Is FLU or Hammer E-Cigarettes Luo Yonghao's Opportunity, or an Opportunity for the Industry?

Is FLU or Hammer E-Cigarettes Luo Yonghao's Opportunity or an Opportunity for the Industry? Luo Yonghao, once full of passion, recently seems a bit out of tricks. After selling smartphones, he ended up with unpaid wages, layoffs, suppliers demanding debts, and even his bank deposits and equity frozen; his bullet messaging app was short-lived, and he could only rely on the so-called upgraded "Chat Treasure" to continue the bullet messaging service. When Luo Yonghao was almost at his wit's end, the emergence of e-cigarettes seemed like a new hope. At the Kuairu Technology press conference on the evening of January 15, besides the widely noticed social product "Chat Treasure" along with Toilet and Duoshan, there was also a trendy product—the FLU e-cigarette.

This e-cigarette was embedded in Chat Treasure's "Song Huanduo Big Action" (a pun on "give, exchange, snatch"). Users who use Chat Treasure during the event period have a chance to receive this e-cigarette for free. This move aims both to attract new users to Chat Treasure and to leverage Luo Yonghao's IP popularity to boost FLU e-cigarette's market awareness.

Many people may not be very familiar with e-cigarettes, so let's start with some basics. As the name suggests, an e-cigarette is an electronic smoking product that mimics traditional cigarettes, consisting of nicotine solution cartridges, vaporizing devices, and batteries. Besides resembling cigarettes in appearance and flavor, e-cigarettes atomize the liquid nicotine in the cartridges into vapor, allowing users to experience the sensation of "inhaling and exhaling smoke" similar to traditional cigarettes.

The FLU e-cigarette launched alongside Chat Treasure uses cartridges containing nicotine salts (used as a substitute for nicotine) e-liquid, known as pod vaporizer or "small smoke" in the market. This type of e-cigarette does not produce tar, carbon monoxide, or other combustion waste, thus effectively reducing harm to the human body compared to traditional tobacco.

Like Bullet Messaging, the founder of FLU e-cigarette was also a former employee of Smartisan Technology who later left to start his own business. Zhang Ji, the legal representative and founder of Kuairu Technology, the developer of Bullet Messaging, was formerly a product manager at Luo Yonghao's Smartisan Technology; while Zhu Xiaomu, the founder of FLU e-cigarette, was Smartisan's first employee and former vice president of the User Experience Center. In a positive light, Smartisan Technology is a "cradle" for entrepreneurs; less flatteringly, the company's decline forced its veterans to seek their own paths through entrepreneurship.

As for Luo Yonghao endorsing Bullet Messaging, Chat Treasure, and FLU e-cigarette, it seems he is running out of options, having failed in the smartphone battlefield and now pinning hopes on social and consumer sectors. Social apps aside, Bullet Messaging's rise and fall seem to foreshadow Chat Treasure's fate, especially with countless competitors in the field. So, what about the emerging e-cigarette sector? Can it offer some solace to Luo Yonghao, who has been hurt by the smartphone market?

Globally, the "2017 World Tobacco Development Report" shows that the global e-cigarette market reached $12 billion in 2017 and is expected to reach $48 billion by 2023, with a compound annual growth rate of 26%. Given China's large population base, domestic e-cigarette consumption is also growing rapidly. Production volumes were 1.205 billion units in 2016, 1.6 billion in 2017, and 2.2 billion in 2018. The Chinese e-cigarette market is expected to reach 112 billion yuan in the next five years, with a compound growth rate of 89%.

E-cigarettes currently have very high profit margins, which explains why Mr. Luo is entering this market, but the industry is complex. Marketing skills are crucial; cheap products alone won't succeed, and Smartisan has never excelled in either.

"An average year-end bonus of $1.3 million"—this was the year-end benefit given by American e-cigarette unicorn Juul Labs to its 1,500 employees after Altria, Marlboro's parent company, acquired a 35% stake for $12.8 billion. The company's gross profit margin reached 75%!

Notably, Juul seized the top spot in the U.S. e-cigarette market within just two years, with a market value soaring to $38 billion! The windfall effect is vividly demonstrated by Juul.

With such high growth and high gross margins, the e-cigarette industry is naturally favored by capital markets, especially companies with their own brands and strong resource integration capabilities.

On one hand, there is a market space worth hundreds of billions; on the other hand, the entry barrier for e-cigarette startups is low, requiring about 5 million yuan in startup capital, including brand and channel building costs, while profit margins can reach 60%. Low barriers, high margins, and large market space make e-cigarettes attractive to many entrepreneurs and investors. According to IT Juzi data, in the past three years, well-known investment institutions like IDG and ZhenFund have invested tens of millions in e-cigarette startups. No wonder Luo Yonghao is pushing FLU e-cigarettes.

However, in reality, e-cigarette entrepreneurship may not be as rosy as imagined. The biggest obstacle remains policy uncertainty. On October 10, 2018, Hong Kong Chief Executive Carrie Lam announced a comprehensive ban on e-cigarettes in her policy address. On January 1 this year, Hangzhou implemented the new "strictest smoking control regulation," which explicitly includes e-cigarettes. Whether China will enact a nationwide ban on e-cigarettes remains unknown. Most funded e-cigarette brands are still in angel, Series A, or Pre-A rounds, with few exceeding 100 million yuan in financing, indicating capital's cautious approach.

Another challenge is the target users. Although e-cigarettes contain lower levels of tar, carbon monoxide, nitrosamines, and other toxic substances than cigarettes, and their taste and experience are similar to traditional cigarettes, attitudes differ between old and new smokers, much like tea connoisseurs' differing views on Pu'er tea paste versus Pu'er tea. For old smokers, no matter how much e-cigarettes claim to be healthier, they lack the "kick" of traditional cigarettes. Thus, the target users are "new smokers" who pursue health and quality of life and are more open to new things. How long it will take to cultivate this market and get users accustomed to e-cigarettes and their relatively high prices (FLU e-cigarette is priced at 299 yuan) remains uncertain.

China is actually the most developed and competitive e-cigarette market with vast opportunities. If the e-cigarette path fails, will Luo Yonghao come up with other new ideas? This is what the public is most curious about. Finally, a question for Smartisan fans: will you buy Smartisan e-cigarettes?