Chinese e-cigarette manufacturers are expanding into Indonesia to better serve the local market.
China has strict regulations for the electronic cigarette industry. However, the export of electronic cigarette products is relatively lenient. Nonetheless, there is a regulation that forbids the shipment of products to certain countries or regions.
According to a report from Chinese e-cigarette industry media outlet 2FIRSTS, Chinese law stipulates that all exported products must comply with the regulations of the destination country or region. If a country does not regulate e-cigarettes, China's regulations on e-cigarette products will apply to these exports, including a ban on flavors and synthetic nicotine.
Chinese e-cigarette manufacturers are establishing factories outside of China to better serve countries and regions without established regulations for e-cigarette products. Many companies are currently investing in Indonesia, which has over 70 million combustible cigarette smokers. These Chinese manufacturers' preference for Indonesia is evident in recent news reports.
The Jingjia Group has established an integrated e-cigarette manufacturing base in Indonesia. STI, a subsidiary of Smoore International, one of the world's largest e-cigarette manufacturers, has invested $80 million in building an e-cigarette factory in Indonesia. The Indonesian factory of the e-cigarette precision assembly supplier will begin operations in 2022.
The cost of factors such as land and labor make Indonesia the preferred location for electronic cigarette companies to set up overseas. Indonesia can offer more favorable conditions.
During his keynote speech at the IECIE vaping expo, Garindra Kartasasmita, the Secretary-General of the Indonesian Vaping Entrepreneur Association, noted that the electronic cigarette market in Indonesia has been steadily growing since 2013, with an annual growth rate of 50%. However, the market experienced a 7% decline in 2021 due to the COVID-19 pandemic. Kartasasmita predicts that the market will rebound to a 50% growth rate by 2022.
Integration of production and sales" Note: This phrase can be used in various contexts, such as in discussions about streamlining the supply chain or optimizing business operations. As an AI language model, I'm unable to fully decipher the intended context without additional information.
Indonesia has helped to spur growth in the e-cigarette industry, which is beneficial for the development of reduced harm products. One big advantage of shifting e-cigarette production to Indonesia is the country's large population, making integration and sales easier. Indonesia has a population of 280 million, making it the fourth most populous country in the world and representing 40% of the total population of Southeast Asia. Additionally, Indonesia has 70.2 million smokers, with a smoking rate of 34%.
The presence of so many nicotine consumers means that electronic cigarettes produced in Indonesia can also be sold domestically. Indonesia's regulatory environment is favorable for the marketing of nicotine e-cigarette products. Indonesia is the only Southeast Asian country that allows tobacco advertisements on television and in the media. It also has platforms for e-cigarette bloggers and cross-category bloggers, such as beauty and skincare. Indonesia ranks second globally in terms of the number of posts shared on Instagram about e-cigarettes and related devices.
Electronic cigarette brands can only be imported and sold in Indonesia with the recommendation of the National Agency of Drug and Food Control (a division of the Ministry of Health) and the Ministry of Industry. Additionally, products must be certified by the Indonesian National Standards. These policies are beneficial to Chinese electronic cigarette manufacturers.
Barir Rahardian, Minister of Investment and Chairman of the Investment Coordinating Board of Indonesia, has publicly expressed his desire for cooperation, work, and opportunities with SMIC Indonesia's factory, saying "let us be brothers". SMIC Indonesia's President, Clayton Shen, expressed gratitude for the Indonesian government's support, including the investment department granting the company a tariff exemption for much-needed machinery imports.
Future Challenges
However, there are some challenges in the Indonesian market. Although it is a large market for Chinese manufacturers, it is not easy to navigate. A well-known Chinese electronic cigarette manufacturer who intends to establish a factory in Indonesia revealed to 2FIRSTS that logistics is the first challenge that manufacturers face, and there is currently no good solution.
For example, if the final product is packaged and assembled in China and then shipped to Indonesia, it is impossible to predict how long the product will be held at customs. "I had a shipment that arrived at customs at the end of last month and it was still there until the 20th of this month," said the Chinese manufacturer. "If it is assembled in Indonesia and shipped from an Indonesian factory, there is not much difference in the time it takes to arrive compared to shipping from China.
The second challenge is the lack of electronic cigarette machinery. Another e-cigarette manufacturer told 2FIRSTS, "There is a serious lack of tools and machinery that can keep up with the production line. If we were to build a factory here, the machines would have to be imported from China, which is a key issue that needs to be addressed.
The third challenge is the differences in work culture and mindset, particularly in regards to employee training and production issues. When training local workers, companies must overcome not only cultural and lifestyle differences but also adapt to the Chinese way of working, which places a strong emphasis on dedication and teamwork. An insider told 2FIRSTS that some workers have a lax attitude towards punctuality, which requires companies to implement various incentive measures to prevent tardiness or leaving work early. This differs greatly from the work ethic of many Chinese employees.
Spillover effect.
Shenzhen is considered as the global hub for electronic cigarettes, being responsible for the design and production of around 90% of e-cigarettes and related devices in the world. The entire Guangdong province, along with other regions in China, houses over a thousand factories and thousands of upstream, midstream, and downstream companies that form the supply chain.
According to the Blue Book of Electronic Cigarette Industry Export in 2022, it is estimated that the global electronic cigarette market will grow by 35% and the total market size is expected to exceed $108 billion. In 2021, China's total electronic cigarette exports amounted to $19.8 billion, and it is expected to reach $26.7 billion in 2022. China's expansion of the electronic cigarette industry from Shenzhen to Indonesia is more accurately described as "overflowing" rather than "migrating.
The hub for manufacturing e-cigarettes in Shenzhen may currently hold a dominant position, but that doesn't mean the global manufacturing layout has been set in stone. In fact, over the past five years, China's e-cigarette industry has expanded from urban areas to the Greater Bay Area. We have seen the spillover effects between Shajing in Bao'an District of Shenzhen and Dongguan.
However, this overflow effect has not had an impact on the development of the electronic cigarette industry in China. At the same time, there has been a period of rapid growth and improvement in the industry supply chain.
Echo Guo, co-founder and COO of 2FIRSTS, recently stated in an interview that China's years of development have not only led to the emergence of a number of electronic cigarette companies in the Bao'an District of Shenzhen, but also the establishment of supporting supply chains for industrial design, molds, and other basic needs in battery and electronic cigarette production. As a result, the entire electronic cigarette industry has formed a "two-hour transportation circle," in which different branches work closely together. Even when manufacturers and customers exchange new ideas, they can prepare prototypes in less than two hours.
The e-cigarette industry in China is expanding to Indonesia, which can be viewed as a utilization of manufacturing resources by the Chinese e-cigarette industry and a breakthrough of the boundaries in the Greater Bay Area, extending to a broader region in Asia-Pacific. This development provides the opportunity for the entire region to create greater economic success through the growth of the e-cigarette industry.
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