Makers and users of E-cigarettes have had a turbulent recently as the illness has been linked to vaping can even lead to death. U.S. President Donald Trump has called for a ban on flavored vapes and the Indian Finance Minister has proposed the ban on the production, manufacture, import, export, transportation, sale, storage and advertising of electronic cigarettes in India. Once approved, this will be the most stringent e-cigarette regulatory ban in the world.

Looking at the past three to five years, both entrepreneurs and the capital market have shown heating enthusiasm about this emerging industry. Seemingly, this impasse between the heating interests of capital and health concerns will be eventually sorted out by regulations. 

The industry chain of E-cigarette

An electronic cigarette or e-cigarette is a handheld battery-powered vaporizer that simulates smoking and provides some of the behavioral aspects of smoking, including the hand-to-mouth action of smoking, but without burning tobacco. The core components are batteries and vaporizers, each takes 55% and 35% of the total cost and most of the production processes were finished in Shenzhen, China. 

Due to the high-speed burst of e-cigarettes, the upstream vaporizer manufacturers have tight production capacity, and the low yield rate is also an important factor limiting production capacity. The industry average yield rate is about 60%-70%. The downstream sales market is dominated by online direct sales and agents. Due to the uncertainty of domestic regulatory policies, offline sales channels bear strong policy risks.

What's the current market size?

In 2017, Juul Lab has turned into a company officially and in December 2018, the parent company of Marlboro-Altria Group completed the acquisition on Juul, and the deal cost Altria USD 12.8 billion exchanged for 35% of Juul's share. After this transaction, Juul's valuation surged to about USD 36.5 billion. Becoming such a super unicorn with valuation similar to Meituan or Didi in less than 2 years operating, it has attracted the attention of countless entrepreneurs and investors in China.

China accounts for 1/3 of the world's cigarette consumption.

According to the World Health Organization (WHO), There are more than 300 million smokers in China, accounting for nearly one-third of the world's smokers. China's cigarette consumption accounts for about one-third of the world's total, in 2009, nearly 2.3 trillion cigarettes were consumed, more than the sum of the other four major tobacco consumption countries in the world (Indonesia, Japan, Russian Federation and the United States).

In 2018, there are more than 40 million consumers of new tobacco products, which is expected to grow to 64 million in 2022, possibly replacing 4.6 million boxes of traditional cigarettes; in 2018, sales of new tobacco products hit USD 24.7 billion, increased 45.8% on a year-on-year base. It has been expected that by 2020, new tobacco products will become the second most popular category of cigarettes. Among them, the e-cigarette is still the largest category of sales. In 2018, the sales of e-cigarettes were about 14.52 billion U.S. dollars, with a year-on-year increase of 27%.

However, with more than one-third of world smokers, China was not in the largest 5 lists in terms of the E-cigarette market size in 2018; the penetration rate was less than 1%, compared to 13% in the U.S., which was considered as a spacious room for growing.

In terms of the domestic market size, the growing trend was obvious in the past 5 years. However, the growth rate in 2018 was 37.5%, less than that of 2015, which was 50%.

The capital market has shown heating enthusiasm since 2018. The chart below shows the number of investments and total amount of them in billion yuan. By far in 2019, there were 43 fund-raising events in China and the one with the largest amount contributed by MOTI's series A, raised USD 50 million. MOTI has secured its Pre-A round of financing in January 2019 led by ZhenFund. Among all the current players in China, RELX values at CNY 5.2 billion, becomes the most valuable e-cigarette start-up.

Has vaping only being an alternative for cigarettes?

Helping people quit smoking has been one of the selling points for E-cigarettes at the very beginning, yet this sign has been abandoned since the benefits and the health risks of e-cigarettes are uncertain. An even worse concern is that non-smokers and children may start nicotine use with e-cigarettes at a rate higher than anticipated than if they were never created. The worry is reasonable due to two main reasons.

First, the packing of cigarettes in many countries shows tobacco-related diseases with terrifying pictures, and advertising activities are banned. However, since the regulation hasn't been published, promotion flows into a grey area. You will find huge logos and advertisements both online and offline such as in music festivals. Second, with online shopping, the threshold of acquiring E-cigarettes is low, especially for the younger generation. Both made this sleek product become a hit among 20-somethings and even younger.

The youth smoking rate in China is 6.9%, and the attempted smoking rate is 19.9%. The impact of E-cigarettes on young people is becoming more and more significant. The use rate of E-cigarettes in the 15-24 age group was 1.5%. The most common way to obtain E-cigarettes is online shopping, accounting for 45.4%.

Regulation is on the way

In July of this year, San Francisco became the first city in the United States to ban e-cigarettes. Immediately after two months, the embarrassment of vaping has become more and more urgent. Subsequently, New York and Michigan successively "banned all electronic cigarettes except tobacco and menthol"; mainstream media such as CBS, CNN revoked e-cigarette ads; US chain retail giant Wal-Mart announced the suspension of e-cigarettes in US stores At this point, the United States has entered a state of full alert. 

At the same time, the domestic e-cigarette market has also been a lot of "sniper". For example, the JUUL products have been suspended for sale in China right after the launch. At present, Juul's flagship store page disappeared in Tmall and JD.com, but there are still third outlets selling JUUL related products.

Since October 1st, the latest tobacco control decree has explicitly incorporated e-cigarettes into tobacco control. It is worth noting that the 'strict' can be regarded as its biggest feature and mainly reflected in the following two aspects: First, e-cigarettes were included in the scope of tobacco control for the first time, which is also the first time in the domestic tobacco control policies. 

There's often a lag of regulation when the new technology or idea was launched, after the probe period, market regulation and supervision will mature gradually.

Since switching a smoker from cigarettes to electronic ones is harder than attracting a non-smoker to try a sleek vaping cloud, many players in this industry may have a closet target customer: the non-smoker younger generation. Apart from the immoral issue, this will push profit-making and attract capital injection at the initial phase, however, it's not sustainable cause there is no doubt regulation will be more strict eventually. 

Hence, in terms of the e-cigarettes, the recent public backlash over teenage smoking and the emergence of health issues will speed up the industry standardization, which will leave no room for speculation. This frontier will no longer surge as easy as it was.