-2019 - Last updated on 08-Apr-2019 at 02:29 GMT

China's e-commerce sector will continue to thrive despite the increasingly stricter rules and more frequent crackdowns, according to HPA-China's executive director, Jeff Crowther. ©Getty Images

The recent slew of crackdowns, regulatory reviews and stricter rules for China's health food and supplement industry are 'growing pains' the industry must overcome, as regulators double down on efforts to promote safety and collect taxes.

Speaking to NutraIngredients-Asia, Jeff Crowther, executive director of trade body Health Products Association – China (HPA-China), said the State Administration for Market Regulation’s (SAMR) quick succession of regulatory changes in relation to daigou traders and direct-selling firms were spurred by a need for greater consumer protection and a higher degree of corporate accountability.

"You're basically dealing with a government that wants to make sure it has some oversight in consumer protection, but also wants to make sure it gets its taxes. You can boil everything down to two things: safety and taxes."

E-commerce interruption

He added that these circumstances had ‘hurt’ some companies that relied heavily on daigou sellers, with increased inspections of goods brought into China from Australia causing activity to become more muted over the past few months.

"Apart from Australia, the SAMR has also been targeting South Korea, as a lot of Chinese have been going over there to buy Korean cosmetics. The new e-commerce rules basically state that it's not against the law to be a daigou seller, but you'd better have a business licence, declare the products you sell, and pay your taxes.

"Most companies have already done as much as they can to deal with that, but some of our members rely quite heavily on daigou — especially Australian companies — so that's definitely hurt them.”

However, he also said that in the long term, things would get better for these businesses.

“Ultimately, it's a matter of moving products through distributors who have the required licences. These are growing pains — things will be bumpy, so companies must be flexible and figure out as far in advance as possible where to make their move, and not keep their eggs in one basket."

He further said that direct-selling companies had been hit even harder, with the segment being in ‘dire straits’. The SAMR has stopped granting licences to such companies, which have been losing market share to new players, particularly in the cross-border segment.

The SAMR’s 100-day operation to clean up China’s health food market, Crowther said, had disproportionately affected direct-selling companies.

Still, he remained optimistic, saying that e-commerce would continue to thrive, and as a result, so would direct-selling firms.

Bad faith for bad players

At the HPA-China’s recent annual China Supplement Seminar at Expo West in the US, seven industry experts, including Crowther, covered a range of subjects related to China’s health food and supplement market.

One of the key takeaways was that China’s regulatory environment was becoming more transparent but also more restrictive, which Crowther referred to as “a good and bad thing”.

The tighter regulations come amid the market’s exponential growth: in 2018, China’s health food industry was reportedly valued at US$59bn with a growth rate of 10%, though certain groups have said this figure was closer to US$30bn with 8% growth.

This makes China’s health food and supplement market the world’s second largest, behind the US.

Crowther said: "Overall, China's getting stricter with the industry, so international companies definitely must keep abreast of what's happening on the ground, especially when it comes to their marketing and advertising campaigns.

“Many of them do business in China through cross-border e-commerce and so they're not allowed to advertise certain claims, or advertise directly. But some companies still try to toe the line by marketing these claims on social media.

"My suggestion is to be careful. These are common-sense things, but they're getting a lot more attention now. China in general is happy to get bad players in trouble, more so than in the past."

Claims and filings

Crowther also noted that the SAMR taking over from the Chinese Food and Drug Administration (CFDA) had accelerated regulatory changes in the industry.

The government had apparently talked “for years” about making changes to the 27 existing health claims for health products, but the CFDA made no progress in this regard.

On March 28, however, the SAMR released a document announcing its plan to revise these claims, which Crowther sees as a positive sign.

"It's been years of regulations not getting attention and not being fixed, so it's nice to see the SAMR being pro-active. The whole reason behind the document was issues with the direct-selling business, where some companies had gotten into trouble for doing things like taking advantage of seniors by selling them products using ridiculous claims."

He added that health claims were an ‘integral part’ of the regulatory system, and that some still blurred the line between general claims and drug claims.

“Companies must be careful with the terminology, because the whole reason (behind reviewing and reforming the health claims) is to stop the consumer confusion between health food and drugs."

"We as an association have been advocating for years with the CFDA to use the US structure for its function claims system, and we'll be submitting a document to the SAMR for public comment regarding its review of China's functional food health claims before the end of this month."

Another area of regulatory reform the HPA-China has been pushing for is the filing system for vitamin and mineral products. Crowther said China’s system was still rather restrictive, covering a limited amount of products.

"One of the things we suggested was ingredients already approved as food in China, as they were safe for consumption. These included herbal products, fish oil, and algae DHA, which will probably added to the system in a few years' time. It's an area the government could utilise."

Furthermore, he said the SAMR should not insist that every health product undergo the blue hat registration process companies require in order to sell their products in brick-and-mortar stores.

"For many foreign companies, their only way to sell into China is via CBEC, so more ingredients approved through a filing system will allow more international companies to sell to China.

Additionally, going through a filing system is not as expensive or time-consuming as blue hat registration: it can take six to 10 months to file something, compared to three to four years for blue hat registration. The former also costs from US$10,000 to US$18,000, compared to the latter's US$180,000."

To help SMEs expand to China with minimal risk and lower investment amid stricter laws, Alibaba’s Tmall Global will launch a new system called Tmall Overseas Fulfilment (TOF) — companies shipping from the US, for instance, will be able to ship directly to consumers from a Los Angeles warehouse via a consignment model.