The Vaping Industry’s "Catfish Effect" and China’s Tobacco Category Reform

In the context of "tobacco sovereignty," how will Chinese tobacco layout its traditional tobacco and new tobacco businesses, and what regulatory measures will be taken for the currently booming e-cigarette market? Let's discuss this.

Before 2019, the tobacco layout was still dominated by traditional cigarettes, while encouraging tobacco companies to research new tobacco products (mainly heated tobacco), but at the same time, regulatory measures prohibited the legal sale of heated tobacco in the domestic market. At that time, traditional cigarettes were everything for Chinese tobacco.

However, e-cigarettes grew wildly in an unexpected way, disrupting all rhythms. Under the ironclad regulation of Chinese tobacco, e-cigarettes, due to their characteristic of being "smoke but not smoke" (having the effects of tobacco products but not being exclusive tobacco products), surged in popularity. More critically, the domestic e-cigarette market faced the entry and harvesting of international e-cigarette giants. All of this forced Chinese tobacco to rethink the future forms of tobacco products and the corresponding industrial layout, just as the national government rethought the future planning of the Guangdong-Hong Kong-Macao Greater Bay Area in light of the Hong Kong events.

So what is the overall planning for the future of Chinese tobacco? Let me share my personal views.

While adhering to traditional cigarettes, Chinese tobacco will encourage the development of domestically produced heated tobacco while restricting the rapid spread of e-cigarettes in the domestic market. Ultimately, the entire market will present a structure of traditional cigarettes + heated tobacco + e-cigarettes.

Next, we will discuss the three product forms separately.

Development and brand upgrading of traditional cigarette categories

The emergence of e-cigarettes has put a lot of pressure and inspiration on traditional cigarettes:

The product design of e-cigarettes is completely market-oriented, which sharply contrasts with the new product development model of many traditional cigarette brands—"leadership brainstorming."

The popularity of e-cigarettes is fundamentally due to convenience and harm reduction, which reminds traditional tobacco R&D not to equate new product development with cigarette pack design, but to further break through at the core product level. Although it is difficult, I believe we cannot yet assert that the technology tree of traditional tobacco has reached its end.

What does it mean to create products for young people, and what is youthful packaging? E-cigarettes have taught traditional cigarettes a lesson.

Even the current weaknesses of e-cigarettes, such as unstable flavors and strong chemical flavoring, remind traditional cigarettes that the advanced industrial manufacturing and strict flavor requirements they previously adhered to are correct and worthwhile.
 
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A slogan from a tobacco leaf re-drying factory. The craftsmanship spirit of traditional tobacco still exists. (Photo by Ruihu)

So, what changes will occur in the traditional cigarette field?

In category development, it will be market-oriented, further advancing segmented products targeting niche markets and demographics. Recently, a brand launched a women's cigarette, although it looks quite unattractive, I believe the awareness is there, and the capability will improve over time.

In technological R&D, returning to "hard technology," that is, exploring flavors and further researching harm reduction, is fundamental to extending the life of traditional cigarettes.

In packaging, we should abandon various eye-catching "mooncake-style" designs (like piano or password designs) and return to leading aesthetic designs. In terms of volume and strength, cigarette pack designs should not be inferior to cosmetics or fast-moving consumer goods. The pursuit of design leadership, rather than falling into vulgarity, should be the next guiding direction.

In terms of channels, we should pay attention to the demands of retailers and various channels, enhance profitability, and bind terminals and tobacco with benefits, so they are not easily swayed to e-cigarettes.

In brand building, we should return to brand building from recent years' internet-based promotions (like scanning codes for points). The core of brand building is not just packaging, but more importantly, the exploration of categories and the creation of product content. Additionally, we should learn from the experiences of the e-cigarette industry and place the brand center in Beijing. (Currently, although Shenzhen is the manufacturing center for e-cigarettes, almost all leading brands that have received financing have their brand and marketing departments in Beijing, which makes sense.)

Heated tobacco, the "lucky one" in the palace struggle

If it weren't for e-cigarettes, heated tobacco might have to stay in the cold palace for a few more years. However, good fortune has arrived.

The "political incorrectness" of e-cigarettes will face a series of regulatory crackdowns in the future. However, the rapid development of e-cigarettes has also validated the real demand and huge potential for new tobacco in the market.

If Chinese tobacco continues to guard the traditional cigarette market and does not embrace new tobacco, it will not only hinder the innovation of traditional cigarettes but will also hand over the new tobacco market to black market transactions, further losing the influence of domestic tobacco products on Chinese cigarette consumers. I previously discussed in my social circle how rapidly iQOS has developed in China; those interested can look it up.

So, if Chinese tobacco wants to develop new types of cigarettes, between heated tobacco and e-cigarettes, there is no doubt that heated tobacco will prevail.
 
The only issue with developing heated tobacco is patents. As long as Chinese tobacco is determined, the patent issue can be resolved, for example, by exchanging market access for patents or simply filing patent lawsuits; Philip Morris is unlikely to fall out with Chinese tobacco.

Based on the above reasons, the following conclusions can be drawn:

The pace of releasing heated tobacco in China will accelerate. The first to enter the market will be heated tobacco pods and devices from domestic e-cigarette companies.

Once released, current private enterprises focused on heated tobacco devices will gain development opportunities. After all, devices are not exclusive products, and Chinese tobacco will not monopolize them, just like lighters.

However, pods are exclusive products, and like traditional tobacco, they will not be sold online and will not allow private involvement.

E-cigarettes, a storm is coming

First, it is clear that thorough regulation of e-cigarettes requires resolving legal issues, which takes time and cannot be fully controlled by any one department, including Chinese tobacco.

Before legal issues are resolved, the management of e-cigarettes will rely more on market means. For example:

Prohibit domestic tobacco leaves from supplying nicotine to e-cigarettes. Tobacco leaves are exclusive products under the jurisdiction of Chinese tobacco, and this method can be used at any time.

Prohibit Chinese tobacco's subordinate enterprises and service providers from cooperating with e-cigarette companies for e-liquid or nicotine supply (except for foreign markets). For tobacco service providers, it is a choice between cooperating with Chinese tobacco or e-cigarette companies.

By verbal declaration, prohibit all licensed tobacco retailers from selling e-cigarettes, otherwise, it will affect their eligibility to order traditional cigarettes. That is, they must choose between selling traditional cigarettes or e-cigarettes.

While prohibiting, Chinese tobacco enterprises will launch their own e-cigarette products in the tobacco retail terminals they control, thereby achieving dominance in the domestic e-cigarette market. The term "their own" includes several meanings: their own brand; self-produced e-liquid; owning their own patents.

The point of "patents" must be emphasized; Chinese tobacco can produce e-cigarettes that surpass existing domestic and international levels.

Through regulatory suppression and the launch of free products, Chinese tobacco will occupy the mainstream of the domestic e-cigarette market. Even if JUUL enters, whether in terms of products or market channels, it cannot compete with Chinese tobacco.

The above analysis outlines the future layout of Chinese tobacco regarding traditional cigarettes, heated tobacco, and e-cigarettes. It is more about sorting out some ideas, and specific details can be gradually expanded in later articles.

Salute to e-cigarettes

The emergence of e-cigarettes is like a catfish, breaking the silence of the Chinese tobacco market.

Traditional cigarettes should thank e-cigarettes. If it weren't for e-cigarettes, traditional cigarettes would still be indulging in the warm bed of the exclusive system; heated tobacco should thank e-cigarettes. If it weren't for e-cigarettes, heated tobacco would still be stuck in black market transactions; tobacco consumers should thank e-cigarettes. E-cigarettes have promoted the progress of the tobacco industry, and more harm-reducing, experience-rich cigarette products will continue to emerge.

However, how should e-cigarette companies face the upcoming regulations, and what is their way out?