Market consolidation? Only major domestic brands and MNCs to thrive in China’s tougher infant formula market – experts

China’s new national standards (Guobiao / GB) for infant formulas were officially enforced from February 22, after it was first introduced two years ago​.

The new GB standards will require manufacturers to reformulate their products in the areas of calories, carbohydrates, proteins, and micronutrients content. 

For example, upper limits have been introduced for micronutrients including vitamin E, vitamin K1 and B1.

On the other hand, manufacturers are no longer allowed to mix soy-based and dairy-based proteins together.

“We didn’t see major challenges meeting the requirements, but of course, the Chinese authorities are becoming more and more experienced. ​

“Other than meeting the new GB standards, the other thing that we did is to take the opportunity to improve the formulation,”​ Celia Ning, director of Junlebao’s Nutrition Research Institute told NutraIngredients-Asia. ​

The Chinese authorities have become more particular about the scientific rationale behind the product formulation, Ning noticed. 

“One of the main reasons behind the new GB is to improve the nutrient profile based on science.​

“The authorities can have many things to challenge you. They might give you difficult questions or ask you to provide more information, and then you have to be prepared to answer all these questions,” ​she said.

And this is where smaller players might lose out, especially when they do not have a strong scientific or regulatory supporting department.

“Meeting the GB standards for nutrients such as choline and vitamins is not the issue, you just need to improve the level to meet the requirements. ​

“But because you need to register the product, the authorities will then ask, why did you add this and that ingredient at this or that level, and so you will need to provide the scientific information,” ​she said.

“Because you need to improve the formulation, register the formulation, improve the nutrient profile, it will be quite a big investment and for some of the smaller players, they probably cannot do it and will be [eliminated] out of the market,” ​she added.

Cathy Yu, general manager of the food business division at regulatory consultancy CIRS, also said that some of the less popular brands and companies might have chosen not to reformulate the products and exit the market.

Another expert believes that the introduction of the new GB standards is basically to gain political trust.

“Infant formula is only a simple product, there is nothing high tech about it. The formulation is mostly made up of essential ingredients and the rest is  about how companies innovate in terms of novel ingredients,” ​said Jane Li, founder and principal consultant at New Zealand’s Li, Page & Co who has experience advising local infant formula firms interested in the China market.

She believes that regulatory developments in China have to be explained via the political lens. One reason why the government is introducing the new GB standards, she believes, is to show that they care about infant formula safety, especially since the melamine scare in 2008.

She explained that since the melamine scare, China’s infant formula sector has been flooded with OEM brands.

Over the years, the government has been refining its policies, which has gradually reduced the number of OEM products on the market.

The latest GB standards, she believes, will further reduce the number of such products, leaving mostly products from MNCs and big local players available in the market.

Number of registered formulas ​

About 450 formulations from around 70 manufacturing firms have been registered based on the new GB standards, local media Sina​ reported on March 1.  

According to Chemlinked, most of the registered formulations came from Feihe/Firmus, Shijiazhuang Junlebao Dairy, Nestle, Yili, and Beingmate. 

One of the companies pending product approval is New Zealand’s The a2 milk Company.

The firm, which managed to snap up a greater pie of China’s infant formula market in the latter half of 2022, said in its latest financial results​ posted on February 20 that its China label a2至初 was pending registration approval from the Chinese authorities.

Dossier review process for the infant formula was completed last December and New Zealand’s Ministry of Primary Industries (MPI) has started to audit the facility of Synlait – its manufacturing partner, in the week of February 20.

The firm believes that it is on track to receiving the new GB registration in the second half of 2023, subjected to China’s State Administration of Market Regulation (SAMR) approval.

Meanwhile, the firm has cumulated a stock build of a2 至初 manufactured under the old GB standards prior to the 21 February manufacturing cut-off date.

These products will be sold in the market until the date of expiry​ to help the company cope with the transition to the new formula.

“We are in good shape heading into an increasingly challenging period with the rolling impact of the decline in the birth rate and a market wide transition of China label product to the new GB standard,”​ said CEO David Bortolussi.

No longer the same ​

Li believes that the China infant formula market is no longer the same as compared to pre-pandemic. In fact, she believes that using the terms “not popular anymore”​ is an understatement of China’s infant formula market.

Her opinion stems from two indicators – namely a negative population growth and economy that has been hard-hit by the harsh lockdown measures, she explained.

“The economy in China is not the same as pre-pandemic,”​ said Li who experienced first hand the impact of the lockdown on her business in China.

Based in New Zealand, Li is the owner of New Zealand Milk Bar located in her hometown of Chengdu, Sichuan.  

“I was not in China, but my business is there, I have been losing money, I fought through, and I know the situation on the ground,” ​said Li who has found success in luxury goods trade recently.

China’s gross domestic product (GDP) growth for last year was three per cent, below the official target of around 5.5 per cent, and the worst since the country came out of Cultural Revolution, Reuters ​reported in January.

The growth for last year was also far lower than the GDP growth of 8.4 per cent in 2021.

The country’s population growth also declined by 850,000 to 1.41 billion last year, with 9.56 million births and 10.41 million deaths.

The declining attractiveness of China’s infant formula market, she said, was the reason why big players such as Abbott had decided to leave China.

She added that for players such as The a2 Milk Company, even though the firm had snapped up more market shares in China, its market share price did not reflect the same level of optimism from investors.

The Sydney Morning Herald ​reported that The a2 Milk Company’s share price was down 8.6 per cent to $6.49 on the day the firm announced its strong performance in China.

“It’s really a share game because there’s no volume growth in the market.​

“When you look at where we play in the market and how well we are positioned with that brand and execution, I think there is still significant opportunity for us to grow over time. But in essence, it’s a share game ... because the market is not growing,” ​the local media quoted CEO Bortolussi. 

Moving forward, Li believes it will mostly be local Chinese companies and large MNCs that will thrive in China.

“They have been in the market for many years and they know how the game plays…Only large companies have the money to do rounds and rounds of product registration approvals,” ​she said, referring to the new GB standards.