China’s E-Cigarette Industry Post-Online Ban

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There are more than 9,500 e-cigarette companies in China, according to Tianyan, a database of Chinese enterprises. Factors such as a low start-threshold, easily accessible core technology, lack of regulatory supervision, etc. contributed to the take-off of the e-cigarette industry, which contained a multitude of both opportunities and risks. But, what entrepreneurs did not expect was that regulations would be put in place in so fast a manner.

By TobaccoChina Online

There are more than 9,500 e-cigarette companies in China, according to Tianyan, a database of Chinese enterprises. Factors such as a low start-threshold, easily-accessible core technology, lack of regulatory supervision, etc. contributed to the take-off of the e-cigarette industry, which contained a multitude of both opportunities and risks. But, what entrepreneurs did not expect was that regulations would be put in place in so fast a manner.

Ban on online sales

On November 1, 2019, the State Administration for Market Regulation (SAMR) and the State Tobacco Monopoly Administration (STMA) jointly released a notice on further protecting minors from e-cigarettes. The departments urged production and sales enterprises or individuals to close online sales sites or apps of e-cigarettes in a timely manner, as well as withdrawing online e-cigarette advertising. They also urged e-commerce platforms to close e-cigarettes shops and remove e-cigarettes products. Subsequently, Snowplus, Wel, and other e-cigarettes have been taken offline from tmall.com, JD.com, and other e-commerce platforms.

The notice, known as the 2019 doomsday for China’s e-cigarette industry, put the brakes on the industry. Since then, many e-cigarette manufacturers in Shenzhen saw their orders plummet. They had to lay off their production lines, clean up their inventories, and terminate all e-commerce marketing programs and budgets. The whole e-cigarette industry chain came to a halt. According to the latest data from the e-cigarette industry committee, about 50,000 people lost their jobs.

Ou Junbiao, chairman of the E-Cigarette Industry Committee of China Electronics Chamber of Commerce, said that the product technology of the e-cigarette industry in the past three years has matured, which was the most prosperous three years of development. More than 70% of e-cigarette sales in the domestic market are online, especially the emerging e-cigarette brands, so the new policy may be devastating for most e-cigarette brands, undoubtedly an industry earthquake. Guangdong Sigelei Electronic Technology Co., Ltd., an e-cigarette production enterprise listed on the new OTC (over the counter) market. In the first half of 2019, like other e-cigarette entrepreneurs, Ou Junbiao, also a director of Sigelei expanded the company’s business from overseas to domestic, renting 1800 sq.m. of office space.

However, due to the ban on e-cigarette online sales, he had to sublease to cut losses, and all the domestic teams recruited with high salaries to expand the domestic market now laid off.

The new policy also led to a precipitous decline in business for e-cigarette factories. Nanwei, in business since 2013 enjoyed a lucrative e-cigarette business during the past five or six years. However, in order to survive, they temporarily shut down their e-cigarette business to develop other business. But, they do not want to leave the e-cigarette industry, unless the industry does not exist at all.

In addition, the Fifth Beijing International E-cigarette Exhibition, was held in early December 2019 had about 60 exhibitors, far fewer than the 100s of exhibitors at immeidately preceding exhibitions in Shenzhen and Shanghai. Since the ban on online sales channels, many brands in the industry face problems of sales and survival. There were many brands who signed up for the exhibition but were absent, and some who paid booths also gave up the arrangement. Yooz, Flow, Lingxi, Boulder, and other brands did not participate in the exhibition.

According to CCTV finance and economics report, data shows that the number of domestic e-cigarettes entrepreneurs exceeded 2,000,000 in 2018 with total annual sales exceeding RMB33.7 billion, and the total export nearly RMB30 billion. With e-cigarette regulations growing stricter globally, e-cigarette enterprises will shoulder more than 50% of the pressure of layoffs. In addition, the orders for more than 70% of the enterprises have declined posing enormous pressure and challenges on the entire e-cigarette industry.

After the ban of online sales channels, the only way for brands to win users is to go offline, which also means that each brand will incur more costs and provide more subsidies to compete for channel resources. Meanwhile, the leading domestic e-cigarette manufacturer, Smoore, submitted an application for listing to the Hong Kong Stock Exchange on December 19, 2019.

Expanding offline channels

It is reported that many insiders said that the new policy broke the original market pattern. Many e-cigarette enterprises doubled their efforts to expand their offline sales channels, including bars, KTV, net bars, supermarket chains, convenience stores, etc., as well as franchise stores built or joined by e-cigarette enterprises. For example, Boulder announced that it would provide subsidies of no less than RMB300 million for the construction of offline retail outlets; Snowplus also launched the “Snowplus direct delivery service” in more than 10 cities such as Beijing and Shanghai while increasing its investment in offline channel expansion.

However, some e-cigarette companies say the impact of the new policy was not catastrophic. Before November 2019, the sales model of Myst Labs included both online and offline. With the release of the notice, it quickly adjusted its sales program and opened the offline store model while taking its products into supermarkets and convenience stores. On November 8, 2019, the first offline store of the company opened in Wuhan, Hubei province. At present, there are a dozen stores in operation. Chen Min, c.e.o. said, “On the one hand, it also sets the direction for our marketing strategy. Starting from science popularization, we focus more on consumers’ cognition of the industry and the product itself. Before the spring festival, we expect to open another 15 stores in major cities across the country. “

Zhao Yangbo, founder of e-cigarette brand RXR, told reporters that they pay more attention to quality than the quantity of channels. “We are more of an empowerer, empowering offline channels, such as providing more support to some stores with unsatisfactory data on sales, improving the rate of sales, and achieving a win-win situation.”

The change of sales channels means that the marketing strategies of e-cigarette enterprises also need to make corresponding changes. As online sales and online advertising are banned, consumers’ access to e-cigarettes is reduced, as is exposure of the brands. How to increase exposure opportunities and occupy consumers’ mental cognition is an issue that many e-cigarette enterprises should take into account.

Recently, it has become the focus of public opinion to strengthen the supervision of the e-cigarettes market and prevent the spread of e-cigarettes to minors. Relx, accounting for 60% of the domestic e-cigarette market, announced on December 18 the introduction of its sunflower system. From the site selection stage, it is forbidden to open stores around primary and secondary schools, so as to reduce the possibility of minors accessing e-cigarettes. In the stores, the system can be used to identify age intelligently by face recognition technology and identify the minors with ID card.

Beijing Daily learned that Relx will gradually deploy the system in six scenes, including Relx’s stores, smart vending machine, Relx ME app, etc. With AI, face recognition, age verification, and child-lock design, it is expected to prevent, trace, and humanize the purchase of e-cigarettes by minors from such links as store site selection to user purchase. The system features a combination “name-ID number-face” triple age check. Relx said that it can ensure that only adults can buy e-cigarette products in Relx stores with AI intelligence, face recognition, IoT, and other technology and product innovations.

How can the system protect personal privacy when face recognition is used at e-cigarette counters? Relx said that the system uses edge computing, and the face data is only calculated locally, discarded once used up, and data sharing is strictly prohibited.

Standardized development in the future

The notice stopped fast-moving entrepreneurs, making them begin to think about a  way out and standardized operations, eliminating non-conforming small brands in the market, and stopping outrageous brand marketing. From this point of view, the notice is also a good thing. Industry experts say the process will increase production costs and could lead many small e-cigarette exporters to go bankrupt. But, the rules will provide clear guidance. China’s e-cigarettes have begun to shift from online sales to offline sales and from domestic market to overseas market, which undoubtedly would accelerate the elimination of small brands.