How will the regulatory measures impact the vape industry in China

China’s vape industry has shown remarkable resilience in the face of previous regulatory crackdowns. The ban on online sales of e-cigarettes implemented in 2019 was a major blow to the industry as it was suddenly cut off from an important revenue stream. However, some of the largest industry players were able to weather the storm by increasing their footprint of brick-and-mortar shops – often placed in prominent locations in busy shopping areas – which enabled it to sustain a high level of growth.

The new measures mark a considerably more hardline approach toward the industry. Some of the new restrictions and prohibitions could make the road ahead much more uncertain and even make the domestic market significantly less profitable.

The most glaring issue for the industry is the prohibition of the sale of flavored vapes, as this is one of the major appeals over traditional tobacco products. Shares of the e-cigarette RLX Technology, the market leader in China, fell 36.8 percent following the release of the new measures.

Although there is no concrete market data on the topic, anecdotal evidence suggests very few users choose the tobacco flavor. Much of the marketing around the product also focuses on the different flavor options.

The silver lining may be that the measures only explicitly prohibit the sale of flavored vapes in China, and do not appear to prohibit the production or export of flavored vapes. Chinese e-cigarette companies may therefore be able to continue to grow in overseas markets where there is a more lax regulatory environment, such as Europe and the US.

In addition to the prohibitions, the implementation of the e-cigarette transaction platform could also be a major headwind for the industry. The platform indicates that e-cigarettes will be subject to the same pricing and quota requirements as traditional tobacco products. This would severely harm the competitiveness of the industry and could hinder innovation in a technology that could yet become safer and healthier.

The requirements to prove a company has the right amount of capital and facilities may raise the barrier of entry for newer and smaller companies that haven’t yet accumulated the requisite funding. This in turn could benefit the established players who already have the means and capital to meet the new requirements and can therefore more easily pass government assessments.

The requirements for license and registration for manufacturers will similarly hurt small companies while helping to give companies with better funding and facilities a competitive edge. However, it also places higher expectations on upstream producers and serves to properly standardize the industry. This will ultimately be good for consumers who can get more reliable, higher-quality, and safer products.

It’s worth noting that the regulations do help to legitimize an industry whose legal status was previously dubious. Some investors have been concerned that China would impose an outright ban on e-cigarettes, as Hong Kong did in October of this year. Many other Asian countries, such as Singapore, Thailand, and India, have taken similarly hardline approaches. By incorporating vaping into the legal framework of the tobacco industry, China is giving the industry the right to exist.