Chinese vape companies have two key advantages in a global multi-billion market

At present, there are roughly more than a billion traditional cigarette consumers worldwide. But as tobacco control measures become increasingly strict across countries and consumers become more health-conscious, the market size of traditional cigarettes continues to shrink. At the same time, the market for e-cigarettes, built around the idea of “harm reduction,” has shown a favorable growth trend.

Traditional tobacco giants are actively transforming and entering the new e-cigarette market

Overall, the global e-cigarette market—including vapor products and heated tobacco products—continues to expand. Growth slowed in 2019, but its share of the total tobacco market still increased. According to Euromonitor data, global sales of e-cigarette products reached about US$48.55 billion in 2019, up 19.40% year on year, a clear slowdown compared with 2018. At the same time, however, the penetration rate of e-cigarette products continued to rise, with their share of all tobacco products increasing from 2.29% in 2014 to 5.94% in 2019.

Looking specifically at vapor products, global sales reached US$20.2 billion in 2019, up 28.43% year on year. At present, vapor consumption is concentrated mainly in the United States, the United Kingdom, and other Western markets, accounting for 47.77% and 13.40% respectively, while China accounted for 6.85%. This is related to the relatively late development of the vaping market in China.

However, despite the impact of tighter regulatory policies, the global e-cigarette market has shown a healthy development trend after going through a period of adjustment. In a sense, this is because e-cigarettes provide traditional cigarette consumers with more choices. Under the current market landscape, e-cigarette products represent the mainstream direction of future global development in this sector. This can be seen in the active and rapid expansion of the world’s four major tobacco companies into the e-cigarette market.

The world’s four largest tobacco companies—Philip Morris International, British American Tobacco, Japan Tobacco, and Imperial Tobacco—have all secured market share through acquisitions and the launch of their own brands. Revenue from their e-cigarette products, including vapor products and heated tobacco products, has reached 18.7%, 4.36%, 3.17%, and 3.56% of their total revenue respectively, and the trend continues to rise.

The dual advantages of China’s e-cigarette industry chain

Although China’s e-cigarette market developed relatively late and remains smaller in size, Chinese e-cigarette companies can still rely on the dual engines of supply-chain positioning and brand development to raise their value and standing in the global e-cigarette industry chain.

First, Chinese e-cigarette companies hold an absolute leading position in the upstream and midstream segments of the industry chain. China is the world’s largest e-cigarette manufacturing base. In 2019, 218 countries and regions worldwide purchased e-cigarettes from China. Overall, China’s e-cigarette industry has already formed a complete industrial chain, from upstream raw material suppliers to midstream e-cigarette design and manufacturing companies, as well as downstream sales businesses. This is a major advantage for Chinese e-cigarette companies. It helps them rapidly iterate products and build full-industry-chain barriers integrating R&D, design, and production.

In particular, e-cigarettes are technology-driven and product-driven products, with market demand playing a strong role. Therefore, product experience has a major impact on consumers and determines whether a product can be welcomed by both the market and consumers.

In addition, although many Chinese e-cigarette manufacturers mainly produce for international brand owners under OEM/ODM models, these models help domestic companies accumulate rich technical and supply-chain experience. In other words, long-term manufacturing experience, technological know-how, and supply-chain clustering give domestic companies advantages over international competitors in cost control and management, rapid product iteration and innovation, and technological breakthroughs. This also helps some e-cigarette manufacturers transition toward building their own brands.

Beyond manufacturing advantages, Chinese e-cigarette companies also have another advantage in brand building. In addition to the cost-performance advantage brought by a complete supply-chain system, Chinese companies tend to place greater emphasis on consumer experience, especially drawing on experience accumulated in consumer electronics and fast-moving consumer goods. This can be transformed into an advantage for Chinese e-cigarette companies, enabling them to understand the needs of consumers in overseas markets with different economic levels and cultural environments, and thereby develop e-cigarette products that better match local demand.

Exploring new pathways for Chinese brands to expand overseas

What is even more noteworthy is that among Chinese e-cigarette brands, some companies originally came from internet businesses in other sectors. Based on internet-style thinking, these companies start from the user perspective, are driven by innovative technology and user experience, excel at supply-chain integration, and can also iterate products quickly. RELX is a standout example in this regard. RELX is currently the largest e-cigarette brand in China. By the end of 2019, it had entered 43 countries, including Canada, the United Kingdom, and New Zealand, and overseas revenue accounted for 25% of its total, with continued growth.#p#Page Title#e#

Beyond RELX, whether more Chinese e-cigarette companies can break into international markets carries special significance for China’s e-cigarette industry. Yao Jianming, a professor at the School of Business at Renmin University of China, believes that without a consumer market, it is impossible to cultivate a brand. Under the current policy environment in China, it is not realistic for e-cigarette brands to first develop strong brands domestically. This is also where e-cigarettes differ from smartphone brands such as Xiaomi and Huawei. Those brands both had strong domestic consumer markets and customer bases before expanding overseas, giving them mature brand advantages in advance.

Therefore, under these circumstances, if regulation is handled properly and Chinese e-cigarette brands are able to build brands in overseas markets with visibility comparable to Xiaomi and Huawei, this would provide a valuable reference for the overseas expansion of other Chinese brands as well. It would also signal the formation of a new pathway for Chinese technology products going global.

Overall, for Chinese e-cigarettes to gradually raise their value and standing in the global industry chain, they need to rely on their supply-chain advantages as well as rapidly advancing domestic independent brands, using the dual engines of “supply chain + brand” to achieve the goal of enhancing industrial value.