2014: An Overview of China’s Cosmetics Market & Regulatory Reform

China’s reform and opening-up policy have brought unprecedented opportunities to every industry sector across the nation. The cosmetics industry as one of the fastest growing sectors has come a long way in both sales revenue and legislative development over the past 20 years. Despite the impact of the global economic downturn and the economic growth slowdown in China, the gross sales revenue of the Chinese cosmetics industry still reached USD 25.9 billion (RMB170 billion) in 2012 ranking third after the EU and the US, of which 60% are of skin care products with cream and anti-aging products taking up a lion’s share, and 14% are of makeup products, emerging to be the second largest cosmetic stream with a 20% annual growth rate. Fragrances, represented mainly by top international brands such as Chanel, Dior, and Estee Lauder, however, only generated revenue of around USD 1.2 billion compared with USD 90 billion in Europe and USD 40 billion in the United States. It goes without saying that there is huge potential in this untapped market given that 20% of the world’s population is responsible for a mere 1% of the global fragrance consumption. The development plan of the Cosmetics Industry in the 12th Five-Year Plan has highlighted the importance of consumption, with hopes that it will boost the economy in China.

On the regulation side, China has undergone several stages of reform, moving towards a more sophisticated and standardized system, epitomized by the regulatory reforms in cosmetic product filing and registration, new ingredient registration and toxicology testing methods. Cessation of mandatory cosmetics animal testing for domestic non-special purpose cosmetics (although this reform is currently extended to domestic manufacturer only), reflects China’s relaxed stance on certain issues and its willingness to align itself with its international counterparts.

A stronger Chinese Yuan and a reduction in the import tariff from 6.5% to 5% since the beginning of 2013 coincides with the upward mobility and increased spending power of China’s consumers. The increase in disposable income; the rising awareness of environmental issues and health and wellness exercised by Chinese consumers is tempting more and more multinational companies to dip their toes in the waters of the Chinese market.

Market Overview: Global vs. China

The cosmetics and personal care industry consists of various products categories including skincare, shampoo and conditioner, color cosmetics, fragrance, etc. where skin care products represents more than 25% of the total sales, color cosmetics and shampoo and conditioners each makes up 20%, fragrance accounts for 10%, and the rest makes up the balance of global sales.

The largest cosmetics market so far is the United States with annual sales of USD 55 billion, following by Japan and China ranking second and third. Geographically, North America and Western Europe makes up a total 40% of the global cosmetics market, while the Asia pacific region alone accounts for 35% making up the largest single market share.

In contrast, China’s cosmetics market is dominated by foreign brands which hold a combine 90% of market share. The largest player is Procter & Gamble, accounting for 15% of the market, followed by L’Oreal and Beiresdorf. Children’s skin care is a growing category dominated by Johnson & Johnson with over 80% market share. Men’s skin care is another growing market with 20% annual growth rate.

The market structure in China is quite different in that skin care products accounts for 40% of the cosmetics and personal care market, compared to the average 25% seen in the global market. Although cosmetics sales in China ranked third globally, the annual sales growth is averaging 23.8%, higher than the average growth rate of the national economy, and far above the global cosmetic sales growth rate.

Recent Reforms & Issues

The long overdue reform of China’s cosmetics law was finally given the green light with the announcement of a revision of the overarching cosmetic law - the Cosmetics Hygiene Management Regulation (CHMR) on September 11, 2013. The reform encompasses the definition, classification and registration protocols for cosmetics, representing an overhaul of the regulatory system instead of simple refinement of certain clauses. The overhaul in part will greatly increase procedural transparency and facilitate both domestic and foreign industry investment.

Registration of New Ingredients

The new ingredients registration has been an ongoing issue due to the painfully long and demanding registration process. Data reveals that only 3 applications for new ingredients were approved out of 155 total applications during the 2008 to 2012 period. Excessive data requirements and technical documentation has stifled innovation and undermined the development of the industry.

Under the old registration system, once a new cosmetic ingredient is approved by the CFDA, all companies were free to utilize the same ingredient in their cosmetic products irrespective of the time and financial investments of the original registrant made during the R&D stage. The consequences of this bizarre lack of IP protection unsurprisingly impaired innovation in the industry and precipitated a market flooded by poor quality me-too products.

To cope with this issue, the CFDA announced a draft resolution to amend the registration of new cosmetic ingredients (NCIs) on Jan 23, 2014. Under the new scheme, registrants who submit complete registration dossiers are entitled to exclusive usage rights of the new ingredient until included in the Inventory of Existing Cosmetic Ingredients in China (IECIC) which extends a protection period 4 years after initial approval provided no adverse events occur during that period. After this all cosmetics companies can then freely access the data and utilize the new ingredient in their formulations. This new clause to some extent solved the problem of exposed of R&D research results yet poses a new challenge: Since the usage of new ingredients is exclusive to the registered companies, each subject company will have to submit compliance documents and test results for a single new substance. This causes duplication of testing that severely undermines the overall efficiency of registration. The draft has come into force on April 1, 2014 and it is hoped that this issue can be addressed through more detailed provision regarding data and costs sharing.

Cosmetics Filing & Registration

Cosmetics filing and registration in China has also been of a concern to many companies and interested parties. In addition to global generally accepted self-monitoring standards, various additional rules are imposed by the government as precautionary measures. This is not surprising as the fundamental paradigm of the overarching law CHMR largely relies on government control instead of corporate self-examination and emphasizes pre-market examination instead of post-market supervision. Under the current cosmetics registration scheme for domestic non-special purpose cosmetics (DNSP), a product cannot be placed on market for more than two months unless a filing certificate and mandatory animal testing results are obtained within the two-month grace period.

On Dec 16, 2013, the CFDA announced a drastic change in registration of the DNSP, detailed in the Requirement for Filing of Domestic Non-special Purpose Cosmetics. The new regulation stipulates that the previous pre-market filing certificates are no longer required; instead, a notification of product formula and sales packaging is requested through an online system supervised by the provincial FDA who would conduct a preliminary compliance check within 5 business days. The rest of the documents and testing results should be kept on records for post-market supervision by the provincial FDA. This amendment which comes into force on June 30, 2014 will not only improve the efficiency of product registration but also strengthen post-market supervision.

A strengthened market supervision system requires devolution of power from the CFDA to the local drug administrations. Regional capacity disparities and inconsistencies in supervision are yet to be resolved. Since most local drug administrations have just assumed supervisory responsibility but lack a thorough understanding of current laws and regulations, it is challenging to streamline the decentralization process.

Toxicology Tests & Alternative Methods

Animal Testing & ‘3Rs’

Toxicology testing is one of the most important parts of the cosmetics industry. Animal testing has been a gold standard testing method adopted by cosmetics companies for decades.  The EU’s comprehensive ban on animal testing and animal-tested products across Europe became effective in March 2013. This change is not only a simple response to an ethical issue but has ramifications for international business, science & technology and the global economy as well. The EU’s ban was soon echoed by several countries such as India, South Korea and China. An amendment in cosmetics laws was made in China to the extent that animal testing is no longer a mandatory requirement for domestic non-special purpose cosmetics as of June 2014. This announcement was embraced by advocates for animal-free testing and was highlighted by a major global Be Cruelty-Free China Campaign. In a press conference hosted by HSI and its partner Capital Animal Welfare Association, a local non-profit organization in China, Troy Seidle, HSI’s director of research & toxicology remarked: “Humane Society International is working around the globe to help countries to Be Cruelty-Free, but it is here in China that we see such enormous potential to end animal testing within the cosmetics industry. China is the key to change, and we’re looking forward to working with Chinese regulators, companies and scientists to see animal tests phased out. China’s adoption of the international best practices will lead the way in transforming cosmetics safety testing without animal suffering.”

The President of Capital Animal Welfare Association said: “Cosmetics animal testing is not only cruel, it is also unreliable. These are old-fashioned tests of questionable relevance to people. Modern state-of-the-art science is far better able to assure consumer safety. So ending cosmetics cruelty is good for people as well as animals and we urge China to do so as soon as possible.”

While celebrating progress made across the globe, the challenge faced by both the EU and the rest of the world is an advanced alternative method to animal testing. Currently, the ‘3R’ principle widely adopted by the European cosmetics industry provides guidance to the alternative methods. The ‘3R’ stands for replacement (of animals), reduction (in the number of animals used) and refinement (of techniques to alleviate or minimize potential pain, distress, and/or suffering to animals). The principle was highlighted in the 8th World Congress on Alternatives and Animal Use in the Life Sciences (WC8) held in Montreal in 2011. Considering the current scientific feasibility, only a few simple animal tests can currently be replaced by single cell culture alternative, a majority of ‘one-for-one’ replacement of animal tests is scientifically impossible in the short term due to limitations of knowledge and technology.

It is recognized that major challenges facing the development of alternatives are integrated testing methods and the validation of alternative methods. China’s major problem and a recurring theme are regional capacity issues. If devolution of supervision is a goal of the future then we can assume that regional disparities in technological capacities are likely to hinder national uptake of validated alternatives to animal testing. The integrated testing methods require an adoption of combination of various non-animal test methods instead of a single alternative method to replace a specific animal test and a data-sharing paradigm. Validation of alternative methods needs to demonstrate that the alternative approach is 1) relevant for its intended purpose, 2) able to produce consistent results within and between laboratories. The validation of alternative methods emphasizes the involvement of regulatory authorities in the development process at an early stage in order for the methodologies to be understood and accepted, and it requires open global communication and cooperation between the authorities, science institutions and manufactures.

Implication for Foreign Companies

Animal testing has been a major issue of concern for companies considering entering the Chinese market due to the fact that animal testing has always been a mandatory requirement for both domestic and imported cosmetics products. The recent regulatory reform of removal of the mandatory animal testing is certainly encouraging; however, it is only extended to domestic enterprises. Foreign enterprises are still faced with the same dilemma, but with more options to work around the law, for example, setting up a local manufacturing base or outsourcing production to manufacturers in China.

Hilary Jones, LUSH’s Ethics Director shared her viewpoints on behalf of LUSH, a pioneer and long-term advocate for ‘no animal testing’ company: “our basic stance is that as things stand at the moment, we cannot risk trading in China whilst the threat of animal testing hangs over our products. We would love to trade in China, because we know that we have many Chinese customers who shop with us when they are visiting London - but we cannot bring the products to their home country whilst there is a need for animal testing.”

Wendy Higgins, EU Communications Director of Humane Society International, corporate partner with LUSH Cosmetics also remarked: “LUSH won't be prepared to take any chance that animal testing could be conducted on their products. So whilst they of course welcome the revision of the regulations as a good step in the right direction, like HSI they want to see a complete ban on cosmetics animal testing and that must include post-market testing too. Only when those amendments are made can it be possible to guarantee that animal testing would not take place.”

LUSH and HIS both adopt a firm stance on the animal testing issue, and represent an industry voice requiring that China implements a full ban on cosmetics animal testing to both domestic and imported cosmetics products.

Conclusion

China’s cosmetics regulatory system is complicated and the subject of national and international criticism. It has been suggested that China should tear down administrative barriers hampering international trade and technological development, and to restructure its cosmetics laws in line with the EU standards and its global counterparts. The supervisory system should emphasize post-market self-regulation instead of excessive pre-market supervision. External pressure has prompted China’s system to modernize however Chinese regulators are proceeding cautiously given the current national condition and regulatory loopholes. A sound self-regulating system requires a high degree of social responsibility and conscience, which many domestic cosmetics companies lack. A stringent pre-market supervision has been China’s weapon in its battle to safely regulate and protect consumer rights.

As for the cosmetics animal testing and alternative methods, technology, education and major financial investment are key in the phasing out process. A set of internationally agreed criteria and processes for alternative test method validation has been established by the Organization for Economic Cooperation and Development (OECD) in cooperation with regional Centers for the Validation of Alternative Methods (CVAMs) in Europe, U.S. Japan, Korea and Brazil. Once an alternative method has been accepted as an official OECD Test Guideline, all member countries are required to accept the test results based on the “Mutual Acceptance of Data” (MAD) system, which is open to OECD governments and non-members like China. The implementation of the OECD alternative test methods in China requires hands-on training and continuing education to help Chinese authorities move from the mandatory animal testing to internationally accepted methods. It is hoped that China will eventually remove unnecessary requirements and barriers to trade and establish the same quality requirements for tests throughout OECD countries.