Foreign HNB Products: Running Afoul of China’s Tobacco Monopoly
HNBs are heating up with consumers, but under fire from authorities in China
In recent years, heat-not-burn (HNB) tobacco products, with the significant advantage of reducing the release of harmful components, have gradually become an important r&d direction for the tobacco industry, causing HNBs’ market share to grow rapidly.
One of the leaders in the HNB market is Philip Morris International (PMI). The company invested more than US$4.5 billion in r&d and testing of low-risk tobacco products since 2008. These efforts led to the creation of its core product, iQOS which took an unheard of (for a new product) 15.8% market share in some markets from its launch in early 2016 to Q1/2018. By the end of 2017, IQOS was sold in major cities in 38 regions or countries such as Japan and Korea.
According to data released by PMI’s 2018 shareholders’ meeting, among the consumers who use iQOS, the switch rates in Greece, Ukraine, and Romania are close to 80%, and the complete switch rates in Russia, Serbia, Portugal, and other countries reached more than 50%. The consumption habits of about 5 million adult smokers switched from traditional cigarettes to such products, reflecting the high acceptance of this new type of tobacco products by consumers. Since its launch, iQOS sales and revenue continue to increase, from a single quarter revenue of US$55 million in Q1/2016 to US$1.64 billion in Q4/2017, accounting for nearly 20% of PMI’s entire revenue.
Glo, British American Tobacco’s HNB tobacco product heats special cut tobacco to about 240℃ producing vapor containing nicotine and generating tobacco flavor. The product was first launched in Japan at the end of 2016. In addition, the company developed glo iFuse, a hybrid electronic device which fuses tobacco heating and vaping technology that not only heats tobacco but also heats nicotine-flavored liquid solutions.
Japan Tobacco went into the heated tobacco market in 2011 with Ploom Tech which is designed using a low-temperature tobacco heating method that “would not smoke, nor smell smoke, or generate ash”. In 2016, Ploom Tech launched in Japan, and its indirect heating of tobacco brought innovation to the Japanese heating tobacco industry. In 2017, Ploom Tech launched in Europe. Currently, Ploom Tech is available throughout Japan since June 2018.
Following the growing popularity of iQOS in Japan, HNB products have become more popular with Chinese smokers due to its fashionable appearance and its claimed lower risk. More and more iQOS devices flow into China through various channels. However, unlike other countries where it enjoys popularity, iQOS has been severely targeted by relevant departments in China.
China cracks down on illicit trade of HNB tobacco products
On August 23, 2018, two Chinese students in Xi’an, Shaanxi province were discovered selling iQOS devices online, involving nearly RMB10 million. This was the first case of new tobacco products in the province. Earlier in 2018, the Ningbo Municipal Public Security Bureau of Zhejiang Province and Ningbo Tobacco Monopoly Administration jointly reported the country’s first case of illicit trade of HNB tobacco products, with 13 suspects arrested. The amount involved was over RMB100 million. Since then, multiple provinces and cities in China have successively cracked down on a number of cases of illegal sales of HNB products.
January 2018, authorities in Shanghai seized many genuine and fake HNB products valued at RMB340,000. In March 2018, a taskforce Hebei Province seized more than 1,500 iQOS devices, worth more than RMB5 million. In July 2018, Zhejiang province cracked a case of online iQOS involving 19 suspects and more than RMB60 million.
Following the successful crackdown on these cases of iQOS illicit trade, Chinese tobacco authorities have further strengthened the supervision of new tobacco products and will continue to intensify investigations and seizures, aiming to hit against “internet + logistics” tobacco illegal crimes.
This leads to the question: Why would iQOS be so severely targeted in China?
HNB products falls into China’s tobacco monopoly commodities category
For most Chinese smokers, iQOS has always been regarded as an e-cigarette, even though the devices produce smoke by baking and heating actual tobacco and not e-liquids. Despite iQOS consisting of electronic parts, it does not fall under the e-cigarette category but rather its own category as an HNB device.
In October 2017, the State Tobacco Monopoly Administration (STMA) issued a notice listing four types of new tobacco products, namely iQOS, Glo, Ploom, and REVO, that registered them into the cigarette identification inspection catalogue. In November 2017, the China National Tobacco Quality Supervision and Inspection Center conducted a test on iQOS cartridge samples for nicotine, four tobacco-specific N-nitrosamines, the proportion of the right nicotine optical isomers in line with general tobacco and tobacco products, and secondary alkaloids consistent with those in general tobacco and tobacco products. The samples were determined to contain these tobacco components and the filler was made of tobacco leaves.
China operates a tobacco monopoly law stipulating, “The term ‘tobacco monopoly commodities’ as used in this law refers to cigarettes, cigars, cut tobacco, re-dried flue-cured tobacco leaves, tobacco leaves, cigarette paper, filter rods, tow for cigarettes, tobacco-specific machinery. Cigarettes, cigars, cut tobacco, re-dried flue-cured tobacco leaves are collectively referred to as tobacco products.” The operation and sales of cigarettes should comply with the national tobacco monopoly management laws and regulations.
Therefore, iQOS cartridges fall under the tobacco monopoly product category, which is subject to tobacco monopoly supervision. Moreover, China has not yet officially begun importing iQOS, so it is not yet possible to sell such products in the country. At present, all iQOS in China are smuggled through foreign countries.
Foreign HNB Products: Running Afoul of China’s Tobacco Monopoly
Authorities have seized thousands of contraband HNBs
Chinese companies striving to develop new tobacco products
In 2013 STMA established a group to guide the development of new tobacco products. In terms of technological r&d, Shanghai New Tobacco Products Research Institute, established in 2015, positioned itself as a new tobacco product r&d base and an industrial, academic, and research entity in China’s tobacco industry. China Tobacco Hunan Industrial and China Tobacco Yunnan Industrial, respectively, set up research platforms for new tobacco products in Shenzhen. In terms of equipment manufacturing, China Tobacco Shandong Industrial built up a research center for new tobacco product equipment engineering in 2015, actively promoting equipment construction and the application and transformation of technological achievements.
In recent years, especially after 2012, China’s domestic tobacco industry has made great progress in the r&d of patented technologies for HNB tobacco products, and the total number of patent applications far exceeds those of foreign tobacco companies and other patent applicants. Among them, Yunnan Tobacco and Hubei Tobacco stand out with more patents.
At present, Chinese companies have developed a complete set of HNB tobacco products, but they are still in the testing stage with only a small range of exports. Sichuan Tobacco is the first company in China to produce and export HNB products, and Kuanzhai Kungfu has received wide attention after its launch in Korea. In addition, the U-sonicig of Hunan Tobacco and MC e-cigarette of Yunnan Tobacco have been exported to other countries. Hubei Tobacco has also begun the production of new tobacco products according to order demand.