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 Here at the Shenzhen offices of e-cigarette start-up RELX
Technology, workers scramble to keep pace with the rush of firms
vying for sales in the world’s biggest tobacco market. Their
potential-customer base starts with 300 million Chinese smokers of
traditional cigarettes – about nine times the number in the United
States. Founded by former employees of Didi Chuxing, China’s answer
to Uber, RELX aims to become China’s answer to Juul Labs Inc, the
San Francisco startup that captured a huge share of the U.S. vaping
market with a sleek and addictive e-cigarette.
RELX makes an almost identical product: a stick-shaped device that
burns high-nicotine liquids packaged in plug-in “pods.” But it won’t
have to compete with the U.S. e-cigarette giant. Juul has yet to
crack China’s market even as it aggressively expands elsewhere in
Asia and faces a regulatory crisis in the United States
https://www.reuters.com/
investigates/special-report/juul-ecigarette over a surge in youth
vaping. Juul’s delayed entry into China – potentially its most
lucrative market – underscores the complexity and risk of operating
here.
E-cigarette sales have grown slowly in China compared to other
industrialized nations. Its market is about one-ninth the size of
the United States, according to market research firm Euromonitor.
One main reason: China Tobacco, which is both the government-owned
cigarette company and the national tobacco regulator. The state
monopoly has not clearly signaled how it will regulate e-cigarettes
– or whether it will sell them. If it does, it has the power to
regulate its competitors out of the business.
One investor in a Chinese e-cigarette startup likened the combined
regulatory and competitive threat to “a knife on the neck.”
China Tobacco did not respond to written questions from Reuters.
The cigarette giant’s power stems in part from its contribution to
the national purse - accounting for 5.45% of China’s tax revenue in
2018. That amounts to 10.8 trillion yuan ($1.5 trillion), according
to calculations by Professor Rose Zheng of the University of
International Business and Economics in Beijing.
Still, China Tobacco sells cigarettes for a fraction of what they
cost in most nations – as little as 3 yuan per pack, or less than
half a U.S. dollar. RELX sells a device and one pod for between 299
yuan to 399 yuan.
Foreign firms, particularly U.S. firms, face the additional
obstacles of the U.S.-China trade war, cultural challenges in
marketing and distributing, and competition from a host of new
Chinese e-cigarette startups including RELX, which was valued at
$2.4 billion based on recent investments.
In September, Juul briefly started selling devices on two popular
online commerce sites, Tmall and JD.com Inc. But the products were
pulled from the websites days later for unknown reasons.
Juul, Tmall parent company Alibaba Group Holding Ltd, and JD.com
declined to comment on the Juul product removals or China’s
regulatory environment. China Tobacco issued a notice Nov. 1 urging
e-commerce platforms and e-cigarette companies to shut online stores
offering vaping products, a move aimed at stopping youth sales.
Juul declined to comment on its China strategy.
RELX CEO Kate Wang said she’s “not worried” about the government’s
impact on the sector. The products will continue to remain
available, she said, “as long as there’s proof that this is a good
solution for smokers.”
FRONTIER MARKET
Many e-cigarette startups still see boundless opportunity in China.
Nearly half of Chinese men smoke cigarettes, according to the World
Health Organization. Chinese factories make 95% of the world’s
e-cigarettes, according to Electronic Cigarette Industry Committee,
a Chinese trade association. But almost all of that production is
exported.
Juul’s explosive U.S. growth only recently convinced Chinese
e-cigarette firms of the viability of small, high-nicotine vaping
devices in China. They had focused on larger, box-shaped devices
that spew vast clouds of vapor and spawned a subculture in the
Chinese hip-hop community. The box vapes were less effective in
delivering nicotine but offered better profit margins, said Michael
Gao, founder of Chinese e-cigarette company Moti.
“The old box-style models, you could sell for $100,” compared to
about $30 for a Juul-like device, Gao said. “So everyone had doubts
about the pod model.”
Juul’s success quelled those doubts. Dozens of Chinese startups
released pod-style vapes starting in 2018. Many had roots in China’s
technology industry. Shenzhen-based Laan, for instance, was founded
by former employees at WeChat, the messaging app owned by Tencent.
YOOZ, based in Beijing, was launched by Cai Yuedong, an online media
entrepreneur.
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Samuel Liu, who launched the Evove brand of e-cigarettes, envisions
a mass market. “It’s a legal drug; it’s a fast-moving consumer good;
and it’s an electronic product,” he said. “Electronic cigarettes
will be the second item you carry in your pocket, after your phone.”
And yet Liu and others acknowledge the risk posed by China Tobacco.
“When VC’s come to me, I always tell them they shouldn’t get too
excited,” he said. “You don’t know when the government will come in
and just claim this market for itself.”
Some VCs are embracing the risk. In April, RELX closed on $75
million in venture capital funding from high-profile investors
including Sequoia China and Yuri Milner.
In addition to e-commerce sites, RELX sells its products through
bars, cafes and smartphone repair shops, and says it has more than
900 branded storefronts as franchise partners. The company also
plans to soon open flagship stores in Southeast Asia and London.
The company’s most popular flavors are mung bean, a common
ingredient in Chinese desserts, and laobinggun, a type of popsicle
popular in the nineties in China.
“We search for flavors that are pretty familiar to people over 30,
things that are old-fashioned and inspire emotion,” says Wang.
MONOPOLY CONTROL, MIXED SIGNALS
China Tobacco dominates the nation’s tobacco supply from
manufacturing to retailing. The same entity controls regulation
under a different name – the State Tobacco Monopoly Administration.
The administration has at times worked against efforts to limit
smoking. In Hangzhou, for example, the local government in 2018
attempted to ban indoor public smoking. The movement lost momentum
after the tobacco administration pushed for lighter measures
including more designated smoking areas, which it said allowed for
“civilized smoking” in a statement to Reuters at the time.
In May 2017, the regulator claimed jurisdiction over heat-not-burn
smoking devices - an alternative type of e-cigarette that creates a
vapor from raw tobacco leaves. The decision effectively barred
Phillip Morris International Inc from Chinese sales of its IQOS
device, a heat-not-burn e-cigarette popular in Japan. China Tobacco
subsidiaries have since begun testing their own heat-not-burn
devices and selling them in limited quantities.
Phillip Morris said in a statement it had no current plans to sell
IQOS in China but did not comment on the nation’s regulation of the
heat-not-burn sector.
The government has sent conflicting messages on whether it intends
to regulate e-cigarettes that vaporize liquid nicotine blends - or
sell them itself.
In March, state broadcaster CCTV aired a segment highlighting the
potential health risks from inhaling nicotine and other chemicals in
e-cigarette liquids. The spot was part of a program - broadcast
annually on China’s national “Consumer Day” - that targets
industries the government alleges have wronged the public.
Industry players say they struggled to interpret the government’s
message in the segment. They hoped it signaled that the tobacco
monopoly would continue allowing e-cigarette sales but start
regulating their quality and safety. They had the same hopes in May,
when a government regulator submitted draft regulations for exported
Chinese e-cigarettes to the World Trade Organization.
Many industry observers, however, continue to believe China Tobacco
will eventually enter the e-cigarette market itself.
State-owned enterprises such as China Tobacco are “bloated and slow
to take action,” said Maggie Chen of ESun, a Shenzhen-based
consulting firm that helps companies comply with import and export
regulations. “But they are definitely paying attention to this
sector.”
(Reporting by Josh Horwitz and the Shanghai bureau; Editing by
Vanessa O'Connell and Brian Thevenot)
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