Shenzhen manufacturers get the taste for e-cigarettesShenzhen firms get taste for e-cigarettes

PUBLISHED : Friday, 18 February, 2011, 12:00am
UPDATED : Friday, 18 February, 2011, 12:00am
 

ZYS Technology began corporate life two years ago as a maker of digital navigational instruments and video handsets. Then the Shenzhen-based company got fired up about a new line of business: electronic cigarettes.

'We switched to e-cigarettes at the beginning of 2009' to boost the company's profit, said Yuki Wen, ZYS' sales manager.

She said the company sold about 150,000 cigarettes every month, with half exported mostly to Japan, the United States and several European countries. The rest are sold on the mainland, mostly online and through television-shopping shows where customers call a hotline to get the goods delivered.

The closely held company now is betting its future on the appeal of simulated smoking and has decided to sell its video handset business as well as its business making instruments for global positioning systems.

Shenzhen has rapidly become the world's biggest centre for making e-cigarettes, a market that researcher Euromonitor estimates is worth US$100 million in annual global sales. According to the National Vapers Club, an advocacy group for e-cigarette users, at least one million people in the US use the product.

E-cigarettes are battery-powered devices that resemble a cigarette. When inhaled, the devices turn nicotine-laced liquid into a fine vapour mist that looks like smoke. They can be flavoured to mimic the taste of well-known brands. 'Any brand, you just name it,' Wen said. 'We can even produce apple or cherry flavoured e-cigarettes.'

The e-cigarettes also are tailored for various markets by the content of nicotine, the chemical found in tobacco that is addictive. Makers say ZYS' exports to Japan and Italy are all nicotine-free, while US customers prefer heavy flavour produced by a higher nicotine content.

Images of actor Johnny Depp puffing, or vaping, on an e-cigarette in The Tourist could stoke sales. 'The movie will certainly further popularise this product,' said an official at Shenzhen Smoore Technology, a big maker of e-cigarettes.

The faux cigarettes have generated controversy in some markets. Their sale is banned in some countries, including many states in Australia, and were declared illegal in Hong Kong in 2009. The US Food and Drug Administration intercepted shipments from China and has been fighting to regulate electronic cigarettes as a drug or medical devices. But in December, a US appellate court ruled electronic cigarettes qualify as tobacco products unless the marketer claims they help smokers get off the real thing.

One big maker, Dragonite International, which is listed on the Hong Kong stock exchange, has been fighting to patent a nicotine atomiser for e-cigarettes. But Chan Yiu-nam, the Beijing-based company's chief financial officer, says: 'The patent issue is very complicated.'

Over the past year, the number of e-cigarette producers in Shenzhen has exploded. 'At the beginning, there were about 15 companies in Shenzhen making e-cigarettes,' Wen said, but now there are more than 100. With about 100 workers, ZYS is already a mid-scale company in the industry; smaller operations have just 20 to 30 employees.

Players are jumping in partly because e-cigarettes are not difficult or expensive to produce and factories do not need to be big. 'An e-cigarette factory can be set up with an investment of four million yuan [HK$4.72 million],' said Zhou Yangmin, president of Ayoungman Management Plotting & Operating, an independent tobacco industry consultant. 'If you have 20 million to spend, then you're a big player.'

But the competition is squeezing profits. 'In April, a set of our product, one cigarette with six smoking oil cartridges, sold for 198 yuan,' Wen said. 'Now the price is 99 yuan.'

Still, the profit margins are nothing to sneeze at. Zhou said the cost of making one cigarette is about 20 yuan, while the wholesale price is often 60 yuan.

Wen believes the Chinese market will become more and more important, in light of the mainland's huge smoking population - estimated at 350 million. Plus, exporting the electronic cigarettes is sometimes difficult.

'An e-cigarette has a battery and liquid in it, so an inspection by the customs office is a must,' said Wen. 'But the procedures are troublesome as they can't even decide if an e-cigarette is an electronic product, medical product or tobacco.'

On the mainland, the market for e-cigarettes is 'developing with crazy speed', added Zhou, because cigarettes made of tobacco are increasingly seen as a health risk.

Li Jinkui, director of the Beijing-based ThinkTank Research Centre for Health Development, said he has been promoting a ban on smoking on the mainland for years but does not recommend e-cigarette as an alternative. He says there is no scientific proof verifying its safety and effectiveness. 'It is groundless to say it can help smokers quit, and no studies in the world can convince me yet that it has no influence over people's health,' he said.

Wang Liping, 48, a hotel manager in Beijing, is one user whose foray into simulated smoking has produced mixed results. He has been smoking e-cigarettes for four months after seeing a television advertisement that touted e-cigarettes could help smokers kick the habit. 'I saw the commercial so I bought one. It cost me 158 yuan,' he said.

Wang also complained that the e-cigarettes that he bought, which were supposed to be flavoured like Mild Seven, tasted 'too light'. Now, he is 'just smoking it for the convenience ... No need to worry for ashes or causing a fire when smoking in bed'.

Healthy margin

An e-cigarette costs about 20 yuan to make but they usually wholesale for: 60 yuan

Smoke signals

Electronic cigarettes are battery powered devices which produce water vapour rather than cigarette smoke

Inside an E-cigarette

Indicator light: LED light flashes when users inhales, simulating the burn of a real cigarette

Battery: Fully rechargeable, provides the power for the e-cigarette

Atomiser: Provides the heat to create the vapour

Vaporising chamber: When a user inhales, a sensor detects air flow and starts the heating process which creates vapour to be inhaled

Refill cartridge: Contains propylene glycol, water, any flavourings and varying levels of nicotine

Mouth piece: A small hole in the end of the inhaler replaces the usual cigarette filter

Flavouring

The vapour inhaled can include additional flavours such as fruit

Nicotine

Solutions are sold separately and sometimes referred to as 'e-liquid', with different strengths. E-cigarettes can also be nicotine free

SOURCES: U.S. FOOD AND DRUG ADMINISTRATION, NJOY

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