Opportunities and Crisis in vape industry in China – Risk for huge profits

Electronic cigarettes have attracted wide attention in the domestic public opinion field in 2019. Meanwhile, Joyetech, ALD, IVPS, Smoore, FEELM, ASPIRE… These vape enterprises that were deep in the streets of Bao’an District, Shenzhen City, quietly operating for years, have also been visited by people from all walks of life, and then known to the world.

Where did these e-cigarette companies come from? How are they living? Where is the future of China’s electronic cigarette industry? With these problems in mind, the author recently participated in the “2019 Publicity Conference on Standardized Development of Electronic Cigarette Industry” sponsored by the Electronic Cigarette Industry Committee of China Chamber of Commerce in Shenzhen.

The rise of Hunan Party

It is well known that e-cigarettes originated from Chinese pharmacist Han Li, but unfortunately, the father of e-cigarettes and his brand Ruyan did not come to the end for various reasons. In 2013, Ruyan e-cig and its patents were acquired by Imperial Tobacco. However, the production and sales personnel trained by Ruyan became the seed of vape OEM cluster in Shenzhen after that. The electronic cigarette market in the United States rose in 2009, , and a large number of OEM orders then rushed to Shenzhen, a major electronics manufacturing town in China. A group of enterprises represented by Joyetech rose rapidly.

At that time, Shenzhen, the mobile phone industry was an absolute star industry, Xiaomi had just sprouted, Huawei was still exploring, and Apple and its affiliated enterprises occupied the most prominent “C” position in Huaqiangbei. Few people have noticed the electronic cigarette industry in the corner, including the Chaoshan Party which occupies an important position in the major electronic markets in Shenzhen. People from Hunan province in China seized the opportunity, which is the second largest group of immigrants in Shenzhen.

E-liquids, chips, atomizers, molds, production and assembly… Every link has the figure of Hunan people, and the birth of Smoore, IVPS, Sigelei and other head enterprises. Now in the electronic cigarette industry, a Hunan dialect may be able to quickly draw closer to each other and promote an unexpected cooperation

On June 26, at the “Propaganda Meeting on the Standardized Development of Electronic Cigarette Industry in 2019”, Ou Junbiao, chairman of the Electronic Cigarette Industry Committee of the China Chamber of Electronic Commerce, appealed to all electronic cigarette enterprises to unite to meet the challenges facing the industry in Hunan accent.

Top 1 challenge in electronic cigarettes industry: Public opinion crisis

Not only China, but also the United States, which has the largest single market in the world, is facing enormous public opinion and social pressure. One of the main “charges” is inducing teenagers to smoke. According to the Food and Drug Administration (FDA), more than 3.6 million American middle school students smoked electronic cigarettes in 2018, a surge of 1.5 million compared with 2017.

Under pressure from public opinion, JUUL, which dominates the U.S. e-cigarette market, has announced the suspension of its Facebook and Instagram accounts and the sale of flavor products to retailers to curb its appeal to young users. In addition, JUUL has raised the minimum user age from 18 to 21.

Moreover, several public health organizations, such as the American Academy of Pediatricians, have also brought the FDA to court, requiring the FDA to complete its review of all new electronic cigarette products on the market within 120 days. Under pressure, the FDA released the latest Compliance Guidelines on electronic cigarettes on June 11, 2019, and required all electronic cigarette manufacturers to submit market access testing (PMTA) application documents after 10 months. The FDA will review them in one year. If it passes the review, the product will continue to be sold in the U.S. market; on the contrary, the product will immediately be off the shelf and leave the U.S. market forever.

This is absolutely a huge challenge for Shenzhen vape manufacturing enterprises, which started from exporting foreign trade.

Top 2 challenge in electronic cigarettes industry: Policy Crisis

So, how about targeting the market at home? Like many enterprises whose foreign trade has been frustrated at present, the business of export-to-domestic-sales is also doing well. However, the future of the domestic market is uncertain. Not only because of the negative public opinion mentioned at the beginning of this article, but also because of the unique tobacco management system in China.

In China, the regulatory authority of the new type of tobacco is the State Tobacco Monopoly Bureau, which reports to the Ministry of Industry and Information Technology, its superior management department. The Ministry of Industry and Information Technology coordinates with other departments to issue documents, thus establishing the new regulations. However, another brand of the State Tobacco Monopoly Bureau is the Chinese Tobacco Company, a giant with traditional tobacco as its main business, which carries the tax pillar of national interests.

Top 3 challenge in electronic cigarettes industry: Patent crisis

The new tobacco market means new rules of the game. Multinational tobacco enterprises represented by Philip Morris International, British and American Tobacco, Japanese Tobacco and Imperial Tobacco saw this trend early and began to layout quickly.

Nie Zhi, Huajin Partner and Deputy General Manager of Innovation Business, said that from 2001 to November 2018, there were more than 200 patent lawsuits in the field of electronic cigarettes worldwide. Over the past decade, the number of lawsuits has fluctuated every year, but the overall trend is on the rise, and in 2018 there has been an explosive growth, of which 45% occurred in the fourth quarter. The global patent litigation competition in the electronic cigarette industry has maintained a sustained high-pressure and upgrading trend.

After completing the initial market expansion, Philip Morris International PMI and JUUL have launched a patent baton to expel the latter ones. According to incomplete statistics, since 2018, PMI has launched 19 patent lawsuits against heat not burn products in China, Japan, Europe, the United Kingdom and Korea. The defendants include British American Tobacco and China Tobacco Cooperative Enterprises; JUUL has launched 25 patent lawsuits against pod system products in the United States and the United Kingdom.

There is no doubt that this is the ultimate BOSS that Chinese electronic cigarette enterprises will face.

A Future Full of Opportunities

After talking about challenges, where are the opportunities? The accessible market is the beacon for every electronic cigarette practitioners.

According to Deng Ming, the global development momentum of new tobacco products is strong, and the market scale is expanding rapidly. In 2018, the number of consumers of new tobacco products has exceeded 40 million. It is expected that by 2021, the number of adult e-cigarette vapers will increase to 55 million, and by 2022, it is expected to increase to 64 million, equivalent to about 4.6 million boxes of cigarettes. In China, the consumption of traditional cigarettes in 2019 is estimated to be 50 million boxes, that is to say, the global consumption of new types of tobacco after three years is only one-tenth of the current sales of Chinese cigarettes.

According to statistics, sales of new tobacco products reached 24.7 billion yuan in 2018, an increase of 45.8% over the same period last year, and the industry scale will reach 45 billion dollars in 2024, with an annual compound growth rate of 26%. The per capita consumption of traditional cigarettes is decreasing, and the per capita consumption of new tobacco products is increasing. The trend of new tobacco replacing traditional cigarettes is irresistible.

Not only that, the new tobacco products represented by electronic cigarettes are facing shortcomings such as e-liquid leakage, difficult to clean, unable to strop craving for cigarettes, high homogeneity and so on because of their short development time. The promotion space is huge, which has become a breakthrough space for many electronic cigarette practitioners to develop upward.

Face the difficulties, and the future has come. Whether for domestic or overseas markets, products are always the first element. Perception of users’ pain points, strengthening R&D investment, establishing patent barriers and getting recognized at home and abroad are the places where every e-cigarette enterprise with long-term ambition are trying to reach in this market.