China’s Vaping Crackdown Hasn’t Stopped Its Producers … Yet

(Bloomberg Businessweek) -- For e-cigarette startups steadily being frozen out by regulators around the globe, China seemed like an easy win. But now the world’s biggest tobacco market is joining the pushback against vaping, leaving companies scrambling. Fearful of its impact on teenagers, China has shifted its stance on vaping from benign indifference to crackdown mode within a matter of weeks. The country banned online sales on Nov. 1, and authorities are considering forbidding vaping in all public venues, a curb not even imposed on traditional cigarettes. That’s a particularly rapid regulatory turn, considering the government only banned vaping for those under 18 in August 2018.

Beijing joins a growing global chorus, from India to the U.S. to Brazil, moving against e-cigarettes. Once seen as a useful tool to help smokers quit, vaping is now linked to a mysterious lung disease that’s sickened 1,888 people and killed 37. That means companies that bet on vaping becoming a massive—and lucrative—successor to traditional cigarettes in China could see their hopes go up in smoke. “There’s a huge opportunity, but given a lot of the new regulations, there’s also a huge regulatory risk,” says Thomas Piachaud, a director at Kantar Consulting in Shanghai.

Nevertheless, startups such as RELX Technology and Shenzhen Xuewu Technology Co., which owns the vaping brand SnowPlus, aren’t quite ready to give up on persuading the country’s 300 million smokers to shift to high-tech smokes. “Even if you’re able to convert only a small number of smokers,” says Piachaud, “given the size of the population and smoking habits, you would make quite a lot of money from doing this.”

To keep growing even as the regulatory noose tightens in China, e-cigarette makers are embracing a controversial strategy already under attack in the U.S.: churning out flavored vapes. In the U.S., the proliferation of flavors such as mango and mint from Juul Labs Inc. has been blamed for the rise of vaping among teens who weren’t previously smokers. The U.S. company, which isn’t selling in China anymore after a brief attempt earlier this year, has halted sales of flavored pods back home after a regulatory investigation into whether its marketing targeted teens. Juul has denied targeting youths, saying its devices are for adults seeking an alternative to cigarettes.

“We do know there’s a lot of argument about flavor—whether it’s good for adults or not, whether it has a bad impact on kids or not,” says Kate Wang, former head of Uber China, who’s now RELX’s chief executive officer. “In China, we see how the flavors can be a helpful factor for adult smokers [who want to quit cigarettes]. This is a finding that we are 100% sure on from Day 1.”

SnowPlus co-founder Derek Li agrees that flavors are essential to convert traditional smokers to vaping: “I really think it’s a balance that the government needs to consider,” he says.

RELX’s blockbuster flavor is mung bean, a traditional Asian ingredient commonly used in soups and desserts. The company also tried such flavors as bubble milk tea and peach oolong and offers themed packs tied to holidays including Halloween and Christmas. Meanwhile, SnowPlus has introduced a pod in Southeast Asian markets that’s flavored like the energy drink Red Bull. It also sells vaping pods that taste like lychee and pineapple coconut. “New flavors are very important, because that’s how you attract smokers or those who feel it’s a trendy culture to follow,” says Yong Teng, a partner at LEK Consulting in Shanghai.

Still, some believe China’s vaping companies are living on borrowed time. Local media reports say more regulation is on the way, including a cap of 2% nicotine content in vape pods—far below the 5% in products popular with consumers. There’s also industry talk that China Tobacco, the state monopoly, is exploring its own vaping products. It contributed about 1.2 trillion yuan ($164 billion) in profit and taxes to the government’s coffers in 2018.

Estimated at $781 million in 2018, Chinese e-cigarette sales are small compared with the U.S.’s $3 billion annual market. But the nation’s entrenched smoking habit has businesses convinced e-cigs have plenty of potential. China’s smoking rate has held steady at a third of its population even as the rate is losing momentum globally. And smoking among younger Chinese age 15-24 rose from 17.9% in 2010 to 18.6% in 2018, according to the World Health Organization.

China has been criticized by activists for its lack of progress in curbing youth smoking. In China, “this gateway effect for children from e-cigarettes might be even greater than in the U.S.,” says Gan Quan, New York-based director of tobacco control at the Union, a health-care nonprofit.

E-cig makers say they’re responding to changing sensitivities about smoking. “When different markets start to have different regulations and expectations, we adapt our messages to make sure we are compliant,” Wang says. RELX and SnowPlus also are focusing more on brick-and-mortar retail shops and overseas expansion in vape-friendly markets such as Southeast Asia, New Zealand, and the U.K.

For now, Chinese vapers are enjoying their e-cigarettes while they can. Zichen Yang, a 23-year-old civil servant in Shandong province who started vaping fruity flavors two years ago to kick his smoking habit, says he may relapse if there’s a complete ban on e-cigs. “Let’s see what happens,” he says. “Right now, I’ve got some vape pods saved up.” —With Qian Ye and Ellen Huet

To contact the editor responsible for this story: James Ellis at jellis27@bloomberg.net

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