Song Qinghui: China’s Vape Brands Show a Fully Competitive Market Structure, and Industry Reshufflin
Renowned economist Song Qinghui stated in an interview that according to statistics from Qinghui Think Tank, there are approximately 350 million smokers in China. It is the world's largest tobacco consumer and producer, accounting for 44% of the global tobacco market. In this context, the electronic cigarette market is also substantial, attracting capital investment. However, the homogenization of household electronic cigarette products is becoming more severe, leading to intense industry competition. Currently, domestic electronic cigarette brands have presented a fully competitive structure, forming three tiers: the first tier consists of early entrants, the second tier is dominated by medium-sized enterprises, and the third tier is based on small enterprises.
In recent days, foreign markets have tightened regulations on electronic cigarettes. The FDA (U.S. Food and Drug Administration) announced on September 11 that to curb the excessive popularity of electronic cigarettes among young people, the U.S. government plans to ban the sale of unauthorized non-tobacco flavored electronic cigarettes. Affected by this unfavorable news, the stock of domestic electronic cigarette ODM leading manufacturer McVewell's parent company, Huizhou Yiwei Lithium Battery Co., Ltd. (hereinafter referred to as "Yiwei Lithium Battery," 300014.SZ), fell below market expectations. The next day, the market value evaporated by 4.01 billion yuan. According to reports from India’s NDTV on the 18th, Indian Finance Minister Nirmala Sitharaman stated that considering the impact of electronic cigarettes on public health, especially on youth health, it will ban the production, manufacturing, import, export, transportation, sale, storage, and advertising of electronic cigarettes in India.
In June of this year, Shenzhen, the world's largest electronic cigarette production base, officially included electronic cigarettes in its smoking ban blacklist. Lin Yue, chief consultant of Lingyan Management Consulting, stated in an interview with the "China Business Journal" that domestic electronic cigarette industry policies are expected to tighten. The direct impact will be a reduction in the market space for electronic cigarettes. Indirectly, the positioning and product boundaries of electronic cigarette products will become clearer, and future electronic cigarettes will distinguish themselves from tobacco and become harmless products that replace tobacco.
The "CITIC Securities Research Report" pointed out that in the long run, strict control of electronic cigarettes is a global trend. On this basis, the market share of leading brands will further concentrate, and the industry will usher in orderly development.
The Public Health and Technology Supervision Research Group of Tsinghua University recently released the "2019 Electronic Cigarette Industry Regulatory Status Report," indicating that as a new product, the rise of electronic cigarettes is still very short, and the domestic electronic cigarette market is still in a period of wild growth. According to the report, in 2017, China's electronic cigarette consumption reached 7.4 million, making it the world's largest producer (accounting for 95% of the global share) and exporter (accounting for 90%). The pursuit of capital has accelerated the formation of this enthusiasm. Currently, there are thousands of electronic cigarette companies in China, with new brands emerging almost daily. Some leading electronic cigarette companies have a valuation exceeding $2 billion.
Platinum partner and CMO Fang Hui told reporters that Platinum began producing electronic cigarettes in 2013. At that time, the industry was in a slump, but since the trend picked up, many companies have started entering the cigarette market. The products on the market are uneven, and some small companies use inferior e-liquids to achieve higher profits. "However, from the core R&D perspective of e-liquids, the threshold for electronic cigarettes is not low."
Renowned economist Song Qinghui reiterated in an interview that according to Qinghui Think Tank's statistics, China has smokers. It is the world's largest tobacco consumer and producer, with a population of about 350 million, accounting for 44% of the global tobacco market. In this context, the electronic cigarette market is also substantial, attracting capital investment. However, the homogenization of household electronic cigarette products is becoming more severe, leading to intense industry competition. Currently, domestic electronic cigarette brands have presented a fully competitive structure, forming three tiers: the first tier consists of early entrants, the second tier is dominated by medium-sized enterprises, and the third tier is based on small enterprises.
Data from "Kaixinbao" shows that in 2017, the number of new enterprises in the electronic cigarette field was 1,834, and in 2018, the total number of new enterprises was 1,170. In the existing electronic cigarette field, nearly half of the small and micro enterprises in the cigarette industry have a registered capital of less than 1 million. Lin Yue pointed out that the electronic cigarette market is currently in its infancy, with well-known tobacco brands and small workshops all chasing this trend, but the current market supervision and standards have not kept pace.
Lawyer Wang Zhenyu from a Beijing law firm has long been concerned about the domestic electronic cigarette industry. He stated that there is no clear regulatory authority, no specific laws and regulations, and no strict scientific regulations. The entry threshold for the electronic cigarette industry is low compared to standards, leading to uneven product quality and safety hazards for public life and health. Moreover, a more serious issue currently is that the sales channels for electronic cigarettes are ubiquitous, making it easy for young people to purchase electronic cigarettes.
Despite the controversies and concerns surrounding electronic cigarettes, capital remains optimistic about the industry. According to statistics from a venture capital information service provider, in the first half of 2019, there were 13 financing events in the electronic cigarette industry, with a total financing amount reaching 1 billion yuan, almost matching the annual financing amount for the industry in 2018. On September 18, 2019, the electronic cigarette brand Magic Flute MOTI secured $50 million in financing, with the renowned international dollar fund SIG Heiner Asia participating in this investment.
"Currently, the level of domestic manufacturers can meet higher quality requirements. The key is to see if the brand is willing to use high-quality materials," electronic cigarette agent Xie Tian (pseudonym) told reporters. The manufacturer is only responsible for production, and the specific sales and profits are unrelated to the manufacturer, which charges based on order quantity. "The biggest difference in quality among e-liquids lies in the e-liquid itself. High-quality e-liquids lead to higher prices. You can import e-liquid raw materials, or you can choose
During an electronic conference, I heard similar statements. Other important raw materials will directly affect the price and quality of the cartridges," said a representative from a cigarette experience store in Sanlitun, Beijing. "It's like perfume. If you open the formula, a bottle can cost 15 yuan, while another can cost over 1,000 yuan. The essence lies in the different raw materials and mixing methods, which lead to different consumer experiences."
Additionally, Xie Tian revealed that various flavored additives can actually mask the differences in e-liquid quality. "It's like a piece of not-so-fresh meat, adding a lot of strong spices can make it taste good.
Regarding the flavor of American electronic cigarettes under regulation, Fang Hui stated that this policy has limited impact on Platinum. Platinum's flagship product is tobacco-flavored electronic cigarettes. The main consumer group consists of long-term smokers, so the primary customer base remains unaffected.
"Since electronic cigarettes emphasize the experience, offline sales channels are always important," Fang Hui told reporters. Currently, all electronic cigarette brands are competing across all channels, but if they replicate traditional retail channels, they will become a way to rob money.
On September 13, the highest-valued American electronic cigarette brand JUUL was taken offline from Tmall and JD stores on September 9. When I clicked on the "JUUL Official Flagship Store" on Tmall, it showed "Unable to access this store."
"I believe that in the near future, offline will become the home of electronic cigarettes. After all, this is the most reassuring appearance and feel," Xie Tian said. Currently, the fastest-growing sales channel for electronic cigarettes is online, but in the past two years, this channel has started to gradually heat up. Due to the significant role of face-to-face sales, many brands choose to open stores in online shops. Online sales cannot be replaced.
According to 36Kr, since the tobacco industry is not allowed to advertise in China, all electronic cigarette brands are only left with crazy sales channels and are pushing aggressively. I have also conducted marketing activities. In bars and nightclubs, I saw people smoking (electronic cigarette brands). I approached and suggested replacing the pleasant product with a brand new snowflake and electronic cigarette along with a cigarette.
Spot Capital partner Fu Zheng stated that most electronic cigarette brands have been established for a long time. Strength is the first step. "Strength" is reflected in differentiation. Electronic cigarette brands will only discover and enhance their unique features. Differentiated characteristics can survive in fierce competition due to their uniqueness. Although electronic cigarettes are emerging consumer products both domestically and internationally, many investors who have received funding are entrepreneurs with internet backgrounds, but in reality, the sales of electronic cigarettes in China are quite traditional, with family-run shops accounting for a large proportion. The channels for educating users, including the components and how to use them, etc.
Meanwhile, domestic regulatory measures for electronic cigarettes may decline. According to the "People's Daily," Mao Qun'an, director of the Planning Department of the National Health and Family Planning Commission, stated on July 22 that the Health and Welfare Committee is planning to regulate electronic cigarettes through legislation. When discussing the potential impact of electronic cigarette legislation on enterprises, Wang Zhenyu stated that the specific passage time and regulatory supervision remain unclear, making the impact on the electronic cigarette industry difficult to predict. It may be that the impact on small and medium-sized electronic cigarette enterprises will be more pronounced, while the impact on large electronic cigarette enterprises is limited, as large enterprises can meet regulatory requirements in terms of funding and technology.
After the U.S. announced a ban on the sale of flavored electronic cigarettes, McVewell stated that this news has limited impact on the company. The FDA and the Department of Public Health have determined the harm reduction performance of electronic cigarettes, retaining electronic cigarettes as a reduced harm product to replace smoking. The open policy will not change.
Managing Director of Xiangxi Capital, Meng Xiang, stated that most domestic electronic cigarettes have low technical content, and the business model is OEM production. The brand mainly engages in marketing and promotion. As regulatory policies tighten, companies without R&D technology that cannot adapt to regulatory standards may not survive, while the headquarters will be more resilient.
Undoubtedly, the policy trend is like a sword of Damocles hanging over electronic cigarette companies. Reporters learned that after observing domestic and foreign policy trends, several large electronic cigarette companies have begun to develop products focused on "nicotine-free" and plan to enter the market with categories such as "inhalable energy sticks."
Lin Yue stated that this may lose the initial consumer group of "old smokers," but under this concept, some trends have emerged, and electronic cigarettes may become a personalized fashion, attracting the pursuit of fashion and health among the post-90s and post-00s consumer groups.
