Two groups of people have been arrested by police in Shenzhen electronic cigarette circle recently: one is the smuggling of IQOS, the other is the copy of IQOS.
In the first decade of the birth of electronic cigarettes, vape products dominated almost the whole emerging tobacco market. Until the end of 2014, a heat not burn electronic cigarette called IQOS was sold in Nagoya and Milan. In just four years, IQOS has entered 47 countries and regions worldwide and generated $4.096 billion in revenue for Philip Morris International Inc. over the past year.
Some people call it the most successful new tobacco product in recent years, and its momentum is no less than that of Juul, the American electronic cigarette unicorn company. At the end of 2018, Juul was valued at $38 billion after being acquired, and the acquirer was the Philip Morris International, which was renamed Altria.
Too many e-cigarette companies want to become China’s Juul, but few determine to be the next IQOS. Technology, patents, policies and other restrictions, so that HNB products can only accommodate a very small number of giants. In China, there may be only one player in the end.
The self-revolution of tobacco giants
In order to quit smoking, Zhang Ping, a HNB manufacturer, tried all kinds of electronic cigarette products, but failed. Until the end of 2017, a friend heard that he was suffering from smoking addiction and gave him an IQOS. Zhang Ping’s smoking cessation plan finally worked out. He felt uncomfortable when he returned to traditional tobacco after using IQOS for less than a week . To this day, he has not picked up traditional cigarettes.
The so-called HNB is to use electronic device to heat tobacco to a lower temperature by burning cigarettes, so that tobacco releases nicotine without producing smoke and soot. Another kind of e-cig products named vape takes atomizer as the core, heating and atomizing the e-liquid containing nicotine to avoid the occurrence of harmful gases such as tar.
Although they are also called electronic cigarettes, there are still significant differences.
Firstly, the price of HNB products is high, and the device is close to 1000 yuan. The price of each pack of cigarette cartridge sales price ranges from 150 to 400 yuan. Vape seldom exceeds 300 yuan, and cartridges do not exceed 50 yuan, which is equivalent to about two packs of cigarettes. On the other hand, the HNB products consume real tobacco, and the vape uses manually prepared vape juice. Zhang Ping said, “Although it also contains addictive ingredients such as nicotine. the transmission efficiency and subsequent satisfaction differ greatly.”
Zhang Ping made an analogy, “If traditional tobacco is regarded as spicy Sichuan cuisine and Cantonese cuisine is lighter like HNB, then vape product is just a tasteless fruit salad.”
“Despite generations of innovations, the flavor of vape products are improving day by day. In the eyes of many smokers, this is a gadget, not a cigarette, and has no comparability with IQOS.” Zhang Ping said.
However, Vape.HK can barely agree on this. I smoked the traditional cigarettes for over 10 years but after I tried the vape, I quit smoking immediately though I didn’t even have a thought to quit. The strong nicotine strengh in vape made me dizzy which I had never experienced in traditional cigarrettes. Much better than smoking. I bet Zhang Ping bought the 0 nicotine contained vape or he is the manufacturer of IQOS-like product.
PMI regards IQOS as the focus of future development, rather than the well-known brand of Marlboro, Virginia and other cigarettes. Since 2017, the world’s largest listed tobacco company has redesigned its official website. In the most prominent position on its home page, Philip Morris International has set its own goal: “Design a smoke-free future.”
Of course, for a tobacco company, the “smokeless future” does not mean that tobacco will disappear completely. Maybe tobacco giants will abandon traditional cigarettes if they can continue the flavor and nicotine in other alternative ways.
Mature industries are often difficult to subvert themselves. In the public opinion, the tobacco industry has built up extremely high barriers and enjoyed huge profits in the past 120 years, which is the most unnecessary to make changes.
In fact, the tobacco industry has been plagued with unease for a long time.
More and more people are aware of the harm of smoking to human body. With the promotion of WHO and national tobacco control organizations, global tobacco consumption has been declining since 2011. In the United States, for example, statistics from the Centers for Disease Control and Prevention show that the smoking rate among adults in the country dropped from 23.2% in 2000 to 15.5% in 2016. To compensate for the decline in sales, tobacco companies had to raise prices, but this was clearly not a long-term solution.
IQOS is an alternative offered by Philip Morris International. It has been inferred that the product name is the acronym “I quit ordinary smoking” (I quit traditional cigarettes). According to its official website, IQOS contains 90% to 95% less harmful substances than traditional cigarette smoke after burning. IQOS mainly provides adult smokers who are unwilling to quit smoking as alternatives to cigarettes.
In 2016, with the introduction of an entertainment program, IQOS’s attention in Japan soared, and its market share increased from less than 1% to 13.9% in two years.
At the same time, other tobacco giants are also trying to enter the HNB areas. Japan Tobacco Co. completed its acquisition of Ploom and its patents in early 2015, started developing HNB products, and then launched Ploom Tech. British and American Tobacco introduced a HNB product called Glo into Sendai, Japan, at the end of 2016, accounting for 5.4% of the local convenience store chain’s sales in just 10 weeks.
However, PMI still has a long way from its dream of a “smoke-free future”. IQOS sales fell for the first time in the first quarter of 2018, with shipments in East Asia and Australia falling by 48% annually. In Korean and European markets, IQOS has maintained a relatively fast growth rate, but the Japanese market is clearly facing bottlenecks. As of March 2018, HNB products have successfully transformed more than 30% of smokers in Japan, and the road ahead is bound to be more difficult.
Finding a new market is imminent. On April 30, 2019, Philip Morris International ushered in a turning point. After more than two years of waiting, the FDA issued a document on its official website, formally approved the application for IQOS entry into the US market. PMI HNB IQOS, original and mint-flavored cigarette cartridges are legally sold in the United States.
Judging from IQOS’s past record, PMI may soon be able to pocket the revenue of the U.S. market. So far, the world’s major tobacco markets are under PMI’s control, and they can finally describe their “smoke-free future” in a broader scope, except for China.
The dilemma of China Tobacco
In China, the tobacco industry practices a monopoly system. The Tobacco Monopoly Law of the People’s Republic of China and the Regulations for the Implementation of the Tobacco Monopoly Law promulgated in the 1990s established the national tobacco monopoly system at the legal level.
IQOS tobacco cartridges contain tobacco, which naturally belongs to the monopoly system. Any transaction of IQOS tobacco products is illegal. According to incomplete statistics, in 2018, the customs anti-smuggling department investigated 70 cases of heating non-burning smuggling, with a value of 540 million yuan. The tobacco Department filed 557 cases and seized 220,000 heating non-burning cigarette cartridges.
An e-cigarette practitioner told us that not long ago, a group of IQOS smugglers in Shajing District of Shenzhen were captured by relevant authorities. These people are mainly engaged in the domestic electronic cigarette trade, since the Internet brand entered the industry, business has become more and more difficult, so they desperate to sell IQOS cigarette cartridges to make money.
On the other hand, IQOS users clearly feel that cigarette catridges are becoming more and more difficult to buy, and prices have been rising. At the beginning of the year, the price of a Marlboro cigarette cartridge was around 320 yuan, and recently it rose to 380 yuan per item. In Japan, the price of the same cigarette cartridge is about 280 yuan, while the price of the duty-free shop is lower, about 240 yuan per item, but each person is limited to 10 items. It is not illegal for consumers to buy cigarette cartridges from Japan for their own use, but trafficking is suspected of smuggling and illegal business operations.
Cartridge sellers revealed that the vicious competition in the industry is fierce, with peers using fishing techniques, first to buy cartridges from others, and then report. As a result, cartridge sellers usually sell products in one place then run to another place, hold shop accounts of multiple e-commerce platforms, and name their products “Ration” with a pet photo to cover them.
After the popularity of IQOS in Japan in 2016, domestic stars, influencers and trendsetters began to try this new product, and IQOS gradually played a brand in China. Before the rise of e-cig trend in 2019, people talked about e-cig, more referring to IQOS, a HNB product produced by Philip Morris International. Nowadays, under the blockade of policies and laws, there are still many illegal traders engaged in smuggling business, and the supply of IQOS cigarette cartridges is in short supply.
China Tobacco is not without any thoughts. Relying on the largest number of smokers in the world, China Tobacco surrendered more than 1 trillion yuan of state finance in 2018. In recent years, the sales of traditional Chinese tobacco have not declined significantly. On the premise of ensuring income, China Tobacco lacks the momentum for innovation. Compared with the 13% penetration rate of e-cigarette users in the United States, less than 0.5% of the 350 million Chinese smokers use e-cigarettes. It is still too early to talk about the impact to traditional cigarettes.
China Tobacco’s e-cigarettes try stays at the research level. A person close to China Tobacco told us that as early as around 2008, China Tobacco had studied new types of tobacco internally, but these products would not be sold in the domestic market.
Until 2014, China National Tobacco Corporation (CNTC) formally launched a new type of tobacco industry. Yunnan Tobacco, Shanghai Tobacco, Jilin Tobacco and other companies began to study e-cigs in this year.
At the end of 2017, Sichuan China Tobacco launched the brand “Kuanzhai Kungfu” of heating and non-burning. Because there are no laws and regulations to regulate such products in China, they can only be listed abroad and exported to Korea and Japan.
Subsequently, China Tobacco companies from all over the world have made great efforts. Yunnan China Tobacco’s MC low-temperature HNB product signed an overseas distributor in April 2018; Guangdong China Tobacco’s MU + and ING two HNB products were listed in Laos in July 2018; and Hubei China Tobacco co-operated in November 2017 on research and development of HNB product vinegar mouthpiece.
He Ping, an external supplier, has been cooperating with China Tobacco for a long time. He has tried all the HNB products produced by China Tobacco. According to his trial experience with the people around him, these products are far from the well-known products in the world.
In Heping’s view, China Tobacco’s new tobacco products are not for sales, but a means of brand cultivation. The products themselves are not considered from the perspective of consumers. “This is not a technical problem, but a genetic problem for tobacco industry practitioners, who are not accustomed to bowing to the market.” He Ping said.
The decisive factor for China Tobacco products has never been the market, but the will of a few policymakers. A large number of new cigarettes are put into the market every year, but they fail to satisfy the customers, and finally have to stop production. He Ping told us, “This is the norm, about 1% of the cigarettes on the market can survive. A cigarette from research and development to the market, it needs investment at least billions of yuan.
“It is impossible for China Tobacco to make electronic cigarettes on its own initiative from top to bottom.” An insider close to China Tobacco asserted. Of course, if one day a considerable number of smokers start using electronic cigarettes, requiring HNB products to go on the market, China Tobacco will not be able to sit idly by.
Another more important reason for restricting China Tobacco is that the traditional tobacco industry has been facing the problem of too large tobacco stocks. Since 2014, China’s tobacco purchases have dropped from 47 million to 35 million a year. Some people in the industry reckon that even if tobacco farmers across the country do not grow tobacco for three years, there will be enough still.
The length of the cartridge used in HNB products is only one third of that of traditional cigarettes, and the production of a cartridge consumes less tobacco. Once China Tobacco promotes the development and production of cartridges, it will inevitably put more pressure on tobacco stocks, and even hit tobacco farmers who depend on tobacco cultivation to survive.
Taking Yunnan as an example, tobacco cultivation is the largest pillar industry in Yunnan and one of the main sources of farmers’income and wealth. On October 24, 2018, Yunnan Province completed the task of purchasing and producing flue-cured tobacco in that year. It actually purchased 15.955 million tons of Flue-cured tobacco, accounting for 45.6% of the national purchasing plan. The total income of tobacco farmers reached 23.450 billion yuan.
If China Tobacco wants to go abroad and enter the territory of foreign tobacco companies to compete with them for the market, the possibility of victory is weak. Just as it is difficult for foreign tobacco companies to enter China, tobacco companies in various countries have strong territorial awareness and have already established strong barriers through policies and laws. All along, China Tobacco has focused on the domestic market and cigarettes. If those new tobacco going oversea could increase a little, it would be at most a icing on the cake.
The impatient manufacturer
“China Tobacco can wait, we can’t wait anymore.” At the IECIE in 2019, the staff from Huayu Science and Technology came up with such a sentence. Huayu Technology is a wholly-owned subsidiary of Tiancheng (Pacific) Co., Ltd. of Yunnan China Tobacco. It develops HNB device MC and other products for Yunnan China Tobacco.
China Tobacco does not make HNB e-cig device itself. Instead, it cooperates with third-party companies, and the products are labeled as China Tobacco.
In China, HNB cartridges containing tobacco components can only be produced by China Tobacco, and e-cig devices produced by third-party manufacturers are not a complete product in the strict sense. Without cartridges, e-cig devices is even inferior to the lighters.
For such enterprises, holding a semi-finished product and facing policy uncertainty, becoming a partner of China Tobacco is the best solution at present. Although e-cig device is not a franchise and its profit is not higher than that of cartridges with high repurchase rate, cautious practitioners have to consider the possibility that even e-cig device will be included in the control of China Tobacco in the future. In this case, you can first connect with China Tobacco, at least to ensure that you will not lose completely.
It has been three years since IQOS became popular. China Tobacco, who never worries about money, can naturally wait. If for-profit enterprises miss this chance, they may not have the next chance.
In 2019, IECIE occupied four exhibition halls in Futian Convention and Exhibition Center, of which the smallest one was HNB products and related accessories. Just as domestic entrepreneurs rushed into the vapes field after seeing Juul’s valuation of $38 billion, domestic manufacturers were also influenced by the reference model IQOS then began to work.
The domestic HNB e-cig device is divided into two camps, one is the split design which is very similar to IQOS and separated from the device and charger; the other is the integrated device, aiming at a long using time, and it can burn multiple cartridges. Pricing is usually around 599 yuan, nearly a third cheaper than IQOS. Most of the company’s products are aimed at the domestic market, and only 5% or less of them are sold abroad.
At present, the production of such e-cig device is scarcely emiting the smell of Huaqiangbei’s counterfei mobile phone. Because of the excessive convergence of products, business-minded manufacturers will come up with novel selling points, such as making the color of the shell with the current fashion fading color, the ability to adjust the heating temperature in multiple stages, or the device with a display screen that can monitor the status of the device. What’s more, they have also developed a device that’s compatible with both Marlboro cartridges and e-liquid pod.
Zhang Ping has 13 years of experience in the mobile phone industry. Before that, he had run a mobile phone brand. The market is mainly for Vietnam, Myanmar and other Southeast Asian countries. After experiencing IQOS in 2017, he conducted several months of research. At that time, there were less than 20 HNB companies in China, and Zhang Ping felt that there were great business opportunities. After consulting with colleagues in the company, Zhang Ping created the QOQ technology to produce HNB e-cig device equipment.
Not only do his teams come from the mobile phone industry, but 95% of the supply chain of QOQ technology was accumulated in the mobile phone industry before Zhang Ping. Shell, plastic parts and other components can be handed over to mobile phone parts suppliers for production. In HNB e-cig device, only heating parts and chips need to find a special supplier.
The technology industry has specialization, and there are companies specializing in core accessories. At the Shenzhen Electronic Cigarette Show, the manager of a supplier of heating parts waved his hand and pointed to the manufacturers of HNB e-cig device, saying, “More than half of them use our products.” According to the manager, the company has a long history and has cooperated with China Tobacco as early as 7 or 8 years ago.
There are several similar vendors in the venue. Some vendors recommend that their products are “the same” as IQOS and their quality is absolutely excellent. When asked if he was suspected of infringement, the staff said to him, “IQOS won’t care much, they can’t sue everyone”.
Patent infringement is an unavoidable problem of HNB products in China. Some practitioners told us that Philip Morris International has built a thick patent wall for a long time, and it is impossible to develop HNB products around its patent barriers.
If infringement occurs, Philip Morris International won’t ignore it or leave it alone. Two months ago, there was a media report that PMI sued five electronic cigarette enterprises that produced HNB products on two patents of electronic cigarette design patent and invention patent.
Cross-border rights protection is difficult, after Philip Morris International filed a lawsuit against an electronic cigarette company in Shenzhen in 2017 for infringement of design patents. Nine months later, the lawsuit ended with the withdrawal of PMI. There are also more helpless operations, such as changing the name of the company after the defendant infringes the right, or reopening a new company, which can be done immediately, which has been a precedent in the industry. In the eyes of a few manufacturers, it is a kind of honor to receive court summons. One manufacturer even takes “being sued by IQOS in court” as the selling point in press releases and propaganda.
Many people feel lucky that on the one hand, IQOS can’t sue everyone, on the other hand, as long as the scale is not too large, no one will come to sue. However, not long ago, some insiders told us that Shenzhen police had seized more than 10 bosses, half copied IQOS and half copied Juul.
Ye Weijie, deputy general manager of Eggplant Technologies, believes that IQOS has no patents and ceramic heating is used in all fields. He believes that his products have advantages in appearance and function, can be heated to higher temperatures, closer to the flue-cured tobacco type preferred by Chinese smokers.
Domestic manufacturers are following closely behind IQOS while disapproving of their patented technology. One practitioner said that even if IQOS was completely imitated regardless of infringement, domestic manufacturers could not produce the same products at this stage.
For example, the practitioner said, “If IQOS products are now almost up to the height of the desktop, leaving some distance to the ceiling, then the domestic HNB, I’m afraid it’s still on the ground floor.”
Some users on the social platform said that compared with IQOS, the temperature control of using domestic devices to smoke Marlboro cartridge is not good, and the taste is worse. Other users pointed out that domestic device is more vulnerable than the delicate IQOS.
The products that can adapt to a variety of cartridges exist in the imagination of many domestic manufacturers, but it is still difficult to achieve at this stage. HNB device and the brand of cartridge is the perfect match. Each product has different heating curvature. It will be adjusted according to the pyrolysis property of the cartridge. It is by no means a simple circuit bridge between heating components.
More unscrupulous manufacturers advocate that their products can be adapted to traditional cigarettes. They will not tell consumers that curing traditional cigarettes has a very low carbonization rate and will produce a large amount of carbon monoxide and nitride, which is far more harmful than any traditional tobacco.
The threshold for this industry is very high, with the exception of the strong tobacco giants, emerging entrepreneurs are almost impossible to get a piece of the pie.
Three days after IQOS passed FDA approval, Philip Morris International CEO Andre Karanz Pross gave a speech at Boston College. He said that in order to find better alternatives to cigarettes, Philip Morris International has invested more than $6 billion in new tobacco research. “We are in an era of transformation, and I hope to see that the transformation from cigarettes to smokeless products is also part of it.”
IQOS has a blue-green hummingbird painted on its outer packaging. PMI said that hummingbird is a symbol of ancient tobacco. It is flexible, agile, beautiful and lively, and destructive to insects that like to bite. In San Francisco’s Oolong mythology, it was not Prometheus who brought fire to the world, but a hummingbird.