Vape brings new hope to tobacco control, but it also affects more stakeholders in tobacco industry. If those health costs are borne by the health insurance system, then the tobacco revolution is imperative.
Tobacco, the only legally marketable commodity in the world that is harmful to health, has never been torn apart and full of contradictions like today.
On the one hand, it has built a global tobacco market of $700 billion, bringing huge taxes to countries. On the other hand, it causes about 5 million deaths every year, is the most serious public health problem threatening human health and life, and is the eyesore of health departments in various countries.
The tobacco industry has been in existence for 3,000 years. It was discovered and used by American Indians, and spread to Asia and Africa through maritime trade by Europeans who came to the New World. It became a global crop and consumer goods. In the era of the industrial revolution, due to the development of mixed tobacco and the production of industrialized cigarettes, nicotine intake of tobacco started from nose and mouth to lungs, which made it easier to become addicted and more harmful to health. After two world wars, the feminist movement and tobacco advertising, cigarettes became very popular. China has also become the country with the largest number of smokers in the world.
All this was stopped more than 50 years ago – scientists have found a close link between smoking and cancer, and tobacco has become a killer of human health.
Health departments around the world immediately carried out various tobacco control propaganda, governments have increased tobacco taxes, victims of tobacco smokers have filed huge compensation for tobacco companies. Pharmaceutical giants such as Pfizer also want to carve up the market from tobacco control.
However, the tobacco industry involves billions of people and hundreds of billions of dollars in huge interests, so it is difficult to smoothly implement tobacco control. At the same time, as a stubborn addictive substance, the demand elasticity of senior smokers is less affected by price. At present, the total number of smokers in the world remains at 1.1 billion, of which 350 million are in China.
After experiencing various forms of tobacco control efforts, smokers can continue to experience fun with safer vapes. And vapes become the focus of scientific research. In 2003, Chinese Han Li invented the world’s first electronic cigarette. After more than 10 years of development, electronic cigarettes have entered a relatively mature stage, heat not burn and the use of nicotine salts – so that the vapor of pod vape are getting alike cigarette. Large vape companies began to emerge, and promoted the transformation of traditional tobacco companies.
Electronic cigarettes are not the product of large companies. To some extent, they are consumers’own choices. Price, equivalent to a pack of vape cartridge (except devices), only about 12 euros, in Britain, France and other countries, cigarette smoking costs 70 euros per pack. In Australia, a pack of cigarettes is equivalent to the average person’s living expenses for a week.
Although it is far from comparable with traditional tobacco, electronic cigarettes also bring considerable benefits. Global e-cigarette revenue reached $2 billion in 2013 and increased to $12 billion in 2018. P&S Market expects the global e-cigarette market to reach US$48 billion by 2023, with a compound annual growth rate of 25.99%. In Britain, which supports e-cigarettes, there are 3 million e-cigarette users, accounting for one third of the smokers’ market.
The tobacco industry in various countries has attacked electronic cigarettes first before catering to them. There are many disputes about the health and safety of e-cigarettes in public health circles. Britain is a supporter, while the United States and Hong Kong are wavering in their attitude. The mainland of China has not made a public statement at present.
According to the data provided by the World Health Organization to Finance and Economics, electronic cigarettes are banned in 32 countries, heat not burn products are banned in 3 countries, and electronic cigarettes are regulated as tobacco products, consumer goods or therapeutic products in 69 countries.
The situation in China is very complicated. China’s tobacco industry has a system of government-enterprise integration. China National Tobacco Corporation and Tobacco Bureau are from one team. The Ministry of Health has little restraint on the tobacco industry.
Tobacco is a state-owned monopoly industry in China. The cultivation, production, processing and sale of raw materials are in the hands of China Tobacco Corporation. No one has ever really challenged China Tobacco. But at present, the state allows electronic cigarettes to develop “slowly”, and CITIC itself is also developing electronic cigarettes.
Tobacco has begun to cost more to public health in some countries than it contributes to the huge tax revenues. Most people interviewed said that in China, it is the health department that really has a chance to compete with tobacco. If the health costs are borne by the health department, then the tobacco revolution is imperative.
Shenzhen: Magic Soil of Global Electronic Cigarette OEM
“How many people in the United States and Britain know about Green and Huawei? But they all know vapes, vapes are our pride.” Ao Weinuo, secretary-general of Shenzhen Electronic Cigarette Association, told Vapehk.
Dozens of women in white hats sit on the production line in turn, and raw materials from nearby are placed in front of them, suction nozzles, catheters, atomization cores, vape sticks, batteries… One after another is assembled, and the machine injects nicotine, glycols, vegetable glycerin and essence into the cartridges. After repeated tests and charging, the average vape took only a few hours, and an electronic cigarette made in Shenzhen was completed.
Shenzhen produces more than 95% of the world’s electronic cigarettes, providing a source of power for the global development of electronic cigarettes. In Shenzhen, Shajing and Xixiang Street, a total of more than 100 square kilometers of land, there are hundreds of such production enterprises.
In 2003, Han Li, a Shenyang pharmacist, was inspired to invent electronic cigarettes in a nightmare of quitting smoking. He was an old smoker. When he was an educated youth in the countryside at the age of 18, Han Li learned to smoke in order to relieve his loneliness away from his family. When his father was diagnosed with lung cancer because of smoking for many years, he decided to give up smoking. He tried the nicotine patch first, but it didn’t work well.
In an interview, he said he sometimes forgot to remove the patch and had nightmares all night. He dreamed that he drowned in the sea and then turned into a mass of steam.
This dream evolved into his electronic cigarette patent in 2003. In 2005, Hanli’s vape is launched, accompanied by vast and intensive advertising, “healthy smoking” and “smoke then quit”, and the sales reached 200 million yuan in the first year, then reached 1 billion yuan in 2008, the product sales exceeded 300,000, and sold overseas. In 2007, when Han Li’s Group went public, its share price was as high as HK$116 and its market value was nearly HK$120 billion.
Almost all vape factories mention the importance of soil in Shenzhen. Ou Junbiao, chairman of the Electronic Cigarette Committee of the China Electronic Chamber of Commerce and founder of Sigelei Company, recalled to Vapehk reporter that he founded the company 10 years ago in a house with a rent of only 700 yuan, “Five or six relatives have been invited to do it, and I have to be a boss, manage finance and production, and build toilets by myself…” But Shenzhen’s government has not levied excessive fees on private enterprises.
At that time, electronic cigarettes were not regulated by any department. Ao Weinuo, secretary-general of the association, said that the government was open to electronic cigarettes, just as it was to counterfeit mobile phones.
Liu Tuanfang, founder of e-cigarette brand Yijiate, recalls a turning point for Shenzhen’s e-cigarette industry: when the export volume of e-cigarettes is increasing, it is impossible to go out of the customs as conventional products. Finally, Shenzhen Customs approved a customs number for electronic cigarettes.
It was also at that time that overseas e-cigarette start-ups emerged and venture capital entered. NJOY, an electronic cigarette company, was founded in 2008 and invested by Bruno Mars, a famous pop singer. The singer also personally endorsed that he had been a smoker since childhood, but in order to reassure his seriously ill mother, he began to gradually quit smoking by smoking NJOY electronic cigarettes.
NJOY’s vision is to “make traditional tobacco history”. The founder, Weiss, said he didn’t want to compete with big tobacco companies only, but to beat them.
Soon, electronic cigarettes ushered in a key point in the history of development – in 2009, the Food and Drug Administration of the United States seized 2000 batches of electronic cigarette products including NJOY brands at customs. FDA wanted to attribute electronic cigarettes to drug management and prohibit the import of electronic cigarettes.
Njoy filed a lawsuit with the FDA. Eventually, the court declared that the FDA had lost the lawsuit and ruled that electronic cigarettes could be regulated as tobacco products and “not drugs equipment”. “The sale of electronic cigarettes should not be banned,” Judge Leon, who was in charge of the case, said in an interview. He agrees with the dealer that electronic cigarettes contain almost no carcinogenic chemicals in traditional cigarettes. The lawsuit laid the legal framework for electronic cigarettes.
After the lawsuit, the electronic cigarette industry ushered in a real boom, and the American market finally opened its door. Shenzhen’s electronic cigarette factory began to flourish. And tobacco giants have begun to develop electronic cigarettes. Lorrard was the first to buy Blu, Altria launched Mark Ten and RJ Reynolds had Vuse.
Samuel, founder of electronic tobacco brand Evove, remembers that foreign orders began to pour in. Foreign tobacco giants often visited factories. They dressed in suits and shoes, and worked efficiently. And Shenzhen businessmen often treat them in the most local way, take them to KTV, and sit next to beautiful Chinese girls, while those tobacco people are generally embarrassed to put their hands somewhere.
As for Ruyan, because of its excessive and false marketing, it was severely suppressed by domestic and foreign regulators. In 2009, Ruyan lost 444 million yuan in the whole year. In the first half of 2010, Ruyan was suspended eight times. After that, its share price has been hovering around HK$0.1 for a long time, and then it was acquired by Imperial Tobacco.
Though Ruyan by Han Li was destroyed, the electronic cigarette industry survived. A person close to China Tobacco said that China’s tobacco sector thought that the electronic tobacco industry would end after the disappearance of Ruyan, but he did not expect that it has been developing at a high speed.
In 2012, with the rise of a new product – box mod vapes, the world ushered in a blowout year of vape.
The mod vape era: the first wealth bubble
A 22-year-old College graduate, with millions of assets, likes to go to Macau and “loses tens of thousands of dollars a night.” He regrets losing his down payment in Shenzhen, leaving hundreds of thousands to buy a new car. And that’s all because he sold a kind of vape juice well.
The rise of mod vape products (referred to as “mod vape” and open system) in 2012 is an inevitable iteration of vape as a substitute product. Traditional electronic cigarettes are called cig-a-like (pod vape). They are small in size and inefficient in atomization. Free nicotine can not meet the needs of vapers for addiction cessation. So you need to inhale more smoke at a time to get more nicotine, which is the essential logic of mod vapes.
When the electronic cigarette just entered overseas, the foreign users did not have a good experience of the electronic cigarette. Often, some users dismantled and refitted the electronic cigarette parts to play with the big vapor.
Later, Shenzhen’s vape enterprises improved the atomizer, vape juice box, chip, battery and other aspects, building perfect vapor products. Yihi said it was the first to innovate on chips, and Sigelei said it had introduced box vape system first.
Mod vapes are quickly sought after in the foreign user market. When fashionistas and sub-cultural groups use mods to vape and vapers get better nicotine satisfaction, it has played a great role in promoting the development of electronic cigarettes.
But it also culminates the discussions about the dangers of e-cigarettes. High-power atomization is easier to crack alcohols into aldehydes, and open systems make the risk of vape even more uncontrollable. Foreign media reported that hazardous compounds of heavy metals such as lead, tin and zinc detected in some electronic cigarettes may be related to defective or negligent production processes.
Various kinds of electronic cigarettes tear the public health sector into two groups. One emphasizes the relative harm reduction of cigarettes, the other emphasizes the potential harm. Various kinds of research reports emerge in endlessly.
In the mod vape stage, shenzhen vape factories began to get rid of the OEM model, branding its own mod vape brand with foreign channels, and made the world’s leading mod vape brands, such as Smok, Vaporesso, etc. The output value of Shenzhen’s vape supply chain has also begun to soar.
Ao Weinuo said that in 2017, Shenzhen electronic cigarettes created 28 billion yuan of output value (customs statistics), which led to 1 million jobs. Among them, the output value of mod vape head enterprises can reach billions of dollars every year.
Zhang De, senior regional director of Shenzhen Branch of Alibaba B2B International Site, has been in Alibaba for 8 years. When we saw him, he was wearing a Gucci polo shirt and sitting in his smoky office. He took out his mobile phone to show his photo with Ma Yun.
In 2012, Zhang noted that Shenzhen was “the most famous” two industries at that time: LED lights (said to be used to illuminate cannabis leaves abroad) and electronic cigarettes, because there were millions of advertising contracts signed between electronic cigarettes and platforms.
E-cigarette factory owners generally keep a low profile and avoid talking about their own wealth stories, but when asked how many billionaires there are in the e-cigarette factory area, “I don’t know how many, at least 50, hundreds of billionaires.” An owner of a vape factory said that an average enterprise could earn hundreds of millions of dollars in a few years.
Vape manufacturers, mainly rely on best seller products with good appearance to make money. And pod vape replies on the tobacco market replacing, brand building ability, sales channel building ability and financing means.
Therefore, after the technological innovation of pod vapes and the advent of JUUL-based era, these manufacturers in Shenzhen began to realize that their dream of wealth has gone forever.
Pod Vape Age Coming: No. 1 Player JUUL
Juul’s R&D skills are at the core of his success. At the same time, Juul is good at Internet marketing, financing and sales channels – the design of U-disc flat mouth, the promotion of fashionable young models, Facebook and other social platforms. Juul is as popular as the iPhone. It was once valued at $38 billion.
The technical breakthrough of pod vape came with the trend of legalization of cannabis. Vape is again popular because of the emergence of nicotine salt technology. Nicotine salt technology allows the pod vapes to provide enough nicotine, so that smokers can get rid of addiction and taste smoothly. This is also the core competitiveness of JuuL, a tobacco revolutionary product. Juul obtained the patent of nicotine salt in 2018. In fact, the domestic nicotine salt is infringing.
This innovative technology came from Ploom, a company that wanted to innovate hemp technology. It not only made JUUL, but also participated in the development of another new tobacco product, IQOS, which was rushed into by tobacco giants.
In 2014, the United States was in the midst of a wave of legalization of cannabis. As cannabis was generally smoked in cannabis leaves, a company called Ploom wanted to seize the opportunity to develop heat not burn products for cannabis leaves. But the study failed. After that, Ploom applied this heat not burn technology to tobacco leaves, and finally succeeded.
Ploom sold the heating technology to Japan Tobacco, which, together with Philip Morris (which has a special tobacco sheet technology), launched IQOS, a heat not burn product. IQOS is the first revolutionary product in the new tobacco field.
IQOS parent and father Philip Morris is the largest tobacco company in the world today. It has Marlboro and other cigarette brands. Following the popularity of IQOS, Philip Morris announced in 2016 that it would phase out traditional cigarettes and transform to new types of tobacco. The full name of IQOS is “I quit original Smoking” (I give up traditional cigarettes).
On the other hand, Ploom, which received a huge purchase, set up a new laboratory Pax. Pax wanted to make a hemp atomization device, but later began to produce vape atomization device. Pax launched its own electronic cigarette product JuuL, using its breakthrough core nicotine salt technology, a combination of free nicotine (alkaline) and acidic substances, which already exists in tobacco, but Juul used it for the first time in pod vapes, which is considered by the electronic cigarette industry as a “revolutionary breakthrough in alternative tobacco products”.
In tobacco, free nicotine binds to citric acid and exists in the form of nicotine salt. At the end of the last century, Marlboro took the lead in adding ammonia to cigarettes to dissociate nicotine salts into free nicotine, which was more easily absorbed by the lungs, making one of the important reasons for Marlboro’s rise.
Interestingly, JUUL adds benzoic acid to the free nicotine purified from tobacco to form nicotine salt again.
Because the atomization efficiency of vapes is not high, the free nicotine added into the vape juice will have a strong hit to the throat when the concentration of nicotine needed by users is reached, and when the concentration is not enough, it will not simulate the taste of real cigarette. For a long time, manufacturers have solved this problem by transforming to mod vapes, but the heavy box mod is not suitable for daily cigarette substitution scenarios.
The emergence of nicotine salts, on the one hand, improves the efficiency of nicotine release, providing more nicotine in electronic cigarettes, satisfy the addiction, but also is not easy to hit the throat.
“Vaping traditional vape juice is like hitting on the floor, while vaping nicotine salt vape juice is hitting on the cotton,” a vape juice manufacturer marketing director told Vapehk.
MOTI’s CMO Zhou Jiebi drew a roller coaster action, “Nicotine salt can simulate the efficiency model of the traditional cigarette (combustion).” The advances in flavors brought about by the technological breakthroughs in nicotine salts also give JUUL the opportunity to develop a large number of flavor e-liquids, such as mango, butter, cucumber and other flavor e-liquids.
Michael, the founder of MOTI, believes that there is another reason for the rise of JUUL, that is, channels. He divides the electronic cigarette channel into two kinds, one is the electronic cigarette entity exclusive store, the other is the public channel, such as convenience stores, gas stations and so on.
He once launched a product in the United States, which was second only to JUUL in market share. He said that the main channel of JUUL was gas stations at that time.
This is a flat-mouthed, USB-like electronic cigarette device, from the distinguished shape of “traditional cigarette.” JUUL, with its cool young style and popular Internet trend, has quickly eliminated its rivals’ leading position in the market of BLU and vuse, accounting for 75% of the U.S. e-cigarette market. American teenagers have invented the word “Juuling” to represent this trend culture.
As the New York Times has analyzed, if cigarettes were born in Madison Street culture, then electronic cigarettes JUUL was born in Twitter and Instagram culture.
Juul’s impact on adolescents has triggered strong public health criticism of e-cigarettes. From 2017 to 2018, the proportion of high school and middle school students using electronic cigarettes in the United States increased by 78% and 48%, respectively, the World Health Organization told Vapehk.
Research shows that although marketing strategies claim that e-cigarettes are an export to help quit smoking, in fact e-cigarettes are becoming the entry point for teenagers and non-smokers to start smoking. If teenagers who have never smoked use e-cigarettes, they are at least twice as likely to start smoking.
Restricted by public pressure and FDA regulation, Juul has shut down Instagram, Facebook and YouTube accounts and stopped selling flavored cartridges (including fruit and butter) to offline retailers in November 2018, retaining only mint and tobacco flavors. And set identity and age verification in their online stores.
After that, Juul chose to be acquired. In December 2018, Altria Group acquired a 35% stake in JUUL Labs Inc for $12.8 billion, making JUUL worth $38 billion in less than four years, surpassing SpaceX and airbnb. As part of the agreement, JUUL’s 1,500 employees will receive bonuses worth $2 billion.
Juul’s success has been transmitted to Shenzhen, China, where vape factories that set foot on the boat on pod vapes have become the industry’s hegemony. Smoore, which specializes in atomizer technology and manufactures OEMs, now has 10 factories, and its annual profit reaches 1.2 billion yuan.
In the corner of the dust-free glass window of its factory, you can see the RELX, Yooz packing boxes. Smoore is not only the representative factory of domestic start-up brands, but also takes part in the orders of JUUL and other brands.
Smoore’s foreign affairs spokesman told Vapehk that the core technology of vapes is atomizer. Smoore has developed it for five years, mainly for medical atomization and vape juice atomization, which is difficult for his peers to surpass. According to reliable information, Smoore will be listed in Hong Kong this year after delisting from the new third board.
Juul’s success has begun to involve Chinese Internet entrepreneurs in e-cigarette entrepreneurship, who want to replicate Juul, a new $30 billion myth in China.
Crazy: the entrance of Chinese entrepreneurs
“Juul has the technology and mature markets they don’t have, but they have all Juul’s controversies.”
In 2016, long before the electronic cigarette soar, Li Oucheng, a Bopai Capital partner who invested in consumption, saw Juul on a trip to the United States when visiting the cannabis industry. “At that time, I judged that it would be a product of the consumer revolution.” He said that this product with high gross profit, strong addiction and high popularity has always been the favorite of the market.
He went to Shenzhen to do research and wanted to invest in a pod vape product matching Juul’s standard, but no electronic cigarette factory was willing to cooperate, the latter believed that there was no future to make a brand in China. Over the past decade, more than 90% of electronic cigarettes have been sold to foreign markets. Finally, Li Oucheng found Samuel, who asked an Indian executive to set up Refined Salt Technology. Li Oucheng was the first investor to invest in electronic cigarettes in China.
Nevertheless, he said, “The domestic market is a chicken rib. It looks meat there, but there is no meat.” Over the past two years, the Refined Salt hasn’t entered the market. Instead, it has developed an atomization technology in Shenzhen. They hope to compete with tobacco companies with technology, just like Juul. At that time, the predecessor MT of MOTI also entered the domestic market to try.
But in June 2018, RELX came in with the money from Source Code and IDG capital. RELX sold 500 million yuan in the last 10 months. By grabbing data from Tianmao and Jingdong, some media have estimated that RELX’s sales in the past 30 days are more than 30 million, while other start-up brands are hovering between 3 million and 6 million.
According to people familiar with the situation, the profit margin of electronic cigarette is 60% – 70% for the brand side, the agent is about 20%, and the cost of e-liquids and vape device is about 50 yuan.
Almost all e-cigarette entrepreneurs interviewed said that seeing Juul’s value was an important reason for their choice of entry. These entrepreneurs who migrated from the old market pile up in an industry derided by half the Internet circle.
Zhu Xiaomu is the No. 1 employee of Hammer Mobile Phone. In his eyes, JUUL is “the next generation of iphone”. Sitting in Soho’s new office in Wangjing, he looked very lively and his staff almost occupied the whole floor.
“When I was working on hammer technology, I saw product managers around me using JUUL, which reminded me of the time when the iPhone was just in fashion.” He described the future use of electronic cigarettes. He went out without a lighter or cigarette, but with only three things: mobile phones, keys and electronic cigarettes. Goldman Sachs also argues in a report that e-cigarettes will be the next generation of Internet of Things.
Cai Yuedong, the founder of yooz, said that he had realized the freedom of wealth, making electronic cigarettes means “wanting to make a career”.
Wang Ying, founder of RELX, told Vapehk that it is often difficult for an organization to achieve both high productivity and high positivity. She hopes RELX become an efficient and happy group for outstanding young people. RELX has six people since its inception, and now has more than 140 people.
In the office of Zhang Jinyuan, the founder of Linx, dozens of products of his peers were displayed. He picked out three and covered the brand logo with his hands. “What’s the difference when you look at the first sight?” He refers to the similarity of vape cutting process is because of the high dependence of entrepreneurial brands on supply chain OEM. This means that the brand seldom grasps the core technology.
“Basically, I can make the same brand with money at home, but not abroad. JuuL was able to break out in the U.S. market at that time, relying on flavors, technological change, product capability.” Voopoo electronic cigarette founder Han Shunfei said his company was a Chinese manufacturer of the American popular brand VMR acquired by Juul.
He said that Chinese start-ups and Juul faced different market environments. Juul has entered a mature e-cigarette market with a large number of users. People have a clear understanding of e-cigarettes. There are relevant laws and regulations, and the rules of the game are clear.
However, the market facing China is immature, a large number of users do not know about e-cigarettes, and regulation has not been established. But he argues that Chinese start-ups are much more likely to succeed than JUUL did at that time.
“We all follow the current trend to go up, the industry gradually standardized, as long as you do not die, there is a certain market share in your industry, there will be a large number of new users coming in, the market will become much larger.” He said. After all, the penetration of e-cigarettes in China is less than 0.1%. The market of e-cigarettes in China is still very imaginative.
Li Oucheng believes that, due to the gap between the flavors of electronic cigarettes and real cigarettes, the effective conversion users of electronic cigarettes in the Chinese market should be pop bead cigarette users. In 2018, the sales of pop bead cigarette are about 500,000 boxes (the total sales volume of pop bead cigarette acceptable by CITIC is about 500,000 boxes), and the market size of 500,000 boxes is about 37.5 billion yuan per 250 yuan.
Michael, founder of MOTI, believes that even considering regulation and taxation, the penetration rate of China’s e-cigarette market can reach 3%-5%. Compared with China Tobacco’s 1 trillion revenue last year, the market size of e-cigarettes will reach 30-50 billion yuan, which will give birth to a company with a market value of 100 billion yuan.
Samuel thinks these estimates are too conservative. He believes that in the long run, with the continuous progress of electronic cigarette technology, problems such as taste will be solved, and smokers will become users of electronic cigarettes, “This is an irresistible trend.”
“The tobacco market is so large that I understand that only a small part of it is enough for the company to grow and grow, which is why a lot of capital will invest in such enterprises.” An investor told Vapehk.
Samuel says he has seen dozens of capital companies and said the same thing at least a hundred times since 2018. Because of their advanced experience in the electronic cigarette industry, many entrepreneurs and investors who want to enter the industry will talk to him.
Zhu Xiaomu disclosed that Flow has completed two rounds of financing, involving four capitalists, “Its evaluation reached the second in the vape industry”. “Some people admire how good my first venture life was,” he said. “How can’t I feel the cold winter of capital market? It’s going to be heatstroke.”
China Tobacco Bureau: Electronic cigarettes can be produced, but supervision should be strengthened.
China Tobacco has bought more than a dozen nicotine factories in the industry. It can not control the development of electronic cigarettes from the legal level, so it wants to control the development of electronic cigarettes from the capital level. “From this point of view, it is impossible to copy a JUUL.” At present, domestic e-cigarette enterprises feel that the supply of nicotine is insufficient.
In China, no matter how hard tobacco controllers have worked over the years, no one has ever really shaken the trillion-dollar tobacco industry.
China’s tobacco industry has a system of government-enterprise integration. China Tobacco Company and National Tobacco Monopoly Bureau are a team of people and two brands, which means that the health sector can not directly supervise the tobacco industry, the latter is on par with the Ministry of Health.
In the tobacco control compliance group, the Tobacco Bureau and the Minister of Health served as vice-chairmen for a long time, while the Development and Reform Commission and the Minister of Industry and Information Technology in charge of the Tobacco Bureau served as group leaders for a long time. Public figures said, “This is the wolf in the sheep’s nest.” This is considered to be an important institutional reason for the long-term failure of tobacco control.
The hundreds of millions of smokers are also an important reason for the challenge of tobacco control. According to an unnamed executive of the Tobacco Control Association, China has a high smoking rate of nearly 30 percent. They have worked for so many years and the smoking rate has not dropped significantly.
Only in 2015, when smog hazard was showing seriously, did the smoking rate in China decline for the first time. On the one hand, the Smoking Regulations in Public Places were passed, covering three major cities, Beijing, Shanghai and Shenzhen.
On the other hand, the consumption tax on tobacco was raised by 4%, reflecting a 10% increase in price, which resulted in a 2.4% decrease in tobacco consumption in that year and a 5.6% decrease in the second year, the first decline in tobacco production and sales in the past 20 years.
Not long after that, the national tobacco control legislation failed to advance smoothly. Several public health professionals said that the bill was hampered by tobacco power in the final stage of the State Council’s review, deleting important public places covered and allowing smoking rooms to be set up.
“This is a disgrace to the public health community.” At present, China has not passed the national legislation on tobacco control. In 17 years, the smoking rate rose again.
The objective data is that the tobacco industry has created huge tax revenue for the country for a long time, and Yunnan and other local governments rely heavily on tobacco. But according to the World Health Organization report, in 2014 alone, the total economic losses caused by tobacco use in China were about 350 billion yuan ($57 billion), an increase of 1000% since 2000. Pan Biling, the Standing Committee of the CPPCC National Committee and deputy director of the Department of Ecological Environment of Hunan Province, told CCTV that this was a conservative estimate.
He suggested that “the tobacco tax may slowly fall below 5%. Personally, I don’t think it’s a big problem.” Regarding the relatively large impact on local areas, he said, “For example, Hunan is not only a major province of tobacco production, but also a major province of cigarette industry.
At this time, the state should formulate some measures to encourage, reward or compensate. According to the plan, the smoking rate in China will be reduced to 20% by 2030, so it is imperative to control smoking.
In March 2018, during the restructuring of the State Council, the Health and Health Commission (formerly the Ministry of Health) served as the head of the tobacco control group. Public health professionals said that this might be an important hope for tobacco reform.
In this context, electronic cigarettes also ushered in new opportunities. According to multiple sources, domestic e-cigarettes are now basically classified into the management of the National Tobacco Monopoly Bureau, which will not be banned, but will be supervised. The State Tobacco Monopoly Bureau allows the development of electronic cigarettes, but at a slower pace, it can not impact the tobacco business too much. In response, Vapehk tried to verify this with the relevant departments, but did not receive a positive response.
Finance and Economics reporter saw two national standards on electronic cigarettes promulgated in 2017, which show that they are in the process of “approval”.
Industry insiders said that the national standard stipulates the nicotine content of e-liquids, which is about 20 grams per milliliter, and the capacity of each bottle should not exceed 10 milliliters, that is, the total content should not exceed 200 grams. The national standard also stipulates smoke safety. The national standard is expected to be issued in July this year. The National Standard Rules show that the leading unit is the National Tobacco Bureau.
According to the news, China Tobacco Bureau is speeding up the supervision and management of electronic cigarettes, hoping to end the current situation of “non-standard”, “non-regulation” and “disorder” in the electronic cigarette market as soon as possible.
A person from the Tobacco Control Association said that opinions on e-cigarettes differ because they have been used for too few years. Smoking has been used for 50 years before they begin to realize what is harmful, and all of its experimental results are consistent. “So now, in fact, e-cigarettes are either supported or opposed. The most important reason is that the evidence is not sufficient now.”
With the rise of vape and heat not burn products abroad, China Tobacco Company is also seeking transformation. In December 2018, China Tobacco International (Hong Kong), a wholly-owned subsidiary of China Tobacco, submitted an application for listing. Some analysts said that China Tobacco’s move is also to better develop the new tobacco business and overseas markets.
Insiders of China Tobacco disclosed that China Tobacco has laid out a number of patents for electronic cigarettes and heat not burn products. Sichuan Zhongyan’s “wide and narrow” and other heat not bure products have been sold overseas.
Insiders of China Tobacco disclosed that at present, China Tobacco has actually mastered the lifeblood of domestic start-up companies – nicotine, nicotine is generally extracted from waste tobacco residue, and currently, China Tobacco has bought more than ten nicotine factories in the industry to limit the supply of nicotine. At present, domestic e-cigarette enterprises feel that the supply of nicotine is insufficient. China Tobacco cannot control the development of electronic cigarettes from the legal level, so it wants to control the development of electronic cigarettes from the capital level.
“From this point of view, it’s impossible to copy Juul.” These people said.
The Future of Electronic Cigarettes: Warm-up Competition Just Begins
China has 350 million smokers, 95% of the world’s sales of electronic cigarettes are supported by suppliers, with enough money and ambitious entrepreneurs. This may be a promising tobacco revolution, but there is no end in sight.
Despite its tremendous success, e-cigarette companies have never been able to maintain their independence. The results of Juul and Njoy illustrate this point.
Once, Njoy was the only one to remain independent. In 2013, $70 million in financing made NJOY a unicorn, but three years later Njoy declared bankruptcy. The reason is the strike from tobacco.
At that time, tobacco giants lobbied the U.S. state legislatures, and some state governments to impose additional excise taxes on electronic cigarette products, with tax rates rising by 66%. In August 2016, new FDA regulations were introduced, which greatly increased the cost of certification of product access threshold.
NJOY mainly produces pod vapes and disposable electronic cigarettes. Nearly 300 products have been put into the market under NJOY. The cost of each product has increased by $1 million. The implementation of this new regulation has resulted in a lot of debt that NJOY cannot pay. According to the bankruptcy filing, it had a cumulative loss of $234.4 million.
Investors and entrepreneurs of e-cigarettes envision an ideal future of $770 billion in world tobacco output in 2017, and a market of $23.1 billion would be replaced by e-cigarettes of 3%.
At present, the electronic cigarette market is 12 billion US dollars. As the largest tobacco country in the world, China’s penetration rate of electronic cigarettes is less than 1%, much lower than 13% of the United States. Its market size is only 4.312 billion yuan (including 1.36 billion yuan of electronic cigarettes and 2.952 billion yuan of sales of electronic cigarettes supporting products), which has great potential.
But they all know in their hearts that fate is not in their own hands.
Vape investor Li Oucheng said that vape companies must face tobacco companies in the end, with only two choices, either to be acquired by tobacco companies or to subvert the tobacco industry. Both of them require the company to have core technology in order to sit at the table. At present, China’s vape start-ups do not have core technology.
A China Tobacco insider said that now cigarettes are basically flavoring technology, that is to say, whether smoking cigarettes or vaping, as long as the fragrance can be transferred, it’s basically replacable. For example, if anyone can bring out a Lotus King cigarette flavor now, it is of great value.
But seasoners are the most important resource of the tobacco system, and it is difficult for the start-up companies themselves to achieve it.
On the other hand, technology can reduce the production cost of electronic cigarettes. Li hopes that the cost of electronic cigarettes will be lower than that of traditional cigarettes. “To make e-cigarettes affordable to people in poor African countries, it is also a market that has never been reclaimed.”
For electronic cigarette, whether it can become a real tobacco revolutionary depends on whether the regulatory authorities can regulate the electronic cigarette in a fair manner and guide its healthy development. The second is whether e-cigarettes can win the respect of public health circles and eliminate 5% of the harm by standardizing production, rational marketing and restricting minors. Thirdly, what kind of technological patent power e-cigarettes can possess, which will bring better product experience to smokers, enough to make 1 billion smokers abandon traditional cigarettes without looking for alternatives.
The stage that startups can reach corresponds to how much valuation they can have.
In August 2016, the Conference of the Parties to the WHO Framework Convention on Tobacco Control, at its seventh session, wrote in an e-cigarette report: “If most smokers who are unable or unwilling to quit smoking can immediately switch to nicotine alternative sources with lower health risks and eventually stop using them, this will be a great achievement of contemporary public health.”
Zhang Jinyuan, founder of Linx and CEO of Tongdao Uncle, once described his vision to the reporter of Finance and Economics. “The most interesting thing about e-cigarettes is not smoke, but atomization.” He hopes to make 70% non-nicotine solution and 30% nicotine solution, which can “atomize everything” (including chewing gum, coffee, snacks). Jin Ju, the owner of the media company, frequently said that what he wanted to compete for was not flavor, but behavior.
“15 minutes a day, kill time, what time can the user not waste?” He felt that vaping was no different in his eyes from reading a media.
If e-cigarette entrepreneurship is a 100-meter race, what stage is it now? Faced with this problem, the entrepreneur thought for a while and said that the referee rules have not yet been decided, so let’s warm up.
Vape can not directly overthrow traditional tobacco, but it is like a flame, which can ignite the tobacco industry and make it self-revolutionary. It can also be a torch for the health sector to use its power to promote tobacco control campaigns.
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