By：Mark Schaub；Effie Liu；Tom Shi
Many Western cosmetics companies considering China are facing a dilemma: seek revenue or stick to their principles?
On one hand, China represents the single greatest market in the world for cosmetics – and one that is still growing at 10% a year . And there is more to come with a new high spending generation of Chinese consumers eager to look their best and with the disposable income to do so.
On the other hand, China still requires animal testing for cosmetic products which is not only problematic ethically but may also lead to a consumer backlash in established Western markets (such as Australia, Canada, European Union and many others which have banned animal testing).
All international cosmetics brands need a China strategy – so how to deal with this dilemma? Is it possible to be cruelty-free and be in China?
In short, the answer is not really.
There was much media attention when earlier this year the Gansu Medical Products Administration issued relevant documents which confirmed that the 2019 post-market testing for cosmetics in Gansu Province will not include animal tests. This was heralded in some quarters as an end to animal testing in China. This is not the case – this is perhaps most easily discerned by the fact that the documents were published by the Gansu Province level authority and not national authorities. Accordingly, a risk remains that post-market animal testing may still take place in China. This is not unusual in a country where authorities retain broad discretions as to how they proceed.
The good news though is that the situation is improving. Much of the impetus for such change is due to sentiment amongst Chinese consumers boosted with efforts by international bodies to combat animal testing. However, it is important for international bodies not to criticize Chinese positions but rather engage in dialogue to improve the situation. A future ban on animal testing in China will likely be due to a mix of dialogue, consumer attitudes and pressure on Chinese cosmetics companies that are wishing to go global.
Accordingly, although there are clear trends emerging it remains unclear when China will fully ban animal testing.
Therefore, until a full ban is in place, international cosmetics brands will need to consider to what degree they are comfortable in entering the Chinese market. At current, the most common ways international cosmetics brands skirt animal testing are either local (often limited) manufacturing or cross border e-commerce. Whether such options are truly considered cruelty-free is in the eye of the beholder. Some organizations and bloggers clearly believe not; others are more willing to recognize that progress has been made and differentiate between product testing and post-market testing.
The Options: One Country, Two Solutions for Cruelty-Free(ish)
As outlined above the two solutions used by international brands to avoid animal testing on cosmetics in China are local manufacturing; and selling overseas products to customers directly via cross-border e-commerce.
All cosmetics imported into China by way of general trade are required to conduct animal testing. There is, however, a range of products (non-special purpose cosmetics) that can be produced domestically without animal testing provided a risk assessment has been passed .
Special purpose cosmetic products include hair dye, perming, hair removal, spot removal, skin whitening, sunscreen, breast shaping, fitness and deodorant. Non-special purpose cosmetics are largely other types of ordinary cosmetics.
Accordingly, it is possible within China to manufacture a cosmetic product, file it with the National Medical Products Administration and enter the market without animal testing. This solution to avoid pre-market animal testing has been available for years but in practice rarely pursued. Many international cosmetics brands decided the potential reputational damage was too great due to the risk of post-market testing coupled with concerns about whether their Chinese suppliers would strictly comply with no animal testing requirements.
Increasing interest in local manufacturing is mainly due to initiatives in zones where the authorities are very clear about the importance of excluding animal testing; increased transparency in the supply chain; and authorities' increasing reluctance to use animal testing. Indeed, to our knowledge, no post-market animal testing has taken place in recent years. Accordingly, although it cannot be excluded the risk of post-market testing is remote. In our opinion, such testing is only likely to occur in the case of a suspected serious public health issue.
Brands wishing to manufacture cosmetic products locally in China can either: 1) set up a manufacturing factory in China; or 2) outsource the manufacturing to an OEM manufacturer in China; or 3) engage in a private label arrangement whereby the cosmetics brand sources ready-made local products which it then labels as its own.
Option 1: Own Manufacturing
Perhaps the obvious way for an international cosmetics brand to produce locally in China would be to set up a dedicated factory. However, this can be time consuming and capital intensive.
In particular, cosmetics manufacturing is technically challenging and requires a series of operational licenses. The days when international companies established manufacturing operations in China to profit from lower production costs and loose local policies are long gone. In 2019 international brands are establishing manufacturing operations in China to access the local market rather than to export.
Option 2: Co-manufacturing (OEM)
OEM contracts has been a popular way for international companies in a variety of sectors to localize production in China. Cosmetics are no exception.
The OEM option is appealing in a number of ways.
Firstly, working with an OEM is a much quicker and less capital intensive approach compared to setting up one's own manufacturing capacity. Secondly, in practice the local OEM will help substantively shorten the supply cycle to the local market. Thirdly, the OEM's insights, detailed knowledge on local consumers and local connections can provide a closer perspective for international brands to understand the local market.
In practice, a cosmetics product can be considered domestically manufactured if at a minimum the bottling process has conducted and completed in China. Therefore, it is easier and more straightforward for international cosmetics companies to qualify their products as "domestic" by ensuring the crucial "local" element with the final bottling being done by a local manufacturer within China. Such approach, while enabling international cosmetics brands to enjoy an exemption from animal testing will also ease concerns international brands may have about the OEM model such as:
IP protection – this is crucial for cosmetics companies – in addition to branding they rely upon the protection of their intellectual property such as formulas and patented ingredients. Restricting the role of the local OEM manufacturer to the final step of bottling substantially reduces the risk of IP leakage.
Quality control – under this model international brands would be able to produce most of the product outside China thereby maximizing control over the production process (i.e. quality control; ensuring proper ingredients etc.).
Option 3: Private Label
Another option for an international cosmetics company is to private label a ready-made, tailored product that has been manufactured locally. This can be a means by which to launch a new product line in China relatively quickly or expand brand awareness in the local market.
However, in any OEM arrangement it is more to have a good partner than a good contract. The single best way to minimize risk is to find an experienced supplier of good repute. But please make sure you have a good contract as well.
Cross-border e-commerce (CBEC) allows international cosmetics brands to enter the Chinese market while still keeping current production arrangements in place (i.e. outside of China).
Cosmetics products shipped through CBEC are exempt from filing and registration requirement and thus no animal testing is required. According to the Notice on Improving the Supervision and Regulation over Cross-border E-commerce Retail Imports (<关于完善跨境电子商务零售进口监管有关工作的通知>) ("Notice"), the requirements of licensing, registration or filing for first-time import of goods do not apply to retail imports into China through CBEC and such imports shall be regulated as goods imported for personal use. It is similar as buying cosmetics when visiting Paris and putting it in your luggage before travelling back to China.
This exemption only applies to purchases via a third-party CBEC platform operator (which must be a third party platform registered with the PRC company registration authority). Therefore, international brands selling directly to Chinese consumers through their own website or an overseas internet platform are not exempted.
Under the CBEC model, a foreign cosmetics company selling to Chinese consumers, as the CBRE retail importer according to the Notice, shall be responsible for product quality control, consumer protection, product safety and must appoint a qualified domestic company to be responsible for relevant declarations and such local company shall be jointly and severally liable for any civil liability with the foreign cosmetics company.
However, the risk of animal testing is not entirely eliminated under the CBEC model. Pursuant to the relevant PRC laws and regulations, the Chinese Customs is authorized to take random inspections of the goods imported via CBEC and animal testing is not explicitly ruled out from the methods that could be used by the Customs during such inspections. To our knowledge there are no reports of animal testing being conducted on imported cosmetics categorized as being "for personal use" although a clear ban does not yet exist, and this may, to a certain degree, ease the concerns of international brands.
There is a clear trend in China away from animal testing. This is due mainly to changing sentiment on the part of Chinese consumers. Local authorities across China are developing cruelty-free programs to entice international brands into China.
However, the system in China tends to allow authorities broad discretions. Accordingly, those awaiting a clear legal prohibition across the whole country may be waiting a long time.
However, brands torn between revenue and conscience may consider whether cross border e-commerce or producing locally are possible solutions. Any brand with great ambitions for China will likely need to pursue domestic production. In addition, domestic production may allow brands to tweak products for Chinese consumer trends. The risk in this regard is that product localization may not receive a warm welcome from Chinese consumers. Many still have great enthusiasm for imported cosmetics. This is especially the case in respect of luxury or organic cosmetics brands.