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| Operating Environment of the Chinese Healthcare Food Industry |
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According to China Economic Net, output from the Chinese healthcare industry was less than 4% of China's GDP in 2007, a proportion much lower than many other developing countries. The pharmaceutical industry had a total output of 600 billion yuan (US$ 80 billion) in 2007, up 15-16% from previous comparable period (pcp), among which included 50 billion yuan of health food sales. Overall, the pharmaceutical and health food industries in China had reached a bottom in 2007, and started a relatively strong recovery.
However, such a growth in the healthcare industry is closely related to the marginal effect from the fast growing Chinese economy, as well as consumers' enhanced attention to healthy living. On the other hand, foreign healthcare companies had made significant inroads in to China. For example, Amway alone had registered US$ 700 million sales in China in 2007, with a 30% profit margin, making China the fourth largest market for Amway. Procter & Gamble and Johnson & Johnson are also entering the Chinese market at a rapid pace. But the local Chinese healthcare industry is still feeling the pressure of low industry concentration, with the top ten players accounting for less than 25% of total industry output.
Favourable externalities
On the demand side, improved health awareness of Chinese consumers are fuelling the healthcare market, and the public's health demand are providing opportunities to the evolving health food sector. While there wasn't a healthcare industry in China twenty years ago, the fast growing Chinese economy and the aging Chinese society today will inevitably lead to a demand surge for health foods. And the healthcare system reform is also a driving force for the industry. As the government plans to increase its expenditure on low-income and rural population, people are very likely to increase their spending on health products. |
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There were a few industry-changing government initiatives implemented on the Chinese healthcare industry in 2007. These include advertising review procedures for medicine and health food products, advertiser credibility administration, health food grading criteria and health food regulatory authority restructuring. But due the implementation lag, most of the effects from these regulations could only be seen in 2008. The traditional promotional model of "winning by advertisement and conception" adopted by the healthcare industry is now facing headwind, and market rectification, innovation, entry threshold and consolidation will be the keywords for the industry operators in 2008.
The functional food and Chinese medicine food sectors are now in an unprecedented supportive period, underpinned by the government's renewed emphasis on heath food innovation, departmental resources from "The Eleventh Five Year Plan" and the Modern Chinese Medicine Program from the State Reform and Development Commission. As a result, it will assist the development of companies with innovative products, clear competition models and significant research activities.
The regulators' effort to rectify the health food industry may force many unqualified products to exit the market. While the government has been increasing its investment in the health foods industry in recent years, it also promulgated a series of tougher measures which demonstrated its objective to further regulate the market. For example, the Administrative Provisions for Health Food Registrations introduced in 2005 has lifted the industry's entry threshold and quality requirements. The Provisions removed some of the previous limits on product effectiveness and supported development of new efficacies and ingredients, so that the previous industry practice of "long on registration, short on R&D" and "long on conception, short on technical contents" could be rectified. The Provisions even retrospectively applied to products registered before the Provisions were introduced.
New comers to the market
China's pharmaceutical companies are also rushing to get exposure to the health food boom, as the pharmaceutical industry is in a period of regulatory transition, product mix upgrades and strategic transformation. Therefore, the vast market potential and development opportunities in the domestic health food market are expected to attract more pharmaceutical companies into the sector, and this could also be viewed as a breakthrough opportunity for some struggling pharmaceutical companies. In addition, with their existing R&D, production and sales capabilities, pharmaceutical companies in general possess strong competitive advantages, which may also contribute to product improvements in the health food industry.
Foreign health food brands are rapidly altering the Chinese market landscape. According to a recent report, in 2007, foreign healthcare brands had successfully achieved a 40% market share in China with only 7% of their product categories, and their market shares are likely to get bigger as more and more foreign brands will rush into the Chinese market.
Issues in the local industry
It is reported that annual R&D expenditure of the Chinese health food industry currently amounts to less than 1% of the industry's output, and most of these expenditure were used for product registration processes. Such a situation is dangerous for operating in an industry notorious for fierce competition and production differentiation. Among the local health food companies, 80% considered that health food products do not require technological contents, and 60% of them prioritise promotional concepts over product effectiveness in terms of success factors. The local health food industry is characterised by insufficient investments in innovative technologies and lack of development initiatives.
Chinese medicine foods also need a legitimate legal status. Many Chinese medicine-related health foods are now becoming more and more like ordinary health foods, with safe but unscientific formulations and controlled but uncertain effectiveness. At present, many popular Chinese medicine products in the market are promoted and positioned in the same way as health foods. If the government continue to be indifferent on health foods and Chinese medicine foods, development of the latter category will be trapped into a blind valley sooner or later.
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