By Kerry Zhang & Ran An / Grandway Law Offices (Shanghai)
In recent years, consumer demand for cosmetics in China has grown rapidly and per capita consumption expenditure of cosmetics has increased significantly. The regulators also stepped up the supervision of the cosmetics industry by introduction of a number of cosmetics-related regulations such as “Regulation on the Supervision and Administration of Cosmetics”, “Measures for the Supervision and Administration of Production and Distribution of Cosmetics”, “Measures for the Administration of the Registration, Recordation of Cosmetics”, “Good Manufacturing Practice for Cosmetics”.
The regulators’ efforts have caused cosmetics industry reshuffle. Companies getting prepared and operating compliantly will benefit huge in the coming years. This article will discuss the overall requirements of cosmetics contract manufacturing in China and how cosmetics contract manufacturer (“OEM”) and foreign cosmetics brands can adapt to the new regulatory environment and avoid regulatory risks.
A cosmetics manufacturer shall apply for a special cosmetics production license from provincial drug supervision and administration authority. Such license will be issued only after application materials have been duly submitted, on-site verification of the applicant's production site has been conducted by the regulator, and all approval conditions are met. In the case of entrusted contract manufacturing of cosmetics, the entrusting party shall be the registrant or record-filing party of the cosmetics manufactured. The entrusted manufacturer shall be an enterprise with a valid cosmetics production license which accepts the entrustment manufacturing within the scope of its approved licenses. The time limit for entrusted production shall not exceed the validity period of the cosmetics production license and the business license. Failing that, there might be civil, administrative, even criminal liabilities.
When a foreign registrant or recordation entity of imported cosmetics entrusts the production of cosmetics to a local OEM, the foreign registrant needs to make filing with the regulator for its contract manufacturing by submitting relevant materials on the entrustment relationship. If a domestic registrant of cosmetics establishes entrusted production relationship with an OEM, such relationship shall be confirmed by the cosmetics manufacturer through an information service platform.
A typical cosmetics contract manufacturing agreement meeting the filing requirement should cover the following essential matters to pass muster:
(1) The respective recordation obligations of both parties and the corresponding liability for breaches. If the OEM fails to complete the recordation due to the entrusting party's reasons, the entrusting party shall compensate the OEM for any administrative penalty or civil damages suffered as a result.
(2) The entrusted manufacturing products and their properties as well as requirements for craftsmanship, formula, quality, labeling and other aspects. For example, if a foreign entrusting party provides the raw materials for the production of cosmetics, containers and packaging materials that directly contact the cosmetics, the local OEM shall require the entrusting party to be responsible for the raw materials, containers and packaging materials provided, and shall inspect the raw materials provided by the entrusting party to confirm compliance with the requirements prior to proceeding with production.
(3) If the entrusting party uses third party's trademarks and copyrights for entrusted manufacturing, the OEM needs to check the relevant authorization documents provided by the entrusting party, and the entrusting party shall bear full responsibility if there is any infringement.
The Good Manufacturing Practice for Cosmetics, which came into force on July 1, 2022, stipulates the requirements that cosmetics production shall meet in terms of institutions and personnel, plant facilities and equipment, materials and product management, production process management, and product sales management. In general, the cosmetics OEM shall standardize production from the following aspects:
(1) OEMs shall conduct production in accordance with the formula and technical requirements of registered or filed products to ensure product quality. Otherwise, the OEM may be civilly liable for breach of contract such as returns or compensation and criminally liable for manufacturing or marketing fake or shoddy products or manufacturing or selling cosmetics not up to hygienic standards.
(2) The cosmetic OEMs shall establish and implement a supplier management system which shall require suppliers to provide at least the following documents: business license; qualification certificate of raw material and packaging material manufacturers; inspection certificate for raw materials and packaging materials. In addition, suppliers of trademark and barcode printing should also provide printing license and barcode printing license. Suppliers shall also issue official sales invoices and related vouchers indicating raw materials and packaging materials’ name, specification, quantity, production date/batch number, expiration date, unit price, amount, date of sale, and the address and contact information of suppliers.
(3) The cosmetic OEMs shall establish and implement a cosmetic material management system under which the purchasing of cosmetic raw materials, containers and packaging materials directly in contact with cosmetics shall be subject to a purchase inspection and acceptance system to verify product certifications, product identifications and inspection reports. The manufacturer shall also establish a purchase ledger to record the product name, specification, quantity, production batch number, the name, address and contact information of suppliers, and purchase date, etc. OEMs should conduct full inspection, random inspection and batch inspection of all purchased raw materials and packaging materials.
(4) The cosmetic OEMs shall establish and implement a quality control system for cosmetic production such that: a. production shall be conducted in accordance with the formula and technical requirements of registered or filed products; b. establishing and implementing a cosmetic production management and record system; c. properly keeping records of receiving raw materials and shipping finished goods, product formulas, weighing records, batch production records, batch packaging records, operation records, and monitoring records of key control points in the production process.
(5) OEMs shall require employees who are directly engaged in cosmetics manufacturing to undergo annual health inspections, obtaining a health certificate prior to engaging in cosmetics manufacturing activities.
(6) Cosmetics manufacturer shall establish and implement a system for the management and inspection record of cosmetics ex-factory inspection. Before putting cosmetics on the market, the OEMs must conduct sanitary inspection of the products in accordance with the national cosmetics hygiene standards, and the qualified products shall be so marked. The OEM's full-time inspectors must have corresponding qualifications. In case the OEM is incapable of in-house inspection, it shall entrust an authorized inspection agency to conduct the inspection.
(7) OEMs shall establish and implement a sample retention management and record system for finished products. Finished products shall be sampled and recorded in each batch. The reserve samples shall be kept under specified conditions and with enough quantity to meet the needs of product quality inspection.
(8) OEMs shall establish and implement a cosmetics sales management and record system. OEMs shall establish a cosmetics sales ledger, record the product flow of cosmetics in detail, including product name, specification, production batch number, quantity, delivery date, consignee and its address and contact information, etc., and retain sales vouchers with relevant information for statutory required time period. Product sales records shall be authentic, accurate and complete.
(9) OEM will generally have access to and become knowledgeable of the product information of the entrusting party during the entrusted production process. Much of such information is business secrets of the entrusting party and should be protected through stricter confidentiality obligations and covenants of the OEMs.
When a foreign cosmetics brand owner wants to do contract manufacturing in China, it should carry out the following steps to stay out of potential regulatory problems: (1) check whether the local OEM meets the regulatory requirements in terms of license, permit, filing, internal compliance policies to stay out of any potential legal risks; (2) draft a proper contract manufacturing agreement with the essential elements; (3) periodic compliance and best practice evaluation on OEM.