New Tobacco Products: E-cigarettes and HNB Devices.

Industry size

Two types of new tobacco products are electronic vaporizers and HNB (heat-not-burn) devices. Both electronic vaporizers and HNB products are electronic devices powered by batteries that use heat to create aerosols with specific scents for smokers. Electronic vaporizers offer a wide range of flavors that differ greatly from traditional cigarettes, while HNB devices use tobacco pods heated to a certain temperature but not burned to release smoke with a flavor closer to traditional cigarettes.

Compared to traditional tobacco, new types of tobacco are perceived to have a reduced harmful impact. These new products provide nicotine without the need for combustion, essentially no tar, and satisfy the body's nicotine cravings. As a result, these new products are experiencing rapid growth in a global tobacco control context.

The new tobacco market is seeing rapid growth as the industry enters a stage of significant development. With global anti-smoking policies becoming increasingly strict, people's health and environmental awareness is strengthening, leading to the continuous growth of new, environmentally-friendly tobacco products with reduced harm. According to data from Analysys, the global new tobacco market is expected to continue to increase in market size and penetration rate. In 2021, the global new tobacco market was worth $56.9 billion, a YoY increase of 25.6%, with electronic vapor products up 17.1% to $35.85 billion and HNB up 43.4% to $21.05 billion. It is expected that by 2023, the global new tobacco market will reach $86.7 billion, with electronic vapor products worth $46.82 billion and HNB worth $39.88 billion. Frost & Sullivan predicts that the global penetration rate of electronic vapor products will reach 9.3% in 2024.

The US market requires compliance with the US PMTA regulations for industry entry and prohibits flavors to protect minors. In May 2016, the US FDA specified that new tobacco products introduced after February 15, 2007 require PMTA review and in August, announced a ban on the sale of e-cigarettes to those under 18. In January 2020, the FDA announced a prohibition on the majority of fruit and mint-flavored e-cigarettes (excluding menthol), and in September 2021 issued a marketing denial order (MDO) to 946,000 flavored e-cigarette products.

In October 2021, the FDA for the first time approved the PMTA application of the product under the Vuse brand owned by British American Tobacco. Since 2022, the PMTA applications of Logic, NJOY, and products under the Vuse brand have been approved one after another. The FDA is implementing an admission mechanism mainly based on PMTA review, which not only safeguards minors from the influence of tobacco but also continuously promotes the healthy development of the electronic cigarette industry.

HNB products gain FDA recognition for reduced harm and experience rapid market expansion. In July 2020, IQOS - a product under the international brand PMI - gained official recognition from the FDA for its harm reduction properties, passing its MRTP (Modified Risk Tobacco Product) review. The FDA's recognition of the reduced harm of heat-not-burn (HNB) products serves as a strong example and could potentially increase the penetration rate of HNB products, leading to a rapid expansion of the market. According to Euromonitor data, the HNB market in the US was worth $22 million in 2020, with a YoY growth of 259%, and is projected to reach $6.855 billion by 2025.

Domestic market.

Electronic vaporization is returning to tobacco roots in China, while HNB (heat-not-burn) products are still not approved.

In the field of electronic atomization products, regulations in China have gradually improved. Since 2017, several policies have been implemented to standardize the industry's healthy development, with a particular focus on protecting minors. By the end of 2019, selling e-cigarette products online was banned, and in 2022, the "Electronic Cigarette Management Measures" and mandatory national standards for e-cigarettes were introduced. These regulations prohibit the sale of flavored e-cigarette products other than tobacco flavor, returning e-cigarettes to their tobacco source, while strengthening protection for minors.

According to sources from HNB, in early 2017, the government designated multiple new tobacco products such as IQOS and Glo to be included in the cigarette identification inspection catalog. This means that HNB, like traditional cigarettes, must also follow the tobacco monopoly system, and currently HNB sales are not yet permitted in China.

In China, electronic cigarette users are primarily traditional smokers, so the ban on flavors is expected to have less of an impact compared to the situation in the United States. According to data from iResearch, in 2021 traditional smokers make up 98.5% of the electronic cigarette user base in China, which is higher than the 76.4% in the United States and 93.9% in the United Kingdom. Electronic cigarette usage is less prevalent among people who have never smoked before. Traditional smokers have a higher level of acceptance when it comes to tobacco-flavored electronic cigarettes, and it is expected that the impact of policies banning the sale of non-tobacco-flavored electronic cigarettes in China will be less pronounced than that of the flavor ban in the United States.

The Chinese market for electronic cigarettes is rapidly growing. According to data from iMedia Research, the compound annual growth rate of the domestic electronic cigarette market from 2015 to 2021 was 55.9%, and the market size of electronic cigarettes in China was 14.5 billion yuan in 2021, a year-on-year increase of 73%. It is expected that the domestic electronic cigarette market size will reach 45.43 billion yuan by 2023. Compared with developed countries such as the UK and the US, the penetration rate of electronic cigarettes in China is still relatively low, at only 1.2% in 2019, far lower than the rates of 50.4% and 32.4% in the UK and the US respectively. The growth space of electronic cigarettes in China is huge, and with the gradual improvement of regulation, the domestic penetration rate of electronic cigarettes is expected to steadily increase.

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