Making Sense of Nutraceuticals in China
The Chinese nutraceuticals market remains some way from realizing its true potential
The Chinese nutraceutical market is considered the third largest in the world after the US and Japan, or the fourth largest if Europe is counted as a single market.
Despite strong fundamentals and high rates of annual growth, though, the Chinese market remains some way from realizing its true potential. Its evolution is muddied by ambiguities around what nutraceuticals actually are and how they should be managed.
The result has been polarization between over-zealous regulation of so-called health foods, and a grey market where products have skirted approval procedures through questionable positioning or by exploiting alternative channels such as cross-border e-commerce.
These ambiguities undermine trust and confidence within a broader food market plagued by safety issues over the last decade.
A revised Food Safety Law implemented in October 2015, however, and the health-food regulations that followed should provide a more rational, stable and transparent way forward for nutraceuticals.
Certainly, there is a strong political impetus to accelerate trends towards personal health maintenance and disease-risk reduction in China.
One crucial factor is rapid population aging under the government’s decades-long one-child policy. That policy was modified from 2016, recognizing the growing imbalance between the elderly and the shrinking generations below them.
Working through the age-dependency (% of working-age population) legacy will take years, though. According to data from the National Bureau of Statistics, China has the lowest fertility rate of any country in the world.
Meanwhile, a tax-funded healthcare system will have to address high levels of need with a dwindling revenue base, while the traditional extended-family unit fragments under pressure of migration to urban centers.
The working-age population of 18-59 year-olds in China is projected to decline from 925 million in 2011 to 700 million in 2050. By that time, nearly 500 million people will be over the age of 60, compared with just over 200 million now.
An aging population is increasingly vulnerable to chronic and high-maintenance diseases such as diabetes, cancer, stroke, hypertension, arthritis and dementia.
In 2013, over 100million of the 202 million people aged 60 and over in China had at least one chronic non-communicable disease. By 2030, three times more people will be living with at least one chronic disease, the World Health Organization says.
Cost of urbanization
Urbanization has brought its own healthcare problems. Diets and lifestyles in China have adjusted to the faster pace of urban existence, and to western influences, as improved incomes, increased mobility and advanced technology open up growing segments of the population to the international marketplace.
One recent study found that in 2011, high blood pressure, high cholesterol, and high blood glucose were associated with, respectively, 3.1 million, 1.4 million and 0.9 million new cases of heart attack or stroke in China. From 1991 to 2011, decreased physical activity was linked to a 0.7 million rise in cardiovascular disease cases, and increased body mass index to 0.6 million more CVD cases.
The healthcare system is struggling to cope. While health insurance in China covers 90-95% of the population, core benefits are limited and out-of-pocket payments account for around 34% of total health expenditure under the three national schemes.
This situation will only get worse. According to Deloitte, annual healthcare expenditure in China is projected to grow at an average of 11.8% between 2014 and 2018.
Wealth of opportunities
All of these factors, and an available population of around 0.7 billion just in urban areas, offer a wealth of opportunities for nutraceuticals. In particular, marketers can tap into the brand preferences and quality perceptions of educated consumers with the disposable income to invest proactively in health.
National per capita disposable income was up by 7.4% in real terms in 2015, while per capita income of urban households was 2.73 times that of rural residents.
Making the most of those opportunities, however, requires clear consumer understanding of the nutraceutical offering and a predictable, transparent and reasonable regulatory framework to back it up.
Instead, market entrants complain of a demanding environment in which official ‘blue-hat’ registration through the China Food and Drug Administration (CFDA) involves product-by-product testing requirements more akin to drug registration.
Waiting times for approval have been anything from two to five years, at a cost ranging from US$50,000 to $150,000 per product, and with five-yearly renewals.
Inevitably some manufacturers have found other entry routes, whether through historically broad interpretations of food-labelling regulations or unofficial channels based on personal relationships.
Cross-border e-commerce (CBEC), where nutraceuticals are sold directly to consumers on a one-to-one basis from outside China, avoiding the rigors of blue-hat registration, has witnessed strong growth in recent years.
Shipping products to consumers can take as much as three weeks, though. A number of companies have tackled this problem by shipping e-commerce product in bulk to China’s Free Trade Zones (FTZs).
Since April 2016, however, the government has started tightening up its CBEC policies: eliminating tax concessions, imposing new customs clearance requirements, and drafting limited positive lists of nutraceuticals that may be sold through CBEC without registration.
It also argued that nutraceuticals sold through CBER but shipped to FTZs were effectively traded on Chinese soil, and hence subject to full registration. The government has granted companies using this route a year’s grace from May 2016 to find alternative business models.
Clarifying the market
With the regulatory system for nutraceuticals alternating between stringency and expediency, it is not surprising the market lacks a consistent identity.
The US-China Health Products Association (HPA) has “found calcium tablets being sold as OTC drugs, as health food products with a blue hat registration from CFDA and as general food”.
Most consumers in China “believe that health-food products are a type of medicine due to their history of being sold in pharmacies as OTC as well as some unscrupulous companies overstating their functions”, the association claims.
Accordingly, market estimates are hard to pin down. By 2017, Transparency Market Research expects China to be generating 39.5% or US$80.9 billion, of a total nutraceuticals market worth US$204.8 billion in the Asia-Pacific region. The US-China HPA put health-food sales in 2012 at around US$15.8 billion.
The new health-food regulations released in February 2016 should help to clarify the market while easing some barriers to entry, particularly for international players.
If the government has tightened its grip on products sold through CBEC, it is also offering less onerous and ingredient-based requirements for nutraceuticals previously subject to blue-hat registration.
The Administrative Measures on the Registration and Record Filing of Health Food, which took effect on 1 July 2016, introduce a twin-track system of registration and notification for different categories of health foods.
Fast-track notification applies to locally manufactured products with contents on a positive list of recognized health-food ingredients, as well as products imported into China if these contain nutrients on the positive list, such as vitamins and minerals.
Health foods in the first of these categories may be filed for notification with provincial FDA departments, which should further save on time and costs.
All other health-food products will be subject to centralized registration through the CDFA, although this process has been rationalized (e.g., the technical review and on-site inspection can now be conducted in parallel). Procedural requirements are more explicit, and timelines have been set for the various stages of registration.
Previously all non-CBEC health foods, whether imported or manufactured locally, had to go through the CFDA’s registration procedure.
This proved especially unattractive to foreign manufacturers. According to HKTDC Research, as of June 2016, the CFDA had approved 16,573 health-food products in total, of which 15,822 were domestically made and only 751 imported.
The tighter restrictions on CBEC sales and conditions for notification may encourage some multinationals to shift production into China and start building up multichannel distribution. That may also favor a shift out of supermarkets and other mass retail outlets into an emerging network of dedicated health-food stores.
Multinationals such as Amway have made considerable headway with a direct-sales model for nutraceuticals.
According to Jeff Crowther, executive director of the U.S.-China HPA, though, direct sales in China require substantial capital investment, while the Ministry of Commerce imposes heavy restrictions on licensing, due to sharp practices that led to a complete ban on direct sales between 1998 and 2005.
Crowther believes the premium-priced direct-sales model will begin to lose traction as a more structured nutraceuticals market develops in China.
According to HKTDC Research, health/food-product multinationals such as Procter & Gamble, Johnson & Johnson, Nestlé and Herbalife, as well as pharmaceutical manufacturers like Pfizer and GlaxoSmithKline, are also actively developing China’s nutraceutical market.
Local companies such as Wanji, Golden Sun, Infinitus, Hong Fu Loi and Dong-E E-Jiao are leading players in the traditional health-food segment, while Shanghai Jiaoda Onlly is a major local supplier of functional foods.
Quality and status
Multinational contenders in China can benefit from quality and status assumptions about higher-priced imported products, particularly those from western markets.
They can also target demographic segments concerned about, and willing to pay for, health maintenance, such as the burgeoning elderly population or younger urban women and men interested both in staying healthy and looking good.
A universal factor that will help drive growth in nutraceuticals, particularly as an alternative to westernized medicine, is the Yin-Yang balance central to Chinese culture, diet and Traditional Chinese Medicine.
That plays to gentle, restorative interventions more characteristic of nutraceuticals than chemical or biologic drugs. A balanced regulatory and marketing environment will do even more to set the Chinese market on course for sustained growth.