In 2022, the electronic cigarette industry, driven by innovative electronic atomization devices, enters a crucial year for "compliance" development. From October 1st, the electronic cigarette industry officially enters a new period of development, with less than a month to go until this milestone. Looking back at the regulatory history of electronic cigarettes in China, since 2017, the relevant authorities have gradually developed standards and administrative regulations, and now formalized laws and regulations have been established. In just five years, the government has traced the roots, explored the patterns, and summarized the experience of the industry with an open and inclusive attitude, recognizing electronic cigarettes as a vibrant and resilient new industry, and promoting the legalization and standardized development of the electronic cigarette industry in an orderly manner.
As one of the key industries with regional advantages in Bao'an district, the development and aggregation of specialty industries such as new electronic atomizing devices is encouraged and supported. This was highlighted in the district's action plan released in March of this year. The electronic atomization industry in China has become an internationally competitive and influential advantage, with over 90% of global electronic atomization devices being manufactured in China. The manufacturing center for these devices is concentrated in Bao'an district in Shenzhen, extending out to Shenzhen, Dongguan, and the entire Greater Bay Area. Bao'an district has now formed a cluster of electronic atomization industries, comprising of a complete industry chain from raw materials, research and development, production, sales, logistics, exhibitions, to services.
Examining the key moments of the electronic cigarette industry's development from 2017 to 2022, it is easy to see that adhering to the shared industry values of "putting national and consumer interests first" is essential for a healthy and stable industry growth. Additionally, transitioning and upgrading to comply with regulations is crucial for adapting to the industry's high-quality development.
The rapid development of domestic electronic cigarette companies is being driven by the overseas market.
According to publicly available data, China's electronic cigarette industry experienced a rapid expansion phase from 2017 to 2018, driven by the rapid development of the foreign electronic cigarette market, which led to the rapid development of domestic electronic cigarette companies, mainly based in Shenzhen. Among them, most of the leading brands, including YOOZ, MOTI and Yookee, were born in 2018 and are now considered top players in the industry. Yookee stands out as it achieved listing in just three years.
At that time, due to a lack of regulation, the e-cigarette industry developed in an unstructured manner. Some products had unclear nicotine content, unidentified additives, and oil leakage, all of which posed a potential threat to consumer health. Additionally, some business owners used false advertising, such as claiming e-cigarettes were "healthy" or aided in quitting smoking, without evidence to support these claims. They also exaggerated the trendiness and popularity of e-cigarettes, enticing minors to smoke and endangering their physical and mental health.
Against this backdrop, on December 15, 2017, the National Technical Committee for Tobacco Standardization formulated the group standard "Gas Chromatographic Determination of Nicotine, Propylene Glycol, and Glycerol in E-liquid for Electronic Cigarettes" to address electronic cigarette products for the first time. On August 28, 2018, the State Administration for Market Regulation and the State Tobacco Monopoly Administration issued a notice titled "On Prohibiting the Sale of Electronic Cigarettes to Minors," showing great concern for the negative societal effects of electronic cigarettes on underage children. On October 29, 2019, the State Administration for Market Regulation and the State Tobacco Monopoly Administration issued a notice titled "Further Enhancing Student Protection Against Electronic Cigarette-Related Harm to Minors," which resulted in the nationwide ban on the sale of electronic cigarettes.
Responding to regulatory compliance, Yoozoo and MOTI have made an immediate decision to shut down all their e-commerce platforms. MOTI has launched the "Youth Shield" plan, prohibiting minors from purchasing e-cigarettes through product packaging and age verification in stores. Meanwhile, they are strictly demanding their partners to prohibit e-cigarette sales to minors and continuously making efforts in contractual terms, daily management, and internal publicity to keep minors away from e-cigarettes.
Intensive regulatory policies lead to a major restructuring of the industry.
According to data, global sales of electronic cigarettes (excluding heated tobacco products) in 2019 exceeded 231.1 billion yuan (33 billion U.S. dollars), a year-on-year increase of 106% compared to 2018. China's contribution to the global market was 11 billion yuan, a 175% increase from its 2018 performance of 4.55 billion yuan. In 2019, China's domestic electronic cigarette industry also experienced unprecedented growth. Industry data showed that over 8,000 new electronic cigarette companies were established, with an average of over 20 new brands registered daily. As the electronic cigarette market rapidly expands, China's policy regulation of electronic cigarettes is gradually strengthening, especially in the protection of minors, with a series of regulatory preventative measures introduced.
On July 1st, 2020, the Chinese Advertising Association released the "Code of Conduct for Online Livestreaming Marketing". On the same day, the State Tobacco Monopoly Administration and the State Administration for Market Regulation issued the "Special Inspection Plan for the Electronic Cigarette Market". On October 17th, the National People's Congress implemented the "Law of the People's Republic of China on the Protection of Minors" as of June 1, 2021.
On June 18, 2021, the State Tobacco Monopoly Administration and the State Administration for Market Regulation released the "Safeguarding Growth" special action plan to protect minors from harm. On November 10, the State Council issued the decision to modify the regulations (Decree No. 750 of the State Council). On November 30, the State Tobacco Monopoly Administration released the draft of the national standard for electronic cigarettes for public feedback. On December 2, the State Tobacco Monopoly Administration also released the draft of the regulations for the management of electronic cigarettes, which are open for public comment.
In the face of increasing regulatory pressure and a major restructuring of the e-cigarette industry, there has been a stronger concentration of power among leading companies with greater comprehensive strength. According to data from Qichacha, a total of 743 e-cigarette-related businesses were deregistered in 2019, a year-on-year increase of 135.87%. In 2020, the number rose to 1133, an increase of 52.49% compared to the previous year. In 2021, a total of 5449 companies were deregistered, a staggering 380.94% increase from the previous year. Meanwhile, data shows that the market share of leading brand Yooz has been steadily rising, reaching 80% as of 2021, with MOTI and other brands closely following, forming a brand matrix of one super brand, two strong brands, and multiple secondary brands in the e-cigarette industry.
Enterprises Focus on Transition and Compliance in the New Era
On May 1, 2022, the "Regulation on Electronic Cigarette Management" officially went into effect; on June 15th, the nationwide Electronic Cigarette Trading Management Platform was officially launched; and on October 1st, the mandatory national standard for electronic cigarettes will also be implemented. With these developments, the electronic vaping industry has entered a new stage with legal and regulatory standards, as well as facing new changes due to policy supervision. The industry landscape is also expected to undergo promising changes.
Under new policy requirements, electronic-cigarette exclusive shops will become a thing of the past and will need to transition to inclusive retail locations. Existing e-cigarette retailers are facing difficulties in adapting to the diversity of products and consumer preferences. It is difficult for store owners to make the necessary changes on their own. This presents a new challenge for brand manufacturers to provide better service and support to their retail partners.
Against this backdrop, industry brands are responding to the call for compliance and transformation, with MOTI being the first to propose embracing non-exclusive requirements. The company has refunded dealer deposits and launched the "Navigator Program for a Thousand Cities and Millions of Shops" to help distributors and terminals transition to compliance smoothly. According to the company, the program focuses on the new era of industry compliance development and proposes "three engines" to help stores transform smoothly in response to the new opportunities and challenges they face. This includes support across product diversification, operational diversification, and brand traffic diversification, providing stores with comprehensive support and solutions to their post-transformation concerns.
Following this, industry brands have begun announcing large-scale refunds of security deposits, supporting non-exclusive operation of brand stores, transitioning to collection store models, and successively launching store owner transformation relief plans, including YOOZ's "Citrus Engine Plan," Viva's "Lighthouse Plan," and so on, to aid the industry in transforming towards compliance.
Licenses are being rapidly issued and businesses are enthusiastically embracing national standards.
The implementation of electronic cigarette regulations has been positively embraced by the industry, with several leading electronic cigarette brands expressing their support for the policy changes. They have committed to actively complying with regulatory requirements and adhering to compliant business practices. According to the website of the National Tobacco Monopoly Bureau, as of August 25, 2022, 19 electronic cigarette brands have obtained production licenses. Among them, the industry leader, Smoore, and leading brands Yooz and MOTI have all received electronic cigarette production licenses, which have attracted significant attention.
In the announcement, MOTI, one of the leading brands in the electronic cigarette industry, stated that they will continue to uphold the industry's core values of prioritizing national and consumer interests. They plan to maintain their technological lead by increasing investment in research and development, providing high-quality products to consumers and ensuring compliance in their operations. Additionally, they aim to fulfill their social responsibility as a company and actively promote the sustainable and healthy development of the industry, making contributions to society.
National standard products are passing review one after another, and the research and development capabilities of leading brands are drawing attention.
In the wake of regulatory guidelines and national standards, there have been further regulations and improvements in areas such as protection of minors, product quality and safety, and consumer protection. This has also stimulated innovation in the industry. As of August 25th, according to industry data, 53 SKU products from 13 electronic cigarette brands can be traded through the national unified electronic cigarette trading management platform. These 13 brands include well-known industry leaders such as Yooz, Mooring, and Juul.
Previously, in order to understand the current status of industry-standard products being submitted for approval, Southern Daily communicated with Shenzhen Raytheon Technology, the company that owns the first batch of brands that have passed the industry-standard review, including MOTI. MOTI stated that the most pressing challenge in evaluating industry-standard products is the dual assurance of efficiency and quality. In order to address this, MOTI dedicated significant effort to the research and development of industry-standard products, implementing a multi-dimensional upgrade to improve product quality compared to previous iterations. Additionally, MOTI collaborated with SMORE to adopt the latest version of its ceramic core, which is leading the world in application. Prior to submitting for industry-standard approval, MOTI established a triple checkpoint with MOTI, SMORE, and a third-party authority to ensure strict quality control and a high rate of approval.
Since August 29, the five provincial level tobacco units in Fujian, Zhejiang, Shenzhen, Guangdong, and Shandong have started the first-ever electronic cigarette ordering on the national unified electronic cigarette trading management platform. This is in preparation for the nationwide electronic cigarette trading platform ordering pilot program which begins on October 1.
Taking stock of the electronic cigarette industry, it has finally moved towards compliance. Although it was inevitable to experience growing pains during the transition period, practitioners in the industry have embraced compliance and responded to regulation with conscious effort. They have also persisted in pursuing innovation-driven development and a long-term approach, resulting in the orderly advancement of the transition period. With the protective measures of regulatory policies, the industry has more stable expectations for its long-term development. Through consensus and joint efforts, the industry believes that "alone we may go fast, but together we can go far." It is expected that after the crucial year of 2022 for the "standardization" of the industry, the industry will embark upon a new development journey with a promising future.
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