E-Cigarettes at a Turning Point as National Standards Near Release

In the face of e-cigarettes, capital and entrepreneurs are pouring in crazily, and the public is following suit and criticizing and worrying.

Following the bicycle chaos, the domestic venture capital circle has entered the war of ten thousand cigarettes since 2018. But on closer inspection, e-cigarette entrepreneurs and layout investors appear to be enthusiastic about marketing, but in fact they are extremely nervous about policies, regulations and every move of relevant departments, trying their best to circle more territory and dividends before the regulatory line of life and death falls.

Although this market space is large enough, the stage of barbaric growth of domestic e-cigarette entrepreneurs will soon end with the introduction of relevant regulatory policies.

Recently, the National Standardization Administration Commission responded to First Finance and Economics and stated that the mandatory national standard for "e-cigarettes" was in the process of drafting, relevant technical indicators and content were still under study, and the approval and release time was not yet determined.

The official website of the National Standardization Administration Commission shows that the national standard formulation plan for "Electronic Cigarettes" issued in October 2017 requires the project progress to go through several stages of online publicity, drafting, soliciting opinions, review, approval, and release. The current project status has entered The approval stage, according to the standard formulation cycle, it will be approved and released by the National Standards Commission within 24 months and 12 months, with about 4 months left before the official completion of the project. By then, the production and circulation of e-cigarettes in China will be implemented in accordance with national standards.
 
Capital poured in

Competition in the domestic e-cigarette industry has developed to a capital level confrontation. Starting from the second half of 2018, e-cigarettes have entered a peak financing period, with 11 financing incidents occurring. Excluding the high financing of JUUL US$650 million and US$12.8 billion, the financing scale of other brands has also approached 500 million yuan. 2019 has entered an accelerated stage. As of late May, 11 financing incidents have occurred, with a total financing amount of nearly 900 million yuan. Many of them are new brands in 2019, founded in Shenzhen, and financing is concentrated in Angel Round and Series A are in their early stages. Behind this round of e-cigarette outlets, front-line investment institutions including Sequoia Capital, IDG, Zhenge Fund, Source Capital, etc. have gathered.

In addition to the primary market, the secondary market is also promoting the concept of e-cigarettes. Major domestic companies engaged in e-cigarette business include Yingqu Technology (002925.SZ), Tianchang Group (02182.HK), Shunhao Co., Ltd.(002565.SZ), Jinjia Co., Ltd.(002191.SZ) and many other A-share and Hong Kong-listed companies. After the March 15 report, e-cigarette concept stocks all showed varying degrees of decline, but soon rebounded and even showed continuous daily limits. The financial report shows that Avipus and McWell's e-cigarette businesses increased significantly in operating income and net profit from 2015 to 2018. The two companies have terminated their listing on the New Third Board, and the industry speculates that they may move to the A-share market.

On the brand platform, the first and largest e-cigarette in China to enter the industry is the e-cigarette relx Yueshi, founded by Wang Ying, former head of Uber China and general manager of Didi's Uber business unit. In June 2018, Yueshi announced the completion of the first round of RMB 38 million in financing, led by source code capital and followed by IDG. In March this year, Yuexie reported a new round of financing, with a valuation of US$800 million.

“Zhang Jinyuan, CEO of Tongdao Uncle, believes that Yueshi genetically understands the basic approach to the e-cigarette market. Its channel advantage is based on brand advantage, but its scale has not reached the level of forming a natural monopoly.

For this reason, after Yueshi took the lead in opening up a gap in the domestic e-cigarette industry, a large number of followers poured in. After all, industry competition is essentially a competition between people, and a major feature of the domestic e-cigarette industry is the influx of many entrepreneurs with their own IP traffic, including Luo Yonghao, the former founder of Hammer Technology, Zhu Xiaomu, the former No. 2 figure of Hammer, Zhang Jinyuan, Cai Yuedong, founder of Tongdao Uncle, and He Chang, founder of Huang Taiji.

Is e-cigarettes profitable?

Internet celebrity founders only bring their own traffic and resources, and will not make it easier to create core barriers. Currently, practitioners mainly focus on competition in brands, channels, supply chains, marketing, etc. This is why the current so-called e-cigarette industry is right and wrong.

“Yes, the cost of e-cigarettes is indeed low. Based on the data provided by many practitioners, the cost price of cigarette bombs does not exceed ten yuan. The hardware equipment is divided into two types: disposable and replaceable cigarette bombs. The former is about ten yuan, and the latter is twenty to thirty yuan. The combined cost price is not high. For products priced at 199 yuan, 299 yuan, or even 399 yuan, the profit margin is indeed very large.# p#pagination title #e#

An industry insider revealed that the factory shipment price of e-cigarettes for about 230 yuan on the market is 40 - 50 yuan. Mold, solution, materials, and labor are the main cost components, and the factory profit is about 30%. Brand owners pay channel merchants at a price of 100 - 130 yuan, and the gross profit of brand owners is 40%-60%. However, the final profit of brand owners depends on the proportion of marketing, operation and other expenses, and each company has different efforts. The terminal price of channel merchants is around 230 yuan, making it the bulk of profits. Judging from the financial reports of companies such as Avips and McWare, the gross profit margin and net profit margin of e-cigarettes are basically around 30%.

However, Wei Lu, co-founder of iLAX, said that the cost structure is different at different stages. The initial marketing cost of the e-cigarette industry will inevitably be the highest and will gradually decrease in the future. At the same time, research and development costs will increase. Nowadays, e-cigarettes mainly focus on two aspects. On the one hand, they build characteristics from the tobacco rod and focus on exterior design; secondly, they will enrich the taste of high-end tobacco oil.

Zhu Xiaomu, founder of FLOW, believes that most e-cigarette manufacturers are currently not profitable, and the main cost is spent on marketing. Take FLOW as an example. Its marketing model mainly adopts the form of cooperation with offline activities, such as IMF electronic syllables and strawberry music festivals. The price of a booth at the Strawberry Music Festival is about 300,000 to 500,000 yuan, and the overall cost of FLOW's participation is about 1 million yuan.

In addition, a direct impact of 315 Therefore, after calculation, e-cigarettes are not a high-profit industry.

Outside the supply chain, tobacco oil is currently the main factor in blocking e-cigarettes. Zhang Jinyuan revealed that the supply of tobacco oil has begun to be tight and is communicating with the China Tobacco Administration in the hope of cooperation.

Hidden dangers of racing around the land

The e-cigarette industry has a broad market in China. China has 350 million smokers, accounting for nearly 30% of the world's smokers, but e-cigarette consumption accounts for less than 1%; In contrast, in the United States, where the e-cigarette market is most developed, e-cigarette consumers account for 13% of the total number of smokers. Once the domestic e-cigarette consumer group is expanded to 10% or more, a market scale of more than 100 billion can be opened up.

It is not so much that domestic e-cigarette practitioners have more optimistic expectations for the future of the industry, but rather that unknown risks and the pressure of capital swarming force them to gallop and compete for the last market opportunity before the end of the dividend period.

But there are also risks and crises behind the rapid expansion of e-cigarettes.

In April this year, the fifth IECIE Shenzhen Electronic Cigarette Exhibition, one of the world's four major cigarette exhibitions, opened at the Shenzhen Convention and Exhibition Center. Hundreds of e-cigarette manufacturers participated in the exhibition, but two-thirds of the products were relatively inferior, such as the use of metal casings. Cigarette rods made of tobacco will produce alumina that is harmful to the human body when heated.

In addition, manufacturers that are not OEM and control their own supply chains are not foolproof. The e-cigarette industry chain is still in an immature early stage of development. Too fast and too hasty launch of new products on the market will directly lead to poor product quality and decline in yield.

In March this year, Yuexie launched its new product Alpha, but then there were yield problems such as oil leaks, and the platform removed products and closed production lines. Recently, the brand will launch new products with a more fashionable appearance and design. Cigarette bombs or tobacco rods are different from existing products on the market.

Wei Lu said that products will inevitably go through multiple polishing processes, and some brands have the need to go public quickly. If they do not go through multiple inspections, the production cycle will be compressed to be too short, and matching problems and product quality problems in various links will inevitably arise. The production of e-cigarettes requires at least 150 days to 180 days.

Risk warnings and regulatory red lines

“Toxicities and policies are two life and death lines on the development path of the domestic e-cigarette industry, even if the industry's broad prospects are known.

Compared with excited entrepreneurs, the entire public opinion is more vigilant and morally critical towards domestic e-cigarettes. The unknown toxic harm of e-cigarettes and the accompanying harm to consumer health are the core criticism points.

Xiong Jingfan, technical officer of the Shenzhen Smoke-Free City Project, said that e-cigarettes, as an emerging product in recent years, are not regulated according to tobacco products. In addition, manufacturers have widely publicized the fact that e-cigarettes can help quit smoking, misleading the public and making them less aware of the dangers of e-cigarettes. At present, Shenzhen has included e-cigarettes in the same way as traditional tobacco products. It plans to ban the use of e-cigarettes in all smoke-free places. It also prohibits advertising, promotion and sponsorship of e-cigarettes. Smokers often choose e-cigarettes just as an excuse. What needs to be more vigilant is the harm of e-cigarettes to young people.# p#pagination title #e#

On May 30, the China Center for Disease Control and Prevention released the "2018 China Adult Tobacco Survey Results." The survey found that the majority of people using e-cigarettes are young people, and the e-cigarette use rate among people aged 15 - 24 is 1.5%. The most important way to obtain e-cigarettes is the Internet (45.4%). It is worth noting that compared with 2015, the proportion of people who have heard of e-cigarettes, who have used e-cigarettes, and who use them now has increased.

The uncertainty of the toxicity of e-cigarettes is currently the core concern and panic point in society.

According to information released by the World Health Organization, the quantity and content of known toxic substances produced by e-cigarettes are usually lower than or much lower than cigarette smoke, but they will produce some new harmful substances unique to electronic nicotine delivery systems, such as glyoxal; In addition, the concentrations of some metals (including lead, chromium, nickel) and formaldehyde in the aerosols of certain e-cigarette delivery systems are equal to or higher than those in traditional cigarettes. In addition, second-hand smoke (second-hand aerosols) from e-cigarettes is also unsafe. It is a new source of air pollution that produces particulate matter, certain volatile organic compounds, certain heavy metals and nicotine. The World Health Organization directly uses whether you want to be hit by a car or hit by a motorcycle to describe the difference between traditional second-hand smoke and second-hand smoke from e-cigarettes to the human body.

The main selling point of e-cigarette marketing is that e-cigarettes can help quit smoking, but this has not yet been recognized. The main culprit of tobacco addiction is nicotine, and the liquid of e-cigarettes also contains nicotine. Because e-cigarettes lack standards, the content of various substances in the liquid varies greatly, making it difficult to assess other health risks.

In addition to health, policies are generally believed by the industry to be the life-and-death line for the domestic e-cigarette industry.

From the reply of the National Standards Committee, we can initially guess that the formulation of mandatory national standards for "E-Cigarette" is mainly aimed at testing the composition of e-Cigarette liquids. The technical scope and content of the specific standard are based on the determination of nicotine, propylene glycol and glycerol in e-Cigarette liquids. Mainly, this standard has not yet been implemented, and it is unknown what disruptive impact it will have on the e-Cigarette industry, but what is certain is that e-cigarette manufacturers whose quality and safety issues do not meet the standards will lose their possibility of survival.

Some investors have expressed a more negative attitude towards the domestic e-cigarette industry. Wang Jing, a partner of Yunjiu Capital, said that the domestic electronics and industry have developed relatively early, but looking forward, due to policy reasons, you can actually see the clear ceiling. Another investor who asked not to be named gave a detail: Foreign tobacco boxes are characterized by a very large area warning that smoking is harmful to health, with the purpose of minimizing consumers 'desire to buy. However, the domestic tobacco industry has not followed up in this regard for many years. It is generally just a reminder that smoking is harmful to health. The tobacco industry provides trillions of yuan in tax revenue to the country every year. The huge profit and influence space determine that the industry will not change much in the short term. Although March 15 named e-cigarettes, doubts about the smoking cessation effect and safety of e-cigarettes did not reach the seven inch market. However, as more and more e-cigarettes reach the incremental market of young consumers, they will inevitably touch the cheese of traditional tobacco. Frequent negative public opinion will also limit the further promotion of e-cigarettes and accelerate the fall of policy sharp edges.

Currently, 32 countries around the world have completely banned e-cigarettes, and 69 countries have implemented controls on them. Six countries ban sales, production and imports and regulate their use. Hangzhou has introduced legislation to ban the use of e-cigarettes in smoke-free places, and some cities are planning to introduce relevant legislation. For example, Hong Kong plans to completely ban e-cigarettes, and Shenzhen is also planning to amend the law to ban the use of e-cigarettes in smoke-free places.

Local legislation cannot replace national standards and industry norms. The introduction of the national standard for e-cigarettes will be the general trend to allow non-compliant products to be delisted as soon as possible. In July 2018, a vote was held on the national standard for e-cigarettes, and the results showed that the pass rate reached 78.18%.

In fact, even if there is room for survival, the only option left for e-cigarette entrepreneurs is probably to be acquired by state-owned enterprises. Referring to JUUL, a representative foreign company, in December 2018, Altria Group acquired a 35% stake in JUUL Labs Inc for US$12.8 billion, directly valuing the latter to US$38 billion.

“It depends on what e-cigarette entrepreneurs want.& rdquo; Investor Zhu Xiaohu is also cautious about the e-cigarette project. He said: Supervision will definitely follow up quickly, see the black swan clearly, and understand the regulatory logic." rdquo;