In the field of e-cigarettes, China and the US have cooperated to strengthen supervision.

On June 23, local time, the US Food and Drug Administration (FDA) issued a “marketing denial order” to the e-cigarette company Juul Labs Inc. (hereinafter: Juul), saying that since Juul's e-cigarette products did not pass the Tobacco Product Pre-Market Application (PMTA), the company must stop selling and distributing all products in the US, otherwise it would face the risk of being administratively punished.

The FDA's decision came as a shock to the global e-cigarette market.

Juul is 35% owned by the American Autia Group, which is also the owner of the cigarette brand “Marlboro.” Third-party data shows that Juul leads the US e-cigarette market with a market share of 35.7%, while 90% of the company's revenue comes from the US.

A head of a domestic e-cigarette company said bluntly: This is a day worth remembering, encouraging us to reflect on our understanding of this industry. The FDA has used practical actions to show practitioners in this industry the attitude that quality and safety need to be focused on.

Just a few days before Juul was banned, China's State Tobacco Monopoly Administration publicly stated that tobacco monopoly administration departments at all levels will continue to strengthen market supervision in accordance with the law. E-cigarette retailers must strictly follow the requirements of e-cigarette supervision policies, not sell e-cigarettes to minors, do not post e-cigarette advertisements, etc.

“Times Finance” quoted Zheng Zhi, a domestic PMTA certification expert, and pointed out that apart from Juul, most of the top 5 e-cigarette brands in the US market are manufactured by the Chinese company Small. These brands have one less competitor, which is beneficial to Smore.

Regarding the FDA's decision, Juul issued a statement saying that it respects but does not agree with the findings and decisions and will appeal the exploration plan. Affected by this, the stock of Auchi Asia plummeted 9% on June 22. The Hong Kong stock e-cigarette concept and Smarmore International have been very popular recently.

Continued sales do not protect public safety

As of September 9, 2020, the US FDA requires all e-cigarette products sold in the US to apply for PMTA, and products that have not passed PMTA certification will not be allowed to be listed in the US.

The so-called PMTA is the Pre-Market Application for Tobacco Products (Premarket Pre-Market Application). After the company submits an application, the FDA will evaluate the product formulation, manufacturing process, health risks, safety for individuals and groups, etc., especially for young people.

More than two years ago, Juul submitted a scientific and health data review, or PMTA application, to the FDA, which includes a cigarette stick and two flavors of smoke bombs. Each flavor also has two nicotine concentrations, 5.0% and 3.0%, respectively. According to Juul, they submitted 125,000 pages of application materials, including scientific research and marketing materials.

However, after evaluation, the FDA believes that the toxicological research data for Juul products is insufficient and that the results are contradictory, including data on genotoxicity and the precipitation of harmful chemicals from smoke oil. Additionally, Juul has prevented the FDA from conducting a full toxicological risk assessment of its products.

Based on this, the FDA determined that continued sales of Juul products would not protect public safety. Therefore, sales and distribution of Juul products must cease in the US, and products that are currently on the market must be removed from the shelves, otherwise they face legal risks. Retailers should contact Juul to dispose of inventory. However, there are no penalties for personal possession and consumption of Juul products.

Juul's highlight came in 2018, when the company's share of the US e-cigarette market once reached 70%. In July of that year, Juul completed financing of 650 million US dollars, with a valuation of 15 billion US dollars.

Just five months later, American tobacco giant Autia spent US$12.8 billion to buy 35% of Juul's shares. The valuation of Juul reached 38 billion US dollars, which is higher than SpaceX, which completed financing during the same period.

Since then, Juul has entered the spotlight of the US FDA, and the company's fruit-flavored e-cigarettes and trendy marketing methods have been accused of “fueling a boom in underage drug use.” In September 2018, the FDA asked Juul to develop a specific plan on how to solve the problem of young people misusing their products; in October, the FDA raided Juul headquarters and took away thousands of pages of internal sales and marketing documents.

In 2019, Juul suspended all print, broadcast, and digital ads. In October of that year, before the FDA decided that it would soon issue a ban on the sale of flavored e-cigarettes, Juul announced that it would stop selling flavored e-cigarette products in the US. The only products sold by the company in the US were mint and original, the two e-cigarette products containing nicotine that submitted the PMTA application this time.

According to data quoted in Goldman Sachs's June 14 report this year, Juul is leading the US e-cigarette market with a 35.7% share.

Vuse Solo e-cigarettes, a subsidiary of British American Tobacco (British American Tobacco), obtained marketing approval from the FDA in October last year. Currently, the company has 31.1% of the market share. However, the company's main sales force, Vuse Alto Vape e-cigarettes, is still awaiting approval from the FDA. In April of this year, several products of the US e-cigarette manufacturer NJOY obtained approval from the FDA. The company's current market share is 3%.

In response to the FDA's decision, Juul explained that the company's products account for a smaller share of youth e-cigarette consumption, which is one of the top concerns of regulators. Juul pointed out that data from the US National Youth Tobacco Survey showed that only 0.5% of high school and middle school children used its products in 2021, down from 11.5% in 2019.

“We respect but disagree with the FDA's findings and decisions and trust that we have provided sufficient information and data based on high-quality research to address all issues raised by the agency,” Juul said. “We intend to seek a suspension and are exploring all of our options, including appealing the decision and engaging with our regulators, in accordance with FDA rules and laws.”

Some industry insiders pointed out that according to US regulations, Juul products do not need to be removed from the shelves for the time being during the appeal period; this appeal process may take more than a year. This also means that regardless of whether the appeal is successful, Juul can stay in the US market for at least a while longer. Prior to that, more than 30 e-cigarette companies that had received “marketing denial orders” had sued the FDA.

95% of the world's e-cigarette products come from China

The ban on sales of Juul e-cigarettes across the US quickly attracted widespread attention from Chinese e-cigarette industry insiders. Some media have alleged that the US market “plays an important role” in the Chinese e-cigarette industry, and that many Chinese companies are also applying for PMTA certification.

Currently, the US is the world's largest consumer of e-cigarettes and the largest exporter of e-cigarettes in China. According to the report of the e-cigarette expert committee of the China E-Commerce Association, 58% of China's e-cigarette export output came from the US in the first quarter of 2021.

On June 15, government officials from Bao'an District of Shenzhen announced at a public event that Baoan is working to build a 100-billion-level e-cigarette industry cluster. Currently, more than 95% of the world's e-cigarette production and products come from China, 70% of China comes from Shenzhen, and more than 95% of Shenzhen comes from Bao'an.

“Today, Bao'an is a veritable world-class e-cigarette center and a global 'fog capital'. In 2021, the production value of e-cigarettes in the region was 31.1 billion yuan, an increase of 1 times over 2020, with 41 regulated enterprises.” According to this official.

Take Smore, an e-cigarette OEM headquartered in Shenzhen, as an example. Financial reports show that in 2021, the company's revenue was 13.8 billion yuan. According to customer registration locations, revenue from the US and Hong Kong, China was 12.2% and 27.5%, respectively. Of the products sold to Hong Kong customers, 90.6% were sent to the US.

Precisely because of this, e-cigarette foundries in China also need to apply for PMTA certification. According to the FDA's official website, up to now, more than 20 types of e-cigarettes and main component products have obtained PMTA certification, including smoke oil, smoke bombs, disposable e-cigarettes, etc., which belong to the three brands Vuse, Logic, and NJOY. Among them, Logic belongs to Japan Tobacco, which is the third largest multinational tobacco company in the world.

China has introduced a number of laws to regulate the market

As a “new type of tobacco,” e-cigarettes have been highly controversial since their introduction. The regulatory policies for e-cigarettes vary greatly from country to country. Some support and legalize sales, some do not support or oppose them, and others completely ban sales.

However, judging from the development trend of regulatory policies in various countries, countries' supervision of new tobacco products such as e-cigarettes is constantly being strengthened. Specific measures focus on increasing taxation, inclusion in the supervision of tobacco products, setting product standards, and restricting advertisements and channels.

In recent years, China has also successively introduced a number of laws and regulations to regulate the e-cigarette market.

In November 2021, the State Council issued the “Decision on Amending the 'Regulations on the Implementation of the Tobacco Monopoly Law of the People's Republic of China'” (State Council Order No. 750), adding Article 65 “Implementation of new tobacco products such as e-cigarettes in accordance with the relevant regulations on cigarettes in these Regulations”, officially incorporating e-cigarettes into the supervision of the tobacco system.

In March-April of this year, the “Administrative Measures on E-cigarettes” and the national standards for “e-cigarettes” were issued in sequence. Subsequently, documents such as the “Implementation Rules for Identification and Testing of E-cigarette Products”, “E-cigarette Warning Labeling Regulations”, “E-cigarette Logistics Management Rules”, and “E-cigarette Trade Management Rules (Trial)” were issued one after another to further regulate the development of the e-cigarette industry.

However, it remains to be seen for a long time whether the “tight band” can be worn steadily.

Taking the current control of the taste of e-cigarettes as an example, the “e-cigarette” national standard continues the provisions of the second draft for solicitation of comments, reducing the types of “additives allowed to be used in atomizers” from 122 to 101, reducing flavorings including plum extract, orange oil, sweet orange oil, and lavender oil.

However, “China Youth Daily” quoted Wang Kean, a Chinese tobacco control expert and former director of the New Exploration Health Development Research Center, as pointing out that it is good that flavors other than tobacco are not allowed to be sold, and the national standard has indeed removed many fruity flavors, but now there is still some room for e-cigarette flavor formulation. There are still coolants and sweeteners in the final version of the national standard.

Chen Zhong, an expert in the e-cigarette industry and editor-in-chief of Blue Hole New Consumer, believes that China's new e-cigarette regulations have not killed e-cigarettes at all. This is not only an improvement in China's regulation over other countries, but also acknowledges that e-cigarettes can be a choice for adult smokers, but also leaves room for development for the industry. “As time progresses, there may also be new changes in the regulation of e-cigarettes.”

“In the long run, this could be the worst year for the e-cigarette industry in the future.” Chen Zhong predicts that this year will be a painful period for the entire domestic industry. The scale will shrink, users will have to face choices, enterprises will need to operate in compliance, and the retail side will need to be reshuffled. This year may be a low point for the industry.

However, he also mentioned that China's position in e-cigarettes in the world will remain “dominant” in the future, and there will be fluctuations in the short term, but because of the mature supply chain and perfect R&D reserves, the center of e-cigarettes in the world will still be China. Regulations currently also encourage exports, reducing export procedures, which is enough to see that regulation is still relatively open with regard to e-cigarettes.

In any case, China's e-cigarette industry has entered a new stage. Simply restricting the taste of e-cigarettes will transform the production plans of large and small factories, the marketing strategies of large and small dealers, and at the same time change some of the lifestyle habits of consumers. What can be seen is that brands, retailers, and buyers are all striving to access the new consumption scenarios brought about by the country's new regulations.