Recently, the National Tobacco Monopoly Administration issued the "Measures for the Administration of Electronic Cigarettes" (hereinafter referred to as the "Measures"), clearly stating that "the sale of flavored electronic cigarettes other than tobacco-flavored ones and those with self-addable atomizers is prohibited." The "Measures" will come into effect on May 1, 2022. Along with the "Measures," the National Tobacco Monopoly Administration also released the national standard for "electronic cigarettes" (second draft for soliciting opinions). On April 8th, People's Daily published an article to strengthen regulatory control over electronic cigarettes.
What impact will strict compliance requirements have on the short-term and long-term development of the industry? Will the regulation of electronic cigarettes as tobacco-related products affect the expansion of offline specialty stores by major companies? The second draft for soliciting opinions has clear restrictions on nicotine content and concentration. Will such restrictions help improve companies' R&D capabilities? Frost & Sullivan's (Frost & Sullivan, abbreviated as "Frost & Sullivan") Greater China Executive Director Xiang Wei recently interviewed with Tobacoo Journal International (TJI) to discuss the future development direction of the electronic cigarette industry under strong regulation.
International Tobacco Magazine
Q: The two recent solicitation drafts aimed at regulating the electronic cigarette industry. What impact will strict compliance requirements have on the short-term and long-term development of the industry? For startups, will it lead to increased difficulty in financing?
Xiang Wei:In the short term, the impact of strict compliance requirements on the industry is mainly reflected in the following aspects:
1) Tax growth leads to increased costs for electronic cigarette companies, raising the industry entry threshold
Firstly, China's tobacco industry generates nearly one trillion in tax each year. If electronic cigarettes are taxed like cigarettes, their costs will significantly increase, with some of the cost increases being passed on to consumers, potentially leading to higher terminal prices for electronic cigarettes. Secondly, before the industry regulations were introduced, electronic cigarettes were only taxed as ordinary consumer goods, resulting in a lower burden from taxes. In the future, the compliance of electronic cigarettes will pose significant challenges for small-scale practitioners, as taxes will raise the industry entry threshold and capital requirements.
2) Standardization of offline stores has a significant impact on offline channels in the short term
Before the introduction of electronic cigarette regulatory regulations, most e-cigarette store owners did not obtain tobacco sales licenses, making it difficult to effectively supervise e-cigarette offline sales. In the short term, the new regulations increase the uncertainty of e-cigarette brand channel development, possibly leading to a large number of offline stores closing down for rectification, which could have a short-term impact on the domestic e-cigarette market. In the future, under the guidance of the new regulations, e-cigarette sales stores will operate more standardly.
3) Small players in the industry will be eliminated, increasing technical barriers; leading companies begin to expand into more overseas markets
The domestic e-cigarette industry has developed rapidly in the past two years, with unclear regulatory regulations, low entry thresholds, and many industry players. The quality of products from non-leading companies varies widely. In the short term, a large number of small-scale and unregulated enterprises will be phased out, and the introduction of policies will inevitably accelerate the elimination of small brands. The market's demand for product technical barriers has significantly increased, and it will also prompt some leading e-cigarette industry companies to try to open up more overseas markets.
In the medium to long term, the proposal of electronic cigarette regulatory regulations plays a positive role in establishing a healthy industry development mechanism and promoting the orderly development of the e-cigarette industry. The environment of China's e-cigarette industry needs to be regulated and standardized, and the chaos brought about by wild development will change under the influence of policies. Non-compliant products and brands will be accelerated in elimination, ultimately contributing to the long-term development of China's e-cigarette industry. As e-cigarette policy supervision steadily progresses, the industry will enter a period of rapid growth, which can not only protect the health of minors and ensure national tax revenue but also maintain China's international competitiveness in this field.
Electronic cigarettes have their particularities, and regulatory policies are only meant to regulate the industry and not to stifle the entire industry; on the contrary, they will promote healthy development of the industry. China has about 300 million smokers, but in 2020, the penetration rate of e-cigarettes in China was only about 2.1%, indicating that there is still huge investment potential in the e-cigarette industry in China. The introduction of electronic cigarette regulatory policies is an inevitable measure to regulate the healthy development of the industry and enhance healthy competition. For emerging companies seeking financing, investors will also discover the market prospects from a sustainable development perspective. Companies with R&D capabilities, stable product supply capabilities, compliance, and product layout advantages will attract more capital.
Q: Will the regulation of electronic cigarettes as tobacco-related products affect the expansion of offline specialty stores by major companies?
Xiang Wei:Currently, sellers of electronic cigarettes do not need to obtain a tobacco monopoly license. However, according to the Tobacco Monopoly Law, if they do not have a tobacco monopoly license, they cannot engage in tobacco business or sales. The extent to which the expansion of offline specialty stores is affected will depend on the scope of implementation of electronic cigarette regulatory policies.
Currently, the offline channels of major companies are relatively complete, and in the future, the e-cigarette sales network is expected to further expand to major supermarkets, tobacco hotels, and other stores with tobacco business licenses for unified distribution and sales. At that time, the offline e-cigarette market will be reshuffled, and non-compliant private sellers will be eliminated from the market.
Q: The second draft for soliciting opinions on the national standard for electronic cigarettes has clear restrictions on nicotine content and concentration. Will such restrictions help improve companies' R&D capabilities?
Xiang Wei:We learned that the second draft for soliciting opinions on the national standard for electronic cigarettes has restricted the nicotine content and concentration in atomizers. The nicotine (nicotine) concentration should not exceed 20 mg/g, and the total nicotine (nicotine) content should not exceed 200 mg. Currently, a certain proportion of electronic cigarette products on the domestic market exceed the concentration limits in the draft. In the short term, stricter control over the nicotine content in electronic cigarettes will inevitably eliminate a series of products with substandard concentrations.
Therefore, the restriction on nicotine content in e-liquid will increase the requirements for companies' supply chain and production cost control. Upstream supply chain management and production quality assurance systems will become one of the core competencies of new tobacco companies in the future. This will further encourage companies to improve their own R&D capabilities, and those that prioritize e-liquid technology will have greater advantages.
Q: Many electronic cigarette companies in Shenzhen do not operate domestically. Will the introduction of Chinese regulations also affect their business?
Xiang Wei:As a world base for electronic cigarettes, Shenzhen currently produces and OEMs more than 90% of the global electronic cigarette industry. Europe, America, and South Korea are the largest e-cigarette markets in the world and also the main export destinations for Shenzhen's e-cigarette OEM factories. Currently, foreign e-cigarette regulatory policies are becoming increasingly strict, and Shenzhen's e-cigarette companies will have to apply for relevant certifications and raise product standards to cope with different national regulatory policies. The introduction of Chinese regulations has limited impact on Shenzhen's e-cigarette companies that mainly focus on overseas markets. On March 11th this year, the National Tobacco Monopoly Administration issued the "Measures for the Administration of Electronic Cigarettes," stipulating that starting from May 1st, the sale of flavored electronic cigarettes other than tobacco-flavored ones and those with self-addable atomizers is prohibited. This means that China's e-cigarette industry is facing strong regulation, with fruit-flavored e-cigarette products exiting the market, and the market will undergo further integration in the future.
The introduction of Chinese regulations has brought the stable development of the e-cigarette industry onto a legal and standardized track. Major countries and regions with a large global share of electronic cigarettes, including Europe, America, and South Korea, have issued clear policy guidelines and regulatory measures for electronic cigarettes. With the later implementation of the second draft for soliciting opinions on the national standard for electronic cigarettes, it will be beneficial for e-cigarette companies that focus on product quality. In the future, e-cigarette companies will compete in terms of compliance and technology.
