CEO Talks | Boutique Struggles: Yunnan Sparking CEO Hu Xin on Survival Strategies of A Midsize E-Liquid Company

Special Report by 2FIRSTS, edited by Sophia Lv
Aug.28.2024
CEO Talks | Boutique Struggles: Yunnan Sparking CEO Hu Xin on Survival Strategies of A Midsize E-Liquid Company
Yunnan Sparking Science and Technology CEO Hu Xin discusses survival strategies for small and medium e-liquid enterprises in China.

Yunnan Sparking Science and Technology CEO Hu Xin: 

Boutique Struggles: 

A Midsize E-Liquid Company's Survival Strategies and Practices

 

by 2Firsts

 

In the initial 20 years of development in the e-cigarette industry, the dominant power in the supply chain was held by OEM factories and e-liquid factories. However, in the past five years, the global e-cigarette market has experienced a "boom" era, with the market gradually transitioning from product competition to brand competition. The dominant power in the supply chain has quickly changed hands and is now being monopolized by brand owners (including brand-type channel distributors). With strong resources and market influence, brand owners serve as the main players in the supply chain, influencing the survival and development of upstream suppliers. As the most important link in the e-cigarette supply chain, the fate of e-liquid factories is particularly uncertain in the tide of the times.

 

With the dominance of major brands, some e-liquid factories are beginning to take sides either proactively or passively, hoping to stabilize their market share through long-term partnerships with big brands. On the other hand, in order to further reduce costs and enhance control over the supply chain, some major brands are now building their own supply chain systems. With huge volumes of orders, top brands have the capability to quickly support more controllable contract factories and e-liquid factories. As a result of these two approaches, the e-cigarette e-liquid market landscape is being rearranged, with leading e-liquid factories establishing "strong connections" with major brands in different ways.

 

What should small and medium-sized e-liquid companies do? With the increasing concentration in the industry, can they still find their position and survive and grow under the competition of giants?

 

With such a question in mind, we visited Yunnan Sparking Science and Technology (referred to as "Yunnan Sparking" below). This company originated from Yunnan, a major tobacco province in China. With a five-year history of development, the company is considered a "new business" in the Chinese e-cigarette circle, and also a typical small to medium e-liquid enterprise.

 

Yunnan Sparking CEO Hu Xin met with 2FIRSTS in his office in Shenzhen. Before the meeting, he had just seen off a group of clients, and there were several e-cigarettes brought by the clients on the tea table. After a brief exchange of pleasantries, Hu Xin quickly shifted into interview mode. With a background in law, he spoke with a slight southwestern accent and was very talkative. When he spoke excitedly, his eyes lit up.

 

CEO Talks | Boutique Struggles: Yunnan Sparking CEO Hu Xin on Survival Strategies of A Midsize E-Liquid Company
Hu Xin was interviewed by 2Firsts in the office | Image source: 2Firsts

 

Boutique Yunnan Sparking: More than E-liquid, but Flavorings and Fragrances

 

2Firsts: Currently, what is the development status of Yunnan Sparking in the e-cigarette industry? How do you position and define your enterprise?

 

Hu Xin: We are focused on creating a small yet excellent enterprise, concentrating on perfecting our technology and products.

 

Yunnan Sparking was established in 2019. After two years in the traditional tobacco industry in Yunnan, we saw the potential of Shenzhen's e-cigarette technology and innovation. Unable to delve into the e-cigarette industry in Yunnan due to its distance, we decided to open a branch in Shenzhen. By being closer to our customers, we believe we have more opportunities for success.

 

Compared to e-liquid factories, I prefer to define Yunnan Sparking as a flavor and fragrance service provider. Currently, many professionals in e-liquid factories act more as "flavor application engineers" rather than true "perfumers." Yunnan Sparking positions itself as a service provider for tobacco flavors in multiple temperature ranges. This positioning is unique in the industry because I focus on temperature ranges. I believe that different temperature ranges must have different forms of tobacco flavors, but currently everyone uses the same flavor and fragrance solutions for all issues.

 

CEO Talks | Boutique Struggles: Yunnan Sparking CEO Hu Xin on Survival Strategies of A Midsize E-Liquid Company
Hu Xin introduced various qualifications and honors of the company to 2Firsts. | Image source: 2Firsts

 

Tied to Large Companies: Practical Advantages, but Not Necessary Long-term Strategy

 

2Firsts: How do you view the current competitive landscape of the e-cigarette industry, and where does Yunnan Sparkingstand in it?

 

Hu Xin: Currently, there are many e-liquid companies in the industry that are partnering with large clients. It is said that some e-liquid factories also have ties with e-cigarette brand companies on a capital level.

 

From a business perspective, any e-liquid factory would be happy to be "tied to a big factory." I also like being tied to a big client because it can quickly bring profits. Tying to the top clients means you don't need to worry anymore. Some e-liquid factories only serve one big client, so they don't need to make adjustments and can just use their existing formulas for production.

 

However, this kind of binding relationship is also changing. On one hand, it is tying together, on the other hand, it is breaking through. Many e-cigarette brands are breaking the traditional boundaries and selecting products from their supply chain.

 

From an industry perspective, binding can also impose restrictions on e-liquid manufacturers. Specifically, I believe that e-liquid has a one-to-many attribute, and binding may not be a good thing. In terms of short-term development for companies, binding is definitely crucial; however, in terms of the long-term development of the entire industry, the one-to-many aspect is definitely more important.

 

I believe that binding is not the only solution. The industry is always changing, and while binding has its benefits, it also has its drawbacks. Relying on a single customer also carries systematic risks.

 

Quality of E-liquid is More Important than Quantity, but There are issues regarding Criteria for Assessing Quality

 

2Firsts: How do e-liquid companies measure and reflect the concept of "beauty" when striving to be "small and beautiful"?

 

Hu Xin: There is a lack of standardized criteria for defining a good e-liquid.

 

Currently, there is a lack of clear standards in the market for what constitutes a good e-liquid. The quality of e-liquids now depends on the size of the company producing them.

 

The current issue is that the assessment of e-liquid quality has essentially become a competition to see which e-liquid brands can make it into the systems of leading e-cigarette companies and gain a sudden boost in popularity.

 

The number of e-liquids is not important, quality is the focus. However, the criteria for judging quality is a problem.

 

Actually, from what I have observed, many e-cigarette companies are now beginning to discuss how to define a good e-liquid in order to determine which e-liquid manufacturer meets their procurement standards.

 

Furthermore, from a market perspective, there is a lack of connection between e-liquid and the consumer end (referred to as "C-end," according to 2Firsts). Some links in the supply chain are often deliberately hidden, with brand owners typically not disclosing the sources of e-liquid blending. In the past, brand owners often chose to conceal specific information about e-liquid suppliers, with some even signing confidentiality agreements to ensure this information is not disclosed. In the future, once the e-liquid brand integrated into e-cigarettes can establish a direct cognitive connection with consumers, it will also have a significant impact on reshaping the evaluation system.

 

Overall, I believe that a consensus will definitely be formed regarding high-quality e-liquids in the future. There must be a pattern to explore the rules and find the "genes" of good vaping.

 

Way to "Small but Beautiful": Innovation in Unique Flavors + Flavor Segmentation

 

2Firsts: How does Yunnan Sparking achieve "small and beautiful" and what is its competitive strategy?

 

Hu Xin: We place great emphasis on developing new flavors. For example, when we launched the longan coffee flavor that we created, imitations quickly appeared in the market because it is very unique. This is one of our Yunnan Sparking's signature products.

 

Currently, we are continuously developing more e-liquid flavors. Each series of flavors is being explored, developed, and stockpiled for future release.

 

In terms of flavor segmentation, we possess strong market competitiveness. For instance, we have continued to vertically segment the watermelon flavor, creating distinct tastes such as watermelon rind, watermelon flesh, watermelon frost, and watermelon juice. Our research on mint varieties is also extensive. Our mint series includes marine mint, continental mint, musk mint, caramel mint, and so on.

 

CEO访谈|云烁CEO胡新:没绑定大厂烟油的中小烟油厂的生存之道
Hu Xin Displays Yunnan Sparking E-Liquid Products | Photo: 2Firsts

 

As an industry develops to this stage, further and further segmentation is my opportunity.

 

I am willing to use my flavor blending capabilities and technology to help e-cigarette brands establish their own flavor systems. I believe that each e-cigarette brand should have a unique taste.

 

Addressing Global Regulation: Returning to the Essence of Tobacco and Seizing Health Demands

 

2Firsts: Many countries and regions are strengthening the regulation of e-cigarettes, including restrictions on flavors. How does Yunnan Sparking evaluate the regulatory prospects and how do you respond?

 

Hu Xin: When some countries' policies stipulate that e-cigarettes are only allowed to have tobacco flavors, many people think it's a devastating blow. But I think it's a return to normalcy. E-cigarettes themselves belong to the tobacco industry; we all have tobacco monopoly production licenses, and every company is a tobacco enterprise. E-cigarettes are not a place outside the law. The global trend of compliance has brought the e-cigarette industry back to its essence. In fact, tobacco flavors can also continue to be segmented, with many expressions still possible.

 

In the face of regulation, I believe that as long as the industry seizes the essential demand for health in the future, there will be opportunities. Under the background of global compliance, flavor bans have always been a topic of discussion. E-cigarettes exist with an identity that is 90% less harmful than traditional cigarettes; they are a healthier product, and health is the essential demand of e-cigarette users.

 

Note: This article is organized based on interview materials. Due to the need for article presentation, some content slightly deviates from the interviewee's original expression.

 


Postscript

 

From the perspective of industrial laws, the development and maturation of an industry are often accompanied by an increase in industrial concentration, which objectively leads to the concentration of market share towards leading enterprises, and some small and medium enterprises will be squeezed out due to inability to cope with competition. On the other hand, the global vaporization industry is still in its early stages of development, with immense potential for innovation and transformation in various fields such as categories, technology, markets, and supply chains. A rich industrial ecosystem will be more conducive to the high-quality development of the global vaporization industry, and small and medium enterprises are an essential part of a rich industrial ecosystem.

 

On the one hand, we should follow market laws and encourage strengthening and growing under competition. At the same time, the global vaporization industry should also establish a sound mechanism to cultivate the continuous emergence and growth of innovative enterprises, injecting vitality into the industry's creation and transformation.

 

Many practices in other industrial fields have shown that when an industry is left with only a few oligarchs, innovation will slow down, competition will become a pursuit of short-term commercial interests, and the long-term interests of consumers and society, as well as human care, will be neglected.

 

The global vaporization industry should not yet reach this point.

 


2Firsts welcomes entrepreneurs from around the world to sign up for interviews. If you are also willing to share your thoughts through 2Firsts and engage in dialogue with global readers, please contact us: Alan@2firsts.com.
 

CEO Talks | Boutique Struggles: Yunnan Sparking CEO Hu Xin on Survival Strategies of A Midsize E-Liquid Company

 

 

 

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