Cigarette Sales Are Falling. So What Is the E-Cigarette — the "New-Type Cigarette" — in China? | Market Inventors

It never became a substitute for cigarettes. It caught on as a toy instead.

On a weekday afternoon at Knight Vape, a vape lounge at the Old Wharf in Shanghai, a few regulars and the staff sit at the bar drawing on "pomelo iced tea"-flavored e-liquid. The air carries a faint smell of flavoring. The shop is half bar, half shop counter: behind the glass sit bottles and jars and rectangular boxes that look like power banks — e-liquids in every flavor, and the devices that vaporize them.

If you walk past a shop with "vapor" or "Vape" in its name and the inside is thick with smoke, it is probably an e-cigarette lounge.

Chris, co-founder of Knight Vape, told QDaily that about 2,000 shops of this kind — part lounge, part store — have opened across the country. Shanghai alone has more than 150 e-cigarette shops, most of them in the past two years. One chain, CYO Vape, has moved into malls: Raffles City at People's Square, Jiuguang near Jing'an Temple.

To set it apart from smoking, enthusiasts coined the word "Vape." It comes from "vapour" and names the act of using an e-cigarette. In 2014 it was named the Oxford Dictionaries Word of the Year.

Global e-cigarette sales have grown at a compound annual rate of 51% over the past five years. According to data Euromonitor gave QDaily, sales reached US$8 billion in 2015.

The e-cigarette has become the key product in the reinvention of giants such as Philip Morris International, Imperial Tobacco and Japan Tobacco. Philip Morris International's "heat-not-burn" new-type cigarette iQOS (which works on a different principle from vaporizing) even rescued its earnings. In the fourth quarter of 2016, sales of "reduced-risk products," iQOS among them, rose 60% and pulled overall revenue up with them. Martin Inkster, Philip Morris International's operations director for the UK and Ireland, said: "Our ultimate goal is to replace cigarettes with non-combustion products." Japan Tobacco, the world's third-largest tobacco company, plans to spend US$500 million to expand e-cigarette capacity, quadrupling output to 5 billion sticks by the end of 2018.

Chinese consumption is nowhere near that scale. China's cigarette sales came to 1.42 trillion yuan in 2015; e-cigarettes were less than 0.2% of that. Worldwide, e-cigarette sales are about 1.1% of cigarette sales. Chinese growth has also trailed the global 51% by a wide margin: 17.5% a year, compounded, over the past five years.

It Caught On Mainly Because It Is Fun

Growth is slow and the market small because the e-cigarette reached China as a market for hobbyists before it ever reached the mainstream — smokers.

Most e-cigarette lounges today feel like a subculture. The staff dress street: tattoos, baseball caps, loose clothes (the people showing off e-cigarettes on video sites dress the same way). If the shop has a television, you will probably see hobbyists blowing smoke rings, with hip-hop or electronic music behind it, cut with shots of skateboarding, modified cars, street dance.

People in the business insist vaping is a lifestyle. Qian Shen, who owns MC Vape, said: "In this circle what counts is cachet: first, how good the product looks; second, its style and its price." Zhang Wei, who owns Knight Vape, put it differently: "It's like fishing, or photography. Vaping is a culture too."

Most shops here sell open-system e-cigarettes — open meaning you can modify the device yourself and mix your own e-liquid — which leaves consumers plenty of variables to play with. Hobbyists have built their own jargon around the tinkering.

"Doing the numbers," for instance, is a phrase insiders use constantly. It means controlling resistance in ohms by changing how the coil is wound and how thick the heating wire is, to get clouds of different sizes. One of the main tests hobbyists apply to an e-cigarette is whether the cloud is big enough.

Besides winding coils for big clouds, mixing e-liquid flavors and blowing trick rings are the pastimes insiders never tire of discussing.

Chris and Zhang Wei think these variables and games are the thing that actually helps smokers quit. "Customers come in and start studying all this, and they stop thinking about cigarettes. There's so much to do with it… Getting into e-cigarettes is like getting into cameras," Chris said.

As with cameras, some hobbyists burn a lot of money collecting gear. The devices are not cheap: most shops carry hardware from a little over 300 yuan up to seven or eight thousand, even close to 10,000. E-liquid in a brick-and-mortar shop generally runs 80 to 200 yuan. Getting started, then, costs at least 400 to 500 yuan — not cheap in a country where a pack of cigarettes averages 13 yuan.

Cool-looking and sold as a lifestyle, the e-cigarette mainly attracts the young.

Ten years ago, the first generation of e-cigarettes sold mostly to middle-aged smokers. The TV shopping ads of the time went like this: a middle-aged man tells you he stopped wanting cigarettes after switching, then several "foreign experts" appear to call it the latest cutting-edge research. Today's consumers are younger. Deng Yao, a senior at a university in Zhengzhou, reviews devices and e-liquids in his spare time and posts the reviews on Weibo, along with videos of himself practicing smoke rings and rebuilding coils. He started because he "thought it was interesting," and because it helps with quitting.

"Fun" is the reason shop owners most often give for how people get hooked. Some hobbyists really are not vaping to quit. Chen Xin, a consumer in Nanjing, started because he walked past a shop, was drawn in by the vapor, and thought the devices looked good.

Still, it is the promise of "replacing cigarettes" and "helping you quit" that pulls in more people. Of the six e-cigarette consumers QDaily spoke with, one denied that quitting was a motive, and one, from Malaysia, never mentioned quitting at all, saying instead that vaping was cheaper. The rest all brought it up: Peng Youcheng searched for "quit smoking," saw an e-cigarette recommended, and bought one to try. Deng Yao heard of the thing after seeing a classmate vape.

E-cigarettes spread through social settings and word of mouth. "I'm out to dinner with friends, I take a few puffs, everyone thinks it's new and strange, they all ask where I bought it, they all come to me," said Wang Li. He works in sales in Urumqi and once resold e-cigarettes on the side, but the business was unsteady and he was left holding stock, so he never went full time.

Outside social settings — in a public place full of strangers, say — vaping does not necessarily work as a walking advertisement. Sometimes it does the opposite. More than one shop owner tells some version of the same story: he, or a friend, was vaping on the street and a passerby warned him not to take drugs.

A Loose Market: No Big Brands, Only Small Players

Plenty of people have heard the phrase "e-cigarette." But when they see the hardware, or watch a hobbyist pump out clouds on the street, they still cannot connect the two.

In the US and UK, by contrast, the e-cigarette has already matured into a fast-moving consumer good. Several of the major tobacco companies had entered the new category, and they spent money teaching the public what it was: Imperial Tobacco's Blu ran ads in Rolling Stone and Sports Illustrated in 2014 and 2015 and hired celebrity endorsers; Njoy, which Peter Thiel had invested in (the brand later went bankrupt), sponsored New York Fashion Week in 2013. That is before counting Blu, Vuse and others stocking convenience stores and promoting offline. Only after all of that did a hobbyist market of "vapers" form.

Samuel Liu, who entered the industry in 2012, is now putting together an e-cigarette brand. He thinks China today looks like the US in 2008 and 2009. "Chaotic" is one of his words for it.

China has an enormous number of hardware and e-liquid brands and not one as big as Ruyan was a decade ago. "People may know about e-cigarettes, but they can't name a brand or a product. There's no dominant brand, nothing genuinely big," said Chen Jin.

The brands that sell well in Europe, the US and Japan struggle to get in. Heat-not-burn products like iQOS cannot enter China formally, because they need tobacco leaf and tobacco is a state monopoly; Imperial Tobacco's JAI, a vaporizer, has only just arrived. Meanwhile China National Tobacco Corporation, which monopolizes the domestic market, has only just begun researching new tobacco products. It does not feel much urgency about the e-cigarette's arrival. "The whole e-cigarette market probably sells less than one prefecture-level city does in cigarettes for them. I think they'll come in, but maybe not that fast," Samuel said.

A few recognizable, name-brand leaders are what popularizes a new category and a new way of consuming — Airbnb for home-sharing, the iPhone for smartphones, the Kindle for e-books.

Without a big brand, awareness stays shut and few new consumers arrive. Some shop owners are betting on enthusiasts buying again or collecting gear. But the hobbyist pool is limited, and not everyone stays interested; most just buy e-liquid, a cheap resupply item. Wang Li used to chase big clouds, then gave it up and now treats the e-cigarette simply as a substitute for cigarettes. "This hobby eats your time," he said.

Meanwhile more hobbyists are becoming shop owners. Opening an e-cigarette shop takes very little. Distributors such as Zhongtai Weipu, a trading company, supply owners with stock and advice. Skip the distributor and "you can just source your goods on Taobao," said Nangua, who owns Vape Cloud.

"Basically everyone around me who got in early is a shop owner now, or has some tie to the industry," said Johnny Yan, who opened a lounge at the Health Valley park after studying in the US.

In cities like Shanghai the lounges already show signs of saturation. Nangua said: "This year a lot of people opened shops and carved up the same customers. Online sellers are competing for them too. You couldn't really say business is going especially well…" The shop made a profit last year; this year it is roughly breaking even.

Will It Be a Good Business?

Against the UK's 2.6 million and the US's 9 million consumers, China has fewer than 1 million. It is a small, tight circle: owners and staff are mostly veteran hobbyists, and some consumers have half stepped into the trade themselves, working part time or writing reviews.

The circle is widening slowly. But the street-culture signals are so loud that pulling in new customers remains a problem for most shop owners. Some people are scared off by the jargon and the specifications; those who feel no affinity for street style, big clouds or ring tricks may hesitate even to walk in.

"I find it hard to imagine everyone using hardware that big in the future. Three batteries, 200 or 300 watts, clouds that huge. It's a terrible image. The nature of the product puts people off," Samuel said. He is preparing a brand for a broader market: a simple, easy-to-use, low-cloud device. "It's like beer. You can have the mass brands, Budweiser or Carlsberg, and you can also have craft."

He is not the only one aiming at the mass market. Imperial Tobacco has teamed up with Kimree, a Shenzhen maker and seller of e-cigarettes, to bring its "British brand" JAI to China. It is already on sale at FamilyMart stores in Shanghai, pharmacies in Shenzhen and some hypermarkets in Xi'an, at 188 yuan for a set of e-liquid and hardware.

But Chen Jin of Zhongtai Weipu, which runs both the Zhengqi Wanwu retail shop and a distribution business, is not optimistic about mass-market e-cigarettes. The product has a learning curve, he says. "From getting started to finally mastering it, there's a process of learning." Convenience stores, pharmacies and hypermarkets cannot teach anyone to use an e-cigarette. He told QDaily: "What we do is still aimed at the hobbyist crowd… Bit by bit they may bring new consumers in."

Beyond how existing retailers run their businesses, the other reason awareness stays low is that the e-cigarette is a gray industry.

Gray because China still has no national standard for e-cigarettes — even though as early as 2011 a company claimed it was drafting policy with the tobacco bureau — and because no one has decided whether the thing is food, medicine or tobacco. The e-cigarette remains a new category shaped heavily by government policy and the tobacco industry, full of uncertainty; judged by the environment it faces, not much has improved in ten years.

Ten years ago a brand called Ruyan appeared on the Chinese market. Sold as a "healthy substitute for cigarettes," it reached sales of nearly 1 billion yuan in a single year, 2005 to 2006. Its run was cut short fast: CCTV's News 30 Minutes cast doubt on it, the tobacco bureau demanded the right to regulate it… It had problems of its own, too, such as overblown claims that it could get consumers to quit for good. Ruyan left the market, and in 2013 Hon Lik, the inventor of the e-cigarette, sold his patent to the British company Imperial Tobacco.

Under the tobacco monopoly, where the regulator and the business are one and the same, it is hard for the e-cigarette to become a mass-market good. Few places restrict smoking and cigarettes are relatively cheap, so consumers have no reason to switch. Two of the big reasons the UK and the US became the first- and second-largest e-cigarette markets are strict smoking bans and high taxes and prices on tobacco.

Compared with the days when it fought cigarettes head-on for the market and for smokers, China's e-cigarette business has learned its lesson. It talks up the lifestyle instead, and some brands no longer say "quit smoking" at all. Ruyan taught them not to advertise in mass media.

The retailers are cautious.

Zhang Wei wants to expand his shop and launch his own brand, but plans to wait a while longer. "Better to wait for the government… A lot of what people think they know isn't real. Because in China it can be one thing today and changed tomorrow. And even once it's written down in black and white, that might not be real either. Look at ride-hailing — changed and changed again, many times. And in the end they cracked down anyway."

Others — mostly people in manufacturing and in the e-cigarette trade — plan to make their money before the state starts regulating, the way they did before the US Food and Drug Administration formally moved in. Samuel said that after the FDA and Europe's Tobacco Products Directive tightened their rules in 2016, sales at some Shenzhen manufacturers started to slide. "They turned around and decided to sell the stuff at home instead."

One person in the industry, who asked not to be named, said: "The most chaotic times are usually the best times to make money."

(Nangua, Wang Li and Chen Xin are pseudonyms, at the interviewees' request.)

Graphics: Feng Xiuxia

Cover image from Pexels, Flickr and others.