Gray Market Cosmetics in China

China’s enormous market is the second-largest cosmetics market in the world. The Chinese beauty and personal care market is booming, and so is the demand for high-end, luxury cosmetics, especially skincare products.

International cosmetic brands may find their products sold as gray market goods in China. Yet, it is usually not easy to combat gray market goods because they are not counterfeit goods.

 

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International skincare brands in China

The top cosmetic brands in China include foreign companies alongside domestic brands. Out of the imported beauty products, half are Japanese and Korean. Brands from France, the U.S. and the UK constitute 35 percent of cosmetics imports. Many of the top brands in China, like L’Oréal Paris and Lancôme, sell luxury cosmetics which the Chinese shoppers want and love.

When companies do not sell in a territory, it is usually easier to tolerate parallel import. Brands can even argue that it promotes brand awareness and sales in the market. Once they enter the territory, gray marketing can be a challenge.

 

What is grey market?

Gray market or “parallel import” refers to goods that are manufactured and sold legally, and then re-sold in a territory (in this case, China) through unauthorized channels.

The goods are genuine, branded products protected by trademark, patent, or copyright. But was the sale authorized by the brand? Not exactly. These are goods sold without the consent of the intellectual property owner in that market. In this case, cosmetics with IP rights registered in China.

The seller may be an authorized seller selling outside of his territory. He can also be an unauthorized vendor in the same region. Even more harmful is when an unauthorized seller imports cosmetics into China and resells them at a lower price compared to authorized channels, creating direct competition.

 

Is gray marketing legal?

As the name implies, gray market goods refer to genuine goods sold in a “gray” situation that may affect their legality. However, they are not “black” market goods, like counterfeits are.

We can say that parallel import is generally legal. It is a consequence of the exhaustion of intellectual property rights or first-sale doctrine. According to this principle, the first sale of these cosmetics outside of China exhausts their exclusive trademark rights in China.

It can be difficult for brand owners to accept gray market goods. When the brand sells in the territory, it loses profits due to competition. It also loses at least some of its control over availability and pricing. Also, gray market goods damage supply chains. Sometimes, they harm brand reputation, reduce customer satisfaction, and dilute trademarks.

 

Mainland China laws regarding gray marketing

The major laws and regulations that protect intellectual property rights in Mainland China do not explicitly restrict parallel importation. This does not mean that there is nothing brands can do.

Trademark holders can take action against parallel imports if the importers violate local laws and regulations. Some examples are safety and product quality regulations, and failure to adapt labeling to local requirements.

Another way to combat gray marketing is through IP law. For example, if the seller used product pictures with trademarks that infringe on your intellectual property rights.

The Anti-Unfair Competition Law prohibits businesses from making misleading or false representations regarding different aspects of a product. As a result, a parallel importer may breach the law if he makes a misrepresentation.

Chinese courts rule on the issue based on the specifics of the case. For example, in Shanghai Unilever Co Ltd v Commercial Import and Export Trading Company of Guangzhou Economic Technology developing District, Hui Zhong Fa Zhi Chu Zi (1999), a parallel importer brought Lux soap into China.

The plaintiff was a local distributor with exclusive right of sale who had registered the trademark in China. The plaintiff argued that the parallel importation infringed the exclusive right to use his registered trademark. The People’s Court rejected the argument that since the soaps were not counterfeit, there could be no infringement.

 

Imported cosmetics exemption

Chinese law requires the import and distribution of foreign cosmetic products in China only if they have been approved by/recorded with the Chinese State Food and Drug Administration (CFDA), renamed National Medical Products Administration (NMPA).

To obtain an official certificate or license, foreign cosmetic brands must show all mandatory safety testing. Until as recently as January 2021, when the new Cosmetics Supervision and Administration Regulation (CSAR) came into effect, safety testing included testing on animals.

However, most foreign brands do not test on animals anymore and cannot show the mandatory results. For this reason, most of them could not register their products and market in China.

Non-Chinese cosmetic brands were instead exempted from licenses and registration in China. The exemption applies if the brands sell their products only on cross-border e-commerce platforms, such as Tmall and JD.com, or other authorized Chinese platforms.

This is still a huge market: according to Statistica, more than 70 percent of cosmetics retail sales revenue in China came from e-commerce channels.

Here’s an infographic explanation:

 

The exemption is specific and applies to the sale of foreign cosmetics through designated e-commerce platforms in China. The import of foreign cosmetics for re-sale in China, but not on the designated e-commerce platforms, is not exempted from recordation in China, and could not be legal.

This situation makes it easier to combat gray market goods: If they are sold offline, they are not legal. If they are sold on designated online platforms, they can be found and taken down.

 

The question: animal testing exemption

The new law is not yet clear on mandatory animal testing. In the next few months, we are likely to see this issue clarified. Animal testing for imported general cosmetics may be replaced with other safety assessments on most items.

Although it may not be easy to qualify for non-animal testing, foreign brands will be able to register their cosmetics in China and sell in the territory through traditional distribution channels. Given the enthusiasm of Chinese consumers for international cosmetics and skincare, such change may offer foreign brands many opportunities.

Parallel import is likely to be less tolerated when in direct competition with the brands.

 

Wiser Market: stopping parallel importing activity

Parallel importing occurs as a part of international trade.

Booming international trade offers opportunities and challenges for foreign brands in China, gray marketing being one of the challenges.

When it comes to understanding gray marketing and how to fight it, Wiser Market has both the technology and the expertise to help your brand offline and online.

Wiser Market is proud to deliver its Parallel Import Control System (PICS), a solution for eliminating parallel import activity.

With Wiser Market’s PICS you can detect leaks in your distribution chains, identifying distributors and resellers who sell outside their assigned territories.

 

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WiserTip: When you package your product differently in different territories, you make it harder for gray market sellers to offer them across borders.