The Road to Building a Vape Brand: How to Create an E-Cigarette Brand in 39 Days

"20 yuan per hour, with breaks, sitting while working, are you interested?" At the entrance of an e-cigarette factory in Shajing, Shenzhen, a middle-aged man with dark skin invited every job seeker standing in front of the job board.

Shajing in Shenzhen, also known as "E-Cigarette Street" in the industry, is the production site for 90% of the world's e-cigarettes. Entering the area, many people gather at the factory gates, including both job seekers and employers. The streets appear ordinary but are densely packed with numerous e-cigarette processing factories, forming a market with sales exceeding 100 billion yuan.

The "Shenzhen speed" has created a series of rapid production lines without brand replication. Over the past decade, I have seen too many small clients, with teams of ten to five people producing hundreds of millions of devices. Initially engaged in mobile phone ODM production, the rapid development of the mobile phone industry over the past ten years has been evident. However, with the rise of mobile phone brands, headquarters companies now occupy 90% of the market share. Since 2016, the business of "fake phones" has become increasingly difficult.

Shenzhen does not miss any "popular" products in the hardware manufacturing industry, transitioning from BBMs to mobile phones and "fake" phones, from palm-sized MP3s to human-like robots. The transition between manufacturing sectors is instantaneous. Factory owners have a keener sense than investment institutions, allowing them to quickly identify market trends.

"In fact, the logic is the same. The e-cigarette industry is very similar to the counterfeit mobile phone industry from years ago," said a representative from Korea. "The e-cigarette supply chain is very simple, and the level is much lower than that of the mobile phone supply chain. Besides researching materials for the atomization core, making chips for e-cigarettes feels like making toys compared to mobile phones."

Unlike Korea, which feels relaxed about the transition due to its established consumer electronics industry chain for producing "counterfeit" machines, Chen Ming, who entered the e-cigarette industry in 2006, has been striving in this process.

Chen Ming, the owner of a frontline e-cigarette processing factory in Shajing, is one of the first to enter this industry. He initially produced and processed the first generation of e-cigarettes, "Ruyan." However, the taste of "Ruyan" was far from that of real cigarettes, and it was later halted due to false advertising. The domestic e-cigarette market once stagnated. Furthermore, there are over 100 suppliers of various sizes in the entire e-cigarette industry supply chain, but none specialize in supplying e-cigarettes. The cost of opening molds is too high, so Chen Ming could only buy some spare parts in Huaqiangbei and modify them himself.

Starting in 2009, countries like the United States and the United Kingdom gradually accepted the second generation of open e-cigarettes due to their significant smoking effects, and a culture of e-cigarette enthusiasts began to form. E-cigarette enthusiasts view vaping as a hobby and are keen to try different devices and e-liquids. Chen Ming gradually began to accept orders from foreign clients and started to "blood transfuse" upstream suppliers to establish his own e-cigarette supply chain.

Chen Ming's factory in Shajing took over the supply chain of the e-cigarette industry simply because it is close to Huaqiangbei. It is very convenient to purchase raw materials and recruit talent for the e-cigarette industry. However, now e-cigarette factories cannot leave Shajing, as no manufacturer can survive independently outside Shenzhen's mature e-cigarette industry chain.

"Even though the prices, rents, and labor costs here are high, you must stay here. For the same piece of plastic, if I am in Shajing, the mold factory is right next door. It can be reached in an hour or half an hour, and it's very cheap. But if the factory is in Huizhou, the transaction costs will also be accounted for by the factory manager," Chen Ming told the Economic Observer. "No factory in the e-cigarette industry can be as attractive as Foxconn, which can say, 'Even if I move to Shanxi or the Gobi Desert in Xinjiang, suppliers can follow me.'"

Wearing shoe covers, dustproof clothing, masks, and hairnets, passing through an air shower, the steps required to enter the e-cigarette production workshop give the impression of entering a food processing plant. Rows of diligent workers sit neatly at long tables in the e-cigarette production workshop, with strong airflow and slightly lower temperatures. Injecting e-liquid into the pods, filling the atomization wires, applying glue, welding batteries, affixing anti-counterfeiting codes on packaging bags, plastic packaging, and product sampling—all steps of e-cigarette production can be completed on the first floor of the workshop, which is not very large.

Using a small syringe to extract oil from the container twice is just the right amount needed for the e-liquid pods, then manually bonding the pods to ensure the contact points are securely attached to the oil part of the pods. Chen Ming said that the manual filling is the reason why the production capacity of third-generation closed e-cigarettes (small vapes) is lower than that of second-generation open e-cigarettes (large vapes).

Producing small vapes requires a more complex production process, which also raises higher production requirements for factories. "Assembling large vapes is simple; you just need to get a few shells, batteries, and circuit boards from the external hardware, package them together with a dozen screws, and they can be sold. Large vapes do not fill with oil. Consumers buy e-liquid and pour it back in. There are no oil leaks. Currently, it is challenging to solve the oil leakage problem in small vapes that are left unused for long periods," Chen Ming told the Economic Observer.

On the next production line, workers are assembling circuit boards through welding. The welded circuit boards will be sequentially assembled with the e-cigarette's battery and casing in the next production process. They are then handed over to workers on the next production line for packaging, with anti-counterfeiting codes affixed to the packaging bags. Producing e-cigarettes only requires five production lines.

Workers in e-cigarette factories typically work from 8:00 AM to 10:00 PM, sitting at long tables, with each production line extended to handle overall planning. Workers are assigned to their posts, and their work is relatively uniform, except for those responsible for assembling e-cigarette casings. The e-cigarettes in their hands now resemble USB drives and will soon be replaced by another brand's e-cigarettes, while the casings look like pen barrels. During the visit, the Economic Observer found that workers on the first floor of the production workshop were processing and producing products from at least five different e-cigarette brands.

"The factory has assigned us nearly 250 workers, but these 250 workers are not just working for our family. If our materials do not arrive, the workers will produce e-cigarettes for other brands. We only make production requests to the factory, and the factory is responsible for overall planning," a production staff member from Xiwu E-cigarettes told the Economic Observer.

"The power generation factory is currently under pressure. The customers are chosen by the power generation factory. Chen Min, CEO of Xiwu E-cigarettes, told the Economic Observer that new e-cigarette brands are emerging one after another. It is impossible to establish one's own factory immediately; people can only seek contract manufacturing. However, the production capacity and scale of factories will not grow rapidly in the short term. At this time, factories will choose brands and customers. In today's e-cigarette industry, factories are in a relatively strong position.

Chen Min stated that the company has invested over 1 million yuan in research and development in collaboration with factories that produce and manufacture e-cigarette products (such as casings and packaging). In September of this year, e-cigarette company York also announced plans to open an exclusive e-cigarette factory in Shenzhen, co-managed with Maxwell. York stated that this exclusive factory covers over 20,000 square meters and employs over 4,000 workers.

Chen Ming is also expanding his factory's scale. "There aren't enough workers. During peak production periods, we need 12,000 workers. Our larger factory in Zhongshan will officially start production in May next year and is currently being renovated."

"If you order 3,000 units at once, I will give you the price," said a stall owner at Huaqiangbei, who produces e-cigarettes, as he calculated the minimum price for disposable small vapes on a calculator: 28 yuan. "You don't have to worry about anything from e-liquid to design to packaging. Just register a brand, and we will spray it on for you, and you can sell it."

With an investment of less than 90,000 yuan and a production cycle of less than 10 days, a new e-cigarette brand can hit the market. "If you make a replacement pod, I can make it with a completely different outer packaging design from Yueke, but the pod can still be used (Yueke)." Another e-cigarette provided by the owner is priced at 33 yuan, with an online selling price of 169 yuan.

An employee in the e-cigarette industry told the Economic Observer that the entry barrier to the e-cigarette industry is extremely low. Now that the e-cigarette supply chain is becoming increasingly mature, all you need is a factory building, some floor paint, and two production lines. Some workers are required to assemble products. There are no inspection processes, and the production standards are not worth discussing. A factory can be established for a few tens of thousands of yuan. After purchasing some raw materials and returning a package, you can directly ask customers to sell the products. Industry insiders say that the entire process from brand registration to factory version to final product launch takes only 39 days.

The owner of Huaqiangbei tried to assure the reporter that the prices he offered were the lowest in the industry. When the reporter asked whether vaping is really safe and whether there are corresponding production standards for e-cigarettes in his factory in Humen, the owner waved his hand dismissively, saying, "Aren't there no standards now? What are you thinking?"

Although he made money by producing "counterfeit" mobile phones, he still feels that he missed the opportunity to become a leading mobile phone brand. Therefore, when he turned to the e-cigarette industry this time, he had to change the game and become a brand. "Mobile phones are rarely replaced every year, but e-cigarettes are different; the resale rate is very high. E-liquid pods represent a continuous purchasing behavior. He firmly believes that there is still a vast empty market for e-cigarettes.

More Koreans dream of becoming "China's YOOZ." In 2018, YOOZ was valued at $38 billion, accounting for over 70% of the U.S. e-cigarette market. The "myth" across the ocean has stimulated the nerves of domestic entrepreneurs and investors. According to incomplete statistics, there were over 35 investment cases in the domestic e-cigarette industry in the first half of 2019, with total investments exceeding 1 billion yuan.

According to a research report by Great Wall Securities, the number of smokers in China accounts for nearly one-third of the world's smokers. As a major smoking country, China's e-cigarette penetration rate is far lower than that of Western countries like the UK and the US. As of 2018, China's e-cigarette penetration rate was only 0.32%. If China's e-cigarette penetration rate reaches 9.50% like in the UK, the market size for e-cigarettes in China would exceed 140 billion yuan.

In the context of high gross margins and high growth, many organizations are entering the e-cigarette industry. Former Hammer Technology product director Zhu Xiaomu founded the "FLOW fulu" e-cigarette. "Half-brother" Cai Yuedong and the former founder of Huang Taiji, He Chang, launched the "YOZ e-cigarette." Half-brother board chairman Zhang Jinyuan, visual CEO Sha Xiaopi, and military division CEO Zeng Hang, among others, co-founded "linkx."

In Korea's view, despite fierce competition and obvious product homogeneity, the e-cigarette industry has yet to form a true brand. In his opinion, York, China's largest e-cigarette brand, with annual sales exceeding 3 billion yuan, is merely a channel company.

"There are very few factories producing e-liquid, and everyone can buy from there. The flavor differences among different e-cigarette brands are not significant, and there are no so-called core patents. E-cigarette brands are more of a promotional approach. "Korea stated that he plans to allocate 10%-20% of e-cigarette profits to agents, 10% to the R&D department, and the rest to the marketing department.

Korea has missed the opportunity to build a leading brand in the mobile phone industry, believing that this time he can seize the opportunity in the e-cigarette industry.