What kind of business is vaping, really?
What kind of business is vaping, really? Since the second half of 2018, vaping has become a new favorite in hardware startups. It quickly entered everyday life in top-tier cities, while its health-oriented image and stylish appearance also turned it into
What kind of business is vaping, really? <\/strong>
Since the second half of 2018, e-cigarettes have become a new favorite in hardware entrepreneurship. E-cigarettes quickly entered the daily life scenes of people in high-tier cities, with the "health" label and fashionable appearance making them a new social comfort. In the primary market, e-cigarettes have become a new darling of capital under the IoT umbrella. According to incomplete statistics, over the past year, more than a dozen e-cigarette companies in China have received financing, totaling hundreds of millions of yuan, including several leading investment institutions such as ZhenFund, Dongyu Capital, Source Code Capital, and IDG Capital. Despite the extremely rational backdrop of the primary market, e-cigarette financing has been smooth sailing, truly becoming the first windfall of the year.
Why has vaping become popular? <\/strong>
The e-cigarette sector is not short of star entrepreneurs. In June last year, RELX announced it had completed its first round of financing of 38 million yuan, with its founder being Wang Ying, the former general manager of Uber China. In January of this year, Zhu Xiaomu, the former product director of Smartisan Technology, founded the e-cigarette brand "flow." The kit includes a vape pen, a charging cable, and three pods, priced at 299 yuan. This configuration and price have almost become the standard for e-cigarettes in China.
Cai Yuedong, founder of Tongdao Dashi, and He Chang, founder of Huang Taiji, jointly established the e-cigarette brand YOOZ. When it launched in January, it claimed to have achieved sales of 5 million yuan within 24 hours. Li Yan, chairman of WeMedia, Zhang Jinyuan, chairman of Tongdao Dashi, Zeng Hang, founder of Military Weapons Next Dimension, and Sha Xiaopi, founder of Visual Zhi, jointly founded Lingxi e-cigarettes. The common feature of these two brands is their marketing prowess, which inherently comes with massive traffic. In March, there were also reports that e-cigarettes had become the next project for Luo Yonghao after his failure with Smartisan Technology, and he was reportedly looking for a factory to produce them.
The sudden popularity of e-cigarettes in 2019 can be attributed to several reasons. Firstly, e-cigarettes are a low-barrier entrepreneurial project. Unlike smartphones, which require billions in funding and hundreds of team members, experts have analyzed that the initial investment for e-cigarettes is only around 5 million yuan. If you do not want to engage in product development and independent branding, you can easily find several OEM prototypes from factories in Shenzhen.
E-cigarettes in China represent a mature supply chain in the light industry sector, with 90% of the world's vapor e-cigarette products and accessories coming from Shenzhen and surrounding areas. However, the main consumer market for e-cigarettes is currently not in China, with over 90% concentrated in Europe and America, particularly the United States and the United Kingdom. Therefore, the e-cigarette supply chain in China is not a new phenomenon; it has already become highly socialized.
Moreover, e-cigarettes do not require thousands of components like smartphones. Core components such as screens, chips, and cameras in smartphones can only be provided by a few core suppliers. E-cigarettes generally consist of three parts: the atomizer, the pod, and the battery. The chip is the most critical component in the atomizer, directly affecting the e-cigarette's power, mode, power supply, and taste. However, even such components have numerous manufacturers around Shenzhen. Thus, the saying "anyone can make e-cigarettes" is not an exaggeration.
China is the world's largest tobacco market, with 316 million smokers consuming around 50 million cartons of traditional tobacco each year, accounting for 44% of the global total. However, the market penetration rate of e-cigarettes was only 1% in 2016. According to relevant statistics, the global e-cigarette market value reached $16 billion in 2018, 1.3 times that of 2017, and 7.6 times that of 2012. Yet, e-cigarette consumption in China only accounts for 10% of the global market. Whether from converting the existing smoker market or expanding new incremental markets, the theoretical space for this consumer market is enormous.
High Profits in E-cigarettes
In the past year or two, Smartisan Technology has repeatedly attempted various smart hardware projects, including all-in-one computers, air purifiers, and even Luo Yonghao mentioned plans to create "humidifiers, fresh air machines, travel bags, smart speakers," etc. It is certain that the gross profit of all these hardware products is not as high as that of e-cigarettes.
I once inquired with an OEM factory about the real costs of e-cigarettes. For example, the cost of regular e-liquid is about 3,000 yuan per ton, while the cost of premium e-liquid is capped at around 7,000 yuan per ton. A 2ml pod typically retails for around 30-40 yuan. No matter how high-end the scenario in which you vape, they all consist of the same flavoring substances that provide a throat hit. The supply of raw materials for e-liquid is very abundant, and there is no effective competitive barrier on the supply side. Additionally, a complete atomizer component can even be purchased for just a few yuan on Alibaba. The batteries used in e-cigarettes are no better than 18650 rechargeable batteries, with wholesale prices ranging from a few cents to a few yuan.
In the entire e-cigarette industry chain, the upstream consists of manufacturers producing components, including chips, batteries, oil-wicking cotton, heating wires, and suppliers of plastic and hardware. The midstream consists of e-cigarette designers and manufacturers, which may be completed by the same company or subcontracted to different entities. The design of e-cigarettes has a slightly higher threshold, requiring some time for development and adjustment based on downstream demand. However, the manufacturing process is much simpler; a production line with a few workers can assemble them. Overall, the factory price of a Shenzhen vape pen, including all costs, will not exceed a few dozen yuan and can even be lower.
In the downstream retail sector of e-cigarettes, gross profits can generally reach 80%, with the main costs being marketing and channel expenses. Simply put, as long as you can sell, it's pure profit. Because of this, internet entrepreneurs can quickly transform into "e-cigarette product managers," packaging their products as stories of consumption upgrades to sell to consumers and reap the initial consumption dividends of the industry. The popularity of e-cigarettes is merely a reflection of capital sensing profits that exceed normal levels; to put it into perspective, Xiaomi's hardware net profit margin in 2018 was less than 1%! Moreover, whether in smart home devices or smartphones, which hardware can generate physiological dependence and create so much long-tail consumption like e-cigarettes?
Thus, the e-cigarette model is akin to that of razors and printers. Gillette razors make money on expensive blades by selling cheap razor handles, while HP printers sell cheap printers and make high profits on ink cartridges. The same applies to e-cigarettes; the price of vape pens will inevitably drop after a round of collective harvesting. Under the influence of internet entrepreneurs' habitual thinking, one day, vape pens may be given away for free, and acquiring a user with a vape pen may just be a matter of time.
In 2019, e-cigarette entrepreneurs rushed in, marking a competition with no technical or financial barriers. The ability to package one's brand and leverage their own channels for sales is the greatest competitive advantage. Therefore, e-cigarette entrepreneurs differentiate themselves through various specifications of vape pens, creating their own territory. On one hand, the specifications of pods are not compatible with each other, meaning that multiple vape pens are needed to firmly bind users. On the other hand, developers are also applying for patents for pods to prevent imitation. On platforms like Taobao, imitation pods can only be sold under different names. Last August, two international students selling IQOS e-cigarettes were arrested by the public security authorities, with the case value reaching nearly 10 million yuan. Similar cases have also emerged in several cities across China.
The future battleground for e-cigarettes lies in the pods, which are both a market specification barrier that needs to combat imitation and a major source of high profits for market participants.
However, just because there is a high-profit space in e-cigarettes does not mean the future is bright. In China, the tobacco industry operates under a planned production and management system. In 2018, China's tobacco industry achieved a total tax revenue of 1.1556 trillion yuan, contributing 1 trillion yuan to the national treasury, roughly equivalent to 5.4% of the national general public budget revenue. Moreover, since 2014, tobacco tax revenue has consistently exceeded 1 trillion yuan.
The approach of using e-cigarettes to carve out a share of the pie is evidently not going to succeed. During this year's CCTV 315 Gala, it was revealed that e-cigarettes are also harmful to the human body, without presenting any other conclusive conclusions. Many e-cigarette practitioners felt relieved. However, compared to the recently popular e-cigarette market, regulation is just beginning; the market is still not large enough. Therefore, while the potential for e-cigarettes is vast, the likelihood of establishing a massive market domestically is not high. They may never even see the day when vape pens are given away for free; it might be better to prioritize developing overseas markets.
Since the second half of 2018, e-cigarettes have become a new favorite in hardware entrepreneurship. E-cigarettes quickly entered the daily life scenes of people in high-tier cities, with the "health" label and fashionable appearance making them a new social comfort. In the primary market, e-cigarettes have become a new darling of capital under the IoT umbrella. According to incomplete statistics, over the past year, more than a dozen e-cigarette companies in China have received financing, totaling hundreds of millions of yuan, including several leading investment institutions such as ZhenFund, Dongyu Capital, Source Code Capital, and IDG Capital. Despite the extremely rational backdrop of the primary market, e-cigarette financing has been smooth sailing, truly becoming the first windfall of the year.
Why has vaping become popular? <\/strong>
The e-cigarette sector is not short of star entrepreneurs. In June last year, RELX announced it had completed its first round of financing of 38 million yuan, with its founder being Wang Ying, the former general manager of Uber China. In January of this year, Zhu Xiaomu, the former product director of Smartisan Technology, founded the e-cigarette brand "flow." The kit includes a vape pen, a charging cable, and three pods, priced at 299 yuan. This configuration and price have almost become the standard for e-cigarettes in China.
Cai Yuedong, founder of Tongdao Dashi, and He Chang, founder of Huang Taiji, jointly established the e-cigarette brand YOOZ. When it launched in January, it claimed to have achieved sales of 5 million yuan within 24 hours. Li Yan, chairman of WeMedia, Zhang Jinyuan, chairman of Tongdao Dashi, Zeng Hang, founder of Military Weapons Next Dimension, and Sha Xiaopi, founder of Visual Zhi, jointly founded Lingxi e-cigarettes. The common feature of these two brands is their marketing prowess, which inherently comes with massive traffic. In March, there were also reports that e-cigarettes had become the next project for Luo Yonghao after his failure with Smartisan Technology, and he was reportedly looking for a factory to produce them.
The sudden popularity of e-cigarettes in 2019 can be attributed to several reasons. Firstly, e-cigarettes are a low-barrier entrepreneurial project. Unlike smartphones, which require billions in funding and hundreds of team members, experts have analyzed that the initial investment for e-cigarettes is only around 5 million yuan. If you do not want to engage in product development and independent branding, you can easily find several OEM prototypes from factories in Shenzhen.
E-cigarettes in China represent a mature supply chain in the light industry sector, with 90% of the world's vapor e-cigarette products and accessories coming from Shenzhen and surrounding areas. However, the main consumer market for e-cigarettes is currently not in China, with over 90% concentrated in Europe and America, particularly the United States and the United Kingdom. Therefore, the e-cigarette supply chain in China is not a new phenomenon; it has already become highly socialized.
Moreover, e-cigarettes do not require thousands of components like smartphones. Core components such as screens, chips, and cameras in smartphones can only be provided by a few core suppliers. E-cigarettes generally consist of three parts: the atomizer, the pod, and the battery. The chip is the most critical component in the atomizer, directly affecting the e-cigarette's power, mode, power supply, and taste. However, even such components have numerous manufacturers around Shenzhen. Thus, the saying "anyone can make e-cigarettes" is not an exaggeration.
China is the world's largest tobacco market, with 316 million smokers consuming around 50 million cartons of traditional tobacco each year, accounting for 44% of the global total. However, the market penetration rate of e-cigarettes was only 1% in 2016. According to relevant statistics, the global e-cigarette market value reached $16 billion in 2018, 1.3 times that of 2017, and 7.6 times that of 2012. Yet, e-cigarette consumption in China only accounts for 10% of the global market. Whether from converting the existing smoker market or expanding new incremental markets, the theoretical space for this consumer market is enormous.
High Profits in E-cigarettes
In the past year or two, Smartisan Technology has repeatedly attempted various smart hardware projects, including all-in-one computers, air purifiers, and even Luo Yonghao mentioned plans to create "humidifiers, fresh air machines, travel bags, smart speakers," etc. It is certain that the gross profit of all these hardware products is not as high as that of e-cigarettes.
I once inquired with an OEM factory about the real costs of e-cigarettes. For example, the cost of regular e-liquid is about 3,000 yuan per ton, while the cost of premium e-liquid is capped at around 7,000 yuan per ton. A 2ml pod typically retails for around 30-40 yuan. No matter how high-end the scenario in which you vape, they all consist of the same flavoring substances that provide a throat hit. The supply of raw materials for e-liquid is very abundant, and there is no effective competitive barrier on the supply side. Additionally, a complete atomizer component can even be purchased for just a few yuan on Alibaba. The batteries used in e-cigarettes are no better than 18650 rechargeable batteries, with wholesale prices ranging from a few cents to a few yuan.
In the entire e-cigarette industry chain, the upstream consists of manufacturers producing components, including chips, batteries, oil-wicking cotton, heating wires, and suppliers of plastic and hardware. The midstream consists of e-cigarette designers and manufacturers, which may be completed by the same company or subcontracted to different entities. The design of e-cigarettes has a slightly higher threshold, requiring some time for development and adjustment based on downstream demand. However, the manufacturing process is much simpler; a production line with a few workers can assemble them. Overall, the factory price of a Shenzhen vape pen, including all costs, will not exceed a few dozen yuan and can even be lower.
In the downstream retail sector of e-cigarettes, gross profits can generally reach 80%, with the main costs being marketing and channel expenses. Simply put, as long as you can sell, it's pure profit. Because of this, internet entrepreneurs can quickly transform into "e-cigarette product managers," packaging their products as stories of consumption upgrades to sell to consumers and reap the initial consumption dividends of the industry. The popularity of e-cigarettes is merely a reflection of capital sensing profits that exceed normal levels; to put it into perspective, Xiaomi's hardware net profit margin in 2018 was less than 1%! Moreover, whether in smart home devices or smartphones, which hardware can generate physiological dependence and create so much long-tail consumption like e-cigarettes?
Thus, the e-cigarette model is akin to that of razors and printers. Gillette razors make money on expensive blades by selling cheap razor handles, while HP printers sell cheap printers and make high profits on ink cartridges. The same applies to e-cigarettes; the price of vape pens will inevitably drop after a round of collective harvesting. Under the influence of internet entrepreneurs' habitual thinking, one day, vape pens may be given away for free, and acquiring a user with a vape pen may just be a matter of time.
In 2019, e-cigarette entrepreneurs rushed in, marking a competition with no technical or financial barriers. The ability to package one's brand and leverage their own channels for sales is the greatest competitive advantage. Therefore, e-cigarette entrepreneurs differentiate themselves through various specifications of vape pens, creating their own territory. On one hand, the specifications of pods are not compatible with each other, meaning that multiple vape pens are needed to firmly bind users. On the other hand, developers are also applying for patents for pods to prevent imitation. On platforms like Taobao, imitation pods can only be sold under different names. Last August, two international students selling IQOS e-cigarettes were arrested by the public security authorities, with the case value reaching nearly 10 million yuan. Similar cases have also emerged in several cities across China.
The future battleground for e-cigarettes lies in the pods, which are both a market specification barrier that needs to combat imitation and a major source of high profits for market participants.
However, just because there is a high-profit space in e-cigarettes does not mean the future is bright. In China, the tobacco industry operates under a planned production and management system. In 2018, China's tobacco industry achieved a total tax revenue of 1.1556 trillion yuan, contributing 1 trillion yuan to the national treasury, roughly equivalent to 5.4% of the national general public budget revenue. Moreover, since 2014, tobacco tax revenue has consistently exceeded 1 trillion yuan.
The approach of using e-cigarettes to carve out a share of the pie is evidently not going to succeed. During this year's CCTV 315 Gala, it was revealed that e-cigarettes are also harmful to the human body, without presenting any other conclusive conclusions. Many e-cigarette practitioners felt relieved. However, compared to the recently popular e-cigarette market, regulation is just beginning; the market is still not large enough. Therefore, while the potential for e-cigarettes is vast, the likelihood of establishing a massive market domestically is not high. They may never even see the day when vape pens are given away for free; it might be better to prioritize developing overseas markets.
