In June 2022, the State Tobacco Monopoly Administration legally and orderly issued a batch of tobacco monopoly production enterprise licenses to e-cigarette-related production enterprises and a batch of tobacco monopoly wholesale enterprise licenses to e-cigarette wholesale enterprises. Tobacco monopoly administrative departments at all levels legally and orderly issued a batch of tobacco monopoly retail market entity licenses, and a number of e-cigarette products that meet the national standards for e-cigarettes have successively passed technical reviews.
On June 15th, the national unified e-cigarette trading management platform was officially launched and put into operation. At present, most of the certified e-cigarette-related production enterprises, e-cigarette wholesale enterprises, and retail entities have completed membership registration on the trading platform. The administrative licensing, technical review, and operation of the trading platform for e-cigarettes are being carried out in an orderly manner. The development of the e-cigarette industry is gradually achieving legalization and standardization.
In April this year, the State Administration for Market Regulation approved and issued an announcement on the mandatory national standard for 'Electronic Cigarettes', which will come into effect on October 1, 2022. Starting from October 1, 2022, domestic electronic cigarette products must be produced in accordance with the national standard for 'Electronic Cigarettes' and sold and circulated through the national transaction management platform.
Combined with the recent launch of the national unified e-cigarette trading management platform and the introduction of the national standard for e-cigarettes in April this year, what will be the future development trend of the e-cigarette industry in China?
Strong supervision will have a profound impact on the e-cigarette industry from aspects such as production, channels, exports, and marketing.
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production side
From the production side, the e-cigarette industry still possesses high growth potential.
The national standard for 'e-cigarettes' and the 'Administrative Measures for E-cigarettes' stipulate the prohibition of the sale of e-cigarettes with flavors other than tobacco. At the same time, the scope of substances permitted for use as atomizing additives has been significantly reduced to 101 items. In essence, e-cigarettes are a substitute for traditional cigarettes, and in the future, the attribute characteristics of e-cigarettes, such as taste fidelity and smoking experience, will be significantly restored. Therefore, companies with technical research capabilities are expected to capture a larger market share in the subsequent market competition.
Specifically, in the short term, due to taste constraints, the sales volume of e-cigarettes will experience a phased reduction. However, in the long run, with the full restoration of e-cigarette tobacco flavors, the market size of e-cigarettes in China still has significant growth potential.
In 2020, the US FDA issued a flavor ban, prohibiting the sale of e-cigarettes with most flavors including fruits and candies, while tobacco and menthol-flavored e-cigarettes could continue to be sold. Subsequently, the retail scale of the US e-cigarette market saw limited decline. However, structurally, among refillable e-cigarettes, the sales ratio of menthol and tobacco flavors significantly increased.
In addition, compared with key global countries, the current penetration rate of e-cigarettes in China is far lower than that in countries such as the United States, Japan, and the United Kingdom. With further improvement in the penetration rate of e-cigarettes in China in the future, the e-cigarette industry in China still has significant development potential.
Image source: Internet
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Channel side
From the perspective of channels, it is expected that the wholesale segment of e-cigarettes within the China Tobacco System may be taken over in the future, and convenience stores, traditional cigarette outlets, and other locations may replace brand-exclusive e-cigarette stores.
According to the 'Electronic Cigarette Management Measures' issued by the National Tobacco Monopoly Administration, enterprises holding a tobacco monopoly wholesale enterprise license can only engage in the wholesale business of imported products after obtaining approval from the State Council's tobacco monopoly administrative department, and it is expected that this link will be incorporated into the Chinese tobacco system in the future.
At the same time, the 'E-cigarette Management Measures' stipulate that 'exclusive operation and marketing of e-cigarette products on the market are not allowed.' Since it is difficult to rely solely on a single brand of tobacco-flavored e-cigarettes for store sales, subsequent brand specialty stores may be replaced by chain stores, convenience stores, and traditional cigarette online stores.
In addition, the 'E-cigarette Management Measures' state that 'the transportation of e-cigarette products, aerosols, nicotine for e-cigarettes, etc., shall be subject to the supervision of the tobacco monopoly administrative department; the mailing and cross-regional carrying of e-cigarette products, aerosols, nicotine for e-cigarettes, etc., shall be managed under limited quantities, not exceeding the limits specified by the relevant competent departments of the State Council.' Therefore, in the future, non-compliant channels such as WeChat business will be subject to significant restrictions.
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export end
From the export perspective, the future formal management measures for e-cigarettes will make export supervision more flexible, which will be beneficial for domestic e-cigarette manufacturing brands looking to go global.
The 'E-cigarette Management Measures' have removed the draft for public comment that included the following provisions: 'To establish foreign-invested e-cigarette manufacturing enterprises, e-cigarette OEMs, e-cigarette brand holding enterprises, and e-cigarette nicotine production enterprises, they must be reviewed and approved by the State Council's tobacco monopoly administrative department before they can be approved for project establishment in accordance with relevant national regulations.' and 'Enterprises producing e-cigarette products not for sale within China but only for export shall register their products according to these measures and obtain a tobacco monopoly manufacturing enterprise license.' Additionally, 'For e-cigarette products exclusively for export, the packaging should indicate the words 'Exclusive for Export,' which has been changed to 'The packaging of e-cigarette products exclusively for export shall meet the requirements stipulated by the State Council's tobacco monopoly administrative department,' simplifying the business processes of pure export enterprises to a certain extent and benefiting domestic manufacturing brands looking to go global.
At present, most e-cigarette products sold and circulated in the global market are produced in Shenzhen.The industrial pattern of 'Made in China, Consumed Globally' has taken initial shape. In global competition, China holds a leading position with relative advantages and has currently become the world's largest producer and exporter of e-cigarettes.
Source: Internet
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Marketing side
From a marketing perspective, the official version of the 'E-cigarette Management Measures' emphasizes the protection of minors, and in the future, the publicity management of e-cigarette advertisements will be strengthened.
The official version of the 'E-cigarette Management Measures' includes two new items: 'The state and society shall strengthen publicity and education on the health risks of e-cigarettes, dissuade teenagers from using e-cigarettes, and prohibit primary and secondary school students from using e-cigarettes', and 'It is prohibited to hold exhibitions, forums, and expos dedicated to promoting e-cigarette products in any form'.
According to the national standard for 'E-cigarettes', starting from October 1st, e-cigarette products must be sold and circulated through the national trading management platform. In the past, e-cigarette market transactions were spread across multiple online and offline channels, making them difficult to supervise. Moreover, transactions on internet platforms were relatively concealed and prone to flow into the underage population. The establishment of the national trading management platform for e-cigarettes helps to address this chaos.
All along, e-cigarettes have had flavored cartridges that have been somewhat attractive to adventurous teenage users. The release of the national standard for 'e-cigarettes' will also address this issue from a systemic perspective.
Overall, Frost & Sullivan believes that the release of the national standard for e-cigarettes and the 'E-cigarette Management Measures', as well as the launch of a unified national e-cigarette trading management platform, will promote the orderly development of the e-cigarette industry. The competitive landscape among producers and brand owners will gradually become clearer, benefiting enterprises with high production standards, technical reserves, and financial resources.
