Imported Infant Formula
The National Development and Reform Commission of China (NRDC) – the state economy planner – announced new rules on Monday to tighten the sale of foreign infant formula into China while encouraging related government departments to help boost the competitiveness of domestic dairy companies. The “locally produced infant formula improvement action plan” for China’s infant formula sector seems directly aimed at wiping foreign players out. “Trying to maintain domestic-made infant formula a self-sufficient level of 60 percent or above.” The locally-produced infant formula currently houses 47 percent of market share.
The regulatory shock on infant formula imports into China hit dairy producers in both Australia and New Zealand, such as A2 Milk (ASX: A2m), Bellamy’s Organic(ASX: BAL) and smaller rivals Bubs Australia(ASX: BUB) and Wattle Health Australia(ASX: WHA). Because of fears the new rules could hurt a large proportion of sales as the Chinese government encourages its citizens to buy more local products, the A2 Milk share price was down more than 9% on Tuesday and has a subsequent effect on its market value since the start of this week. Similarly, Bubs Australia Stock declined 8 percent on Tuesday after crashing 7 percent on Monday.
The chief executive and founder of Bubs Australia, Kristy Carr, however, said: “the focus on encouraging Chinese players to move further into global supply chains would work in Bubs’ favour, given an established a relationship with Chinese formula group in March.” Beingmate is a Hangzhou based infant formula producer, closely aligned with the Chinese government. Kristy Carr expects to set up a joint venture with the company in future.
Stricter rules suggested in the plan
In order to reach the goal of 60 percent market share from a current level of 47 percent as well as restore the public confidence in China’s baby formula industry after 2008 Chinese milk scandal, the action plan calls for plenty of regulations in the infant formula sector, which will come up soon under the guidance of the state planner.
NRDC suggests the media’s cooperation to promote locally-produced formula and bans the advertising for formulas for infants aged 0-12 months. The plan also encourages mergers and restructuring to update the productivity of local formula firms with tax reduction incentives.
At the Chinese end of the supply chain, the plan suggests tougher regulation on cross-border e-commerce sales of infant formula and “zero tolerance” of importing unregistered infant formula; increased patrols and testing of formula in mum-baby stores. There will also be a tougher quality regime, with a new round of testing over the next three years.
Battling tighter regulation has been issues of Australian and Kiwi players for long. Foreign infant formula producers have been subject to an increasingly strict regulatory framework since 2015, with the significant change coming into force in January last year, whereby all formula products had to obtain registration before they could be sold in China. But it appears the new action plan suggested the government to conduct greater control of imports.
New rules over-interpreted?
However, analysts in China said Beijing had set similar targets to be more self-sufficient before that were not realised and commented on the new rules in that they should not be “over-interpreted”.
There had been no new specific regulations proposed or any amendments to the existing regulatory framework revealed in the plan and there was no timeframe set for the goal.
Song Liang, a dairy analyst in China, said: “I don’t think it will have a significant impact on overseas infant formula manufacturers, the plan is to show the central government’s desire to support domestic infant formula producers. For overseas sales agents and manufacturers, if you abide by China’s regulation, there should not be a problem.”
As the trade tension between the US and China escalates, it is also suspected that the plan was politically motivated, noting Australia had close ties with the United States and political and trade relationships were often linked.
In the plan, NRDC encourages both cooperation and fair competition between domestic and international companies and invited foreign producers to establish plants in China.
As the founder of Bubs Australia Kristy Carr mentioned, setting up a joint venture could be a preferred form of foreign direct investment, which can be passed by Chinese authorities.
Kristy Carr said: “Joint venture is really the type of kind of relationship between an international brand and a Chinese company that they are encouraging”.
By Frank Zhang
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