China’s E-Cigarette Industry at the Turning Point?

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By TobaccoChina Online

The waves of negative news about e-cigarettes came one after another last September, which heretofore can be regarded as a “Black September” for the vape industry and manufacturers. Due to the emergence of more cases of lung diseases suspiciously related to e-cigarettes, several states in the US have successively announced stricter control over them. For this, the current US administration regards e-cigarettes as “new issues” facing the country due to “multiple deaths”. Subsequently, Thailand and India also began to “encircle the e-cigarettes”. Alibaba and JD.com, China’s two major e-commerce platforms, on October 9 announced that they would suspend the sale of e-cigarettes to US buyers in order to comply with the strict control policy over this category in the country.

For China’s e-cigarette market at present, there is no clear regulatory department, no clear special laws and regulations, no clear quality criteria and entry barriers. Tobacco control experts and industry associations have for years called for the introduction of relevant laws and regulations.

Moreover, the Chinese market with its huge potential has become the target of e-cigarette brands at home and abroad. As of August 2019, the domestic e-cigarette market financing had exceeded RMB1 billion. For such a huge market, it is essential to release national criteria soon to strengthen the supervision of the entire industry, which also means that the Chinese e-cigarette industry will embrace a new turning point.

The national criteria is under approval

In July 2019, the National Health Committee together with relevant departments conducted research on e-cigarette regulation and expected to implement it through legislation. On China’s National Criteria Information Public Service Platform, it can be seen that two new criteria for the e-cigarettes are currently in the approval stage.

The first one is the national criteria on e-cigarettes, which is under the jurisdiction, reporting, and implementation by TC144 (National Tobacco Standardization Technical Committee), and the competent department is the State Tobacco Monopoly Administration (STMA).

At present, the national standard is in the process of approval. The project cycle is 24 months and the deadline was October 11, 2019.

The second national criteria is the Determination of E-Cigarette Nicotine, Propylene Glycol, and Glycerol by Gas Chromatography, which is also under the jurisdiction, reporting, and implementation by TC144 (National Tobacco Standardization Technical Committee), and the competent department is the State Tobacco Monopoly Administration (STMA). The competent authority is the State Tobacco Monopoly Bureau.

From the current draft of e-cigarette regulations, circulating in the network, the most important limitation to the purity of nicotine is no more than 30mg/ml. That is to say, the concentration of nicotine is limited to 3% or less, and several brands have introduced zero nicotine e-cigarettes. As is known to all, the higher the nicotine content, the stronger the addiction will be.

Therefore, the introduction of China’s e-cigarette national criteria is highly expected, in which the minimum nicotine concentration in the liquids related to personal health and safety is of significance.

However, the draft has neither been officially confirmed nor has it yet taken effect. Any update and modification is possible when the official one is issued.

The national standard is not yet in place. However, STMA and SAMR (State Administration for Market Regulation) on November 1 announced the Notice on Further Protecting Minors from E-cigarettes, requiring all market entities to not sell e-cigarettes to minors; urging e-cigarette production and sales companies or individuals to close e-cigarette internet sales websites or apps; urging e-commerce platforms to close e-cigarette stores and remove e-cigarette products; and urging e-cigarette production and sales enterprises or individuals to withdraw their e-cigarette advertisements posted via the internet. On November 4, STMA talked with major e-commerce platforms on how to regulate e-cigarettes. On November 7, the National Health Commission of China and seven other departments issued a notice to clarify that local tobacco control legislation shall actively promote the prohibition of e-cigarettes smoking in public places. It is speculated that e-cigarettes will most likely be regulated by STMA as do traditional cigarettes.

Reshuffle is on the way

Since the demand for e-cigarettes kicked off in 2018, investors who attempt to make quick money have been rushing into the market. It is only necessary to invest RMB5 million to create a new e-cigarette brand, which can be profitable within certain channels. There are no less than 1,000 such brands. Therefore, the upstream and downstream of the industry are calling for the rapid introduction of regulatory criteria. Then, the introduction of the electronic cigarette national standard will set a certain threshold for entry. The industry is expected to accelerate the reshuffle, and enterprises with leading brands that have large scale and r&d capabilities will stand out in the future.

In addition, a large number of SMEs are engaged in low value-added OEM export business. The introduction of the national e-cigarette criteria will undoubtedly greatly improve the product manufacturing quality and production costs, the low value-added small factories will be forced to leave the market, and leading brands complying with safer criteria will remain.

Many Chinese e-cigarette producers said that they expect the introduction of national regulatory criteria, which will be the “bottom line that must be adhered to” will undoubtedly lead to the gradual standardization of the e-cigarette industry and consumer rights. At present, some Chinese e-cigarette companies established their own corporate standards, which to some extent improved the quality of products.

E-cigarette tax may come next

At present, e-cigarettes are taxed at 13% VAT. Some tobacco control advocates have called for bringing e-cigarettes into the scope of conventional tobacco control, as well as high taxation. Liao Wenke, vice president of China Tobacco Control Association, has repeatedly stressed the need to strengthen supervision over e-cigarettes. This is the trend. The relevant departments are studying the measures to be taken.

According to a recent report by Bloomberg, the US House of Representatives fundraising committee approved the nicotine taxation measure would tax US$50.33 on 1,810 mg liquids with nicotine. Take Juul as an example. Its pod has an average nicotine content of 5%, the liquid capacity is 0.70 ml, so it should be taxed US$1.15. If the nicotine content is 3%, it should be taxed US$0.68 for 0.70 ml of liquids. Although the official news has not come out in the US, if the tax really comes, it will be the government’s fundamental solution for e-cigarettes.

On July 22, Mao Qun’an, director of the Planning, Development, and Information Technology Department of the National Health Committee of China, said that more measures should be taken to reduce the number of new smokers and reduce exposure to e-cigarettes. Mao revealed that he has discussed with international organizations and experts the current situation of tobacco tax in China and the possibility of tax adjustment, but it is yet to be determined whether e-cigarettes are included in it or not.

In fact, some insiders think that it is “still too early” to say when the Chinese e-cigarette national regulatory criteria will come out, and rumors even go that the release has been postponed until 2020. It has a large chance that the e-cigarettes will fall under the scope of STMA, and the e-cigarette tax is also likely to be released.