China Wants to Regulate ENDS Like Tobacco

    Photo: Taco Tuinstra

    The Chinese government wants to overhaul the rules governing the market for electronic nicotine-delivery systems (ENDS), according to the South China Morning Post.

    Draft regulations posted online by the Ministry of Industry and Information Technology (MIIT) suggest it will seek to regulate these products like traditional cigarettes. The ministry is seeking public comments on the draft regulations until April 22. With an estimated 300 million smokers, China is the world’s largest market for tobacco products and the largest potential market for ENDS.

    The news caused the share price of RELX, China’s largest e-cigarette brand, to plunge. At 2:45 p.m. today, its value on the New York Stock Exchange was down nearly 45 percent to $10.69 per share after a recent high of $19.46 per share on March 19.

    RLX Technology raised $1.4 billion during its initial public offering (IPO) in January this year. It sold 116.5 million shares with a target price of between $8 and $10 a share. Its market debut turned its 39-year-old founder, Wang Ying, into a billionaire overnight with an estimated net worth of $24.8 billion.

    In its prospectus, RLX stated that vaping products only have a 1.2 percent penetration rate in China compared with 32.4 percent in the U.S. According to the China-based Electronic Cigarette Industry Committee, China’s 2020 e-cigarette sales were an estimated CNY14.5 billion ($2.2 billion), an increase of 30 percent from 2019. The U.S. e-cigarette market in 2019 was worth $5.34 billion, according to Grandview Research, which expects the U.S. market to reach $6.50 billion in 2020.

    RELX recently announced a partnership with 110 authorized distributors to supply its products to more than 5,000 RELX-branded partner stores and more than 100,000 other retail outlets nationwide, covering over 250 cities in China, according to its prospectus. Revenue for the company nearly doubled in the nine months ended Sept. 30, 2020, to $324 million, with a net income of $16 million, the latest figures available at the time of this writing.

    Under scrutiny

    Vapor companies are increasingly facing scrutiny from regulators in China. In 2018, the country made it a crime to sell a vapor product to anyone under 18 years of age. In November 2019, an online sales ban was implemented in order to further prevent youth initiation. In 2020, the country passed the Law of the People’s Republic of China on the Protection of Minors. That law is aimed at preventing parents or other guardians from “indulging or instigating minors” to smoke or vape.

    The China National Tobacco Corp. (CNTC), which holds a monopoly of tobacco manufacturing in China, is a major source of funding for the Chinese government. Its contribution accounted for an estimated 5.45 percent of the country’s tax revenue in 2018. That amounts to CNY10.8 trillion, according to media reports. The vapor industry in China, by contrast, remains largely in private hands. If CNTC were to enter the vapor market, the monopoly’s existing 5 million domestic retail outlets could present a major challenge for private vape shop owners.

    Until today’s announcement, the vapor industry seemed to shrug off the impact of stricter regulations, continuing to perform well even in the face of the coronavirus pandemic.

    Tobacco Reporter covered the trials and tribulations of China’s vapor industry in-depth in its April 2020 print edition (see “Double Whammy”).