Business vapourised: Could coronavirus hurt e-cigarette makers?
China, the world centre for vaping devices, has also imposed an online sales ban as health concerns mount.
Shenzhen, China: Frank Liao looked confident as he stood in the stairwell of an old factory tucked behind an upscale shopping centre in the heart of Shajing – the electronic cigarette district in Shenzhen, China‘s tech and industrial powerhouse city.
He was there to cut a red ribbon under a shower of confetti to mark the opening of a new production plant for his e-cigarette company.
But that was in December, just before a deadly viral outbreak rapidly spread across parts of China and beyond, forcing Chinese authorities to lock down entire cities, shut down transport links and prevent people from gathering in enclosed spaces – including factories like Liao’s.
His plant and the complex next to it were both closed due to the coronavirus outbreak.
China’s e-cigarette industry today faces three main challenges. The outbreak is one.
The other is regulation. Governments both at home and abroad are trying to curb the use of the devices among children while in the United States, an outbreak of another lung disease – this one directly linked to vaping – has led to intense regulatory scrutiny of the industry. Meanwhile, China has implemented a ban on online sales of e-cigarettes.
And it faces an uphill struggle to encourage smokers of traditional cigarettes in China to switch to electronic vaporisers because of a state-run monopoly on tobacco.
On the verge of bankruptcy
“Lots of companies, especially newer and smaller ones that had been heavily relying on online sales, have been hit hard, causing some to be on the verge of bankruptcy,” Liao, CEO of Hankang Biotechnology Co Ltd, told Al Jazeera.
The company makes portable devices that send an electric current through liquids containing either nicotine or cannabidiol , which according to the World Health Organization is a component of cannabis but does not induce a high. Users then inhale the resulting vapour.
China, and Shenzhen in particular, is the world’s e-cigarette capital. About 85.7 percent of the world’s vaping devices are made here, according to the China Electronics Chamber of Commerce (CECC).
Hankang’s products are sold in China and around the world.
The recent troubles at China’s e-cigarette makers began in the second half of last year as governments at home and abroad began clamping down on the sales of devices.
The Chinese government imposed its online e-cigarette sales ban in November – ostensibly to prevent minors from accessing them.
Meanwhile, the number of deaths in the US – among the biggest markets for China’s vaping product makers – caused by a lung disease known as EVALI and associated with the use of e-cigarettes, was climbing.
The US Centers for Disease Control and Prevention says 64 people have died due to EVALI as of February 4, with more than 2,700 people being hospitalised.
In January, the US announced restrictions on the sale of fruit and mint-flavoured e-cigarettes to discourage children from using the devices.
And then the virus struck.
From the highs to the lows
The rapid growth in demand for e-cigarettes in developed countries in recent years had been a big incentive for entrepreneurs like Liao looking to cash in on the trend. About 10 years ago, the devices were initially aimed at people trying to wean themselves off traditional tobacco-based cigarettes.
But they soon developed a cool factor, as younger audiences adopted them.
According to the CECC, China’s e-cigarette industry generated total sales of 33.75 billion yuan ($4.8bn) in 2018, with exports worth 28.69 billion yuan ($4bn).
Incomplete statistics for 2019 show an estimated export volume of $6.2bn, and what was approximately a 175 percent growth rate domestically before the online sales ban, Liu Yufeng, Vice President of the CECC, said at an e-cigarette industry forum in December.
The clampdown has led to a series of large-scale layoffs.
The most recent casualty has been Snowplus, a large e-cigarette maker. The company said in a statement it has let go about 20 percent of its support staff, following reports in state-run media that it had laid off roughly half of its employees since November.
Across the industry, about 50,000 employees had already been laid off by the end of December, out of approximately 500,000 directly employed by e-cigarette factories in and around Shenzhen, the CECC told Al Jazeera.
Cranking up
Altogether, the industry supply chain directly supports about two million jobs, Ao Weinuo, secretary-general of the Electronic Cigarette Industry Committee under the China Electronics Chamber of Commerce, told Al Jazeera.
As workers from small towns and villages trickle back to the big cities following the extended travel restrictions to contain the virus, some activity is resuming in the e-cigarette business.
“We’re already working now, but we’re all working from home,” Hankang’s Liao said of the current situation related to the outbreak.
A spokesperson for the company told Al Jazeera that the factory would open “soon” once all health protocols were in place for returning workers, including temperature checks, ensuring they all have masks and possible further examinations for those who may have been in close contact with people who contracted the virus.
The factory, once running in the next few weeks, is projected to produce between 50,000-100,000 devices per month.
Other big manufacturers are also slowly cranking up operations.
RELX, one of China’s top e-cigarette brands, has reopened most of its stores in China following the extended Spring Festival and outbreak, according to company spokesperson Yasha Wofman. Some stores remain out of bounds, however, as the malls they are in are still shut.
Production has resumed at the factory that produces RELX devices, Wolfman said, though the scale of production was not yet available.
Self-regulate or fail
But even as manufacturing resumes, other challenges remain.
The rash of deaths in the US – attributed in part to people using the psychoactive substance THC in vaping devices – has left a deep scar in the industry.
A growing number of industry insiders are calling for participants to regulate themselves more stringently, before tougher rules are imposed on them.
“We want to eliminate smoking and e-cigarettes can be a major tool for this around the world,” Konstantinos Farsalinos, a cardiologist and research fellow at the Onassis Cardiac Surgery Center in Athens, Greece, who has done extensive research on health impacts from vaping, said at the CECC-organised forum.
“But we need appropriate regulation and a responsible industry – globally [the e-cigarette industry] has been one of the most irresponsible industries and you need to change that, otherwise you are going to fail.”
Some companies are heeding the call.
At its newest store in Shenzhen’s Nanshan district, RELX has prominently displayed signage forbidding minors from entering the store and launched a vaping device called RELX i that users can lock using Bluetooth technology and which can only be activated by the age-verified purchaser.
Big tobacco, big tax revenues
But a more fundamental challenge for China’s e-cigarette makers is the country’s entrenched tobacco industry. Trying to get its estimated 300 million smokers to switch to e-cigarettes is proving to be a monumental hurdle.
Cigarettes are everywhere in China and easily accessible, even for minors at most corner shops. Almost all of them are made by China National Tobacco, a state-run monopoly with deep pockets.
The ban on online marketing has further tied the e-cigarette industry’s hands, insiders say.
“You’ve seen there’s been an increasing demand for electric cars in recent years, and this has made many petroleum companies panic,” Ou Junbiao, president of the CECC, and head of the Sigelei e-cigarette company, said in his office in Shenzhen. “They worry that these new energy vehicles will replace them.
“This situation is a lot like that in the relationship between e-cigarettes and tobacco, and similar measures can be taken to address the imbalance between the two,” he told Al Jazeera.
Ou says China National Tobacco brought in 1.17 trillion yuan ($166bn) in tax revenues in 2018, making it one of the biggest contributors to government coffers.
That tax revenue is just too important for the government, Ou said, even if e-cigarettes have the potential for global expansion.
But that potential may never be fulfilled as long as the vaping industry does not address the health concerns that are now making headlines in the West.