---
title: "E-cigarettes: Finally Settled"
description: "With the countdown to the ban on fruit-flavored e-cigarettes, the industry is in turmoil. The new regulations will ban all flavored e-cigarettes except tobacco flavor, reshape sales channels, and trigger a major industry shakeout, favoring large players with capital and technical strength."
author: "郑一鸣"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2022-03-27"
language: "en"
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---

# E-cigarettes: Finally Settled

> With the countdown to the ban on fruit-flavored e-cigarettes, the industry is in turmoil. The new regulations will ban all flavored e-cigarettes except tobacco flavor, reshape sales channels, and trigger a major industry shakeout, favoring large players with capital and technical strength.

"Countdown to the ban on fruit flavors: XX days" – this is a WeChat Moments post from an e-cigarette distributor, with the words **"Buy now while supplies last"** highlighted in bold red. It seems all e-cigarette stores and consumers are racing against time, more specifically, against May 1st.

On March 11, the "Measures for the Administration of E-cigarettes" (hereinafter referred to as the "Measures") were officially released and will take effect on May 1st. The Measures stipulate regulations on domestic e-cigarette production and quality management, sales management, import and export trade, and supervision and inspection. Article 26 clearly states: **"The sale of flavored e-cigarettes other than tobacco flavor and e-cigarettes that can add aerosol by themselves is prohibited."** This news is a bolt from the blue for brands and consumers alike. The E-cigarette Industry Committee of the China Electronic Chamber of Commerce stated that the Measures have been finalized and will not be changed subsequently.

**Panic and Turmoil: E-cigarettes at a Loss**

Although the "Measures for the Administration of E-cigarettes (Draft for Comments)" (hereinafter referred to as the "Draft") was publicly announced and solicited opinions as early as December last year, the market attitude at that time was mostly wait-and-see. "Waiting for news" became the inner thought of most e-cigarette brands. The flavor whitelist in the Draft actually included some fruit flavors, but no one expected that the official Measures would ban all flavors except tobacco. Due to this regulation, the prices of special-flavor pods on the market skyrocketed from the official guide price of 99 yuan to 120 yuan, and the upward trend is far from over. In response to this phenomenon, we interviewed Cheng Xin, an e-cigarette industry practitioner. He explained that 90% of China's e-cigarette manufacturers are based in Shenzhen. Affected by the recent epidemic, production and logistics have been impacted, coupled with sudden market demand, making the already limited inventory very scarce.

"Not all distributors are hoarding goods," Cheng Xin said. "If you hoard a large amount of special-flavor pods but fail to sell them before May 1st, then after the new regulations take effect, this batch of goods will only be left in your hands. Hoarding is a very risky behavior." According to the "2021 Q1 China E-cigarette Industry Development Status and Market Research Analysis Report" previously released by iiMedia Research, 46% of consumers choose e-cigarettes because of the variety of flavors, and tobacco flavor accounts for at most 10% of e-cigarette pod sales. From 2013 to 2020, the scale of China's e-cigarette market increased from 550 million yuan to 8.38 billion yuan. Although compared with the cigarette market, whose profits exceeded one trillion yuan as early as 2016, e-cigarettes seem insignificant, since the consumer group of e-cigarettes is young people, there is still ample room for market growth. After the new regulations take effect, can the e-cigarette market, which uses flavor diversity to please young people, maintain such high growth?

**In addition to product restrictions, the Measures also have corresponding policy provisions on sales channels.** According to Article 8 of the Measures, the e-cigarette market will implement a very strict licensing sales system. Enterprises related to e-cigarette product production, OEM processing, and brand holding must be reviewed and approved by the tobacco monopoly administrative department of the State Council, obtain a tobacco monopoly production enterprise license, and be registered with the market supervision and management department. In the past, due to unclear policy regulations and the unclear nature of e-cigarette products, private enterprises could participate in both production and wholesale. After the new regulations take effect, the wholesale link of e-cigarettes will be taken over by China Tobacco's local tobacco companies, implementing unified procurement and distribution. Distributor channels will withdraw from the e-cigarette market, whether they are direct-sale stores selling only a single brand, multi-brand collection stores, or "stores within stores" in bars, KTVs, and other venues.

**After the Pain, a More Regulated Market**

In recent years, the e-cigarette market has been in a regulatory gray area. The unclear classification has allowed many companies to seize the window of institutional gaps and run wild, engaging in an arms race over nicotine content, pursuing "bigger, more, and more addictive." When the national standard for e-cigarettes was first solicited for opinions on November 30 last year, it stipulated that nicotine concentration should not exceed 2%. In reality, most fruit-flavored e-cigarettes on the market have a nicotine concentration of 3%, tobacco flavors reach 5%, and some even add prohibited substances. Due to the chaotic sales channels of e-cigarettes, the phenomenon of "stores within stores" exists not only in bars and mobile phone stores but also in stationery stores near schools. Multiple media outlets have reported incidents such as "stationery stores selling e-cigarettes to elementary school students" and "elementary school students following trends and using e-cigarettes." Although the "Notice on Further Protecting Minors from E-cigarette Infringement" issued on October 30, 2019, officially banned the sale of e-cigarettes through online channels, WeChat business and private domain communities still serve as covert online circulation channels.

After the Measures take effect, the originally chaotic channels of the e-cigarette market will be replaced by standardized existing tobacco channels. In terms of marketing, e-cigarette companies deliberately hide the "nicotine product" attribute of their products, emphasizing fashion, socializing, and even "health" labels. Many young people who disdain traditional cigarettes mistakenly regard e-cigarettes as "social toys" without considering the addictiveness of nicotine, including minors. In fact, the primary purpose of "prohibiting the sale of flavored e-cigarettes other than tobacco flavor and e-cigarettes that can add aerosol by themselves" is to prevent minors from using e-cigarettes. The Measures, which clarify quality standards, are expected to change the long-standing industry chaos of mixed quality and good and bad products, eliminating a large number of "small, scattered, chaotic, and poor" manufacturers. Most importantly, the new regulations officially clarify the legal status of e-cigarettes.

Short-term negative, long-term positive. When discussing future market prospects, this is the first view of the e-cigarette practitioners we interviewed. After the new regulations take effect, the e-cigarette industry will indeed experience a decline in sales for one or two quarters, but at the same time, e-cigarettes will finally have a legal status, and the market will no longer have a bottleneck as it does now. Consumers who give up e-cigarette products due to flavor reasons do exist objectively. Cheng Xin said, "But it won't have a big impact. We can use the United States as an example. On September 11, 2019, the U.S. government decided to take measures to ban most flavored e-cigarettes other than tobacco flavor. From the data, after the ban on fruit flavors, the penetration rate in the entire U.S. market only dropped by 0.6% in the second quarter. By the end of last year, the business scale had returned to the level before the regulations were issued."

**Industry Shakeout, Giants Enter**

The current structure of e-cigarettes is relatively simple: a simple battery plus a control chip forms the e-cigarette stick, and an atomization core wrapped in an oil tank forms the e-cigarette. It is hard to say that there is high technical difficulty, so many brands differentiate themselves by focusing on flavor. This has also led many to mistakenly believe that after abandoning the strategy of using flavor to highlight differentiation, the e-cigarette market will plummet. However, if we distinguish e-cigarette consumers by group, we will find that the core attribute of e-cigarette products is not flavor but "convenience." For users who smoke both cigarettes and e-cigarettes, in the context of indoor public place smoking bans in China, e-cigarettes can satisfy the body's nicotine needs anytime and anywhere. For pure e-cigarette users, after nicotine addiction, they need to consider the problems of bad breath and secondhand smoke odor attachment caused by traditional cigarettes. Even if they switch to the cigarette market, they will experience the behavioral cycle of the first type of users: in places where smoking is prohibited, they use more convenient e-cigarettes to supplement nicotine. Moreover, this type of user does not simply buy pods of a specific flavor; they have a basic tolerance for flavor acceptance, making it easier for e-cigarette companies to conduct flavor education for consumers later.

Tobacco flavor does not equal tobacco. Both have a tobacco taste, but e-cigarettes have a smoother taste compared to traditional cigarettes. In terms of taste, tobacco-flavored e-cigarettes can be better than tobacco-flavored cigarettes. This turns the technical threshold, which was not originally a problem, into a consideration for major e-cigarette brands: how to build a technical barrier under the same conditions to differentiate products within the same category? In this regard, leading companies in the e-cigarette industry will have greater advantages, not only in having the funds for taste research and development but also in being able to produce e-cigarette products that meet the new national standards, which many small and medium-sized domestic enterprises cannot currently do.

The advantage is not only reflected in technology. The Measures' provisions on sales channels shift the focus of e-cigarette companies from seizing offline channels to serving offline channels. In the future, for e-cigarette companies that want to expand market scale, the essential condition for increasing increment is the ability to maintain and promote terminals. China has more than 7 million mom-and-pop stores. Whoever can serve such a large-scale, scattered terminal market will survive. Whether they can be a good service provider is the core of the success or failure of future e-cigarette companies. Therefore, the e-cigarette market will usher in a major reshuffle. A large number of small and medium-sized enterprises that cannot produce products meeting national standards, lack taste research and development capabilities, cannot complete user flavor education, cannot survive the bleak period of one or two quarters after the new regulations take effect, and cannot provide good terminal services will be eliminated and no longer have the conditions to compete with giants.

The entry threshold for the entire e-cigarette market has been raised by the Measures. Subsequent players need considerable capital strength to qualify for a seat at the table. After the policy officially takes effect on May 1st, e-cigarettes will truly become an industry, becoming a track that is relatively fast and no longer limited in market capacity. The era of disorderly regulation is over, and the industry is being restructured. The development of e-cigarette companies will be determined by technology, capital strength, and service capabilities. Under strict regulations, the magical scene of e-cigarettes is just beginning. Old players should prepare for re-competition, and new players will be selected through compliance competition. (At the request of the interviewee, Cheng Xin is a pseudonym.)

**Are you "watching" me?**


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