The Rise and Fall of China's E-cigarette Industry

The trend of young people wearing electronic cigarettes, which look similar to USB drives, is gradually fading away.

Kimi is the owner of a hand-to-hand fitness studio in Beijing. More than a year ago, he was a loyal consumer of Juul and had a record of consuming one pod in three days. Initially, he purchased Juul to quit smoking, but ended up with a greater addiction to e-cigarettes and higher "hidden costs".

Compared to traditional tobacco products that are slightly more expensive, the frequent updates in e-cigarette flavors and their inherent social attributes have become "hidden costs." Kimi stated that while spending a few hours drinking and chatting in a bar, nearly everyone had an e-cigarette on hand. The next day, it was realized that the e-cigarette needed to be charged and the pod needed to be replaced.

One day, Kimi woke up with frequent coughing, more phlegm, and a constant bad taste in his mouth. He began to reflect on how his initial goal of quitting smoking had led him into another trap, spending more money in the process. He decided to give up everything related to smoking and instead made an appointment at the respiratory department of Chaoyang Hospital to quit smoking.

Among young consumers, electronic cigarettes have sparked an industry revolution. A new technology product resembling the "iPhone" has emerged, and if you don't use it, you're out of touch.

Even Luo Yonghao briefly dabbled in the electronic cigarette industry, but quickly withdrew. During 2020's Singles Day shopping festival, Luo, as a co-founder of Little Wild e-cigarettes, shared a pre-sale link on his personal Weibo account.

Just 20 minutes after he released an advertisement, the "electronic cigarette" industry was hit with an unprecedented blow.

On November 1, 2020, the State Tobacco Monopoly Administration and the State Administration for Market Regulation jointly issued a notice aimed at further protecting minors from the harmful effects of electronic cigarettes. The notice prohibits the sale of electronic cigarettes to minors, online sales of electronic cigarettes, and online advertising of electronic cigarettes.

This means that the online sales channels for the e-cigarette industry have been cut off, with a ban on sales and advertising across the entire internet. Several e-commerce platforms are now fearful, as e-cigarettes face the fate of being taken off the shelves.

In just one year, the partnership between Lao Luo and "Xiaoyin Technology" came to an end and the competition to dominate the e-cigarette market has turned into a "Stalingrad Defense Battle" between Yooz and other brands.

The opening of the iecie Shanghai Vapor Culture Week featured the debut of the V1wood by Yosen Electronic Cigarette, which caught the attention of attendees.

Industry experts joke, is this a cursed fate?

After a period of rough growth, YUEKE has managed to survive.

The creation of e-cigarettes was not a sudden inspiration, but rather an iterative process that evolved from similar ideas by many people. The modern prototype of e-cigarettes was introduced for sale in the early 21st century. The goal of these individuals was to combat traditional tobacco and create a product to replace smoking.

However, it is important for consumer awareness to be established. The model of prioritizing awareness has proven successful in numerous cases within the new consumer market.

However, global public opinion and research are resisting the "new understanding" that electronic cigarettes are trying to promote.

The United States implemented restrictions on e-cigarettes before China. On September 12th, 2019, the White House announced that due to an increase in middle and high school students using e-cigarettes, those with flavors such as fruit would be banned and only tobacco-flavored e-cigarettes would be produced. On November 16th, Apple announced it would remove all e-cigarette related apps from the mobile app store, resulting in the removal of 181 apps.

American supporters of electronic cigarettes took to the streets with a rallying cry: "We want e-cigarettes, we want our vote to count.

Four years ago, American e-cigarette giant Juul was flourishing with an annual revenue of $2 billion and a workforce that skyrocketed from 200 to 1,500 employees.

Subsequently, there were back-to-back bans, investigations, and lawsuits, as endless regulations caused Juul's market share to decline from 70% to 35%. Moreover, it was the marketing strategy targeting youth that proved to be the fundamental cause of Juul's downfall.

The proportion of American teenagers smoking was originally on a declining trend after decades of continuous campaigning, but the rise of "e-cigarettes" has brought about a resurgence of nicotine addiction among young people, and it is even more severe than before.

By using technology as a facade, at its core, the business of electronic cigarettes is still that of traditional tobacco. The goal is to cultivate a new generation of "vapers" and turn them into a consumer group similar to traditional smokers, ultimately creating a multi-billion dollar market.

The electronic cigarette industry in China has experienced a rapid growth due to its technological advancements. Many new brands have emerged and a search for "electronic cigarette" on a business database in 2019 yielded over 100,000 related companies. However, with stricter regulations in place, the industry seems to be heading towards decline.

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As early as 2017, YOOZ had already taken notice of the proposed national standard for e-cigarettes. YOOZ has prioritized establishing a strong physical presence since the beginning.

According to JoyyJoyy's prospectus, its online channels contributed 60% to its revenue of 133 million yuan in 2018. In 2019, it accelerated its expansion offline through a "dealer + specialty store" model, expanding its specialty stores to 1,500 nationwide, with offline channels contributing 1.139 billion yuan in sales and accounting for 74% of revenue. By the first three quarters of 2020, JoyyJoyy's offline channel revenue had doubled to 2.201 billion yuan year-on-year, with 110 authorized distributors, over 5,000 specialty stores, and over 100,000 retail stores.

Yueke has survived, but the hidden crisis could erupt at any time.

In its transition to selling coffee, Luckin has lost its identity.

Despite being the top leader in the domestic "e-cigarette" industry, Yooz continues to face the fate of being squeezed from both inside and outside forces.

From an internal perspective, the pandemic has greatly affected the sales of most physical stores. Yueke, whose consumer base mainly consists of young people in first and second-tier cities, has also been impacted. However, many of Yueke's own stores are unable to sustain themselves and are choosing to close down one after the other.

Of greater significance is the strict regulation and implementation of the "Electronic Cigarette Management Measures" and related policies in March 2022. Under the new national standard restrictions, fruit-flavored electronic cigarettes will no longer exist. All electronic cigarettes will have only tobacco flavors and the regulations will officially take effect on September 30th.

According to a representative in charge of national sales at Puddingstone, Puddingstone's disclosed number of over 5,000 exclusive stores in its IPO are continuously contracted. If the number of exclusive stores that have already terminated their contracts is also included, the total figure would be around 15,000, indicating a contract termination rate of 66%.

In the future, Yiku will only have one flavor - a light tobacco taste.

From an external perspective, Yueke is faced with a core technological challenge - the issue of atomization technology.

As is well-known, the key factor affecting e-cigarette sales is the vaporization technology, while the mixing of e-juice and the supply of nicotine concentration are almost identical. North America and countries like Japan and South Korea already have fairly mature technologies in this area.

However, there are many differences in the technology of atomization.

Yooz, a vaping company, has consistently used atomizers provided by Smoore International due to the advanced heating technology known as "FEELM." This technology involves a metal film covering a ceramic core to ensure optimum heating, resulting in more consistent and smooth vapor production. The company has applied for over 1,600 patents for this technology, with more than 700 of them already authorized in China and internationally. This commitment to innovation has kept Yooz at the forefront of the vaping industry.

Yueke, a company in the vaping industry, has attempted to break away from the technology provided by Smoore International and develop their own atomizers. However, their attempts were met with mixed results, with the second and third generation products having poor user acceptance and even experiencing severe oil leakage issues.

Smol International has become a "super supplier" in the international e-cigarette industry thanks to this technology. Among its five major clients, Yooz only qualifies as a small customer, and Smol International holds greater bargaining power.

This is comparable to the relationship between chips and mobile phones.

Once Sumitomo International completes its transformation and establishes its own independent brand, the situation for YUEKE will not improve.

However, in their marketing, YUEKE has consistently reminded consumers that they have an independent research institution. However, conducting research is one thing, actually implementing it in the products is another.

Image Source: Official Website of Yueke

In actuality, Yueke is implementing a self-rescue plan.

On July 15th, a coffee shop named "Xingke ON" opened its second branch at Chengdu Hejing Morphosis Shopping Center.

The store has adopted a self-pickup system similar to that of "Luckin Coffee", saving on store rental costs. They have also implemented a similar membership program where, for a monthly fee of 20 RMB, members can enjoy special benefits such as discounts and free delivery.

Behind the cake-sharing between joining the army of coffee with "Luckin" is the anxiety of "Wuxin Technology" about the future.

In 2021, the group's revenue was RMB 8.52 billion, a significant increase of 123.1%. The adjusted net profit for the year reached RMB 2.25 billion, also increasing by 181.1%.

In the second quarter of 2021, the company's revenue reached its peak for the quarter. However, in the first quarter of 2022, the adjusted net profit decreased significantly by 40.6% compared to the same period last year.

Can AwakenerON create a miracle? This is another question.

Without young people, who will still buy YUEKE?

Yueke, a company seeking to break away from traditional tobacco constraints and embark on a new e-commerce era, is unable to scientifically explain the health risks associated with electronic cigarettes, and its novel concept is not comprehensible to consumers and regulatory agencies.

As a result, all "fruit-flavored" e-cigarettes were removed from the market starting in September.

A consumer editor randomly interviewed a veteran smoker named Lao Xia, who has been smoking for 15 years. During the conversation, Lao Xia expressed dissatisfaction with the fruity flavors of e-cigarettes, stating that "the imitation flavor is very different from the real thing. I tried using e-cigarettes to quit smoking before, but it was not effective, and I ended up smoking even more." For traditional smokers, the question of whether e-cigarettes can be used to quit smoking remains a concern.

What's the point of electronic cigarettes without fruit flavors for young people?

Young people who follow trends will eventually leave when the tide recedes, and those who really want to quit smoking do not want to choose smoking cessation methods that have not been scientifically certified by authorities.

Yueke is a culinary experience that is too good to waste on tasteless food.

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