China Braces for Foreign Competition

China’s entry to the World Trade Organization will have a tremendous impact on its fast-growing cosmetics industry, put pressure on domestic brands and rewrite regulations, according a recent article by Reuters.

Yet, leading domestic manufacturers insist they can outperform foreign competitors in the US$2.4 billion-a-year market by seeking acquisition targets and reshaping its sales system.

“There are about 3000 cosmetics-making companies in China. Some are worth being acquired,” Zhou Qiying, executive director and general manager of Shanghai Jahwa , said recently in Shanghai. “We are in talks with some of them.”

Jahwa is 28.15% controlled by Hong Kong-listed herbal medicine group SIIC Medical Science and Technology (Group), which is in turn owned 63.93% by blue chip conglomerate Shanghai Industrial Holdings

China’s entry to the World Trade Organization, expected to be formalized next month, will be a boon to foreign cosmetics makers because it will be required to gradually cut import tariffs on cosmetics products to about 15% from the current 28-35%, Zhou said.

Foreign brands, including imports and products sold by foreign-invested firms in China, already make up 40% of the domestic market.

WTO membership will also force China to abolish rules that do not conform with international practices, which effectively limit imports of cosmetics and personal care products and prevent foreign cosmetics firms from opening chain stores in China.

Among rules to be phased out are Chinese government licenses for domestic and foreign cosmetics makers, requiring them to present results of tests on animals of their products, a practice banned in some countries.

Moreover, local producers, including Jahwa, must be cautious about buying imported raw materials from domestic agents, as some of these products may have patent-related problems

China has agreed to phase out geographic restrictions for foreign retailers after WTO entry, and there will be a great increase in the number of privately-owned wholesale companies in the coming years, he said.