By:Chen Bing, Dai Enchao, Gui Siyu
It has been years but many people might still recall the melamine scandal. As part of the efforts to rebuild the food safety system, infant formula registration was firstly introduced in the Food Safety Law (2015). This registration mechanism aims to enhance the safety of the formula industry by setting higher thresholds for infant formula manufacturers, and kicking out those lack sufficient capabilities in safety control and technologies.
Apparently, this is not an easy task, as it nearly reshaped the benchmark for all infant formula companies, both domestic and international. CFDA (now being restructured in State Administration for Market Regulation) has promulgated a series of registration rules, implementation notices, protocols, transition polices over the years, and in the end the final and official deadline was set as 1 January 2018, after which no infant formula products can be sold through general trade without formula registration.
Please refer to our previous articles (see links ) in case you would like to know more details of the infant formula legal rules and their evolution.
Observations of Registration Status
Based on the published information from CFDA, here are our observations.
By the date of May 19, 2019, CFDA has granted registration certificates to over 162 companies for 1253 formulas.
Most of the big infant formula companies have obtained registration for their formulas. For companies who have only one plant, they more tend to reserve a few quotas for future applications.
The registration is a complicated process with large amounts of documents to be prepared and provided to the relevant authorities. More than 8 months shall be anticipated to complete the process.
CFDA has wide discretion. CFDA official will conduct on-site review of the facilities during the application process, which also applies to offshore plants of international dairy companies. This is definitely uncommon, as Chinese authorities normally will not exercise any substantial jurisdiction outside China.
It appears CFDA granted registration to most of the applications. CFDA also published a few rejection cases. This is also not very common, because usually in practice the authorities will request an applicant to withdraw the application or simply not accept the application if the conditions are not met. The published rejection cases are all international companies but this does not mean only international companies are targeted.
Most of the brands of those registered infant formulas are either owned by the plant, or by companies that control the corresponding plants. Despite that, there are a limited number of exceptions.
Situation and Issues
Directly or indirectly, the infant formula registration requirement has precluded many companies that do not have safe manufacturing capabilities from continuing operation of infant formula business. It should be noted that Chinese authorities do not appreciate any "clever" players who concentrate on promotion of brands rather than improving the quality and safety of the products. This is also one of the reasons that the application must be initiated and applied by manufacturing plants.
Due to the registration requirements, here is the situation.
Many of the brands still have not yet received registration for their formulas. This could be because of the long and complicated process for application, or due to other reasons, for example the formula or the facilities cannot meet CFDA standards.
Some companies simply are not qualified for formula registration. So for these companies they just cannot obtain such registration in their own name.
In addition, many companies that are capable of or already have obtained formula registration might want to engage in strategic cooperation with a third party or restructuring its infant formula business. Or, an entity disqualified for infant formula registration might intends to cooperate with a company that is qualified or has already obtained such registration. Under such scenarios, evaluation and arrangement of formula registration is a critical matter.
Solutions and Pitfalls
The following solutions might not be applicable to all types of companies. Each company struggling with the formula issue needs a tailored guide map.
Cross-Border E-Commerce (CBEC) is still an option
After years of uncertainty and various conflicting rules, finally we are looking at a seemingly stable period, more or less. By the end of last year, CBEC regulators including MOFCOM issued a series of notices and rules governing CBEC model, which are widely referred to as the New CBEC Policies. The New CBEC Policies officially cancelled the registration requirement that infant formula sold through CBEC must have infant formula registration certificate. So at least for the near future CBEC is still a legitimate option for international companies that still have not obtained formula registration. Accordingly these companies might need to pay attention to new requirements under New CBEC Policies.
For those interested to know more about CBEC, please refer to know our previous articles with links in footnote.
Infant formula registration is irreplaceable
This section is not about solutions. Though CBEC is a feasible approach, infant formula registration enjoys advantages that CBEC can hardly offer. There are apparent limitations with respect to CBEC model, no matter in terms of supply quantity or consuming experience. Further for Chinese consumers who prefer international brands, they would be much more comfortable to buy those brands that have been registered with CFDA, after all this is a competitive market. Further CBEC is still regulated under changeable polices, which make it much more vulnerable than the general trade.
So companies that have a long-term China strategy should factor into consideration the formula registration, rather than solely relying on CBEC.
Other options? Risk Level?
Yes, but this should be pursued very cautiously. The concept of alternative solutions is not a myth. Basically it is about how to cooperate with a company with registered formulas or capable of obtaining registered formulas legitimately. It must be noted this option could involve a risk of disastrous levels if the option is not structured carefully and sophisticatedly.
Early this May a famous Australian brand was reported to collaborate with another offshore dairy plant in order to obtain a formula registration. According to the report, the formula registration was applied in the name of the plant while the promotion and sales seem to be controlled by the brand company. The report indicated that such act could "mislead the consumer" and "goes against the intention of formula registration". Please see the link in footnote for more details of the report.
If the facts in the report are true, a much more fundamental issue is such arrangement might violate the legal requirement of prohibiting OEM or co-man arrangement. OEM or co-man arrangement are quite common in other countries but have be prohibited by CFDA in infant formula industry years ago. It must be aware that this prohibition still stands. There is no explicit rule indicating such prohibition only applies to domestic companies in China.
Accordingly international companies getting used to OEM arrangements should be very cautious when initiating similar arrangements, and seek advice from legal counsel to find an appropriate solution to mitigate the risk, rather than building the business model on a shaky arrangement. The risk would be higher in case a domestic company would like to try this or similar approach. Accordingly various factors shall be taken into consideration to make sure the basis of business model is in line with the relevant laws and regulations. Generally speaking, a systematic fire-wall, from trademark, sales, to manufacturing, should be established if such model will be considered.
In summary, formula registration has become a fundamental part of operation for those infant formula companies. Companies should be prudent in this regard and take formula registration into consideration in all the major transaction arrangements, to avoid systematic risk incurred to their business operation.
Note : before publication of this Article, Seven ministries including NDRC under the PRC State Council jointly issued Action Plan of Promoting Domestically Produced Infant Formula Milk Powder ( in Chinese 国产婴幼儿配方乳粉提升行动方案 ) .The Action Plan covers nearly all the major aspects of infant formula supervision, from production, sales, storage, financing, to import and export, etc.. Among other things, it specifically mentions, "strive to maintain self-sufficiency level of infant formula milk powder to be over 60%", and "strengthen administration on imported infant formula and CBEC", promotion of industry restructuring by M&A and phasing out those relatively small--sized companies. Feel free to reach out us if you needs to know more details of this new policy.
Notice on the transition period for formula registration of infant formula milk powder products (No.160 of 2016) China Food and Drug Administration (now being restructured in State Administration for Market Regulation)Notice on the execution date of formula registration for imported infant formula milk powder products (No. 101 of 2017) General Administration of Quality Supervision
New Era for Infant Formula in China, Jan 23, 2018. https://www.kwm.com/en/cn/knowledge/insights/new-era-for-infant-formula-in-china-20180123
Time to Act – Infant Formula Registration Entering Transition Period, Nov 2, 2016. https://www.chinalawinsight.com/2016/11/articles/restructuring-insolvency/time-to-act-infant-formula-registration-entering-transition-period/
Infant Formula Registration Rules Finally Settled Down, June 16, 2016. https://www.chinalawinsight.com/2016/06/articles/healthcare/infant-formula-registration-rules-finally-settled-down/
China Cross-border Ecomm: Intentions Become Clearer, May 16, 2017. https://www.chinalawinsight.com/2017/05/articles/corporate-ma/china-cross-border-ecomm-intentions-become-clearer/
Respite or False Dawn: MOFCOM Hints at Softening of Tough PRC E-commerce Policies, March 27, 2017.
Exporters of the World Rejoice – PRC Customs issues e-commerce reprieve, May 27, 2016. https://www.chinalawinsight.com/2016/05/articles/international-trade-wto/exporters-of-the-world-rejoice-prc-customs-issues-e-commerce-reprieve/
"Keep Calm and Carry On": Keeping up with China's changing rules for cross-border e-commerce, May 9, 2016.
New Challenges in China Cross-border E-commerce, April 13, 2016.https://www.chinalawinsight.com/2016/04/articles/corporate-ma/new-challenges-in-china-cross-border-e-commerce/
The renamed Viplus milk powder brings the doubt of Bellamy's "surrogacy" (in translation), 《维爱佳奶粉更名 引出贝拉米"借腹生子"之疑》，Beijing News, May 8, 2019. http://www.bjnews.com.cn/feature/2019/05/08/576737.html