Despite Tighter Regulation, Capital Continues to Flow into the Vaping Industry

On July 26, the WHO released the "2019 Global Tobacco Epidemic Report", calling on governments and consumers of all countries not to trust tobacco companies 'propaganda on e-cigarettes and other products. The report states that the so-called e-cigarette damage is only a publicity strategy of tobacco companies, and supervision of the e-cigarette market should be strengthened.

Vinayak Prasad, an official of the WHO Tobacco Control Department, directly pointed out that products such as e-cigarettes have the same hazards as traditional cigarettes, but the biggest difference may be that the former has no visible smoke. He emphasized that the e-cigarette market must be strengthened, which is also the clear goal of the WHO.

According to CNN, in June, the San Francisco City Supervisory Board voted to pass a ban on the sale of e-cigarettes, making the city the first city in the United States to completely ban the sale of e-cigarettes. The decree stipulates that no one is allowed to sell or distribute e-cigarettes in San Francisco until the Food and Drug Administration completes a marketing review of the product, including sales in physical stores and online sales sent to San Francisco.

In China, Mao Qun 'an, director of the Planning Department of the National Health Commission, revealed at a press conference on July 22 that the National Health Commission is working with relevant departments to conduct research on the supervision of e-cigarettes and plans to pass legislation to regulate e-cigarettes.

According to incomplete statistics, there are currently 42 countries and regions around the world that have banned or restricted the use of e-cigarettes in public places. Hong Kong, Macao Special Administrative Region of my country, Hangzhou and Nanning have stipulated that the use of e-cigarettes is prohibited in public places. Shenzhen will also include e-cigarettes in tobacco control management starting from October 1.

Especially on March 15 this year, CCTV directly named e-cigarettes at the 315 party, saying that eight kinds of e-cigarette cigarette liquids randomly purchased through the market were sent to the laboratory for testing. Laboratory staff found that some nicotine content exceeded the standard. The CCTV host said that scientific experiments have proved that e-cigarettes contain many harmful substances and are no less harmful than cigarettes. It is believed that the e-cigarette industry lacks effective supervision.

It was also after March 15 that major online sales platforms took the initiative to strengthen the management of e-cigarettes, mainly reflected in:

1) Limit e-cigarette keyword searches. For a period of time after 3.15, some e-commerce platforms such as Jingdong and Taobao removed e-cigarette keyword searches;

2) Strengthen the qualification review of e-cigarette products on shelves. According to the First Financial Report, e-cigarette products are required to bear R labels (registered trademarks reviewed by the Trademark Office); at the same time, merchants must promise to bear product quality problems;

3) The diversion of e-cigarettes is restricted. For example, Douyin, Xiaohongshu, and Weixin Mini Programs have been successively prohibited from diverting e-cigarette sales platforms.

Capital enthusiasm remains undiminished

Although the regulatory authorities continue to pour cold water on the e-cigarette industry, they have failed to stop the rapid development of the e-cigarette industry, nor have they prevented more and more capital and companies from entering the industry. According to Sky Eye data, Beijing Sankuai Technology Co., Ltd., the operating entity of Meituan, changed its business scope on July 26 and added retail tobacco (including e-cigarettes) and other businesses.
 
Sky Eye Inspection Meituan changed its business scope

Figure 1: Sky Eye Inspection Meituan has changed its business scope. (Photo source: Sky Eye Inspection)

The change in Meituan's business scope means that users may be able to order e-cigarettes directly on Meituan takeout in the future. However, the strange thing is that electronic enthusiasts have not found any change records of the company in the national enterprise credit information disclosure system or enterprise investigation.

At the end of May this year, the business scope of Zhejiang Tmall Network Technology Co., Ltd. also changed, adding e-cigarette sales (including online sales).

In addition to the increase in these channels, capital only slowed down slightly in April and May this year, and 12 investment and financing incidents occurred in the following two months in June and July. lt; Electronic enthusiasts have compiled the investment and financing events of the e-cigarette industry in the primary market in the past two years based on public information online. See Table 1 for details.

We can see from the table that from 2017 to July 29, 2019, 41 domestic financing cases of e-cigarette companies were completed. Among them, there have been 23 financing cases from January this year to now, with a total financing amount of nearly 700 million yuan.
  #p#Pagination Title #e#
A review of investment and financing events in the primary market of the e-cigarette industry from 2017 to 2019.

Table 1: A summary of investment and financing events in the primary market of the e-cigarette industry from 2017 to 2019. (As of July 29, 2019)(Data source: online public information)

Why do so many capital and companies flock in?

Capital is always profitable. So much capital has entered the e-cigarette industry, which shows that there are the interests they value most. As an emerging industry, e-cigarettes are growing rapidly.

From a market perspective, the size of the e-cigarette market was US$18 billion in 2018, and the compound growth rate from 2015 to 2018 was approximately 34%. The global e-cigarette sales penetration rate increased from less than 1% in 2013 to 2017. 3.04%. Among them, the market size of e-cigarettes for e-cigarettes is 58.7%, and the market size for non-burning (HNB) is about 41.1%. Because the HNB type uses real tobacco, its taste is closer to that of cigarettes. However, the current research and development efforts on the taste of tobacco oil type are increasing, the degree of simulation is getting higher and higher, and there is no disadvantage in taste.
 
Global e-cigarette market size from 2015 to 2019.
 
Figure 2: Global e-cigarette market size from 2015 to 2019. (Data source: Aibang ESMOKE Industry Information, Tianfeng Securities Research Institute)

Although the United States is the largest consumer of e-cigarettes, accounting for 47% of the market share; European countries account for about 29%; and China only accounts for 3.22%; the main producing areas of China's e-cigarettes are the absolute core of the e-cigarette industry chain. Since Han Li invented e-cigarettes in 2003 and obtained intellectual property rights, the Ruyan Company he founded began selling e-cigarettes in 2004. Relying on its complete electronics industry chain and foreign trade advantages, Shenzhen has become the main force in the global e-cigarette industry. At present, more than 90% of the world's e-cigarettes come from Shenzhen, where there are nearly a thousand e-cigarette manufacturers.

In 2018, the market share of major e-cigarette consumption regions, while other regions here mainly include Japan, South Korea and other countries and regions.

Figure 3: Market share of major e-cigarette consuming regions in 2018. Other regions here mainly include Japan, South Korea and other countries and regions. (Data source: 2018 World Tobacco Development Report, Tianfeng Securities Research Institute)

3.15 Later, although the overall online sales of e-cigarettes were suppressed, the obstruction of online sales did not hinder the development of e-cigarettes. Because since March, a large number of e-cigarette brands have begun to increase their offline promotion efforts, KTV, bars, and convenience stores have become the focus of e-cigarette distribution and promotion. For example, Magic Flute promotes its products at the Strawberry Music Festival, and Whale Light Cigarette enters the Internet Fish Internet Cafe.

By distributing goods offline, brand owners not only promote sales, but also help brand formation, which also promotes online sales. In other words, although the overall sales of e-cigarettes online have weakened, the impact on leading brands has been limited. For example, leading brands such as Yuexie are currently increasing month by month.

In addition, due to greater policy uncertainty, although a lot of capital has entered the industry, there has been no obvious price war that often occurs in other industries. In the field of e-cigarettes, product prices are relatively stable, with little difference between different brands. For example, the price of disposable e-cigarettes is generally around 40 yuan; the price of replaceable e-cigarettes is generally around 200 - 300 yuan. After deducting costs and expenses, brand owners can still make higher profits.

Sales price of replaceable e-cigarettes
 
Table 2: Sales price of replaceable e-cigarettes.

The core reason why e-cigarette prices remain stable is that the current policy trend is not yet clear and there is uncertainty about gaining market share through burning money. For brand owners, profit is still an important consideration. It is estimated that before future regulatory policies are clear, it will be difficult for the industry to have a fierce price war.

Conclusion #p#pagination title #e#

It is precisely because of the high profitability and prospects of the e-cigarette market that it has attracted a lot of capital. Today's e-cigarette market is quite similar to the copycat market more than ten years ago. The price is not expensive and there are many manufacturers. Everyone is basically at the same starting line, and there is no dominant company.

However, with the introduction of capital, overseas e-cigarette leader JUUL announced an investment of US$100 million to deploy the China market, and the gradual implementation of domestic e-cigarette policies. In the future, companies with substandard qualifications may be accelerated to launch, and companies with excellent quality will stand out.