The Vapor Movement is well known in the US. While our media and legislative discourse is uneducated, the facts, known to all who have real world experience, stands. Vaping is effective at helping you stop smoking, and the movement is growing and starting to exhibit political power. However, with harmful political regulations and higher taxes looming, is there an alternative market? For many companies looking to expand the Vapor Gospel, help smokers and export their product, thoughts turn to China.
Why is China an exciting market for foreign manufacturers of e-liquid?
• History: The electronic cigarette was invented by a Chinese pharmacist, Hon Lik, who patented a product similar to the modern vaping devices in 2003. It is also well known that China, specifically Shenzhen, is the center of equipment manufacturing. If you have opportunity to travel to Shenzhen you can quickly see why this is the case. Within a few square miles there are dozens of manufacturing sites efficiently, and inexpensively, building the devices.
• Market Size: China’s huge population is well known, as if their affinity for smoking. The market potential for e-cigarettes is huge. There are around 350 Million smokers in China, so if even if a small percentage of the smokers switched to vaping, the market would surpass the US. A recent research report predicted the Asia Pacific e-cigarette market is poised to grow over $5 billion by 2025, at a double digit growth rate per year from 2016 to 2025.
• Smoking is Killing China: It is estimated that smoking will cause 20% of all adult male deaths in China during in next few years, this translates to almost 2 million deaths in 2030 due to smoking. The government can mitigate this trend, and lower its healthcare expense, by encouraging vaping.
• Expanded Wealth and Buying Power: China’s economic rise is unprecedented, and even with the recent troublesome macro-economic trends, will likely continue. It is also of note that the Chinese government is directing the economy away from manufacturing to a “consumption economy”. This means that the policies are all directed towards getting consumers to buy more stuff.
• Low Trust of Chinese products: Chinese consumers don’t trust their own supply chain to protect them. US food brands are dominating many markets, as consumers are scared, with good reason to ingest anything that has been produced inside China. There are stories of baby formula manufacturers adding poisonous chemical’s to their product, sickening thousands of infants and killing some of them. This presents an opportunity as E-Liquid made in the US is much more trusted, just by virtue of fact that it has been made in US.
While China is an exciting market, there are also challenges associated with getting your product in the hands of Chinese consumers.
• Limited understanding: China’s consumers just are not that familiar with electronic cigarettes, according to a 2014 survey in Tobacco China Online, 93% of consumers had never heard of electronic cigarettes.
• Stranger in Strange Land: China is a hard place to do business for foreigners, the perspective of Chinese business men can be summarized that business is equivalent to war. Business is harshly competitive, with very different standards of morality and legality. Entering the market without experience, patience and an experienced, trusted partner is likely to end in tears.
• Limited protection of Intellectual property: Estimates are that 60% of all western branded products sold on taobao are fakes. Chinese law doesn’t recognize any foreign patents and they have a first to file trademark system. This means that a Chinese company can take your brand, simply by filing first.
• Government Incentives: Chinese government completely controls the cigarette market. Estimates are that 8% to 10% of the total government revenue is generated by cigarette sales. It is likely that, should the electronic cigarette market grow as forecasted, that the government will take action to regulate and tax electronic cigarettes.
• Brand Destruction: The key point is that you can’t trust a Chinese distributor to protect your product. Inherent in the mindset of Chinese businessmen is a short term mentality, and this will destroy your brand. It happens this way. A Chinese distributor approaches a US e-liquid manufacturer, they buy your e-liquid and you get a short term sale. However, they will then resell it to many, many taobao storefront owners, who in turn have no incentive to build your brand, rather they are willing to sell at very small profit. Instantly, your price point is now set just a bit above wholesale cost.
Given all the red flags, what are action items in order to distribute e-liquid in China the correct way and take advantage of this explosive market.
• Register your trademark: China does not recognize the fact that you built the brand in US and the legal system in China is not setup to protect you or your brand. You need to file a trademark for your e-liquid, in China.
• Invest in scan able product verification: Companies such as Kezzler, Authentisuite, and Authenticateit are helping many American companies.
• Set up your own e-commerce store: You can have a store on Tmall or JD.com. They have options if you choose to set up company in China or cross border if you don’t.
• Don’t give up control of your brand to a Chinese distributor.
• Local Knowledge: Work with someone who knows the ins and outs of the Chinese market and can protect your brand in China. SVBS
Bill Cosgrove is partner in Export Help China which focuses on exporting e-liquid into China. Bill also co-owns three Vapor Stores, two in Washington DC area and one in Shanghai. Bill has also lived in China and speaks a bit of Mandarin. Bill can be reached at [email protected]