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How Will The New Administrative Measures Impact China’s Vape Industry?

Posted: 21st March 2022 11:47

China’s vape industry has been hit with another round of legislation. The new measures build upon a decision to move the industry under the purview of the State Tobacco Monopoly Administration and regulate e-cigarettes / vape products as tobacco products, which will put significant restraints on the industry catering to the domestic market. We discuss the finalized regulatory measures below. They will be implemented from May 1, 2022.

On March 11, 2022, China’s State Tobacco Monopoly Administration (STMA), the country’s top regulator of tobacco products, released the finalized version of the Administrative Measures for E-Cigarettes (the ‘measures’), which lays out new regulations for the production, marketing, and sales of e-cigarettes in China.

The latest version of the measures is an amendment of a previous draft that was released for public opinion in December 2021. Several provisions have been amended and new regulations added in the latest version. Among other new regulations, the measures now prohibit the sale of flavored e-cigarettes, a significant blow to the industry.

The measures build upon a decision in 2021 to move the industry under the purview of the STMA and regulate e-cigarettes as a tobacco product. The measures will go into effect on May 1, 2022.

Note: In this article, the terms ‘vapes’ and ‘e-cigarettes’ are used interchangeably and refer to the same product.

Regulating China’s Vape Industry 

On November 26, 2021, China’s State Council announced it had amended the Regulations for the Implementation of the Tobacco Monopoly Law of China to include e-cigarettes and related products, stipulating that they are subject to the same regulations as tobacco products. This means vapes will now be subject to the same rules for licensing, production, sales, import/export, and taxation, among other rules, as traditional tobacco products.

Then on December 2, 2021, China’s State Tobacco Monopoly Administration (STMA) released a draft of the Administrative Measures for E-Cigarettes (the ‘draft measures’), a new set of measures for governing the emerging China vape industry. These measures were later amended, and a final version released on March 11, 2022.

The draft measures were based on the following Chinese laws governing the tobacco industries and the protection of minors: The Tobacco Monopoly Law of the People’s Republic of China; The Law of the People’s Republic of China on the Protection of Minors; and Regulations for the Implementation of the Tobacco Monopoly Law of the People’s Republic of China. The draft measures stipulated regulations for the production, sale, marketing, and import and export of e-cigarette products and nicotine for e-cigarettes. Perhaps one of the most significant rulings was that the industry would have to process all transactions through an ‘e-cigarette transaction platform’, overseen by the STMA. 

Overview Of China’s Vape Industry

The China vape or e-cigarette industry has exploded in growth over the past couple of years, with early movers benefiting from unfettered access to the largest population of smokers in the world. The industry also has massive growth potential.

According to a report from Chinese data analysis firm iiMedia Research, the penetration rate of e-cigarettes had reached just 1.5 percent in 2021. This report notes that this is far behind countries such as the U.S., the U.K., and Japan, all of which have penetration rates above 30 percent. 

There is therefore significant room for expansion if companies are able to convince more of China’s 300 million or more smokers to wean off traditional tobacco. 

Regulations will now be the biggest hindrance to the industry’s potential. Until recently, e-cigarettes were not regulated as a tobacco product. Companies instead operated in a legal grey area that ultimately enabled it to grow into an RMB 8.3 billion (US$1.3 billion) industry.  

This decision, although perhaps not welcomed by the industry, will not come as a surprise; the government began deliberating it back in March 2021, and the pressure on lawmakers to sign off on the decision will only have become more acute as other laws aimed at enhancing the welfare of minors were released last summer. 

The issue of the protection of minors was likely also behind the decision at the end of 2019 to ban the online sale and advertising of e-cigarettes, as concerns rose over how accessible the youthfully marketed product was to minors.

A Look At China’s E-cigarette Regulations 

The measures are applicable to companies that engage in the production and operation of electronic cigarettes within China and cover all vape products, including vape cartridges, vape sets, and products sold as a combination of cartridges and sets.

Heated tobacco products will be regulated as traditional cigarettes and not as e-cigarettes.

Regulations For Producers And Manufacturers 

Under the measures, local tobacco monopoly administrative departments are responsible for the monitoring and management of e-cigarettes in their jurisdiction.

The administrative requirements for the production of e-cigarettes have been somewhat relaxed in the new version of the measures.

The draft measures required local tobacco administrative departments to implement a registration system for e-cigarette companies and products. Companies were also required to register their vape products with the STMA before they can sell or market them in China. Eligible products were then supposed to be added to an approved product catalog.

However, the new measures have removed mentions of the registration system and product catalog, possibly because the administrative burden on local authorities to establish and manage these systems was considered too high.

Instead, the local tobacco administrative departments are required to organize professional institutions to conduct technical review of e-cigarette products based on application materials, such as inspection and testing reports.

They must also conduct regular and ad-hoc inspections of companies and individuals with licenses to sell vape products.

License And Registration

Companies must receive approval and obtain a license from the tobacco monopoly administrative department of the State Council before they can establish business to manufacture e-cigarettes. The license must then be ratified and registered by the market supervision and management department.

To be eligible for a production license, companies must meet the below criteria:

  • Have an appropriate amount of funding for the production of e-cigarettes;

  • Have the necessary technology, and equipment required for the production of e-cigarettes;

  • Comply with the national e-cigarette industry policy requirements; and

  • Other criteria stipulated by the STMA.

Manufacturers must reapply for a license if their scope of business changes and obtain approval from the STMA if they intend to expand production capacity.

The tobacco products used by manufacturers to produce e-cigarette products and nicotine must be purchased from a company with the right to operate and may not be purchased from an illegal seller.

E-cigarette products must use a registered trademark and the packaging must comply with the regulations on labels and warnings.

Regulations For China Vape Retailers And Wholesalers

Companies engaged in the wholesale and retail of vape products are subject to the same rules and criteria for registration as producers and manufacturers. That is, they must obtain and receive approval for a license to engage in the wholesale or retail of e-cigarette products from the STMA or get approval for a change in the business scope of the license if they are pivoting into wholesale or retail.

The criteria to receive a license are the same as those required to receive a license for production and manufacturing listed above, adjusted to apply to wholesale and retail.

Prohibitions on the sale and marketing of e-cigarettes

Qualified and licensed retailers are also required to purchase vape products from a local licensed wholesaler, and wholesalers are not permitted to sell e-cigarette products to unlicensed retailers.

The measures prohibit retailers and wholesalers from holding events, such as exhibitions, forums, and expos, to promote e-cigarettes.

In addition, e-cigarette retailers may not be located in the vicinity of any primary school, secondary school, vocational school, or kindergarten. They are also not permitted to sell e-cigarette products to minors and must place a sign banning minors from purchasing e-cigarettes in a prominent place in the shop.

E-cigarette products can now also no longer be sold through vending machines or any other self-service mechanism. The transport of e-cigarette products will be monitored by the local tobacco administration departments. The department will also impose limits on the amount of e-cigarette products that can be shipped and carried across borders, considerably curtailing the amount of product small vendors can ship through the postal service.

One of the major new additions to the measures is the ban on the sale of flavored e-cigarettes. The measures now prohibit the sale of e-cigarettes in any flavor other than tobacco and the sale of e-cigarettes that can have flavors added to them.

China’s New E-cigarette Transaction Management Platform

The STMA is in the process of establishing a ‘unified national e-cigarette transaction management platform’ (‘e-cigarette transaction platform’), through which manufacturers, producers, wholesalers, retailers, and other related companies will be required to carry out all vape product transactions. Imported vape products can also only be sold to domestic wholesalers or producers through this platform.

Overseas suppliers of e-cigarette products are also only permitted to sell products to domestic manufacturers or wholesalers through this transaction management platform.

Products that have not passed a technical review cannot be sold on the platform and the information on the e-cigarette products sold on the platform must be consistent with the information submitted for the technical review.

No seller or individual is permitted to sell e-cigarette products through a channel outside of this management platform.

Regulations For Import And Export

If a wholesaler wants to pivot to exports, it must update its license scope and get approval from the STMA.

All imported e-cigarette products can only be sold through the e-cigarette transaction platform. The imported products sold in China must also undergo a technical review and must use an approved trademark that has been registered in China.

The latest version of the measures has slightly relaxed requirements for the production of vapes made for export only, having removed the requirement for companies that produce vapes for export only to register their products and receive a production license from the STMA.

The new measures do stipulate that products made for export must meet the standards and regulations of the import company. If the import company does not have any relevant standards or regulations, then the products will be subject to China’s standards and regulations instead.

Oversight And Role Of Corporate Social Credit System

Finally, the measures give the STMA the power to take action against companies that violate any of the measures or other tobacco regulations. Measures include holding supervisory talks, suspending the company’s platform trading qualifications, ordering the suspension of production and business operations, carrying out rectification, and even canceling the company’s qualifications for production and operation of e-cigarette products.

The STMA will also establish a corporate social credit system. E-cigarette companies that have breached regulations will be listed on the system and be subject to closer monitoring and will also have their information listed on the National Credit Information Sharing Platform.

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.

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