Huang Lingling, who has for years imported edible bird’s nests, a traditional Chinese delicacy, is finding her business increasingly difficult. Huang sells bird’s nests processed by Indonesian companies officially registered in China with traceable QR codes, an indicator of legal importation and quality, a guarantee that comes at a price. But in the past two years, she has spotted more and more cheap products bearing the coveted QR codes. Most of the “traceable” products are actually from unknown sources or smuggled in with fake QR codes, she told NewsChina.
At the end of August, Liu Genghong, a pop singer from Taiwan who has gained huge popularity with his work-out sessions in the past few months on Douyin, China’s TikTok, was accused by famous livestreamer Xinba of selling fake bird’s nests back in 2020. Liu apologized for “not reviewing the product carefully enough.” Xinba himself was fined by market regulators for selling fake bird’s nests that year.
In March, Xiamen-based Yan Palace, China’s largest edible bird’s nest importer and supplier, filed to list on the Shanghai Stock Exchange, its third IPO attempt after failing in 2011 and 2021. Yan Palace aims to be the first listed edible bird’s nest brand in China.
Yet the path to an IPO is bumpy. In response to Yan Palace’s application on April 22, the China Securities Regulatory Com-mission (CSRC) asked the company to clarify 57 questions about its product and strategy, including nutritional value, business model and competition strategies, whether it promotes sales by reducing prices and whether it relies more on marketing than quality to support its market dominance.
The pressure from low-cost rivals that importers like Huang are experiencing, online fake nest scandals and the CSRC’s questions all concern the quality of the bird’s nests on the market, which has long been a drag on the industry.
Edible bird’s nests are made from nests built by swiftlets from saliva secretions, called cubilose, and feathers during breeding seasons. Chinese people have been eating bird’s nests for centuries, dating to the Ming Dynasty (1386-1644). Dishes made from bird’s nests appear in novels and costume dramas as a tonic or herbal medicine for imperial or wealthy families.
Due to rising purchasing power and thriving e-commerce, edible bird’s nests are more available to general consumers today, although they are still a niche market due to high prices. They are touted as having high nutritional value, containing sialic acid, a type of sugar molecule with claimed health benefits, and amino acids, molecules the body needs to make proteins.
A report by Iresearch, an industry information platform, shows that bird’s nests ranked first among nourishing tonic foods in terms of transaction volume in 2019. From 2016 to 2020, the amount of imported bird’s nests in China increased from 41.5 to 340.4 tons, a seven-fold increase. The market scale totaled 40 billion yuan (US$5.9b) in 2020, an increase of 33 percent year-on-year and five times that of 2016, according to a report by the Edible Bird’s Nest Market Committee of the China Agricultural Wholesale Markets Association in 2021.
Bird’s nest products are now attracting a wider range of consumers, as more Chinese people born since 1990 are willing to spend on health-related products than older generations. The new varieties of edible bird’s nests, packaged ready-to-eat or for heating up at home, appeal to young consumers who value convenience. In 2019, people aged 25 to 34 accounted for 51.95 percent of consumers, according to the Edible Bird’s Nest Market Committee.
More players are stepping into the arena. By the end of 2020, the number of domestic and foreign companies manufacturing and retailing edible bird’s nests under the officially built traceability system, the Chinese Bird Nest Traceability Management Service Platform, totaled 15,172, a year-on-year increase of 39 percent, among which over 99 percent are Chinese. Brands like Yan Palace, Xiaoxiandun and Yan Sotrue are leaders in the rapidly expanding market.
This competition has led to price wars. As shown in Yan Palace’s prospectus, between 2018 and 2021, its consolidated gross margin rate in the last three years declined mainly because it had to cut prices to gain an edge in online sales. The average price for a jar of its most popular product, Wanyan instant-eat nests, which come prepared in a congee-like broth and do not require cooking, dropped from 180 yuan (US$26) in 2018 to 158 yuan (US$23) in the first half of 2021. The most expensive are 600 yuan (US$89) a jar.
Although a leading company, Yan Palace was embroiled in the “toxic red nest” scandal in 2011, when nests imported from Malaysia which have a red color and cost much more than other nests, were found to have harmful concentrations of nitrites. These are often used to cure processed meats, and give products like ham and bacon their characteristic red color. Natural red nests are the result of interactions between the birds’ saliva and natural minerals in the cave. But those toxic ones were reportedly processed by putting edible bird’s nests in boxes full of swallow excrement so they would absorb a crimson color. The process generated high concentration of nitrites. Sellers took bird’s nest products off the shelves. The whole industry was hit hard for a while. It was following this scandal that Huang Jian, founder of Yan Palace, came up with the instant Wanyan product line that rescued the firm. The company topped the list of domestic importers between 2019 and 2021.
But other brands like Xiaoxiandun, Yan Sotrue, Zhengdian Yanwo, Twin Lotus, and traditional Chinese medicine brands like Tong Ren Tang are snapping at its heels. Between 2015 and 2021, Xiaoxiandun, a brand established in 2014 that mainly sells online nest products that need heating up, received five rounds of investment. In 2018, its revenue was only 200 million yuan (US$29.7m), but in 2020 it earned 686 million yuan (US$101.8m) during two online shopping promotions in June and November, making it Yan Palace’s biggest rival.
Meanwhile, the controversy about the efficacy or not of edible bird’s nests rumbles on. Unlike other health products, bird’s nests have never been approved officially as medicine or health products. Even so, they are promoted as having significant health benefits such as boosting immunity, slowing aging, improving the skin and even prolonging life.
There is no scientific evidence that bird’s nest products provide the claimed health benefits. Yan Palace claimed in its prospectus that bird’s nests boast a high density of sialic acid, which is effective in adjusting immunity, slowing aging and boosting cell growth. The company’s advertisements hint its products can ease pregnancy symptoms and help pregnant women give birth to healthy babies.
In response to the prospectus, in April the CSRC questioned the company, asking whether it is involved in false promotion. Hong Kong pop star Carina Lau advertised the product, claiming she had a bowl of Yan Palace bird’s nest every day. Commercials claimed that emperors and Empress Dowager Cixi of the Qing Dynasty (1644 -1911) ate bird’s nests every day to keep healthy and young. All their adverts imply that bird’s nest products are a recipe for maintaining health, beauty and longevity. The CSRC ordered Yan Palace to provide authoritative statistics and sources backing the claimed nutritional value, and clarify whether there is compliance risk in promotion and whether the company has been punished for false advertising.
In its updated prospectus in May, Yan Palace did not directly respond to the questions but reasserted that edible bird’s nests are a traditional food of scarcity and cited traditional Chinese medicine texts. It mentioned research proving the benefits of edible bird’s nests but did not clarify the specific functional ingredients nor showed the advantages of edible bird’s nests over other food in terms of nutritional ingredients.
It is doubtful that eating bird’s nests is the best source for sialic acid, their main selling point, as it is also found in foods like eggs and milk. Sialic acid can also be manufactured. As many scholars point out, sialic acid is not exclusive to edible bird’s nests and the nutritional value of edible bird’s nests might be far below that of milk and eggs in terms of sialic acid or protein. There are also questions whether adults need to supplement extra sialic acid as the human body itself can produce it.
What’s worse, there are often scandals involving the quality and false advertisement of the products making it hard for ordinary consumers to distinguish fact from fiction, which further hollows out consumer trust.
In 2020, a scandal erupted involving one of China’s top livestream sellers on short video platform Kwai. Livestreamer Xinba, who has more than 70 million followers, held livestream sessions in September and October 2020 where he peddled a bird’s nest soup with alleged health benefits made by Guangzhou Rongyu Trading Co for 40 yuan (US$6). An investigation found it contained little more than sugary water. Both Xinba and the company were fined hundreds of thousands of dollars and they were demanded to pay compensation of nearly 80 million yuan (US$11.8m) to buyers. Xinba claimed he did not know the product was fake. In April 2021, Xiaoxiandun was fined by Beijing’s market regulators for false advertisement and misleading consumers.
The questions over nutritional value and quality problems are regarded as the biggest hurdle hindering companies like Yan Palace. “The controversy over the nutritional value of edible bird’s nests limits its profitability and growth,” noted Shen Meng, executive director of Chanson Capital. He told News- China that its market potential as food is limited and is not attractive to investors. “This is why some companies want to dress up edible bird’s nests as a highly valued medicine and health product and hint at medicinal value in their advertising,” Shen said.
The overreliance on marketing instead of product quality gnaws away at the industry’s reputation. Yan Palace’s prospectus shows that between 2018 and 2021, its advertising and marketing budget increased every year, hovering close to 20 percent of revenue. In 2021, it spent 267 million yuan (US$39.6m) on advertising and marketing, but its R&D budget was less than 2 percent of its revenue in the same period.
This is not a problem exclusive to Yan Palace. Xiaoxiandun reportedly spends up to 600-700 million yuan (US$89m-104m) a year on marketing, and their advertising features expensive A-list celebrities.
It is common for players in the industry to gain sales via marketing, and then invest in marketing again, noted experts.
“It’s like this in many consumer goods industries. Investors pursuing profit like to invest in companies that expand quickly leveraged by capital so they can get listed, then they withdraw with their pockets filled,” Shen said. A reason behind the heavy marketing at a cost of sacrificing profit is the lack of competitive products that distinguish one company from another, Shen said.
When all market players rely on marketing to stimulate sales, its yield rate will gradually decline as the competition grows increasingly fierce, against severe homogenization of edible bird’s nest products. “The overall market is not so big and the entrance threshold is not high. Investors will worry about the future profitability of these companies,” he said. Due to the lack of R&D and innovation, company revenues are likely to fall sharply once their marketing expenditure falls, Shen said.
Most products sold in China are imported from Indonesia and Malaysia. Zhou Zhenlai, a Chinese Malaysian who deals in bird’s nests told NewsChina that anyone can get involved. In Malaysia, farmers build houses to attract swiftlets. The majority of harvested nests are dried and processed, including feather-picking and shaping. The price for legally imported edible bird’s nests range from 15-18 yuan (US$2-3) per gram.
After the toxic red nest scandal in June 2011, the price of edible bird’s nests cratered and China banned imports of bird’s nests for two years.
By October 22, 2021, there were only 41 Malaysian and 29 Indonesian edible bird’s nest processing plants legally registered to export into China, according to the General Administration of Customs of China. “There are small workshops everywhere. They profit hugely from getting cheap edible bird’s nests that contain more feathers, and they clean and bleach them with chemicals, selling them as quality products,” said importer Huang Lingling.
It is common to use chemicals or food additives to polish the nests, which is illegal, Shao Jianhong and his colleagues from Zhuhai Entry-Exit Inspection and Quarantine Bureau revealed in an article published in 2018. Bleaching, brushing edible glue on the nest and using other materials to repair broken nests are other techniques used to polish edible bird’s nests. Materials used to pass off as edible bird’s nests include tremella (a type of fungi), pigskin and blood algal.
Some Indonesian and Malaysian producers believe that shoddy products result from demand. “Some wholesalers pay no attention to quality as long as the price is low,” said one edible bird’s nests dealer in Malaysia. “One client has no quality requirements at all as long as the products are not toxic enough to kill consumers.”
The industry is infamous for smuggling via regions like Vietnam and Hong Kong. Yuan Qing, an edible bird’s nests dealer, told NewsChina that she used to sell smuggled edible bird’s nests, “but once caught, we would be fined five times the value and get imprisoned.” After being caught twice in 2017 and 2019, she turned to goods with traceability QR codes, though it means an extra tariff of 13 percent. She did not provide details of her punishment, but jail time ranges from less than three years to over 10 years based on the scale of smuggling.
The price difference between smuggled and legally imported edible bird’s nests could be as much as 3,000 yuan (US$445) per kilogram, according to one dealer who declined to reveal his name. This means suppliers still sell smuggled products without QR codes, NewsChina found, which Huang believes has intensified competition and caused price wars.
Although hopes were high for the QR code tracing system, its role proved limited. In 2012, China’s quality supervision authorities signed agreements with Indonesia and Malaysia over the need for a traceability system for exported bird’s nests. Currently, there are two traceability systems provided by the Chinese Academy of Inspection and Quarantine (CAIQ), the national public institute for food safety and quality and the China Certification & Inspection Group. Only companies registered in China that have passed a food safety inspection can apply to use the QR system. Customers who scan the code can get product information such as origin and where the nest was processed.
Yuan observed that as custom checks have become stricter in the last two years, more dealers and customers are turning to products with a QR code. Data from the Chinese Bird Nest Traceability Management Service Platform shows that the amount of imported nests using the CAIQ’s QR code totaled 116.5 tons in the first quarter, a 21.4 percent rise year-on-year.
However, the number of processing plants that applied for the QR code system has not really increased. CAIQ found that in 2021, only 12 new bird’s nests plants in Indonesia and Malaysia registered to export to China.
The legitimacy of the QR codes has become an issue. Some companies licensed under the QR scheme sell their codes to other processers. It means trust is lost in the system and it blurs the line between officially imported and smuggled nests. Liu Yong, who has been involved in the bird’s nest business for many years, told NewsChina that some processors increase the number of bird’s nest sources – natural caves or increasingly man-made nesting houses – to get more QR codes, then they sell these codes to unlicensed processors who could source the nests from anywhere. “So consumers can’t trace the source of the products they bought even if there is a code.”
Importer Huang Lingling said this is how cheap products that have a QR code show up in China. “Some processors don’t care about reputation and will offer the code as long as they make money,” she said.
An expert who helped build the traceability system told NewsChina on condition of anonymity that while products with a fake QR code are not necessarily shoddy, they make the registration system invalid, which allows potentially dangerous products to be sold. The expert suggested monitoring the annual output of registered processors and paying extra attention to those whose exports deviate too much from output.
Another chronic problem is the absence of standards. The anonymous expert believes the QR system plays an important role in tracing products and producers if there is a problem. But he cautioned it is “not a mark of quality.”
Zhu Yi, an associate professor of food research at China Agricultural University, told NewsChina that the QR system is remarkably effective in cracking down on smuggling, but the traceable information is limited, only covering where the birds live and processing plants. “It provides a guarantee for authenticity and food safety, but not the quality of products, and it lacks a sensory evaluation in terms of cleanliness or smell,” Zhu said.
Zhu pointed out that there are a variety of industrial and association standards that stipulate the rating, cleanliness and testing methods for bird’s nests, but they are all different. Besides, industry or association standards are not compulsory, so it is questionable whether they are widely and strictly implemented.
“All standards are a result of negotiations between involved parties. It is difficult to have a standard that manufacturers, consumers and supervisors all find satisfactory, and which is implemented properly to evaluate the authenticity, safety and quality of products,” Zhu said. She added that edible bird’s nests exporters in Malaysia, Indonesia and Thailand have their own criteria for product testing. Malaysia is the only country requiring a sialic acid test, but without sensory evaluation and detection of impurities like feathers. Indonesia and Thailand, however, do not test for microelements like lead and mercury.
Consumer rights lawyer Chen Yinjiang from the China Law Society said that the industrial standard for edible bird’s nests is incomplete and there is no solid research to prove their nutritional benefits. Some companies take advantage of this gap and exaggerate their nutritional value, and this involves fake advertising, he told NewsChina.
Chen suggested authorities need to thoroughly investigate edible bird’s nest products to clarify their properties and build a complete standard system based on authoritative research, to provide a regulatory basis for market supervisors and draw a red line for businesses.
“Regulators should strengthen market supervision and deal with false advertising and quality issues strictly according to the law and expose them to the public,” Chen said.
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