• May 23, 2024

Feeling the Squeeze

 Feeling the Squeeze

Photo: Taco Tuinstra

Photo: Taco Tuinstra

A crackdown on vapes has pushed some Chinese companies out of business and encouraged others to prioritize international sales.

By Stefanie Rossel

China is the world’s center of e-cigarette production, accounting for approximately 90 percent of vapor hardware. Between 2022 and 2023, China’s vape product exports increased 12 percent, according to ECigIntelligence. Domestically, however, the vape category seems condemned to disappear, although with over 350 million smokers and an estimated annual smoking-related death rate of more than a million, the country’s potential for reduced-risk products is huge. This year, the country’s vaping population stands at 3.5 million, ECigIntelligence estimates.

The rise of China’s internal vape market was short-lived. Initially, there was little awareness of e-cigarettes in the country. In 2013, domestic vape sales surpassed $13.75 million, and the sector continued to grow rapidly until November 2021, when China’s State Tobacco Monopoly Administration (STMA), the administrative arm of China National Tobacco Corp., which with around 2.5 trillion cigarettes a year is the world’s largest producer, asserted its authority over the vape industry.

In November 2022, the Electronic Cigarette Management Measures (ECMM) took effect, putting substantial restraints on manufacturers catering to the domestic market. The measures regulate the production, sale, marketing and import and export of all vape products, including cartridges, vape sets and products sold as a combination of cartridges and sets, but not heated-tobacco products, which will be regulated as traditional cigarettes.

It is worth noting that the ECMM legalized an industry whose legal status was previously dubious. Whether the legal space it gives vape manufacturers is enough to keep their domestic business viable is questionable, however; none of the companies approached was prepared to comment on the record.

Among other requirements, the new regulations prohibit the sale of e-cigarettes with flavors other than tobacco on the domestic market. The document also sets a wide range of technical standards, including permitted ingredients and additives, nicotine levels, testing and safety standards and accreditation. Manufacturers, wholesalers and retailers of vape products are required to obtain a license from the STMA and are obliged to process all transactions through an e-cigarette transaction platform overseen by the monopoly. Other measures include prohibition of vape product advertising and a ban on e-cigarette sales through vending machines or any other self-service mechanism.

Shortly after the ECMM entered into force, e-cigarettes became subject to a consumption tax. The rate for the production and import of e-cigarettes is 36 percent while the rate for wholesale is 11 percent.

Sharp Decline

Mercedes Gorgni

The ECMM follows a tightening of other rules, such as the decision at the end of 2019 to ban the online sale and advertising of e-cigarettes in response to concerns about underage vaping. In April 2022, the STMA released a new set of trial policy measures, which sought to control the structure of the e-cigarette industry by regulating where production capacity is concentrated and dictating the distribution of vape product retail outlets.

One-and-a-half years after their introduction, the rules have taken a toll on domestic vape sales. “The market uninterruptedly grew from 2017 up to 2020 when the online ban of e-cigarette sales dampened the growth. However, the increasing popularity of prefilled pods and the increase in prices still generated a 26 percent growth rate compared with 2019 despite the setback in accessibility,” says Mercedes Gorgni, China analyst at ECigIntelligence.

“The peak of the market was reached in 2021 at an estimated RMB19.7 billion ($2.7 billion) with 7 million adult vape users. Regulations in 2022 resulted in a sharp decline in the domestic market. The market value is estimated to have shrunk to RMB9.3 billion in 2023 and 3.8 million users due to restricted flavors, tax-induced price increase and a declining number of retailers offering products.”

The shift in regulations, Gorgni says, posed a challenge for smaller and medium-sized companies within the industry, as adapting became increasingly difficult. “On the other hand, leading firms such as RELX leveraged their superior capabilities and resources to meet these stringent government demands, securing approval by the first half of 2022. RELX was—and still is—the leading brand in China. During 2021–2022, net revenue of Fog Core Technology, RELX’s holding company, saw the impact of the new regulations, dropping from RMB8.5 billion to RMB5.3 billion, with a further decline in 2023 when revenues fell to RMB1.5 billion.”

The new regulatory environment, which favors larger companies capable of meeting the complex technical requirements, has incentivized domestic brands toward seeking opportunities beyond national borders, Gorgni explains. “It’s only natural that leading domestic brands like RELX, Yooz and Moti are now also pivoting their focus toward international markets as a strategic move to diversify their product offerings and mitigate investment risks. At the same time, several Chinese manufacturers are relocating to Southeast Asian countries like Indonesia and Malaysia, making the most of the benefits of lower labor costs and more favorable trade tariffs, thereby enhancing their competitive edge in the global market.”

More recently, RELX’s market share has declined as other, mostly compatible, pod brands are widely sold informally, mainly via online platforms such as WeChat, Douyin or Xiaohongshu, in flavors other than tobacco and flavored disposables. “The illegal or informal market has certainly expanded, especially due to the availability of flavored disposable vapes sold online at significantly lower prices than on vape or retail stores,” says Gorgni.

China’s illicit vape market is significant yet challenging to accurately quantify. With the government intensifying its crackdown on e-cigarettes, physical sales have become increasingly difficult. “However, the online black market is flourishing, offering popular models such as the ‘bubble teacup’ or other designs featuring cartoons, typically coming in sweet flavors and large capacities,” says Gorgni. “Moreover, pods designed to be compatible with RELX devices, indistinguishable in design and available in over 20 flavors from various brands like VS, Yeeg and Zgar, can easily be purchased with just a conversation on WeChat. These vapes are then discreetly shipped to buyers through common mail, a practice that has become widespread with the rise of e-commerce platforms like Taobao. Some vape shops surveyed by ECigIntelligence have also started adapting to this situation, acknowledging that a portion of their customer base prefers to have their purchases mailed to them given the inconvenience of visiting physical stores.”

Focus on Exports

Offline enforcement of e-cigarette sales regulations is stringent, according to Gorgni. “Conversations with the Electronic Cigarette Chamber of Commerce, which represents over 650 manufacturers in Shenzhen, have revealed there will be an increase in government crackdowns over the next four months. This enhanced enforcement aims to limit the growing illegal market for vaping products in China,” she says.

Many retailers have already gone out of business following implementation of the ECMM. Prior to the regulations, the market was flooded with a vast number of specialist and generic e-cigarette retail points, with approximately 190,000 retail stores and 47,500 specialist vape retailers operating across the country, according to Gorgni. “After the new regulations, which required retailers to get authorization to sell e-cigarettes, took effect, the number of specialist retail points plunged to under 15,000, signaling a significant shift in the industry landscape,” she says.

“Retail stores can now apply either for a license to sell e-cigarettes or traditional tobacco, incentivizing retail chains and supermarkets to play safe and possibly to maintain combustible cigarette sales. In 2022, a survey carried by ECigIntelligence showed that more than 70 percent of legal e-cigarette retailers faced financial challenges, with less than 10 percent remaining profitable.”

Online, enforcing the new rules proves more challenging. “Sellers skillfully navigate the digital landscape by continuously opening new accounts, using alternative terms in posts and comments to avoid direct references to e-cigarettes, and engaging with potential customers through comments on popular videos and posts,” says Gorgni. “This method of operating under the radar complicates efforts to monitor and control the online sale of e-cigarettes, underscoring the complexities involved in regulating the digital aspect of the vaping market.”

The regulatory measures were introduced in accordance with the country’s “Healthy China 2030 Plan,” which was released in 2016 and calls for a comprehensive strengthening of tobacco control to reduce the smoking rate to 20 percent among adults over the age of 15 by 2030. So far, progress remains slow. According to Gorgni, more than 25 percent of Chinese aged 18 and over were smokers in 2022, with men making up more than half of the smoking population. “With the focus on regulating e-cigarettes more strictly and limiting the availability of flavored vapes, consumers who previously turned to vaping as an alternative to smoking may revert to traditional cigarettes. It is expected that smoking rates may stabilize or even increase slightly,” she says.

With the increasing focus on exports and the growth of the global vape market, Chinese vape manufacturers will likely continue to prioritize overseas markets due to the challenges and restrictions in their own domestic market. “The export volume of disposable vapes has been rapidly increasing, proving a shift toward international markets,” says Gorgni. “Enforcement being done by governments, like the U.S., is vital to avoid their population accessing low-quality vapes and eventually suffering the consequences. The STMA is aware of this situation and has made its regulations accordingly. Western governments should make use of this and improve communication with its Chinese counterparts to curb contraband practices and protect their own population.”