Jeff Crowther11.01.08
China's dietary supplement or nutraceutical industry began approximately 20 years ago. Today it is estimated to be worth approximately $6 billion in annual sales, according to the China Health Care Association, which is an association attached to China's Ministry of Health. Although the industry is young compared with the U.S., and about one-fourth its size, the potential for sizeable growth is significant due to China's rapid economic growth and increasing consumer demand for natural products that promote health and overall wellness.
China's fast paced economic growth, which is currently at 11% (GDP real growth rate), together with the establishment of a large consumer base has enabled the expansion of many industries, including dietary supplements. Since China joined the World Trade Organization (WTO) in 2001, many corporations have aspired to enter this market of 1.3 billion people. In reality, however, the actual size of the consumer base is roughly 200-250 million.
According to the Chinese Academy of Social Sciences, the middle class accounted for 19% (247 million) of the population in 2003 and is expected to increase to 40% (520 million) by 2020-larger than the current combined populations of the U.S., Canada, the U.K. and Japan. Tracking retail sales figures is an important indicator of consumer confidence and overall market vitality. Recently, China's National Bureau of Statistics reported that retail sales of consumer goods in July 2008 climbed nearly 22% from the previous year and continues to claim a stable consumer confidence rating. Figure 1 (next page) shows the cities in China with the most disposable income.
As of 2006, there were 23 different countries and regions importing products that would be considered dietary supplements into China. The top five countries/regions in order by market share are the U.S., Hong Kong, Japan, Korea and Canada. The remaining share was divided almost equally among the 18 other countries and regions.
U.S. manufacturers of dietary supplements will continue to enjoy an advantage over their competitors due to consumers' strong desire to purchase dietary supplements manufactured in the U.S. In fact, the U.S. is the only country with a strong trade association (The Natural Products Association) that is partnered with the U.S. Department of Commerce and is dedicated to the continued growth of U.S. dietary supplement exports to China. Although the U.S. is the dominant import player in this industry, with a 53% share of the import market, it maintains only a 21% share of the overall market.
While China may appear as an ideal place for U.S. dietary supplement manufacturers to expand their business, there are some issues to consider. First, is there truly a need for dietary supplements in China? Second, is the current regulatory system conducive to the importation and expansion of this industry?
The need and potential could be demonstrated by the following: In 2003, SARS (Severe Acute Respiratory Syndrome) captured the attention of the entire world and caused China to suffer physically, as well as economically. Since there was no treatment readily available, people began taking great interest in products that could safeguard their well-being. This newfound interest encouraged consumers to purchase dietary supplements that were known to enhance the immune system. As a result, the immune support category witnessed substantial increases in sales during this time and was able to gain a host of new consumers that continue to use these products today.
In 1979, China instituted the "One Child Policy." Most recently, the government decided to uphold that policy in crafting its five-year plan (2006-2010). As a result, parents are willing to spend extra money to ensure their child has every advantage in life, especially when it comes to health and nutrition. Due to what has become known as "the little emperor" phenomenon, the infant and child category represents one of the top sectors among health foods and supplements.
At the other end of the population spectrum is the elderly. According to the U.S. Census Bureau, China's population age 60 and above was more than 142 million in 2005. The bureau estimates that by 2025 this demographic will more than double in size to approximately 290 million. Nutritional products will lead the way for sustaining the health of many of these individuals. Age-related deficiencies can lead to catastrophic health and lifestyle costs, many of which could be prevented through dietary supplement use.
A United Nations report published in 2004, titled "Vitamin and Mineral Deficiency: A Damage Assessment Report for China," estimated that 20,000 children die annually from nutrition deficiencies that could be prevented or treated by taking vitamin and mineral supplements. Other studies with less dire findings report that both seniors and children are often deficient in essential nutrients such as B vitamins, vitamin C and calcium.
Although the need and potential are quite evident, the extent of actual growth is extremely dependent on the regulatory system. Strict, overbearing regulations will of course stifle the growth of any industry. In relation to China, this is definitely the case. China is one of the most restrictive and chaotic markets to enter for dietary supplements. Because the industry is relatively new, existing regulations and classifications remain somewhat ambiguous. For instance, unlike in the U.S., the term "dietary supplement" usually only refers to vitamins or minerals, not herbs, amino acids or other specialty nutrients. There is no definitive list of how an ingredient might be regarded-food, dietary supplement, TCM (traditional Chinese medicine) or drug-and approvals are made on a case-by-case basis and rely heavily on how the registration paperwork is filled out.
In 2003, oversight of dietary supplements changed over from the Ministry of Health to the State Food and Drug Administration (SFDA). Many industry experts saw this as a positive move, which would enhance the regulatory environment and the policing of it. Since taking control of the industry, the SFDA has done much to rid the market of many unscrupulous companies making false claims and inferior products. At the same time, however, the regulatory environment the SFDA created to rid the market of these companies has made entering the market extremely difficult.
Earlier this year, the state counsel placed SFDA under the auspices of the Ministry of Health, a move that was expected due to SFDA's inability to police itself. Over the last few years, SFDA has made the headlines numerous times for allowing tainted medicines and other related drugs into the market. The former head of the SFDA from 1998 to 2005, Zheng Xiaoyu, was executed in July 2007 as a result of such scandals. The reshuffle of agencies gives regulators a chance to review their systems and revise where necessary.
Prior to market entry, manufacturers must register dietary supplements with the SFDA. The process requires enormous investments of both time and money. A typical registration can take up to two years to complete and can cost as much as $50,000. If the ingredient or product is new to the market, however, it can take as long as five years and up to $500,000. After market entry, the registration is valid for five years and then must be renewed.
The SFDA has a list of 27 approved functional claims that marketers of dietary supplements are allowed to make once the product is registered. The process involves a lengthy testing protocol, including animal and human studies. It is very similar to the approval process for pharmaceuticals.
There are two main issues with this current list. The first is that the list of 27 functions is non-comprehensive with regard to what dietary supplements are known to support. For example, glucosamine and chondroitin ingredients have years of solid scientific research from a variety of international sources to support human joint health, but "joint health" is not an approved function. Second, regardless of whether or not an ingredient has been tested and known to have a specific function, it nevertheless has to go through all testing procedures every time an application is submitted.
SFDA has potency-level restrictions for nutritional supplements that do not always coincide with current dietary supplement research. For example, the latest research indicates that pregnant women should supplement their daily diets with the following substances to meet their increased nutritional needs: calcium (Ca) 1300 mg, iron (Fe) 25 mg and folic acid (acidum folicum) 800 mcg. SFDA's "Regulations for Application and Evaluation of Nutritional Supplements" subsection IV states, "Supplements should be reduced by 1/3 to 2/3 of the recommended dosage for pregnant women." Per SFDA regulations on daily intakes, calcium would be reduced by 50%, iron by 48% and folic acid by 67%. With potency limitations in place, there is no room for the industry to adjust potencies to match current research.
China's dietary supplement industry has great potential, featuring a growing number of consumers interested in purchasing products that will enhance their overall health. Even though the current regulatory environment appears grim, officials and industry leaders are beginning to realize the benefits of reorganizing the system to allow for appropriate regulations and oversight, as well as transparency and healthy development.
As a result of WTO entry, industry inefficiencies and problematic systems, China's regulators are all too familiar with amending its laws and operating procedures to be more in sync with the international community. Consequently, the dietary supplement industry is finally getting to the front of the reorganization line. The Natural Products Association and its partner, the U.S. Department of Commerce, will be continuing cooperative talks with China's regulators well into 2009. The future of China's dietary supplement industry is bright. In fact, many experts remain confident that it will become the largest market for dietary supplements by 2020.
China's fast paced economic growth, which is currently at 11% (GDP real growth rate), together with the establishment of a large consumer base has enabled the expansion of many industries, including dietary supplements. Since China joined the World Trade Organization (WTO) in 2001, many corporations have aspired to enter this market of 1.3 billion people. In reality, however, the actual size of the consumer base is roughly 200-250 million.
According to the Chinese Academy of Social Sciences, the middle class accounted for 19% (247 million) of the population in 2003 and is expected to increase to 40% (520 million) by 2020-larger than the current combined populations of the U.S., Canada, the U.K. and Japan. Tracking retail sales figures is an important indicator of consumer confidence and overall market vitality. Recently, China's National Bureau of Statistics reported that retail sales of consumer goods in July 2008 climbed nearly 22% from the previous year and continues to claim a stable consumer confidence rating. Figure 1 (next page) shows the cities in China with the most disposable income.
As of 2006, there were 23 different countries and regions importing products that would be considered dietary supplements into China. The top five countries/regions in order by market share are the U.S., Hong Kong, Japan, Korea and Canada. The remaining share was divided almost equally among the 18 other countries and regions.
U.S. manufacturers of dietary supplements will continue to enjoy an advantage over their competitors due to consumers' strong desire to purchase dietary supplements manufactured in the U.S. In fact, the U.S. is the only country with a strong trade association (The Natural Products Association) that is partnered with the U.S. Department of Commerce and is dedicated to the continued growth of U.S. dietary supplement exports to China. Although the U.S. is the dominant import player in this industry, with a 53% share of the import market, it maintains only a 21% share of the overall market.
Need and Potential for Growth
While China may appear as an ideal place for U.S. dietary supplement manufacturers to expand their business, there are some issues to consider. First, is there truly a need for dietary supplements in China? Second, is the current regulatory system conducive to the importation and expansion of this industry?
The need and potential could be demonstrated by the following: In 2003, SARS (Severe Acute Respiratory Syndrome) captured the attention of the entire world and caused China to suffer physically, as well as economically. Since there was no treatment readily available, people began taking great interest in products that could safeguard their well-being. This newfound interest encouraged consumers to purchase dietary supplements that were known to enhance the immune system. As a result, the immune support category witnessed substantial increases in sales during this time and was able to gain a host of new consumers that continue to use these products today.
In 1979, China instituted the "One Child Policy." Most recently, the government decided to uphold that policy in crafting its five-year plan (2006-2010). As a result, parents are willing to spend extra money to ensure their child has every advantage in life, especially when it comes to health and nutrition. Due to what has become known as "the little emperor" phenomenon, the infant and child category represents one of the top sectors among health foods and supplements.
At the other end of the population spectrum is the elderly. According to the U.S. Census Bureau, China's population age 60 and above was more than 142 million in 2005. The bureau estimates that by 2025 this demographic will more than double in size to approximately 290 million. Nutritional products will lead the way for sustaining the health of many of these individuals. Age-related deficiencies can lead to catastrophic health and lifestyle costs, many of which could be prevented through dietary supplement use.
A United Nations report published in 2004, titled "Vitamin and Mineral Deficiency: A Damage Assessment Report for China," estimated that 20,000 children die annually from nutrition deficiencies that could be prevented or treated by taking vitamin and mineral supplements. Other studies with less dire findings report that both seniors and children are often deficient in essential nutrients such as B vitamins, vitamin C and calcium.
Regulatory Background
Although the need and potential are quite evident, the extent of actual growth is extremely dependent on the regulatory system. Strict, overbearing regulations will of course stifle the growth of any industry. In relation to China, this is definitely the case. China is one of the most restrictive and chaotic markets to enter for dietary supplements. Because the industry is relatively new, existing regulations and classifications remain somewhat ambiguous. For instance, unlike in the U.S., the term "dietary supplement" usually only refers to vitamins or minerals, not herbs, amino acids or other specialty nutrients. There is no definitive list of how an ingredient might be regarded-food, dietary supplement, TCM (traditional Chinese medicine) or drug-and approvals are made on a case-by-case basis and rely heavily on how the registration paperwork is filled out.
In 2003, oversight of dietary supplements changed over from the Ministry of Health to the State Food and Drug Administration (SFDA). Many industry experts saw this as a positive move, which would enhance the regulatory environment and the policing of it. Since taking control of the industry, the SFDA has done much to rid the market of many unscrupulous companies making false claims and inferior products. At the same time, however, the regulatory environment the SFDA created to rid the market of these companies has made entering the market extremely difficult.
Earlier this year, the state counsel placed SFDA under the auspices of the Ministry of Health, a move that was expected due to SFDA's inability to police itself. Over the last few years, SFDA has made the headlines numerous times for allowing tainted medicines and other related drugs into the market. The former head of the SFDA from 1998 to 2005, Zheng Xiaoyu, was executed in July 2007 as a result of such scandals. The reshuffle of agencies gives regulators a chance to review their systems and revise where necessary.
The Registration Process
Prior to market entry, manufacturers must register dietary supplements with the SFDA. The process requires enormous investments of both time and money. A typical registration can take up to two years to complete and can cost as much as $50,000. If the ingredient or product is new to the market, however, it can take as long as five years and up to $500,000. After market entry, the registration is valid for five years and then must be renewed.
The SFDA has a list of 27 approved functional claims that marketers of dietary supplements are allowed to make once the product is registered. The process involves a lengthy testing protocol, including animal and human studies. It is very similar to the approval process for pharmaceuticals.
There are two main issues with this current list. The first is that the list of 27 functions is non-comprehensive with regard to what dietary supplements are known to support. For example, glucosamine and chondroitin ingredients have years of solid scientific research from a variety of international sources to support human joint health, but "joint health" is not an approved function. Second, regardless of whether or not an ingredient has been tested and known to have a specific function, it nevertheless has to go through all testing procedures every time an application is submitted.
SFDA has potency-level restrictions for nutritional supplements that do not always coincide with current dietary supplement research. For example, the latest research indicates that pregnant women should supplement their daily diets with the following substances to meet their increased nutritional needs: calcium (Ca) 1300 mg, iron (Fe) 25 mg and folic acid (acidum folicum) 800 mcg. SFDA's "Regulations for Application and Evaluation of Nutritional Supplements" subsection IV states, "Supplements should be reduced by 1/3 to 2/3 of the recommended dosage for pregnant women." Per SFDA regulations on daily intakes, calcium would be reduced by 50%, iron by 48% and folic acid by 67%. With potency limitations in place, there is no room for the industry to adjust potencies to match current research.
Conclusion
China's dietary supplement industry has great potential, featuring a growing number of consumers interested in purchasing products that will enhance their overall health. Even though the current regulatory environment appears grim, officials and industry leaders are beginning to realize the benefits of reorganizing the system to allow for appropriate regulations and oversight, as well as transparency and healthy development.
As a result of WTO entry, industry inefficiencies and problematic systems, China's regulators are all too familiar with amending its laws and operating procedures to be more in sync with the international community. Consequently, the dietary supplement industry is finally getting to the front of the reorganization line. The Natural Products Association and its partner, the U.S. Department of Commerce, will be continuing cooperative talks with China's regulators well into 2009. The future of China's dietary supplement industry is bright. In fact, many experts remain confident that it will become the largest market for dietary supplements by 2020.
