A Big Agenda: OEM/ODM in China’s Vaping Industry

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OEM and ODM services are crucial for almost all of China’s e-smoking manufacturers, often generating the bulk of their revenues. Three leading companies shared their insights with Tobacco Asia.

By Thomas Schmid

Granted, the myriad of vaping and HNB companies centered on the Chinese city of Shenzhen are all marketing at least one proprietary product brand; frequently enough even several. But OEM (original equipment manufacturing) and ODM (original design manufacturing) are nevertheless the mainstay of all but the smallest outfits. The two segments not only ensure that production facilities that have tied up considerable investment amounts can be utilized to their full capacities, but they also can be considered the true bread-and-butter business, keeping balance sheets in the black. This seems even more important now that China has banned all online sales of e-smoking devices, forcing local manufacturers to curate their exports and court foreign brand owners even more vigorously than in the past.

ALD Group – Heavy Focus on OEM/ODM

ENDS (electronic nicotine delivery systems), IMV (inhaled medical vaporizers), and HNB (heat-not-burn) devices are the principal products that ALD most commonly manufactures for overseas OEM customers. “As is normal with OEM, practically all the devices are produced under the respective clients’ own brand names,” said Wang. However, certain ALD-proprietary components such as heating coils, electronics, newly-developed exterior or interior materials, as well as some designs elements commonly are deployed in OEM products or adapted to client specifications. “But for ODM and JDM [joint design manufacturing] cases, ALD is devoted to developing components exclusively for the clients,” explained Wang. Non-disclosure agreements prevented Wang from divulging details on the latest OEM and ODM products that ALD had carried out. “What I am at liberty of mentioning is that ALD serves top brands like iKrusher, STIIIZY, and a host of others,” he said.

Groundbreaking innovations drive industry

Like many of its peers the company dedicates considerable r&d efforts to developing new technologies and materials, many of which also are used in OEM or ODM products, besides ALD’s own brands. Among the most recent innovations is ALD’s “AG+” antibacterial technology, which primarily is used in mouthpieces. “AG+ has been proven to reduce microorganism contamination of mouthpieces and is most effective against three common types of bacteria or fungi, namely Escherichia coli, Staphylococcus aureus, and Candida albicans,” Wang elaborated. “The AG+ material incorporates nano silver ions [“Ag” is the chemical sign for silver] and eliminates more than 99% of present microbe populations within 24 hours, ensuring a safer, more sanitary vaping experience,” said Wang.

In March of 2019 ALD introduced its groundbreaking “SILMO 3.0” heating element as its third-generation atomization technology platform, which adapted cellular ceramic material and metal thick-film printing technology. Just a little over a year hence, the company recently rolled out the next step in the SILMO series, “SILMO 4.0”. “Compared to its predecessor, the SILMO 4.0 heating element is made from a different cellular ceramic material and also uses a newly developed “Ω”-shaped metal thick-film heating coil for more flexible application,” explained Wang.  SILMO 4.0 was primarily designed for e-liquid vape kits, as it uses less battery power than its predecessor but still offers long-lasting and stable performance. Moreover, ALD has veered off the more commonly used cotton wool as e-liquid carrying material and switched to specially treated flax wool, which is used in the company’s ETCHIP heating element. “We tested more than 20 different materials that could potentially serve as a replacement for cotton, looking at their liquid-absorbing properties but also how well they resisted the heat generated during vaporization,” said Wang. “Flax worked best in our lab tests and we have trademarked that material’s usage in our heating element as ETCHIP.”

Improving positive cognition is a challenge

ALD is of course not exclusively involved in OEM/ODM business. The company also markets its own e-smoking brands. And just as with OEM/ODM, exports are of tremendous importance. ”Exporting our own brands helps us understand different consumers and markets better,” confirmed Wang. “As a welcome side effect, it also leads us to develop better technologies and products, which in turn benefits our OEM and ODM clients, too.” The US remains the company’s largest export market for both proprietary brands and OEM/ODM, though recent developments caused some manageable setbacks (see side box). And while ALD is eager to explore new markets elsewhere “the biggest challenge is to improve positive cognition among consumers and OEM/ODM clients alike,” according to Wang.

Yet the fact that literally hundreds of Chinese vaping companies are striving to achieve the same thing, makes the competitive situation not exactly a walk in the park. “But as a leading vaping solutions provider and manufacturer since 2009, ALD remains committing to innovation, r&d, scientific management, and lean [as in: cost-effective] production; and that gives us a definite edge,” Wang insisted. ”And as an export-oriented company, we will always consistently assist our customers in facing challenges together, such as the current Covid-19 crisis or sudden local policy changes, embracing them as a challenge rather than a threat.”

FirstUnion – 16 Years of OEM/ODM experience

Shenzhen FirstUnion Technology, established in 2004, is one of the world’s leading one-stop solution providers for e-smoking products. Headquartered in Shenzhen, the company maintains five production bases: three in Shenzhen, one in Zhongshan, and one in Vietnam. That is more than 200,000 square meters of floor space altogether, with over 5,000 employees. The company is also very active in the OEM and ODM theater, according to Steve Jia, FirstUnion’s senior business development director. “The most important difference between OEM and ODM is of course the latter’s design capability,” he explained. “In OEM the contracted manufacturer simply produces goods after the customer-provided design. But in ODM, the design and development phase also is entrusted to the contractor.” With over 16 years of relevant business experience, FirstUnion indeed looks back at a huge number of OEM and ODM projects.  

Unlike some smaller companies, FirstUnion in this regard is not limited to only one or two product types, thanks to a strong manufacturing capability and modern facilities that can handle the full bandwidth of products, from e-pipes and cig-a-like to open or closed system devices, and from ENDS to IMV and HNB gadgets. “Our production lines are constantly being upgraded to address shifting market changes and product preferences both at home and in our export markets,” Jia asserted.

Research, research, and more research

To spearhead its technological advances, FirstUnion some time ago established its in-house Advanced Technology Institute (ATI) in cooperation with the Chinese Academy of Sciences’ Shenzhen Institute of Advanced Technology. ATI since then has been instrumental in developing new materials such as advanced ceramics, heating alloys, and high-performance fibers in an effort “to build the best atomization platform possible,” according to Jia. But the institute also focuses on innovative technology research - such as new heating methods and deep atomization mechanisms. “ATI’s state-of-the-art research has definitely helped Firstunion to gain an unparalleled competitive advantage, supporting our customers worldwide,” Jia elaborated. Meanwhile, FirstUnion’s laboratory was recently granted UL’s WTDP certification after earlier already having obtained CNAS laboratory certification. Jia said this was a further steppingstone in the company’s continued expansion drive in the international market. FirstUnion group attaches great importance to product quality and international product certification and, therefore, has deepened its cooperation with international certification agencies,” he remarked. “Through this recognition, FirstUnion group can shorten the product certification cycle and enable new products to enter the international market as soon as possible.”

Although Jia confirmed that certain types of FirstUnion’s proprietary components may find their way into OEM products, “such as disposables, closed, or open pod systems”, he declined to divulge closer details. “The models that we manufacture or develop for foreign or local customers are all subject to confidentiality agreements and we are not at liberty to discuss them,” he reasoned. However, Jia cited the example of a “currently available product whose design was revamped by us for a foreign client about two months ago.” Following in-depth market research, the company exchanged that product’s original closed cartridge to an open one and, at the same time, optimized the taste experience and re-designed the vibration reminder functions.

Performing well around the globe

“The US market is our most important market, but we also perform positively in the UK and other European territories,” Jia claimed. He added that the company routinely assisted OEM/ODM customers who wish to enter the US market to assemble and file the PMTAs required as per the latest legislation. Southeast Asia also showed an increasing trend towards vaping products, according to Jia. That observation is somewhat paradoxical considering that vaping is banned in almost every regional country. However, despite being illegal, vaping nevertheless is “in” among a rising number of Southeast Asian consumers. That popularity even has led to the curious situation that informal vaping exhibitions are frequently taking place in countries like Indonesia, obviously being condoned and tolerated by the authorities.

But Southeast Asia, Europe, and North America aside, FirstUnion is also planning to ramp up marketing activities elsewhere. “We are eyeing Asia-Pacific and MEA as potential further markets and intend to explore them more vigorously,” Jia said. Greater market diversification makes sense, of course. Just like China’s vaping industry at large, FirstUnion “experienced and survived various industry shocks over the past decade,” conceded Jia. And it is due to that relative volatility that the company now maintains “complete risk management” procedures, which allow it to “immediately respond with necessary adjustments in case of a crisis of whatever nature.” Furthermore,  Jia also expressed hopes that the current Covid-19 pandemic is going to abate soon, “not only in terms of [its] economic impact but also for the sake of all humankind.” “And I believe that exports will recover thereafter also,” he concluded.

Teslacigs – Taking cues from a genius

Naming a vaping brand after one of the most gifted inventors the world has ever known, Nikola Tesla, certainly is a smart move. And it is exactly what Teslacigs pulled off when it was established in 2013 by its mother company, Shenzhen Kingzone Technology. But Teslacigs is not only bathing in the legacy of the Serbian genius. The company is innovative in its own right, having put great emphasis on painstaking r&d for electronic smoking from its very first day.

“We have developed a lot of novel technology involving analysis of aerodynamics and hydromechanics for heat cores, airflow, tank storage, and more,” confirmed Teslacig’s product director, Johnathan Shuai. “And we continue being very active in our research, coming out with new technologies all the time.”  It’s a drive that the company also has put to excellent use as far as OEM and ODM are concerned. In these two segments, the company foremost produces pod systems, disposable vaping devices, and starter kits for clients both within China and without. According to overseas sales director Caroline Liu, foreign customers account for 80% and 70% of the firm’s OEM and ODM business, respectively. As with most other Chinese vaping brands, the North American market plays an overwhelmingly important role (see table).

Cotton ain’t just cotton

Liu also confirmed that OEM products often make use of Teslacigs’ proprietary components to a larger or lesser degree. “Most of our clients demand the best technology, so it is common that we utilize our own heat technology and other innovations that we originally developed for our products with a lot of investment and research effort,” she said. On the other hand, quite the opposite would be true for ODM clients. ”While we occasionally may use one or another readily available component, it is not common. The point of ODM generally is to research and develop technology from scratch,” Liu explained. “That usually would be under some sort of joint development agreement with our client, where we own the new technology patent together.” She added that ODM projects mainly revolved around disposable pen-style vaping devices, but declined to expose closer details “due to NDAs signed with the customers.”

Product director Shuai, meanwhile, elaborated on Teslacigs’ recently launched new organic cotton heating core, which is “non-leaking and provides a high nicotine transfer volume. “The capillary effects of the literally thousands of cotton types in the market are totally different from one another – and not every type is suitable for use in a heating core due to insufficient liquid permeability,” he said. The airflow also was a very important aspect to ensure better evaporation, which in turn would produce cleaner, purer taste and also greatly improve the nicotine transmission rate. The type of organic cotton selected by Teslacigs for its new heating core achieved exactly that, he asserted.

Targeting “under-the-radar” markets

Contrary to other leading Chinese companies in the vaping sector, Teslacigs stands out for the fact that it also puts considerable marketing efforts into promoting and selling its own range of vaping products and services. According to Liu, the company’s proprietary product range generates a respectable 40% of total annual revenue. By comparison, 45% is derived from overseas OEM/ODM activities and 15% from OEM/ODM within China. But, these figures also make it crystal clear that exports are of enormous importance to Teslacigs. “I can say with confidence that approximately 80% of our annual business revenue is derived from exports,” Liu affirmed.

However, she also conceded that “the PMTA [issued by the] United States’ FDA has affected the entire vaping industry.”

“But as a GMP standard manufacturer, we are working very closely with some clients to strictly adhere to the PMTA provisions; and that is likely to open the doors to the US market again in the near future,” she said. Teslacigs also would like to expand to global regions that in the past perhaps flew a little too much under the company’s radar due to the focus on North America. “Africa, Oceania, Latin America, Asia… many countries in all these markets still have often huge conventional smoker bases, so we definitely would like to explore them and offer our products there as healthier alternatives,” Liu said. But she also cautioned that the main uncertainty factor that could pose an obstacle to these aspirations were the “vaping policies by the various governments, which often are vastly different from one another.”

No Shattered American Dream for ALD

“Generally, the regulatory policies regarding the US vaping industry have had a limited negative impact on our OBM, OEM, and ODM business there,” proclaimed ALD Group’s Julian Wang. He asserted that since the promulgation of PMTA and Tobacco 21, as well as far-reaching ban on e-flavors, the US market had adjusted and is “now normalizing.” The string of legislation may have caused some short-term pain for the industry initially, but in the long term it would actually “help the market go further and grow bigger.” Stricter legislation, Wang asserted, would benefit manufactures and brands that hold legal licenses. “As for ALD Group, our OEM brand partners include British American Tobacco, R.J. Reynolds Tobacco, ITC, Canopy Growth, RELX, iKrusher, and STIIIZY, all of them being top industry players,” he said. And, in a comprehensive effort to assist them, ALD had set up a series of product quality control systems, testing standards, and certification procedures. Among these are:

  • The establishment of an ALD research institute to drive technical innovation, novel testing protocols and new product and material development;
  • Implementation of a unique set of proactive quality control modes, including 8S management, OHSAS18001, ISO14001, GMP environmental standards, and ISO9001;
  • ALD’s product manufacturing and quality control also have successfully obtained CE, SGS, PSE, UV, EK, HPHC, and other certifications.

“In short, we are confident in the future of the industry and the continued development of our clients in the United States,” Wang concluded.