Domestic tax provisions and tightened regulations have led to Chinese e-cigarette brands looking to new international markets as higher prices and flavour limits mean fewer vapers at home, according to experts.
Since 1st November, owners of e-cigarette brands in China must pay a 36% rate levied on tobacco products and distributors a tax of 11%. Together the two taxes are expected to significantly increase the end price consumers pay for vaping products in the domestic Chinese market.
According to one Chinese source: “In terms of the most valued pods, taking Relx as an example, the wholesale prices of the three pods have increased by 66%-78%, and the prices of the two pods of Yuzu e-liquid have increased by 54% and 59%. The price of five pods increased by 25%-61%, and the price of one pod from Magic Flute increased by nearly 69%. The price of a pod from Snow Plus has risen by about 60%, and the wholesale price of a pod from Ono has risen by about 75%.
“In terms of vaping kits, increases on the above-mentioned brands ranged from 18% to 129%. In terms of the suggested retail price of the platform, each brand also has correspondingly different increases.”
This, combined with previously implemented new regulations on e-cigarettes that – among other things – require licensing and product registration on a national platform and bans the domestic sales of all non-tobacco flavours is expected to cause a drop in Chinese vaping prevalence.
2Firsts, a Chinese e-cigarette association, estimates that the regulations alone will likely reduce the number of vapers by 20%. The tax may further reduce the number of domestic vapers, currently estimated by ECigintelligence to be around 10m.
Greater focus on exports
“The overall retail prices of different brands in the whole market have increased a lot, with an average increase of about 50-60% of the retail price, going up to 100% for some products,” a representative of a Chinese e-cigarette company told ECigIntelligence. “Right now the combination of limited flavours and price increases has affected the willingness to purchase.”
As a result, vaping brands are also expected to step up the pace of innovation – with changes to products made to differentiate on both price and quality in the domestic market leaking over to export sales and vice versa, with those made to penetrate new markets influencing products to be sold elsewhere.
This is part of a greater focus on export markets in the strategic approach of Chinese e-cigarette brands. This is both for sales – with populations where vaping has little to no penetration in the smoking population being considered – and for some manufacturing outside China. Indonesia is seen as particularly attractive in this regard.
The government is giving grants and tax-free incentives, according to 2Firsts. Further factors, such as cheap real estate and labour costs, also make Indonesia attractive for brands looking to set up outside China.
“A lot had moved before the law had even started – taking up some of the workloads that have been overflowing from China,” a 2Firsts representative told ECigIntelligence.
For example, Smoore recently opened a factory in Indonesia. Clayton Shen, president of Smoore Indonesia, expressed gratitude for the support of the Indonesian government, especially the tariff-free incentives granted by the Ministry of Investment for the company’s imported machinery.
Pros and cons of Indonesian connection
Commenting at the time, Indonesia’s investment minister, Bahlil Lahadalia, said: “We need cooperation. We need jobs. We need opportunities that will make our brothers owners of our country.”
Indonesia also has a high smoking rate of around 29% of adults and a young demographic make-up, with 57% of the population being under 35, giving it a large potential future vaping market – though e-cigarette regulation there is still being finalised.
Garindra Kartasasmita, secretary general of the Indonesian Personal Vaporiser Association (APVI), said the market has been growing around 50% year-on-year since 2013, apart from 2021, when it shrank by 7% due to Covid. Growth is expected to return to pre-pandemic rates this year.
However, there are also issues with setting up there. Though Indonesian labour is cheap, much of it is unskilled, and a lack of domestically produced machinery means much of the equipment required for outfitting a facility must be imported.
“There’s a critical lack of tools and machinery to keep pace with the production lines,” one manufacturer told 2Firsts. “Should factories be built here, machinery must be transported from China, which is a critical problem to tackle. It’s a misconception that the only shortage we would face is raw materials.”
Another well-known Chinese e-cigarette manufacturer that was intending to build a factory in Indonesia said logistics also remained a problem for companies operating there and, currently, no good solutions were available. “I had a batch of goods that arrived at customs the end of the previous month, but they are still in customs as of the 20th of the current month,” the company told 2Firsts.
– Freddie Dawson ECigIntelligence staff
Photo: Jiǎntǐ Zhōngwén