Vape Industry Awaits National Standards for Direction

With over 300 million smokers in China, e-cigarettes have been pushed into the "spotlight" as a substitute for traditional cigarettes in recent years. However, this currently hottest electronic consumer product is facing increasing scrutiny and restrictions.

On October 9, Alibaba and JD.com announced a suspension of e-cigarette sales to American buyers to comply with strict local regulations in the U.S. Industry insiders believe that the release and implementation of e-cigarette industry standards in China are also "on the verge of happening." With tightening regulations, what does the future hold for the e-cigarette industry?

Capital's Appetite in a Trillion-Yuan Market

Once, even pigs could fly in a booming market.

From October last year to September this year, the stock price of EVE Energy Co., Ltd. soared from a low of 10.76 yuan per share to a high of 45.10 yuan, with a cumulative increase of 270%. The surge in performance was not due to its main business of lithium batteries, but rather e-cigarettes.

Previously, EVE Energy invested in Myle, holding 37.55% of its shares. Myle specializes in the sales and R&D of electronic vaporizers and key components, making it a leading enterprise in China's e-cigarette industry.

EVE Energy is just one of the beneficiaries of the booming e-cigarette market. According to Euromonitor, in 2018, China's e-cigarette market reached 5.152 billion yuan, a year-on-year increase of 28.5%, with a compound annual growth rate of about 35% from 2012 to 2018.

Against this backdrop, e-cigarettes have become a hotbed for venture capital and investment in China.

According to incomplete statistics from "EC E-cigarette World," there were over 35 investment cases in the e-cigarette industry in just the first half of 2019, with disclosed investment amounts totaling at least 1 billion yuan. Among them, it was reported that the e-cigarette brand JIL, promoted by Nanjing Durmei Electronic Technology Co., Ltd., received 12 million yuan in angel financing in March 2019, with the investor being a Suzhou-based e-cigarette accessories manufacturer that primarily produces cartridge components for a major American e-cigarette brand.

"E-cigarettes have been highly sought after as a startup project in China, almost enjoying the 'favorable time, geographical advantages, and harmony among people.'" Li Chaohui, an investment advisor at Dongwu Securities, believes that compared to the U.S. e-cigarette penetration rate of 31%, China's current penetration rate is less than 1%. If calculated at a 10% penetration rate, the market size could reach a trillion yuan level, naturally attracting many entrepreneurs.

What excites entrepreneurs even more is that although China is not the largest consumer market for e-cigarettes, it is the world's manufacturing base, accounting for over 90% of global e-cigarette production. As of August 2018, there were a total of 25,979 e-cigarette patents globally, with China accounting for 87%. This manufacturing foundation undoubtedly provides fertile ground for these new entrepreneurs. For instance, Shenzhen, as the largest e-cigarette production base, has over 500 e-cigarette manufacturing companies.

Reports indicate that Suzhou also has a complete e-cigarette industry chain. Many companies are laying out in areas such as engineering plastics, mold injection, hot runners, atomizers, and control boards around the internationally renowned e-cigarette brand JUUL, with notable companies including Dongshan Precision, Ruibao Ceramics, Suzhou Zhuoqun, Zhun Da Hot Runner, and Jingpin New Materials.

The "Harmless" Selling Point is Widely Questioned

However, alongside the e-cigarette startup wave comes widespread skepticism about e-cigarettes.

Currently, many e-cigarette brands often promote "harmless" as their main selling point, aiming to attract a large number of traditional smokers with the "satisfying" attributes of tobacco and the "healthy" attributes of e-cigarettes. However, increasing evidence suggests that this is not the case.

According to the latest research from New York University, e-cigarette vapor can cause lung cancer and potential bladder cancer in mice, damaging their genes, and it concludes that e-cigarette vapor may be "very harmful" to humans.

At a press conference on tobacco control held on July 22 this year as part of the "Healthy China Action," Mao Qun'an, director of the Planning Department of the National Health Commission, also stated that both domestic and international studies have found that the aerosol produced by e-cigarettes contains many toxic and harmful substances, and various additives in e-cigarettes also pose health risks. Additionally, many e-cigarette products have unclear nicotine concentration labels, which can easily lead users to consume excessive amounts.

As e-cigarettes face "harmful" allegations, a new social phenomenon has raised public anxiety: benefiting from China's convenient e-commerce sales channels, teenagers attracted by the "trendy" nature of e-cigarettes can easily purchase them, almost undoing decades of tobacco control efforts driven by administrative orders.

Recent survey results from the Chinese Center for Disease Control and Prevention show that the e-cigarette usage rate among the 15-24 age group in China is 1.5%, with 45.4% of users obtaining e-cigarettes through online channels. On October 10, a reporter randomly interviewed 10 young people on the streets of Nanjing's Xinjiekou, among whom four identified as "smokers," and two reported having tried e-cigarettes, with all purchases made online.

"I bought a fruit-flavored e-cigarette online, and it tasted pretty good. When I bought it, I thought e-cigarettes wouldn't harm my body," one interviewee responded when informed about the dangers of e-cigarettes.

National Standards Expected to Be Released by October

With many issues arising from e-cigarettes operating on the edge of laws prohibiting the sale of tobacco to minors, urgent solutions are needed. While countries like the U.S. are treating e-cigarettes with strict measures, relevant standards in China may soon be released.

Public information shows that the most explicit signal regarding e-cigarette regulation in China came at the end of July this year, when the National Health Commission, along with relevant departments, conducted research on e-cigarette regulation and planned to legislate for e-cigarette regulation. Additionally, according to the National Standard Information Network, the national standard for e-cigarettes was planned to be formulated on October 11, 2017, with a formulation period of 24 months, and it is currently in the "approval stage." This means that the national standard for e-cigarettes is expected to be released as early as this month.

"I've been waiting for this day, both fearful and expectant," said Liu Cheng, a leading brand agent for e-cigarettes in Nanjing. He told reporters that he worked hard to "snatch" the agency rights for this brand last year and opened three offline stores in Nanjing, "Currently, each store can net about 30,000 yuan per month, which is more profitable than my previous clothing agency business."

However, Liu admitted that the e-cigarette boom has made the market somewhat "overinflated," leading to continuous price increases for raw materials. "Since September, the price of nicotine salts has doubled, and our procurement costs have also increased significantly." Therefore, as a leading brand agent, Liu hopes that the national standards will be introduced to regulate the entire market.

At the same time, Liu is also concerned that the standards may be too strict, "I've heard that there will be limits on nicotine content, not exceeding 2%, while the mainstream products currently range from 3% to 5%." Liu expressed that if a 2% threshold is introduced, it would affect existing inventory and the taste changes in new products might "drive away" some consumers.

"Indeed, the entire industry is filled with anxiety, and capital may be the first to react," Li Chaohui told reporters. Currently, many investors are taking a wait-and-see approach to e-cigarettes. Although the e-cigarette market seems large, it is a very vertical niche, and only a few leading brands will ultimately succeed, while most players will inevitably be eliminated in the new round of reshuffling after the standards are introduced.

Tianfeng Securities industry analyst Wu Li is more optimistic, believing that with the implementation of national standards, the domestic e-cigarette market may usher in a second boom. At that time, under clear industry standards and regulations, both upstream manufacturers and downstream distributors will have "laws to follow," leading to healthy and sustainable development in the industry. Intern reporter Chen Cheng.