By TobaccoChina Online
Chinese electronic cigarette (e-cig) manufacturers now face both opportunities and challenges in production and sales at international markets due to the adoption of stringent new rules by the US Food and Drug Administration (FDA).
Since August 8, 2016, most of the e-cig products around the world have been subjected to regulation and restriction of the new rules requiring certification by FDA.
The US e-cigarette market has always been a weather vane of the global market. The US government’s stance, policy, and legislation on e-cigs will not only influence the future direction of this segment there, but will also, as significantly, have a powerful impact on the global market. Therefore, the entire e-cigarette manufacturing sector faces a relatively “harsh” situation in business development, which leads to the question – what impact and chain reactions will China, as the largest electronic cigarette producing region in the world face?
New FDA Rules on E-cig Manufacturing
In May 2016, FDA enacted new rules on e-cig products. The new rules provide that any product sold in the US from last August 8 onward must pass certification, with the cost running up to some US$1 million. If a product fails to pass certification, the cost will not be refunded.
Here are some aspect of the new rules:
1. Redefinition of “new products. From last August 8, for manufacturers wishing to sell an e-cigarette product in the US, the product first must undergo a complicated review process. Any sale of the products without FDA approval will be illegal. Any changes made on or after that date to the products in terms of nicotine content, bottle size, the quantity of flavorings used, the type of essence, ingredients, etc., will all be categorized as new products and will have to be reviewed anew.
2. Submission of premarket tobacco applications. All electronic cigarette products from e-liquid to vaporizers must undergo traceable premarket tobacco application. Manufacturers must provide a list of ingredients of the product as well as results of research on its impacts on public health. For any single product thereof, its satisfaction of this requirement will cost at least US$2 million
3. Prohibition of publicity for modified-risk products by manufacturers. Manufacturers are prohibited from depicting various content in the label or advertisement of any product, such as: the product can reduce risk of diseases related to tobacco; the product does not contain any tobacco; the chemical substances contained are much less than the corresponding levels in traditional cigarettes; and the use of the product is safer than cigarette smoking.
The E-Cigarette Market in China
China’s e-cigarette market accounts for about 5% of the world’s total. According to statistics released in February 2017 by Ecig Intelligence, the global electronic cigarette retail market amounts to some US$6.4 billion. In 2016, the market size in China was about RMB3.2 billion Chinese (US$465 million) of which RMB1.8 was sold online (based on statistical data from the two leading B2C platforms, Alipay and JD.com), and RMB1.2 billion sold through physical stores (including sales by online shops operated by physical stores on the WeChat web and sales realized through WeChat apps).
Another RMB200 million sold through other retail channels, including second tier e-commerce platforms like Suning; shops, supermarkets, tobacco retailers; exhibitions, conventions and offline operations; drugstores; companies purchasing e-cigs as corporate gifts; and a number of independent e-commerce platforms operated by the tobacco industry.
By the end of 2016, there were 39,000 online e-cigarette shops on the Taobao and T-Mall e-commerce platforms. With the inclusion of the hundreds of online shops on JD.com (including 24 self-owned brands), the total number of e-cig stores in China exceed 40,000, with virtually thousands of stock-keeping units available there.
According to comprehensive estimates from multiple channels, the number of independent physical stores of e-cigs existing in China now stands at some 1,600. Over recent years, physical stores have developed rapidly in third and fourth tier cities across China, particularly in the northeast of the country and in Beijing.
Even though this sector in China is developing favorably, uncertainty does exist over the development for manufacturers. Firstly, in China, the status of e-cigs have has not been well defined by law, and there are no regulations. Nor is there specific legal provision for their industrial attribution in the country. As a result, the threshold for entry into the sector remains low while the quality greatly differs from one manufacturer to another. Secondly, over 90% of the Chinese manufacturers are based in Shenzhen. Ninety percent of the Shenzhen e-cig market share is in foreign countries, with the US being a major destination.
Impact of New FDA Rules on Chinese E-Cigarette Manufacturers
The new FDA rules on e-cigarettes have had a mixed response. Some Chinese manufacturers happily welcome the rules, some are worried, and some have mixed feelings.
For large manufacturers that began operating earlier and have been rapidly developing over recent years, they believe that the implementation of the new rules can promote “survival of the fittest” in the sector, and can change the status quo where superior and inferior players coexist in the marketplace. Meanwhile, some other manufacturers believe that the repetitious and complicated review and certification processes in a large number will have serious negative impact on the development and speed of innovation by manufacturers, and means a waste of resources.
Huizhou City Kimree Technology is one of the first e-cigarette manufacturers in Shenzhen. Liu Qiuming, Kimree marketing manager, said, “So far, there has been no specific legislation on regulating [the sector] in China, while electronic cigarette products have gone through a period of rapid development. The market looks prosperous, but the quality of products is quite different from one manufacturer to another. Without a complete set of stringent regulatory measures, the market in China will become more and more disorderly, which in the long run will be a detriment to the development of the entire segment.” Therefore, he believes, “Long-term development requires stringent regulation by law.”
After FDA’s new rules were announced in May 2016, Kimree swiftly organized to have the full text of the rules, comprising over 13,000 sections on more than 500 pages, translated to conduct an in-depth interpretation and study of them. When many manufacturers were busy making appeals against the new rules, Kimree had already come to understand that this was legislation coming from a higher perspective of caring about the safety and health of consumers. Based on this understanding, Kimree actively aligned its operations to comply with the new rules and immediately started registering all its products accordingly. As a result, Kimree found it relatively easy when the new FDA rules came into effect.
On the other hand, there are some manufacturers who believe the new FDA rules meant the imposition of serious restrictions. For example, the rules require that all new e-cigarette equipment and new e-liquid submit premarket tobacco applications and approvals before being marketed. The new rules also require that each different type of e-cigarette equipment be subject to separate premarket tobacco applications as an independent product and that likewise, each type of e-liquid with different levels of nicotine, different flavoring, or any other different ingredients also be subject to separate premarket tobacco applications as independent products. These manufacturers believe that such harsh, complicated, and repetitious tests will not only cost a large number of manpower, material resources, and financial resources but will also, at the same time, create an economic burden for manufacturers trying to export.
Feellife Biotechnology is a Shenzhen-based e-liquids manufacturer famous for its innovation and development. Feellife has applied for more than 1,000 patents at home and abroad. Feellife founder and c.e.o. Edward Hua Jian said, “We have always been dedicated to turning ourselves into a technology innovation enterprise that is responsible to consumers with products strictly in compliance with high international standards for production. However, the new FDA rules, with a guarantee of production of safer electronic cigarette products as a pretext, has imposed a heavy burden on manufacturers, and such a burden has already impacted our innovation capacity.” Sources with the Shenzhen Creative Age Convention and Exhibition, which organized the 3rd Shenzhen International Exposition of Electronic Cigarettes, told TobaccoChina Online that the new rules have indeed caused damage to small enterprises with self-owned brands, causing them to shift onto other businesses, and that small OEM enterprises have also had to shut down or suspend their operations due to lack of new orders. Meanwhile, some relatively large OEM enterprises have had to offer their market share to large tobacco companies because of bankruptcy or shifting to other businesses. Under such circumstances, the large tobacco companies have all registered sharp growth in performance due to receiving increasing numbers of orders.
In 2015, there were over 800 e-cigarette manufacturers in Shenzhen alone, but by 2016, the total declined to just over 300. The new FDA rules blocked many manufacturers from growing abroad and has triggered a round of restructuring in this sector. Although China has yet to come out with legislation, it is inevitable that e-cigarettes will be controlled by government regulations. By then, Chinese manufacturers will be facing even more serious challenges, and a greater number of small and medium-sized manufacturers will have been phased out due to strict regulations. Meanwhile, the larger manufacturers will have ushered in more and better business development opportunities.