Vape Nation — Digitizing the World’s Largest Tobacco Market

China is home to 315 million smokers, nearly equal to the population of the entire United States. One out of every three cigarettes smoked in the world is in China. However, China’s State Council released a national health plan in July of this year that stipulated tobacco control as a major objective to improve public health. While this may seem like a conflict of interests given the exorbitant tax revenues generated by the state-owned tobacco companies, the reality is that the Chinese government is looking to reduce the population’s tobacco consumption.

As health concerns continue to weigh on smokers in society, it seems that the disruptive potential of technology has not spared the tobacco industry. E-cigarettes, or vapes, have been increasing in popularity, especially among younger generations who are less inclined to using traditional tobacco products. State media reported that the number of e-cigarette users in China is estimated to be around 1% of the total population, around 13 million. Chinese state media has announced that the government is considering implementing new policies regarding vapes in an attempt to combat their prevalence among the youth. However, vaping companies, both Chinese and foreign, have received massive support from the venture capital community, despite regulatory uncertainties.

Recently vaping has come under intense scrutiny from US lawmakers after health concerns were raised about the products. New York banned flavored e-cigarettes, and India has banned e-cigarettes altogether. India’s finance minister, Nirmala Sitharaman, said, “The decision was made keeping in mind the impact that e-cigarettes have on the youth of today.”

China has previously released industry standards for e-cigaretttes, focusing mainly on the level of nicotine and the type of additives. American vape unicorn JUUL Labs Inc. has removed their products from the Chinese market for the time being, while many industry observers speculate that the withdrawal of JUUL products comes in anticipation of new regulation on vaping. While vaping is not as prevalent among Chinese teenagers as their American counterparts due greater price sensitivity, the addictive nature of the product makes it an attractive investment opportunity for the venture capital community. In addition, the lack of cross-brand substitutes increases the stickiness of the product, as vape brands have specific pod configurations that cannot be swapped among different devices. This means that unlike cigarettes, where smokers can easily switch between brands, the nature of the e-cigarette means consumers will remain loyal to individual brands.

One Chinese e-cigarette company that attracted significant investment is RELX. The vape startup completed its first round of financing earlier this year, to the tune of 38 million yuan (~$5.3 million) from well-known funds like IDG Capital and Source Code Capital. Founder Kate Wang explains that the company’s origin stems from her father’s crippling health problems associated with smoking cigarettes. As a result, she set out to provide people an alternative to cigarette use without the harmful health complications. RELX’s founding team is comprised of employees from OPPO, Huawei, Chinese Academy of Sciences, Loreal, P&G, and Uber. Source Capital partner Huang Yungang said: “The RELX team is caring about the world and doing something of great social value.” RELX has recently entered the Philippines with the objective of converting 1.5 million adult smokers to RELX users in five years. This September, the company has opened one of the world’s largest e-cigarette specific factories in the world. The facility covers 20,000 square meters and has more than 4,000 workers. Its peak production capacity can reach up to 50 million pods per month.

Meanwhile, one of RELX’s competitors, another Chinese e-cigarette company called SNOWPLUS, recently raised a record $40 million in its Series A round of financing. The founder Wang Hao cites a similar motivation as Kate Wang for starting the company, commenting, “What we have always wanted to do has a positive impact. We believe that e-cigarettes are positive and will improve people’s lives.” Despite the competition in the industry, the market is still under penetrated, with just 1% of the population using e-cigarettes compared to a more mature 13% in the United States. Given China’s propensity for traditional cigarettes, it is surely just a matter of time before alternative nicotine products grow in popularity as well. SNOWPLUS’ is an ambitious company with plans to expand into markets including Canada, Korea, Malaysia, Russia, India, and Europe.

A former chief scientist of JUUL, Xing Yuechun, founded Shenzhen Wuling Technology in July of 2019, debuting the vape brand MYSTLABS. Xing was responsible for inventing nicotine salts at JUUL and her experience in R&D should lend MYSTLABS a competitive advantage in consumer experience and product quality. Within the new company Wuling Technology, Xing positioned herself again as chief scientist and not CEO. She believes strongly in the R&D capacity in the tobacco alternatives industry. In an interview she spoke about some of the ways her company is distinct from the competition.

She spoke of the product’s differentiating factors, “We can make it possible to punch the throat without piercing the throat and moderately imitate the natural particles when traditional cigarettes are burning. The vapor taste of P1 is specially designed for senior smokers in China. With the unique design of cartridge and atomizer, the vapor after atomization has a good balance of throat hit and smoothness.” Xing is unique in focusing on senior smokers in China, while many vape companies are targeting younger generations with energetic and sexy advertising. Xing talks about the research and development of “second-generation e-liquid (nicotine X)” which “is committed to providing mature smokers with a taste and satisfaction closer to real smoke from the e-liquid technology, and reducing the attraction of non-smokers and minors.” It seems that Xing Yuechun is intent on leveraging innovative e-cigarette technology to distinguish MYSTLABS within a crowded market, while also trying to closely emulate the feel and taste of traditional cigarettes to convert as many smokers as possible to their products.

The e-cigarette market in China is especially competitive, with new brands popping up ever so frequently. For example, the 4th annual Beijing Vape Expo in 2018 welcomed 300 exhibitors and over 30,000 visitors to the event. The 5th annual Beijing Vape Expo in 2019 is set to take place from November 22 to 24. Time will tell whether the tailwind provided by eager venture capitalists will propel Chinese vape companies to prominence despite looming regulatory obstacles.