the e-cigarette industry in china by roger luo operation director of cecmol

The E-Cigarette Industry

in China

By Roger Luo

Operation Director of CECMOL

1. E-cigarette Industry Association

2. Held the first and biggest E-cigarette Forum in China.

3. Organized the first Vapor Expo in China

4. World No-smoking Day: Press Conference

5. Our next Vapor Expo: October 20-23 2015, Shenzhen

Introduction of CECMOL

Purpose: To promote tobacco harm reduction, improve people’s life quality, and build a smoke-free society.

The 2rd CECMOL China International Vapor Expo

October 20-23 2015

The 3rd CECMOL China E-cig Summit Forum

April 10-11, 2016

Shenzhen Convention and Exhibition Center

Contents

1. Market Environment of E-cigarette in China

2. Market Capacity of E-cigarette in China

3. Consumer Behavior of E-cigarette Market in China

4. Consumer Preference of E-cigarette in China

5. Historical Sales Data of E-cigarette in China

6. Suggestions on Future Development of E-cigarette Industry

In 2003, E-cigarette was invented; in 2004, patent was filed.In 2005, E-cigarette was introduced to Europe by the British.In 2007, E-cigarette entered the US market.

With the reputation of “tobacco alternative” and “smoking cessation product”, E-cigarette attracts the attention of global smokers. Statistics show that in 2011 in Japan and the USA the tobacco sales dropped by 10.8% and 2.8% respectively,

while E-cigarette sales had significant increase. Therefore, when E-cigarette is noticed by tobacco consumers, the market starts transforming and developing.

On the National Tobacco Industry Conference this year, Mr. Ling pointed out that “We should grasp the international tobacco market trends, attach great importance to the research and development of new tobacco products, such as heat-not-burn cigarette, E-cigarette, Snus etc, and take it as the major project for the sustainable development of the industry. The China Tobacco has set up a leading team to work on the planning, designing and major projects of new tobacco products.”

Mr. Ling, the leader of China Tobacco, has attached importance to domestic market of E-cigarette in China.

With such development trend,

what’s the policy

environment?

World Health Organization strengthens supervisionSince 2008, WHO Framework Convention on Tobacco Control (FCTC) has gradually brought E-cigarette and other tobacco alternatives into supervision.

In 2010, according to the 4th session of the Conference of the Parties to the WHO FCTC, WHO published a report: Control and Prevention of Smokeless Tobacco Products and Electronic Cigarette.

On the 5th session of the Conference of the Parties to the WHO FCTC, WHO confirmed regulations on prevention and control of smokeless tobacco products, electronic cigarettes and nicotine alternatives; had health hazard tests on new nicotine alternatives and submitted the results to the 6th session in 2014 for further discussion.

Regulations in Chinaa. China Tobacco regards the contents of E-cigarette as high purity

nicotine extracted from tobacco, so it suggests

State Administration of Work Safety be responsible for the

regulations, according to Hazardous Chemicals Control

Ordinance.

b. State Administration of Work Safety thinks that it’s only

responsible for the safety of production and transportation of

hazardous chemicals, but it’s other regulator’s responsibility for

the possible hazard from consuming hazardous chemicals.

However, there’s no legal restrictions on consuming nicotine at

present in China.

How to analyze the policies?

Legislation Comes FirstTobacco Monopoly Law came into effect in 1991.It’s amended in 2009, but it’s not binding for E-cigarettes.

There should be at least 5 conditions for legislation:1. WHO must confirm whether the smoking conditions of traditional cigarette apply to E-cigarette; 2. WHO must confirm whether E-cigarette is harmful to human health;3. Some countries have legislations on E-cigarette, which can be used as reference in China;4. According to the feedback from domestic market, E-cigarette is growing continuously and exponentially in China.5. Some e-cigarette brands have been involved in the competition of global tobacco market.

The Twelfth Five-year Plan of TobaccoIn the 12th Five-year Plan (2011-2015) made by China Tobacco, the core strategic target is “upper level of tobacco”, and there’s no planning or goal about E-cigarette, which is one of the reasons why it’s not regulated at present.

After the change in leadership of China Tobacco in 2014, the new Leader Mr. Ling’s comments means strategic planning for E-cigarette. However, at the end of the 12th Five-year plan, there’s little possibility of setting clear regulations for E-cigarette. Thus in the near future there will still be lack of regulations.

The 13th Five-year Plan will come to a conclusion(2016-2020)

Two hot phrases before the 13th Five-year Plan:1. New Normal: the new normal of the market segment of traditional cigarette, and the new normal of technological innovation.2. Three Major Issues: a. How to gain bonus from reforming? To adhere to the monopoly system of tobacco. b. How to reach the potential of development? To focus on the new development of global market. c. What is our goal? To aim at reaching global prominence and catching up with the Top 3 multinational brands.

When will E-cigarette be regulated in China?

Analysts conservatively estimate that in 2 years

(2017) the policy will be gradually clear;

at the end of the 13th Five-year Plan, there will be

clear regulations.

Contents







The E-cigarette Consumption Rate in major cities of China

The percentage of E-cig consumption in the past half a year (N=2038)

Source: CATI

According to the statistics of the 5 major cities, the E-cigarette consumption rate is 3.4%, among which the rate in Beijing is the highest, followed by Shanghai and Guangzhou;

the rate in Xi’an is close to average, while Harbin’s rate is only 1.7%, much lower than average.

E-commerce (online) Sales

• Taobao.com: 1575 online stores. A level stores: 59; B level: 565; C level: 683.

• Tmall.com: 71 online stores. Mostly are flagship stores and self-owned domestic brands; seldom international brands.

• Main stores: top-ranked stores are from Tmall.com, mainly are self-owned brands made in China.

• Search engine index: the site search index is increasing, and in July 2014 the average number of people who search is 43,000; the industry search index vs. product index of all sites is 1:0.8. The market capacity is huge and the competition is small, indicating a good trend.

Estimation on E-cigarette Market Capacity

• ①This is the first field research on E-cigarette in China, so there’re no other case study data about E-cigarette usage for reference.

• ②This CATI research is based on 500 samples of each city; since the E-cigarette usage rate is low, so that in the sample database the number of people using E-cigarette in each city is too low, plus in the database the frequency of using E-cigarette by consumers is too scattered, so it can’t be regarded as effective reference.

• ③According to the data of consumer questionnaire collected by an entrusting party, the frequency of using E-cigarette by consumers is: 21.5% consume 1 piece or above per day on average, 13% consume 4 to 6 pieces (include refills) per week, 10% consume 2-3 pieces (include refills) per week, 10.4% consume 1 piece (include refills ) per week, 22.6% consume 2 to 3 pieces (include refills) per month, 10.7% consume 1 piece (include refills) per month, 5.25% consume 1 piece (include refills) every 2 months, 6.7% consume less than 1 piece every 2 month on average. Based on this frequency, it’s estimated that the average usage is 118 to 789 pieces (include refills) per person per year; since the data of Beijing, Xi’an and Shanghai are not ideal, it’s conservatively estimated as 118 pieces of E-cigarette usage per person per year in those 3 cities.

• ④This research is based on a small scale of consumer questionnaires, so the estimated average annual use of E-cigarette usage is only for reference.

CityPopulation

(10,000)Percentage of

ppl aging 15 - 64Usage Rate

Percentage of E-cig Usage

E-cig average usage each year

Market Capacity

(10,000)

Beijing 2069 72.70% 27% 4.9% 118 2348

Shanghai 2380 72.70% 26.20% 4.1% 118 2193

Guangzhou 1275 72.70% 25.40% 3.9% 295.5 1083

Xi’an 846 72.70% 22.20% 2.3% 118 370

Harbin 993 72.70% 30.10% 1.7% 130.6 435

Formula: Market Capacity=population * percentage of ppl aging 15 - 64 * usage rate * percentage of E-cigarette usage * E-cigarette average usage each year

Ru Yan2002

JianKangYuan2005

Dekon2005

First Union2005

Kanger2006

Smoore2006

2006

Sai Le Bao2007

DESONIC2007

Kimree2008

Joytech 2008

Boge2008

JSB2009

Tian Rui

JOMO

Aspire

Feng Tian Yuan

Yan Qu

Innokin

Sai Er Mei

LTD

Xing Nuo Kang

Wei Qi

Playboy

Chen Xiang

Si Mo Ke

Fei Yan Tian Xia

GREEN

……..

SIGELEI

BoDi2008

Contents







The Characteristics of domestic E-cigarette consumersThe average age of E-cigarette consumers is 33.5 years old, and there are mainly 2 kinds:1. Moderate to heavy smokers (daily smoking is over 15 pieces of cigarettes), trying to quit smoking gradually;2. Young light smokers (daily smoking is less than 8 pieces), regarding E-cigarettes as fashion and fun.College degree or above accounts for 53.6%, overall education is above average; income peaks at 2 levels, one is for low income groups whose annual family income is 10,000 to 50,000RMB, and the other is relatively high income groups whose annual family income is 100,000 to 200,000RMB, among which those with annual family income over 100,000RMB account for 33.9%。

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2.90%7.20%

36.20%

26.10%

23.90%

3.60%

Primary School or below Junior High School Senior High School

College Bachelor Master or above

18.116.7

10.1 10.1

7.2

10.1

2.90.7 1.4 0.7 0.7

7.25.1

8.7

02468

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11.610.98.7

6.5 6.5

12.310.9

4.32.9

1.4 0.7 0.7 0.7

18.1

1.42.2

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EducationOccupation

Annual Individual Income (10,000)

Annual Family Income (10,000)

Source: CATI

The Reason Why People Use E-cigarette

43.3

20.9

17.9

11.5

16.1

30.6

26.0

28.0

22.5

3.2

2.6

12.1

1.6

5.8

15.8

E-ci g i s heal thi er

Sense ofsati sfacti on

More opti ons

No second handsmoke

Lasti ng l onger

Di ff erent fl avors

Fashi onabl e

Good taste/upscal e

Personal i ty

Manl i ness

Status symbol

Sui tabl e forsoci al si tuati ons

Conveni ent to buy

Many peopl e areusi ng i t

Other' srecommendati on

Reasons for using E-cigarette

• Compared with traditional cigarette, E-cigarette’s unique feature is the biggest attraction for consumers; it’s healthier, less harmful, brings consumers certain satisfaction, which has a great appeal to them.

• E-cigarette is a symbol of identity. It indicates good taste, high-level and individuation, which is another feature to attract consumers.

• E-cigarette products’ diversity is realized by a few people gradually.

• Others’ recommendation is another driving force for consumers to use E-cigarettes.

Division Criteria for E-cigarette by Domestic Consumers

Division CriteriaDivision Criteria

PricePrice

• The most intuitive criterion

Domestic/Domestic/ImportedImported

• Imported is

high level • Domestic is

mid-low level

TechnologyTechnology

• Refill is good• Disposable is

not good

FlavorFlavor

• Better flavor, higher level

AppearanceAppearance

• Woodiness is better;

• On the market there’re more disposable & EGO

BrandBrand

Good brand is good-looking, with better techniques, safe to use.

MaterialMaterial

Battery, atomizer, nozzle, packaging

In the interviews most consumers divide e-cigarettes on a superficial level, they have much blindness on dividing E-cigarettes:

• Price is the most intuitive criterion for consumers;

• Imported E-cigarette is better than domestic ones.

Other consumers have good knowledge of E-cigarette products, and they are more rational when dividing E-cigarettes.

Division criteria include price, domestic/imported, product, packaging, brand, material etc, but for most consumers, price is an important criterion, as well as the popularity and quality of the brand. At present most consumers are emotional for dividing E-cigarettes.

Contents







Features of good E-cigarettes – different levels

– More direct need for ordinary consumers•Flavor

– Necessary & basic criterion for mid-end consumers

•Brand (famous, upscale)

– Requirement of mid-end consumers•Packaging

– Criterion of high-end consumers•Technology

Lo

w to

H

igh

Mid

dle

to

Hig

h

Consumers divide E-cigarettes from brand, packaging, technique, flavor etc, but different levels of consumers have different division criteria:High-end consumers are rational, instead of caring about the appearance, they evaluate E-cigarette from its techniques, such as the model, exquisiteness, fashionable taste, volume of cloud or sealability etc. Although such consumers haven’t made clear requirements for brands, their demand for high quality products indicates that for high-end consumers, good E-cigarettes need to be of high quality and created by really good brands.Mid-end consumers care more about brand and packaging, believing that good E-cigarettes should be famous, upscale and with exquisite packaging.Ordinary consumers care more about the product itself instead of the brand; they focus on the flavor and sense of satisfactio, and they have direct & clear requirements about packaging.

Features of good E-cigarettes

•Single Packing

•Appearance

•External Packing

•Techniques

Brand

•Flavor： pure natural flavor of tobacco, original flavor; mellow and soft, a sense of satisfaction. Change to other flavors once in a while.

Portable, fashionable, simple;Upscale, has a deep culture & connotation;Received recognition from most mid-high end consumers (such as pipe model)

Upscale, presents nobility;Color not too bright, better be calm & decent;Has it’s own feature, great visual effect to be easily remembered;Material: most consumers recommend wood box or similar as iPhone packing.

For refillable E-cigarettes, single packing has great sales potential;For disposable E-cigarettes, most consumers regard a pack of 5pcs as the best. But refillable E-cigarettes are more popular among consumers.

Feel great in the hand;Taste great, easy to smoke;Good sealability, no e-liquid leak.

•Specifically, we define good E-cigarettes from the flavor, model, packaging and techniques. Here are the features of good E-cigarettes considered by consumers:•Specifically, we define good E-cigarettes from the flavor, model, packaging and techniques. Here are the features of good E-cigarettes considered by consumers:

Consumer Preference on FlavorFlavor Preference - Overall

Flavor Preference - City

Beijing Harbin Xi’an Shanghai Guangzhou

Origin 89.1 84.3 72 64 80.0

Cocoa 15.2 14 14.3 21 19

Wood 18 8.1 9 16 11

Fruit 10.4 6 9.6 24 20

Coffee 9 7.1 6 28 12.5

Source: Consumer Questionnaire

18-35 36-45 46 or above

Origin 80.3 84.5 85.7

Cocoa 10.2 6.9 6.1

Wood 4.7 34 49

Fruit 8.7 6.9 4.1

Coffee 6.3 3.4 6.1

Specifically, consumers prefer E-cigarette with original flavor, especially in Shenzhen and Beijing, followed by Harbin, Guangzhou and Xi’an; Consumers in Shanghai have great interest in new flavors, such as fruit, wood, cocoa etc.In terms of age, young consumers aging from 18 to 35 prefer other flavors, and easier to accept mixed or additive flavors.

Flavor Preference - Age

Consumer Preference on AppearanceFrom the appearance, consumers prefer portable and pipe model,

between disposable and personalized ones. For pipe model,

consumers preference in Shanghai accounts for 73.8% which is

high, followed by Beijing.

In terms of age, young consumers prefer portable E-cigarettes, while

elder ones prefer pipe model. It can be seen that young consumers

pursue the fashion, while elder ones prefer the cultural charm.

Source: Consumer Questionnaire

Appearance Preference - Overall

Appearance Preference - City

18-35 36-45 46 /above

Personalized 45.7 22.4 10.9

Pipe Model 21 45.4 63.2

Portable 56 30.1 17.5

Disposable 16 19.3 9.1

Appearance Preference - Age

四、宣传与推广偏好

Ordinary ConsumersOrdinary Consumers Mid-high End ConsumersMid-high End ConsumersCultural

Promotion

Brand Publicity

DistributionChannel

TerminalDisplay

Ways ofPromotion

Promote the taste & brand culture of E-cigarette

Fashion magazines, introduce E-cig experts, provide E-cig in high-end

places or hotels. (Brand stories, lifestyle, usage)

High-end hotels, office buildings, clubs, coffee shops

Style: low key, decent

•Introduce the lifestyle, brand history and usage of E-cigarettes.

•No discounts

Not mentioned

•Free tasting•Give away disposables

•Promotional benefits

Websites, supermarkets, tobacco specialty shops, cigarette and wine shop

Advertisements, bars/clubs, websites

(brand awareness; benefits of using E-cig: healthy, flavors)

Great quantity & variety

Consumers hope we will have publicity or promotion about E-cigarettes as currently there’s none. In terms of the category of E-cigarette, it should be based on promoting a healthy and relaxing lifestyle, combined with E-cigarette branding; meanwhile, run promotions like terminal display. However, different consumers prefer different promotions:High-end consumers dislike discounts; they believe we should focus on brand culture for promotions, such as tasting, introducing E-cigarette experts, or providing brands in high-end places etc;Mid-end consumers prefer promotions that promote them more about E-cigarette products & flavors, cultivating them for a better taste, such as giving away E-cigarette professional appliances etc;Ordinary consumers are more pragmatic, preferring promotions like giving away gifts etc.

Contents







Analysis on Domestic Market

Total Turnover of the Top 10 Brands on Taobao.com in 2012 to 2014

Source: database of Taobao.com

Unit: CNY

In 2014, the E-cigarette market in China was growing dramatically, the

market sales soared 263% year on year compared with 2013, and the

number of consumers rose by 259% year on year. On one hand,

consumers’ awareness of health increased; on the other hand, the

products spread faster.

In 2014, the total sales of Top 10 brands on Taobao.com reached 140

million yuan. The growth rate of 2015 is the same as that of 2014, which

is estimated to exceed 400 million yuan on Taobao.com 。

Analysis on Domestic Market

Top 10 Brands of Smoking Cessation Products in 2012

E-cigarette Industry in China

No. Brand Turnover No. of Sold Products No. of Buyers

1 Zhen Wei Ru Yan

5,539,645 109,653 48,589

2 Yi Xing 2,869,124 64,695 25,496

3 OVALE 2,782,393 29,647 7,905

4 Wei Er 2,726,360 33,555 14,508

5 Yi Kang 2,332,684 20,404 15,986

6 Ling Ze 1,473,441 15,917 7,726

7 Kingsong 1,049,995 25,395 9,493

8 Kang Jian 566,063 11,208 3,216

9 Han Cao 309,848 9,233 1,544

10 Zhong Yan Ke 295,230 16,094 4,899

E-cigarette Industry in ChinaTop 10 Brands of Smoking Cessation Products in 2013No. Brand Turnover No. of Buyers No. of Sold Products

1 Yi Kang 12,469,385 86,213 112,703

2 OVALE 9,549,986 21,409 79,415

3 Kingsong 7,564,618 50,854 109,892

4 Ru Yan 6,210,293 26,290 54,338

5 Le Xiang 4,318,415 29,984 51,834

6 Sanjods 3,825,200 25,411 55,238

7 Zhen Wei Ru Yan

2,825,998 28,922 65,032

8 Doulton 2,739,338 16,164 34,976

9 Fei Yi Qing 2,427,984 20,947 58,161

10 Yi Xing 1,638,813 11,350 22,417

In Total 53,570,032 317,544 644,006

E-cigarette Industry in ChinaTop 10 Brands of Smoking Cessation Products in 2013

No Brand Turnover No. of Buyers No. of Sold Products

1 Doulton 41,611,078 266,500 452,229

2 Yi Xing 24,221,559 117,922 172,942

3 OVALE 21,243,171 43,892 110,488

4 Yi Kang 10,306,378 67,277 112,995

5 EGO-T 10,135,296 64,989 134,520

6 Ru Kang 9,561,088 58,722 96,069

7 Ru Yan 8,886,244 39,931 79,935

8 Di Ya Si 5,834,896 47,143 63,200

9 CRENTIA 5,528,592 60,870 94,444

10 Zhen Wei Ru Yan 4,078,990 55,798 78,260

In Total 141,387,293 823,044 1,395,082

Analysis on E-cigarette Industry at Tmall.comPercentage of Top 10 Brands on Tmall.com in 2013

Contents







As long as your product is good enough,

people will choose it.

The product is the basis for development of the industry, and continuous

innovation is necessary for leading the industry and products to maturity.

We should seek for combination point between the traditional tobacco

products and electronic heat-not-burn cigarettes, or develop the similar

flavors of traditional tobacco products for E-cigarettes. The flavor, sense

of smoking and satisfaction of traditional cigarettes and individual needs

will be the basis for the innovation of E-cigarette products.

Channel and convenience are the

emphasis of marketing

According to the sales data of E-cigarette distribution channels, the traditional

stores sales account for about 56%, while the sales of tobacco shops and online

stores are only 20%. With the development of modern information technology,

especially e-commerce, there’s wider space for the key enterprises launching

marketing campaigns, building modern marketing network, and reducing

marketing costs. Since 2012, Lorillard Tobacco Company has placed E-cigarette

ads starred by famous actors on the US TV shows which have good results. The

brand operation of E-cigarette not only requires increasing efforts on position

design and tonal development, but also innovations on advertising screen,

advertising channels, advertising language, sales methods, O2O (online and

offline interaction), and crossover marketing etc.

Promotion and Communication

Brand is the basic point

Compared with traditional tobacco products, the prices of E-cigarettes are

generally higher, ranging from tens of RMB to a few thousand RMB, sold as

ordinary products or gifts. Most consumers are high-end, whose habits are

developed for years and difficult to change. Instead of trying to change their

habits, we can cater to them so that the consumers will enjoy the pleasure of

tobacco alternatives and healthy vaping, while they are aware of the harm of

smoking but not able to quit it. Thus they don’t have to change the habits or

suffer from smoking cessation, but meanwhile their demands can be satisfied.

Focus on the domestic market

Look to the international market

In any emerging market, the freedom of development and competition is the greatest. We should grasp the opportunity to do everything possible to build our brands, grow them rapidly, form the scale, and seize the benefits!

1. Within the limited time and space, we should have clear goals of developing brands, build sales network of brands, attract consumer groups for the brands, and create brand value and reputation!

2. Strengthen the brand against any future risk of new policies and regulations. Focus on the domestic market to build the brand, and look to the international market for export!

The 2rd CECMOL China International Vapor Expo

October 20-23 2015

The 3rd CECMOL China E-cig Summit Forum

April 10-11, 2016

Shenzhen Convention and Exhibition Center

Thank you!

the e-cigarette industry in china by roger luo operation director of cecmol

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