Rise of Indonesia: New Competitor for China's E-cigarette Industry

For a long time, Shenzhen, China has been regarded as the global hub for the e-cigarette supply chain and manufacturing industry, with over 90% of e-cigarettes being produced here. This viewpoint has gained wide recognition in the global e-cigarette industry, earning Shenzhen the nickname of "Vape City".

However, according to data released by the United States Trade Commission in June 2023, there seems to have been some changes. The data shows that in the first half of 2023, e-cigarettes imported from China accounted for only 63.7% of the total, while e-cigarettes from Indonesia held a share of over 35%. This means that Indonesia has surpassed other countries to become the second largest exporter of e-cigarettes, just behind China.

According to data from the US Trade Commission, 2FIRSTS compared the e-cigarette export data from China and Indonesia to the United States in the first half of 2023. The data reveals that Indonesia has consistently had a significant share of e-cigarette exports to the US. Particularly in March 2023, e-cigarettes imported from Indonesia accounted for as much as 48%, while China only accounted for 52%.

The aforementioned data indicates that Indonesia's market share is gradually expanding in the e-cigarette market, making it China's biggest competitor. So, what is the current situation of Indonesia's e-cigarette manufacturing industry? And what are the reasons for its rapid rise?

China's e-cigarette manufacturing industry is expanding to Indonesia.

Staff members at 2FIRSTS purchased a product from VUSE, which claims to be the leading e-cigarette brand in the United States, only to discover that the packaging bears the inscription "Made in Indonesia." This indicates that VUSE is collaborating with an Indonesian manufacturing facility. According to statistical data from Nielsen, VUSE holds a market share of 42.3% in the United States as of May.

Furthermore, in several news reports related to e-cigarette manufacturers, 2FIRSTS has also uncovered certain circumstances.

In July 2022, Smoore, one of the world's largest e-cigarette manufacturers, established its 14th global factory in Malang, Indonesia. The factory spans approximately 6 hectares and houses 16 production lines, each capable of producing 7200 e-cigarette pods per hour. In August 2022, Jingjia Corporation (002191.SZ) revealed on their investor platform that they were building a production base in Indonesia to provide integrated services for e-cigarettes. E-cigarette accessory supplier Zijing Precision also announced that their Indonesian factory had commenced operations in 2022. In January 2023, tobacco giant Philip Morris International (PMI) completed the construction of a factory in Indonesia, which required an investment of $180 million and is dedicated to the production of IQOS HEETS pods. On September 11, 2023, South Korea's largest tobacco company, KT&G, announced plans to construct a new factory in East Java Province, Indonesia, with operations set to begin in 2026.

The move of e-cigarette manufacturers to establish factories in Indonesia indicates that the country is being favored by international companies as a new emerging center for global e-cigarette production and manufacturing.

What are the advantages of Indonesia in terms of market, costs, tariffs, etc.?

Indonesia, as the largest economy in ASEAN, saw its GDP surpass 1.3 trillion US dollars in 2022, ranking 16th in the world. It is considered one of the most important and dynamic markets in Southeast Asia.

In this context, the e-cigarette industry in Indonesia has unlimited growth potential. Garindra Kartasasmita, Secretary General of the Indonesian E-Cigarette Association (APVI), stated in a public speech at the 2022 Jakarta International E-Cigarette Exhibition (IECIE) that the Indonesian e-cigarette market has been growing at an annual rate of approximately 50% since 2013, with a decline of 7% in 2021 due to the pandemic. It is expected to rebound in 2022 with a growth rate of 50%.

Indonesia, known for its labor-intensive market and relatively low labor and land costs, possesses a well-known advantage. However, the main advantage of Indonesian e-cigarette exports to the United States lies in the latter's tariff policy.

In retrospect, in April 2018, the United States released a list of goods subject to increased tariffs on China. The initial list included goods worth a total of $34 billion, which also included e-cigarette products. This measure led to an increase in the e-cigarette tariff from the previous 6.5% to 31.5%.

On the contrary, with Indonesia regaining Most Favored Nation treatment in 2020, Indonesian e-cigarette kits exported to the United States are now subject to a mere 2.6% import tariff. Undoubtedly, this preferential tax rate further boosts the export of the Indonesian e-cigarette industry and strengthens its competitiveness in the American market.

In June 2023, there has been a notable shift in the importation of e-cigarettes from China and Indonesia to the United States, as the proportion of imports from each country has taken opposite directions. It appears that the gap between these two nations is further widening. Although China presently remains the primary source of e-cigarette imports for the US, the question remains whether China can uphold this advantage in the face of Indonesia's strong emergence.