LAMI ZERO+ President He Chang: We Hope the Heated Tobacco and Vaping Industry Is Respected

LAMI Vaping | ZERO | Heated Tobacco | IQOS

1. We are genuinely in the e-cigarette business, not competing with gum or milk tea shops.

99% of the market's vaping pods are fruit-flavored and sweet. How do we convert smokers? Is there an inherent relationship between the two? If everyone says we are making e-cigarettes to replace smoking and reduce cancer risk, have you checked how many people in China were diagnosed with cancer last year? In 2020, there were 4.67 million cancer cases in China, with only 810,000 being lung cancer. At this moment, there are 130 million people with diabetes in China, which means one in ten people has diabetes, and two more are on the way.

2. Trends are for harvesting, not for nurturing.

Every industry goes through stages: demand surges, some see opportunities and provide supply, and the industry thrives, making quick and big money. When many discover that the industry is profitable, they flock in, leading to a rapid increase in supply, which causes demand to drop. However, some demand is fake, just a trial, not real demand. When demand decreases, the supply established during the boom suffers. This is the current situation. When the third stage arrives, demand and supply will both decrease, and some will exit the market. Those who can still provide supply are those who have survived the third stage; by then, it will be too late to enter. We believe that the e-vapor product market in China is nearing the end of the second stage, which is the supply phase. Next year may very well be the third stage; how long it lasts is uncertain—maybe six months, two years, or three years. To reach the fourth stage of victory, one must endure.

In the first two stages, there are planned opportunists; small business owners make most decisions based on speculation about a product or category, but they need to be more precise. If you are an investor and know that a company is in the third stage and should win, the trend will definitely come, but you don’t know when it will arrive. So, this is a long-term strategy of waiting for the trend. What to do when the trend arrives? Many say to jump in, but when the trend appears, it’s usually a harvesting time, not a planting time. When the trend appears, one should believe in staying away from it, especially for store owners and distributors. It’s better to seek companies in the first stage that have not yet exploded in demand, as that is the biggest opportunity. Learn to wait at the next intersection instead of chasing a car that has already started; the e-vapor industry is that car that has already started.

After all this, can you give us some advice? Listening to industry experts, the CEO of Altria said that the future of vapor e-cigarettes is still uncertain. IQOS has an 85% repurchase rate, while JUUL's valuation has dropped from $34 billion to only $2 billion now, resulting in significant investment losses. I believe this is a bloody lesson, so I trust what he says.

3. Do you have genuine e-cigarettes in your store?

Look at the market. In Japan, 40% of smokers have switched to heated tobacco users, but the laws, environment, and regulations are different. Even if it’s bad, can we achieve 4%? If we can reach a 4% penetration rate in the Chinese tobacco market, what a huge market that would be! What products can achieve this? ZERO, as a sub-brand of LAMI, is non-tobacco, using plant cores and particle technology to simulate the taste and aroma of tobacco, compatible with IQOS devices and more heated tobacco devices, allowing users to experience a taste closer to that of smokers.

Attempting to convert smokers using e-liquid vaporization is far less effective than the inherent advantages and industrial revolution of heated tobacco products, as IQOS has already proven. IQOS has never declined, and its stock price has never fallen; the market is still visible in the future, as they have already called for a smoke-free society due to alternatives.

Has the e-cigarette store really become saturated? From my personal entrepreneurial experience, having worked with Huang Taiji and opened hundreds of specialty stores, managing thousands of employees, I can honestly say that the operational level of e-cigarettes is really too simple. Compared to the food and beverage industry, it’s incredibly easy. But why do many fail? First, you need to understand whether your product is in the field of technological innovation or model innovation. In the field of technological innovation, opening an e-cigarette store is definitely not as easy as creating a LAMI product, but creating a LAMI product is certainly not as easy as creating a heated tobacco product. From the perspective of vaporization, making pods is relatively easy, but making heated tobacco pods is not likely because the largest industrial chain in China is in our hands. If you don’t give us OEM, we can’t produce it. If it’s model innovation, e-cigarette stores are not as good as milk tea shops, and milk tea shops are not as good as restaurants. The operational level of e-cigarette stores is insufficient compared to the entire industry.

3. The future of e-cigarettes should be terminalized and retail-oriented.

As mentioned earlier, collective stores are indeed the future trend. Currently, we see single price bands and brand specialty stores, with many new products breaking through different price bands. In the future, collective stores will have high, medium, and low price ranges. But is there a greater possibility of offering different categories at different price bands? Where are cigarettes sold on the streets now? Are there specialized tobacco stores? Are there specialized tobacco collective stores? They are mixed with other business types. Why don’t we return to the essence of tobacco? Future stores should sell tobacco, alcohol, tea, betel nut, coffee, and sweets—anything addictive should be included.

The name is not important because it must connect with trust in your store area. Putting a LAMI name may not guarantee trust, but putting a name like Boss Zhang might. The current survival status of tobacco shops reflects this reality; we cannot violate the essence of this business. Why can I do it? I have liquor; we currently have 500 acres in Moutai, with a production capacity of 100,000 tons. Our new flavor this year is wild betel nut, which is already in mass production. We also have tea, traditional tobacco, and alcohol, forming a composite chain of legal addictive products. It’s not complicated; whatever can be sold in a store should be sold. Why must we stick to just one category of e-cigarettes?

4. The three elements of project selection.

Basically, we look at three core competitive factors:

First is specialization.

Second is innovation capability.

Third is managerial advantage.

Specialization: Our group has been focused on traditional rolled tobacco for 22 years, starting with Wuye Shen and Taiwan Alishan cigarettes, and then LAMI in 2019. There’s no one more specialized than this.

In terms of innovation advantage, all our products are produced by LAMI, from single units to e-liquids, equipment assembly to printing and packaging, we do it all ourselves. We have a complete industrial chain with two factories in Dongguan Qingxi. Are we inventors of great flavors or mere transporters of good flavors? LAMI is determined to be the inventor, so this year we launched many unique flavors like coffee betel nut, etc. Although niche, this is our answer to the market, proving that we can create a business model like Coca-Cola syrup to gain more long-term partners.

Managerial advantage: The chairman is Wen Yuqing, whose brands have generated hundreds of billions in revenue. His properties include the Ping An Building and the Baibaihui Plaza in the center of Shenzhen. We started our entrepreneurial journey together in 2011, and the group’s R&D and related industrial chain personnel have 20 years of cooperation experience. Don’t worry about personnel changes when cooperating with LAMI; these people are stable, and there’s no need to worry about high-level personnel loss or internal investment.

We hope to respect this industry and have reverence for it. We hope the e-cigarette industry will continue to improve. Would you choose a path that is one meter wide and one kilometer deep or one kilometer wide and one meter deep? LAMI firmly chooses one meter wide and one kilometer deep, always digging down, continuing in this industry until we cease to exist.

How to proceed in 2022? Choose the right organization, integrate business types, establish integrity rules, and reserve funds to buy original shares of brands in the post-regulatory era. The e-cigarette industry has great opportunities. Yesterday, everyone saw the news about the national mandatory standards committee; we were also invited to participate in the meeting, but specific details cannot be disclosed. The capital circle cares a lot about this matter. Those truly engaged in this industry know that the tobacco system's regulation is extremely complex, and we are far from the day of judgment. Future regulatory policies will be neutral and positive. This industry not only has a way out but will also have significant development, but the threshold will be very high, and many will not have the opportunity to participate.

Before the new regulations are implemented, everything is just a warm-up. From being at the peak to being sold at a loss, a company worth 100 billion Hong Kong dollars was finally sold for only 7 million. RELX's stock price peaked and dropped to one-tenth in just nine months. Before the country has regulations on e-cigarettes, no matter how much you stir things up, it’s just a warm-up; only when the rules are in place does the competition begin.