How are Chinese E-Cigarette Foreign Traders Affected by New Policies in China

Looking back on the history of e-cigarettes in the past two decades, we want to share a glimpse at the an ordinary role that was integral, those that connect Chinese e-cigarette manufacturers with the world market. Operating by integrating demand information and connecting buyers with sellers, they survive on trust and price differences.

They are the foreign/international traders of e-cigarettes.

However, a notice of China’s regulation re-shapes the marketing norms of e-cigarettes. The third line of Article 17 “Sales Management” of the Measures for the Administration of E-Cigarettes(MAEC) states: “An enterprise that has a Tobacco Monopoly Wholesale Enterprise License must obtain the approval from the Tobacco Monopoly Administrative Bureau and change the scope of the license before engaging in the wholesale business of electronic cigarette products.” The above article does not specify the approaches for applying for “Tobacco Monopoly and Wholesale Enterprise License.” Therefore, in this distribution system in China, retail stores must directly trade with local state-owned licensed wholesale enterprises. The wholesale qualifications of previously established e-cigarette foreign traders would be terminated, leaving them to walk on thin ice.

In face of uncertainty, we can walk back and trace the steps that lead to the split roads of E-Cigarette foreign traders.

The Veterans of the E-Cigarettes Industry

As early as 2009, Mrs. Huang Guihua, when she had yet founded Shenzhen Green Sound Technology, was still engaging in the foreign trade in Guangzhou. She met with a foreign client who wanted to buy “fake cigarettes” from China. She, like many others, misunderstood the word “fake cigarettes”. They were referring to e-cigarettes that imitate the appearance of cigarettes. By this encounter, Huang Guihua discovered the vast spread of e-cigarettes and founded Shenzhen Green Sound Technology Co., LTD., which mainly manages the foreign trade of e-cigarettes before transforming into an e-cigarette manufacturer.

Zhu Xiaochun, who entered the industry first, established an export-oriented Shenzhen Kanger Technology Co., Ltd. as early as 2007. They sold it to the European market through Turkey as a transit, which opened up e-cigarettes to going abroad. In the peak seasons, the company would be overloaded with orders, and even once had Turk intimidate them: “If you don’t sell, we will block the door with knives.”

Zhu Xiaochun recounted: “It was a first for me, to meet a buyer with a knife.”

Huang Guihua before she established a e-cigarette manufacturer and the Turk from the story would both be categorized as foreign traders.

The History of Foreign Trade in China

The term “foreign trade” enjoys a time-honored history. The earliest written record of trade between China and foreign countries can be found in “Historian Records: Business Chapter”. After Zhang Qian in the Western Han Dynasty and Ban Chao in the Eastern Han Dynasty traveled to the Central Asia, the Silk Road was built to transport goods between China, India, Persia, to the Roman Empire. In short, “foreign trade” can be understood as doing business with foreigners.

In 2001, after more than ten years of negotiations and the signing of more than 1,000  documents, China succeeded in becoming a member of the WTO. Since then, Chinese products have been traded around the world in open official capacity. 

Foreign trade during the early period was mainly about locating the sources of products. Once foreigners have demands, they will start to find factories in China to manufacture, thus a larger amount of products marked with “Made in China” started to appear in places all over the world.

Canton Fair has become the most important platform of Chinese foreign traders since 1957. There were more than 100,000 buyers attending the fair in 2000. An American who spent his early years as a foreign buyer in China recalled that the annual Canton Fair was like a big festival, in which a lot of foreigners brought all sorts of new things to Chinese factories and asked whether they could manufacture it. The Chinese people had never seen many of those things, but they will try their best to meet customers’ requirements. During the fair, the revenue of the tickets from foreign traders, accommodation, and other costs will reach as much as 100 million, excluding the transaction revenue.

Foreign trade played an important role in the development of China’s manufacturing industry. Factories accumulated to undertake more orders, and many world-famous industries centers are formed: small commodities in Yiwu, Zhejiang, home textiles in Nantong, Jiangsu, underwear in Panyu, Guangdong, and toys in Chenghai, Guandong. Production machines imported from Japan and Germany began to operate in the factories along the Yangtze River Delta and Pearl River Delta, creating stories of rural enterprises that became landed the first wave of fortune.

(Figure Note: Scene of the Marine Export)

Basic Laws of Foreign Trade

Following the trend of WTO, Chinese cigarettes also came forth to the world market. In the 80s and 90s, Marlboro, Blumen, and other foreign tobacco products were imported in China. This aroused domestic tobacco to cry “the wolf is coming” and decided to push back by exporting. However, it’s not easy to “go global”.

Coincidentally, the exporting of e-cigarettes is booming to an unexpected level. The tobacco researcher Li Min said: “If we call traditional cigarettes the essence of nature, then e-cigarettes are more like white canvases that can be dyed and customized in light of consumers’ preferences. That’s probably why Chinese e-cigarettes have been successfully sold overseas.”

(Figure Note: 2FIRSTS visits of the warehouse of PNDUS Biotechnology Co., LTD.)

In 2002, the Chinese pharmacist Han Li invented the first commercially available e-cigarette, and named it “Ruyan.” Within three years, the revenue of the company exceeded 1 billion yuan and its market capitalization reached 100 billion Hong Kong dollars(HKD). The popularity of “Ruyan” has attracted many imitators from home and abroad. From then e-cigarettes have become popular in many countries and regions around the world within just a few years.

In 2007, e-cigarettes were exported to the United States and Europe and were granted with an international patent, winning over the international market gradually.

Faced with high overseas demand on the one hand and abundance of domestic supply on the other, foreign traders of e-cigarettes are also springing up quickly. This was a time when the Internet was still relatively less-developed.

Generally speaking, when foreign buyers have the demand for products, they will contact Chinese middlemen (the foreign traders). Those middlemen find out clearly about the goods and the batch the buyers want, as well as the price they’d like to pay. Thus, they can quickly match to the corresponding companies in the supply chain. Those middlemen collected the information of various factories, sent quotations to overseas clients, obtained instructions from the parent companies, facilitated orders and production. That is the space to earn from the price difference. In addition, they also provided a series of extra services such as advanced capital and quality control. That was the way, Chinese e-cigarettes with foreign labels were loaded into containers in large quantities and shipped to foreign consumers.

The CEO of Cloupor Technology, Li Bo adds: “There are a lot of small-scale customers overseas who couldn’t connect with Chinese brands or Chinese factories wouldn’t pick up orders due to the low volume. Therefore, those foreign traders helped them by assembling together a larger order, which also provided certain discounts from larger orders.”

Over the years, many companies of e-cigarettes in the supply chain have maintained a friendly and mutual trust relationship with foreign traders. As efficient middlemen, foreign traders also assume the modest role as guarantors. This can allow manufacturers to accept their orders with more ease.

The Old “Dumb Way”: Wait for a Big Fish With Wide Nets

Today, the Internet makes open and transparent information available to everyone. Even so, there are still quite a few manufacturers of e-cigarettes reluctant to connect with foreign buyers directly. And the old ways of the foreign traders of connecting the buyers and sellers have not changed for more than 10 years. Contacting a large number of overseas customers every day, publicizing the information of the ID and mold, waiting for the client’s response. After receiving replies of customers, they send some samples, then making orders after customers have agreed this business.

Mr. F, an executive of an undisclosed foreign e-cigarettes enterprise, reveals that he can obtain the channels of contact of clients through some companies specializing in data, and then “cast a wide net to wait for the big fish,” In fact, this dumb method is widespread in the industry, as it’s easy to implement. It is difficult is to keep up every day. “It is very similar to managing ordinary foreign trade. We send 50 ~ 100 emails out every day. Only about 30 of them will reply us, and only a few deals can be finalized. However, one overseas order is equivalent to the total number of domestic orders for half a year.

Seeking cooperation (sending samples), negotiations (arranging production after 30% ~ 50% of the deposit is paid), packaging, testing, and invoice on delivery. The overall foreign transaction of e-cigarettes is very similar to domestic trade, except for the difference in time due to longer distance. 

“We only earn 0.1 to 0.2 US dollars per item, equivalent to about 20 RMB yuan. However, the profit is still considerable for a larger volume of goods.” That is to say, the advantage of foreign traders lies in that they can earn profit in any case. To put it simply, they are sure to profit no matter the order volume. Their profit grows the larger the volume.

Mr. F says there are two types of overseas customers, respectively the overseas distributors and the overseas brand owners. Overseas distributors directly import domestic products to sell, while the brand owners require factories to print the brand logo first.

Mr. X, who works in a logistics company for e-cigarettes, says, “Each shipment (of e-cigarette products) ranges from hundreds of kilograms to tens of tons. From the data of our clients, single-use products cover 50%, CBD equipment 30%, and big smoke equipment 20%."

Mr. X thinks that at present, the greatest appeal of the overseas market is a brand: “Foreign hot brands are followed by a large number of fans.” This appeal is a threshold that the export of Chinese e-cigarettes can never catch up with, and is also one of the fuses that force some foreign traders to make transformations.

Advanced Form of Foreign Trade: Four Tigers

The first e-cigarette foreign trade company in China was founded in 2007, called Shanghai Huyue Electro-Mechanical (the predecessor of Heaven Gifts). Since then, foreign trade companies have become actively exporting e-cigarettes.

In 2009, Sottera (NJOY’s parent company) and Smoking Everywhere sued the FDA over its proposal to regulate e-cigarettes as drug inhalers. It resulted in a lose for the FDA in 2012. A milestone in the history of e-cigarette development.

Since then, the “Great Smoke” era started. China’s e-cigarettes developed rapidly as more and more enterprises engage in the foreign trade. Even two people can manage an e-cigarette foreign trade company. The four companies Heaven Gifts, Cacqu, Ave40, and Elego stood out in this period, and were named as the “Four Tigers”. The most common characteristic of the four foreign trade wholesalers is that they have rich experience as agents and mature overseas wholesale channels.

In 2015, a Chinese scientist, Chenyue Xing who worked in an American e-cigarette brand JUUL invented and patented a unique nicotine oil formula. It boosted JUUL’s sales by 700%. Moreover, this contributed to the growth of overseas e-cigarette brands in the following years. As OEM model became less popular, the golden era (2012 to 2018) of China’s e-cigarette traders came to an end. 

At the same time, the trend of “disposable vape” became popular overseas, and many foreign trade companies struggled to adapt to this change. After years of deliberation, China’s domestic regulatory policies have been finalized. The lack of wholesale qualifications of foreign traders has caused controversy. Accompanied with many other factors, most Chinese e-cigarette traders are lost about their future.

Attacked by the tide of the times, some foreign traders who adhere to the traditional scalping business model have sifted out from the e-cigarette market while some foreign traders started to transform their business.

An entrepreneur Mr. A said: “A senior foreign trader doesn’t just engage in quotation, but goes deep into the whole link of the supply chain and specifies the source of parts, materials, and production specifications. He is responsible for the integration of a supply chain. Once he masters all the channels, he can customize sale volume and may even lead the producing activities.”

The advantages of transformation are more than just a higher revenue. If the foreign traders is capable to start their own factories or make their own brands, they will have the qualification of applying for the license of Tobacco Monopoly and Wholesale, and really take root in the industry.

The competition of market is as fierce as carps trying to leap into the Dragon’s Gate and the possibility of successful transformation is low. The scale of most foreign trade enterprises is not large plus only a small number of enterprises will make such choices. Consequently, the enterprises that can succeed are rare.

The vice-president of Heaven Gifts, Ms. Wang Liyun, introduces that their company once tried to transform in 2014 but didn’t get the desired results. Luckily, they succeeded the second time. In 2020, the executives saw the popularity of disposable e-cigarettes and cultivated the ELF BAR brand. Since they have accumulated customers’ tastes over years, ELF BAR found the right target market, featuring of complex flavors and characteristic appearances. Heaven Gifts doesn’t ignore small to medium clients. With their help in promotion, ELF BAR, a new brand, launched with great prospects.

The executive of another company, Mr. B, says that their company holds the concept of branding, follows the trend of the times to quickly adapt the direction of development. The company is purely an exporter and has not ventured into domestic e-cigarettes markets. Moreover, they’ve integrated R&D of products with established foreign distribution. Now, they have successfully established more than a dozen foreign brands, and some brands even rank among the top five in terms of popularity. Today, the company’s revenue has exceeded 2 billion yuan.

The general manager of e-cigarette foreign trade enterprise Elego, Mr. Feng Yewang said: “During the early years of managing foreign trade distribution business, we helped China’s e-cigarette industry to broaden channels, meet the one-stop purchasing needs of overseas customers, and also accumulated a large number of overseas channel resources for ourselves.” The company’s annual revenue exceeded 1 billion yuan during the peak period. Since 2019, the company’s market share have been in decline due to the decline in the distribution business. They have been looking for a way of transformation for more than two years. At present, Elego has opened up two new segments of business, one is its own brand VOZOL that focuses on overseas markets achieving rapid development in many countries around the world, and the other is Hongyi Manufacturing that focuses on contract manufacturing business.

Are the Roles of Foreign Traders Over?

The overall transformation of China’s foreign traders still demonstrates a strong color of “agency”. After years of working as an “agency” between clients and manufacturers, they have obtained a rich amount of customer profiles and overseas channels. This is beneficial to the development strategy of the enterprises in the future, and can help them to directly transform into brand owners, or the “service provider” of brand owners.

In the modern business society, both buyers and sellers want to optimize the channels to reduce costs and increase profits. The reform of the e-cigarette agency system, to put it bluntly, is an attempt to disintermediate as more and more transparent information are available on the Internet. It compresses the market in the links path, eliminates unstable factors, facilitates better management by relevant departments, and promotes the compliant and legal development of e-cigarette companies.

As an executive of a brand company, Mr. D said: “After our company transformed into a brand company from a foreign trade company, no other giants have emerged in the vacant foreign trade market, which indicates that this part of the market share hasn’t been taken up by others.” In his opinion, the role of foreign trade is not necessary, the future distribution channels will be held in the hands of the brand owners.

However, Mr. B holds a different opinion and says: “that the value of intermediaries is not only to provide information, but more importantly to provide services.” He vividly compares it as an overseas education agency. No one can deny the rationality and necessity of overseas education agencies, even though some families complain about their high service fees choosing to file paperwork and applications for studying abroad themselves.

As the intermediaries, e-cigarette traders first navigated the mystery of overseas markets, provided high-quality services for exporting e-cigarettes, and reduced the trial costs of manufacturers. Mr. A says: “Although the foreign traders survive on price differences, they can match the supply chain with the demand side. When there are too many orders for one manufacturer to cope with, the foreign trades can split the orders to various producers. Faced with multiple suppliers, foreign traders can negotiate price advantage for buyers and find better partners, so as to ensure product quality.”

The Low-key Style

China’s e-cigarette industry is centered in Shenzhen, which has consolidated its status as the “Vape Valley” over the past two decades with large and impressive trade data. According to the 2021 E-Cigarette Industry Book jointly produced by ECCC and JuanJuan Think Tank, by the end of 2021, there were more than 1,500 e-cigarette manufacturing and brand enterprises domestically, and nearly 100,000 e-cigarette supply-chain and surrounding service enterprises; the total export of e-cigarettes reached 138.3 billion yuan in 2021, up 180% year-on-year, which is seven times the size of the domestic retail market during the same period. This splendid result can’t be achieved without the silent contribution of the foreign trader.

(Figure Note: 2021 E-cigarette Industry Blue Book)

While the role of foreign trade traders is familiar, judging from the responses of the interviewed entrepreneurs, they communicate very little with each other. There has never been any professional survey research and statistical data on this field, because it is too difficult to implement. First, the scale of foreign trade traders varies, just two people is able create a foreign trade company. Second, strictly speaking, foreign trade traders still belong to the gray area of regulations, and most them stay low-key. When asked about the share of the e-cigarette market occupied by foreign trade, most entrepreneurs are reticent. Mr. B says that our company is focused on our own business and there are about 60% to 70% of foreign traders that have similar production patterns to ours. “The products exported by foreign traders account for about 10% of the e-cigarette market,” Mr. D says.

When asked about the size of e-cigarette traders, most entrepreneurs say they are not clear. Another e-cigarette trade executive estimates that there are probably more than 10 foreign traders that has scaled of to over the hundred million threshold.

That doesn’t mean companies of e-cigarettes are indifferent to each other. The lack of information sharing among e-cigarette foreign trade merchants is just a self-protection measure for enterprises during the transition period (April to Oct).

According to Mr. A’s observation, although regulatory policies have confused some Chinese e-cigarette traders, their business has not shrunk, on the contrary, the number of overseas orders is still growing, especially the orders of disposable vapes from Europe. He also reveals that the value-added tax of the factory’s tax bill to the dealer is 10 percent, and the trader’s tax rebate is 13 percent. It’s worth mentioning that this difference is also one of the profit points for foreign traders.

However, Mr. B who is versed in customs business refutes that: “If the invoice for a certain part is not approved, the refund of the entire order can’t be carried out. It may result in millions of yuan to be detained for up to half a year. So it’s not enough to just survive. The most fundamental way for enterprises to get out of the predicament is to rely on scientific and technological strength to make persistent efforts and innovate without bounds.”

Deliberating a Migration Trend

According to Mr. E, an executive of a leading enterprise of e-cigarettes, under the pressure of regulatory policies, some e-cigarette companies have recently decided to migrate overseas, targeting overseas markets such as the United States, Europe, Russia, and Southeast Asia.

From the perspective of China’s e-cigarette traders, it isn’t easy to explore the overseas market. Once becoming foreign enterprises, they will not be able to export to China. According to the relevant provisions of the Foreign Trade Law of the People’s Republic of China and the Measures for the Record and Registration of Foreign Trade Managers: “If the foreign trade operator fails to go through the application and registration, the customs will not process the customs declaration and inspection procedures for import and export.” The import and export right is limited to foreign trade operators who have registered for industry and commerce in China according to law, restricted to Chinese enterprises rather than overseas enterprises. Therefore, once a foreign trader becomes an overseas company, it can’t obtain import and export rights in China and can’t export goods through Chinese customs. To make this process feasible, the finished product must go upstream to be exported via manufacturers. This greatly increases the cost of distribution.

On the other hand, a problem of national level is looming. The migration of e-cigarette enterprises will deconstruct the domestic electronic vaporizer industry cluster. The Shenzhen Baoan disctrict has proposed: “To support the development of regional industries with characteristics and advantages, encourage the agglomeration and development of industrial enterprises such as electronic vaporizer equipment. To reward the implementation of the construction of industrial parks of electronic vaporizer equipment, award enterprises and industries, such as electronic vaporizer equipment according to the increment of added value.” Once vaporizer manufacturers migrate overseas, it will be difficult to continue the industrial development path conceived above.

In addition, if a large number of e-cigarette enterprises migrate overseas, it will be disadvantageous to the leading position of the domestic electronic vaporizer industry. Domestic e-cigarettes occupy the position of core supply chain in the global market is that China has a profound "industrial chain" of e-cigarette manufacturing. Once these manufacturers migrate as some domestic policies and regulations tighten, overseas companies will start to take the larger share of the production and marketing of the global market. 

From a macro perspective, this is not only a “loss” of the industrial chain, but at the same time, the cost of other links in the e-cigarette industry chain will rise, which will put more pressure to the migration of other associating enterprises. It is bound to damage the industrial basis and product innovation.

Therefore, Mr. E puts forth two suggestions for the country: “First, he suggested to issue traders focusing on the overseas market with the qualification to apply for wholesale licenses. Second, he suggested that the government should control the warehousing and logistics of wholesale businesses to prevent products from illegally flowing into the domestic market.”

As the president of the China Electronic Chamber of Commerce Wang Ning said on June 15, we hope that relevant departments would consider new approaches to the management of e-cigarettes and innovate the management system. “It’s necessary to regulate e-cigarettes but not curb them. When small and medium-sized enterprises face difficulties during the epidemic, I hope relevant departments can be benevolent to enterprises of e-cigarettes.”

Despite the uncertain road ahead, Mr. A holds an optimistic attitude: “In any case, our company stay rooted in China. If we can’t manage a business on e-cigarettes in the future and our customers still have demands for other products, we will try all means to meet their needs. As it’s said, there’s always a way ahead.”

Edited by Siri Wang

Translated by Jason Tian