Summary of fears

Below is a summary of issues that has resulted in fear recently:

Increased tax

Products bought online and imported into China with value over 500Y no longer have a 10% parcel tax, but instead have a 11.9% import tax. The net difference is a 1.9% additional tax.

This tax change was designed to elimimate the competitive advantage of offshore retailers who avoid taxes that are imposed on local sellers.

Remember a few years ago Gerry Harvey (from Harvey Norman) was complaining about people importing goods from overseas that bypassed taxes and therefore disadvantaged local sellers. China have actually acted upon this issue rather than the Australian government doing nothing. It's hardly China trying to stop infant formula from being imported into the country.

Approved list

China recently introduced a list of products that can be sold online via foreign websites and then imported. Infant formula was on this "approved" list of products.

The list of approved products contains "normal foods" and no "health" foods. Infant formula is a "normal" food and therefore not subject to a product registration process that can take 2-4 years.

Infant formula is already highly regulated in China to improve food safety and tighten supply chains:

• The manufacturer of all infant formula brands sold in China must have a Certification and Accreditation Administration of the People's Republic of China (CNCA). As this is a lengthy process, the barrier to entry for infant formula in China is  already high. BAL's manufacturer received a CNCA in 2014.
• China recently introduced a food safety law that limits manufacturers to selling a maximum of three brands in China.

Australian Government crackdown on daigous

Exporting of baby formula up to 10kg is unregulated in Australia. Exports over 10kg must be sourced from registered export establishments, have a health certificate and meet all of China’s import requirements. The Australian government is targeting commercial quantities of infant formula being sent and not small parcels.

It's not in the interest of the Australian government to prevent sales of goods to overseas, however, it is in the interest of health and safety to make sure that commercial quantities of infant formula meet strict standards. This further enhances Australia's reputation as an origin of safe products.

In the event that the daigous business is reduced as a result of the Chinese government preventing parcels or travelers bringing infant formula into the country, this will actually benefit BAL. The Chinese who rely on daigous/travelers for their supply of formula would therefore need to use authorised methods of buying infant formula, such as online stores and retail stores in China. These revenue streams are a much higher margin for BAL.

The idea that the Chinese are going to go back to buying locally produced infant formula is unrealistic. If you have ever used Weibo or read mothers forums you'll see how prevalent this view is.

The Chinese middle/upper class are price "inelastic" and "Chinese mothers spend a higher proportion of their income on infant formula than we would in Australia. They also do far more research. “So brands [that have] a point of difference — are doing well against other brands that struggle to have that point of difference." (Peter Nathan, A2 CEO).

The current "uncertainty" about regulation is once again reminding the Chinese that their country has ongoing food safety issues. They are reminded of why imported formula is popular in the first place.