A Detailed Guide to the Vape Industry Supply Chain

A detailed interpretation of the e-cigarette industry chain was successfully concluded at the second E-Cigarette Supply Chain Integration Summit Forum in Shenzhen. We invited four industry experts to share the latest knowledge in the e-cigarette sector. The host stated: China has always been a major player in the tobacco industry. According to statistics, in 2016, the sales of traditional tobacco in China reached 1.3 trillion yuan, accounting for 44% of global sales. The sales of new e-cigarettes in China were only 3.2 billion yuan, merely 0.32% of traditional tobacco sales. Compared to the usage of e-cigarettes in the United States, the United Kingdom, and Italy, the penetration rate of e-cigarettes in China is particularly low, indicating that e-cigarettes are indeed a market waiting to be explored.
At the beginning of 2019, many new e-cigarette brands entered the market, most of which were not founded by industry insiders, with notable representatives being RELX and Huoqi e-cigarettes.

It is reported that RELX e-cigarettes achieved sales of 60 million yuan in January 2009, with a market valuation estimated at 800 million USD. Tongdao Dashi shared a social media post that sold 5 million e-cigarettes in just 24 hours.

Currently, the capital market is very optimistic about the e-cigarette industry, and these new brands are influencing new users through their own channels. Today, the e-cigarette supply chain is dominated by Micvail, which monopolizes the supply chain for small e-cigarettes. Micvail's net profit in 2018 is estimated to reach 730 million yuan, with a market valuation projected at 8 billion yuan.

Currently, e-cigarettes are still produced using relatively traditional processing methods. Is it possible to launch newer and better products? For example, data-driven and smart e-cigarettes.

The e-cigarette supply chain is filled with opportunities and challenges. The next four guests from different segments of the e-cigarette supply chain will engage in in-depth discussions on these issues.

From a capital perspective, I want to share the current and future of new tobacco from the capital market's viewpoint. In the current global context, traditional tobacco is under pressure. In 2006, the WHO issued the Framework Convention on Tobacco Control, which now has 180 parties.

Under the convention's restrictions, the global smoking rate has decreased from 23.5% in 2007 to 20.7% in 2015, and it is expected to drop to 17% by 2030. According to the latest data, the number of smokers globally is nearly 1.1 billion, with approximately 310 million smokers in China, making it still a major smoking country.

In 2017, global cigarette sales (excluding China) reached about 62 million cartons, while China's cigarette sales were about 48 million cartons. A clear trend is emerging: as income levels rise, people's health awareness strengthens, and the demand for traditional cigarettes declines significantly. According to Euromonitor, global cigarette sales are expected to continue declining over the next five years, with a CAGR of -1.67%.

In the context of global tobacco control, the four major tobacco giants—Philip Morris International, British American Tobacco, Japan Tobacco, and Imperial Brands—hold a combined market share of 67.2%, effectively dominating all tobacco markets outside of China.

With the strengthening of tobacco control and increasing health awareness, new reduced-harm products are growing rapidly and have become a key focus for these four tobacco giants in their R&D and promotion efforts.

Comparing the four major tobacco companies, Philip Morris International is the earliest to enter the market and has invested the most in reduced-risk tobacco products (RRPs). Since 2008, Philip Morris has invested over 4.5 billion USD in the R&D and scientific testing of RRPs. Japan Tobacco follows with over 2 billion USD, while British American Tobacco and Imperial Brands joined the fray in 2012 with their investments.

From a market structure perspective, the global sales scale of new tobacco products reached 17.75 billion USD in 2017, with a year-on-year growth of 49%. It is expected that the global scale of new tobacco products will reach 25 billion USD in 2018 and exceed 30 billion USD in 2019.

From the sales scale chart of various new tobacco categories, it can be seen that before 2016, e-cigarette products were mainly dominated by open-system large devices. However, with the rise of IQOS and JUUL, the closed-system small devices have rapidly emerged, accounting for nearly 45% in 2017, while disposable small devices are gradually being phased out.
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From a regional perspective, traditional vaporized e-cigarettes are prevalent in Europe and America: due to strict controls on traditional cigarettes, high taxes, and health risks, consumers in Europe and America are more accepting of vaporized e-cigarettes. According to Euromonitor, in the category of liquid nicotine products (excluding heated non-combustion new tobacco), the North American market alone reached 4.9 billion USD in sales in 2017, accounting for 43% of the global vaporized e-cigarette market. In terms of brand structure, compared to heated non-combustion products, the vaporized e-cigarette market is relatively fragmented and has a low concentration, with consumers primarily being "non-smokers." Traditional tobacco companies have low participation and revenue contributions in vaporized products. Currently, except for JUUL, the vaporized industry chain mainly follows the "manufacturer → distributor → retailer" business model, with weak brand power.

In the past two years, IQOS has led the heated non-combustion trend, with its market share in Japan rapidly increasing from less than 1% to 15.5%. The reasons include not only the quality of the product but also the company's effective influence strategies:

Affordable pricing and diverse flavors

Additionally, Philip Morris has launched IQOS in various cities across 43 countries, including Switzerland, Russia, Portugal, Germany, and Canada. According to PMI statistics, there are currently 5.9 million retained consumers (no longer using traditional cigarettes), with a global market share of 1.7%.

East Asia is the main market for IQOS: due to smoking culture and vaporized e-cigarette regulations, countries like Japan and South Korea are more accepting of heated non-combustion products. According to PMI statistics, East Asia currently has 4.41 million users who have fully converted to IQOS (no longer using traditional cigarettes), accounting for 76.4% globally.

From the current state of the new tobacco industry in China, regulatory policies for new tobacco products are the key driving force for market development. China manufactures over 90% of e-cigarette products, yet there are few well-known domestic brands in the new tobacco sector.

Unclear policies have restricted the speed of development in the new tobacco industry. If clear policies are introduced, they will effectively change the current situation of the new tobacco industry, and domestic new tobacco companies will rise.

Currently, the high profits from smuggled pods continue to attract criminals to take risks, with most cases involving internationally recognized heated non-combustion pods, and the overall trend shows large case values, high frequency, and wide geographic distribution. The frequent occurrence of smuggling cases reflects a portion of domestic consumers' demand for diverse tobacco products. If policies are relaxed, the prospects for the domestic new tobacco industry will be very bright.

Currently, various tobacco companies and their research institutes are actively laying out in the new tobacco field through self-driven or cooperative means, with six companies already releasing related products. Companies that have developed and launched finished products include Sichuan Tobacco, Yunnan Tobacco, Guangdong Tobacco, Hunan Tobacco, Hubei Tobacco, and Shanghai New Tobacco Research Institute, with products including heated non-combustion tobacco, e-cigarettes, and oral tobacco. In terms of sales channels, they mainly focus on testing the waters in foreign markets, with no domestic sales plans yet.

Finally, looking ahead, from a capital market perspective, the rise in PMI's stock price is also attributed to the launch of IQOS, which is expected to pass FDA approval in the US soon, marking the acceleration of the new tobacco era and the beginning of a rapid development phase! At that time, the stock prices of related listed companies such as Philip Morris International and Yingqu Technology are expected to reach new highs! Investment opportunities in the secondary market are emerging!

It is now evident that investment in the entire new tobacco field is booming, with listed companies like Jinjia Co. collaborating with Xiaomi's industrial chain to layout new tobacco; Shunhao Co. has been developing heated non-combustion products since 2017 and began testing and producing pods in Cambodia in 2018.

In the primary market, many companies or entrepreneurs from different fields are entering the e-cigarette sector, with the startup RELXVC being highly valued. Many entrepreneurs from the mobile phone supply chain are also venturing into the new tobacco field. We also look forward to the emergence of a Chinese version of IQOS in the future.

I believe that through the joint efforts of everyone present, the e-cigarette industry in our country will surely transition from "Made in China" to "Intelligent Manufacturing in China." Those interested in making a career in the e-cigarette industry can consult WeChat: vapeos or call our e-cigarette market manager: 17682343645.