Analysis of Dispute Between South African Distributor and Chinese Manufacturer

Editor's Note:

As Chinese e-cigarette brands accelerate their global expansion, emerging markets have become a new engine driving industry growth. 

However, the road to globalization is not without its challenges, as various issues such as product quality, tax compliance, and a lack of trust in partnerships have quietly emerged. These potential "hidden dangers" between brands and overseas distributors could lead to disputes at any time, hindering the healthy development of the industry.

Recently, 2Firsts received a request for help from a distributor in South Africa (referred to as distributor A in this story), who is experiencing a dispute with the Chinese brand (referred to as Brand B) over the content of e-liquid and deposit issues. The lack of effective communication between the two parties has resulted in a deadlock in their cooperation. Distributor A hopes that 2Firsts can assist in facilitating effective communication between him and brand B to resolve the conflict.

Due to limited information, 2Firsts is unable to independently assess the authenticity and completeness of the information provided by all parties, nor can it determine the allocation of responsibility. 

However, the issues reflected in this dispute regarding communication and cooperation between overseas distributors and Chinese manufacturers are worth considering and taking seriously. Therefore, 2Firsts has omitted the specific identities of the parties involved and only presented the sequence of events.

2Firsts, reporting from Shenzhen - Recently, 2Firsts received an email from an e-cigarette distributor in South Africa. The distributor, who claimed to be the agent for a domestic e-cigarette brand in South Africa, stated that their cooperation with the brand was in crisis due to product quality issues and financial disputes.

From customer complaints to admitting false advertising

The email is from South Africa. To protect their personal privacy, they will be referred to as distributor A in the following text. They are in dispute with a domestic e-cigarette company, referred to as brand B.

Currently, the distributor's online store primarily sells two types of e-cigarettes: 4000 units of 8ml e-liquid and 8000 units of 16ml e-liquid. Since receiving this shipment in June 2024, Distributor A has reported receiving frequent customer feedback complaining about the short lifespan of the pods, e-liquid leakage, and rapid battery depletion in the products.

"So the leaking and the batteries dying out, I 100% understand because it's mass produced, I don't hold them at fault for that but the misleading label regarding the ML," said distributor A.

According to distributor A, the 4000-pack and 8000-pack packaging they purchased is labeled to contain 8ml and 16ml of e-liquid, respectively.

In 2024, the sales manager of brand B in South Africa traveled to South Africa to conduct market research. Distributor A learned from the other party that the actual e-liquid capacities of these two products are 6ml and 12ml.

Distributor A then conducted self-testing, and the results showed that the true capacities of the two products were lower than what the other party privately disclosed, measuring only 5ml and 10ml, which is about 45%-49% lower than the labeled values. 

To support this claim, they showed 2Firsts a video of them dismantling 8000 units of the product.

In a video recorded by distributor A, 2Firsts observed their method of testing: manually squeezing e-liquid from the cotton wick into a container until the wick was dry, then using a syringe to measure the volume of e-liquid extracted.

Distributor A explained to 2Firsts the reason for personally inspecting the amount of e-liquid. He mentioned that he has been deeply involved in the e-cigarette industry for 14 to 15 years, during which he has been responsible for quality testing of a large number of devices and e-liquids, accumulating rich experience. This time, he recorded the entire process on video, tested the two pods, and sent the test results to brand B for verification.

However, 2Firsts consulted an industry testing company on the dismantling method used by distributor A. The testing company pointed out that during the process of personal dismantling, there may be a slight loss of e-liquid in the storage cotton, leading to some margin of error.

The testing agency also introduced more professional testing methods: "Typically, when determining the volume of e-liquid in a testing agency, multiple samples are taken from the same batch for measurement, and the average is calculated. If the product contains storage cotton, the factory needs to cooperate to separately measure the weight of storage cotton without oil and with oil to ensure accuracy.

Distributor A has yet to provide a professional inspection report. However, according to the information he provided, brand B has acknowledged discrepancies in the reported e-liquid volume.

Compliance risks behind the false labeling of e-liquid

For distributor A, the consequences of mislabeling e-liquids go beyond just customer complaints.

Distributor A stated that strict regulations in South Africa govern the monitoring of e-cigarette products, and falsely indicating the capacity of e-liquid could result in substantial fines or even legal penalties for his company and brand B.

In June 2023, South Africa implemented new tax requirements on e-liquid products, including bottled, pod, and disposable e-cigarette e-liquids, with a tax rate of 2.90 South African Rand (approximately $0.16) per milliliter. This means that for the popular 3ml disposable e-cigarette in the South African market, the tax portion will be £0.48, while a 60ml bottle of e-liquid will have a tax rate of £9.

This means that inaccurately labeled e-liquid capacity could result in distributors bearing additional costs in taxes.

"For the 4000puff which is 8ml I paid 1.28usd, 8000puff which is 16ml I paid 2.56usd. So I'm loosing very very vert big profits by the mls being incorrect," he said. "I'm paying 0.48usd extra on the 4000puff, and 0.96usd on the 8000puff."

He stated that after discovering the issue, he engaged in several months of ongoing communication with the brand B, but was unable to reach a consensus. Recently, even the two contacts he had been maintaining with brand B no longer replied to messages.

"As the situation remains unresolved, we find ourselves in a difficult position, unable to continue selling these products while brand B has not provided any concrete steps to address the matter with viable resolutions," he added. 

Distributor A hopes to contact the CEO or other senior executives of brand B to seek a resolution.

Deposit Issue Causing Trust Rift

In addition to the misrepresentation of e-liquid, distributor A also revealed to 2Firsts another issue with their partnership with brand B: a dispute over a deposit of thousands of dollars.

According to A, this payment was originally a prepayment for the next batch of goods. However, despite being aware of issues with the first batch of products, brand B insisted on shipping them and unilaterally increased the deposit by 50% from the originally agreed upon amount.

Distributor A said: 

"This amount included a 50% increase, which had not been agreed upon, and they did so without our consent, disregarding our concerns about the change."

Distributor A also said that the brand B began production of the second batch of goods without receiving full advance payment from him, and attempted to shift the responsibility to him.

"Brand B proceeded with the production of a second shipment without consulting us, even though the agreement stipulated that it should only be manufactured upon full pre-payment. They moved forward without receiving the full payment, and now they are attempting to absolve themselves of responsibility, violating our initial terms once again."

Looking back at the early stage of co-operation, distributor A said that the two parties had only reached a verbal agreement and a written contract did not seem to be important. However, since discovering the problem of false labelling of tobacco oil, he subsequently proposed to brand B to sign a formal contract, but was refused by brand B.

"They actually refused when we did eventually ask them," said distributor A. He didn't clarify to 2Firsts the specific reasons for brand B's refusal.

Faced with this series of problems, distributor A put forward his own demands: he hoped that brand B would return the existing stock of goods, make up for the overpayment of tax due to false labelling, and compensate for transport costs, VAT, storage costs, petrol costs and a series of other losses brought about by the substandard products.

The representative of the brand B, with whom he had been in contact previously, told him that brand B have never recalled any products before, so they cannot recall our non-compliant goods.

Currently, there is still no agreement between the two sides on how to deal with the issue.

Responses From Both Sides And Industry Warnings
 

In response to the above, 2Firsts contacted a person from the management of brand B to verify the situation. The person said he came across that there might be some information gap between the two sides and there should be some kind of misunderstanding.

As of press time, distributor A sent 2Firsts his latest claim:

"In the beginning we were open to reimbursenment of stock etc (they wanted us to spend MORE money for new future orders to get giveaways, which is explicitly inexcusable) but the way they handled everything with absolute disrespect and regulatory disregard, we no longer see an ethnical business future going forward with (brand b), so we just want our compoensation of full costs incurred and loss since dealing with their company."

The dispute between distributor A and brand B is inevitably not an isolated case, and it reflects the three major pain points that are common in the current process of e-cigarette companies going overseas:

Quality issues: E-cigarette companies that adopt behaviours such as false labelling of tobacco oil for short-term profit will damage the brand's reputation and even the image of the entire Chinese supply chain in the long term. Consumers in emerging markets have not yet established their awareness of new brands, and they are extremely sensitive to quality, which will cost them more than it is worth.
 

Compliance risk: There are significant regulatory differences between countries around the world, and tax and labelling compliance needs to be examined in advance, especially in regions and countries where few companies are involved, and the lack of preliminary research and market launch will lead to both cost and legal risks.
 

Co-operation norms: In the early stage of co-operation, both parties only rely on verbal agreements, the lack of written contracts can easily lead to a crisis of trust and disputes over responsibilities, and after the ‘honeymoon period’ there are more disputes over the division of responsibilities one after another.
 

Globalisation is an opportunity and a litmus test. When Chinese e-cigarette companies go global, compliance and transparent communication are not only the bottom line, but also the key to success. 

2Firsts hopes that by sharing this story, the industry will face up to the problem, improve the mode of co-operation, and help e-cigarettes continue to flourish and develop in international co-operation.

To comment on the article or provide more information and cases, please contact 2Firsts: info@2firsts.com.

Reference: Taxing of Vaping Tobacco products with effect from 1 June 2023

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