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Walk about 50 kilometers from Shenzhen Huaqiang North to the northwest, and you will arrive at Shajing. This small town (now renamed Street), which was originally famous for its delicious oysters, is the core area of a world-class electronic product manufacturing base. Over the past 30 years, from game consoles to point readers, from pagers to USB flash drives, from telephone watches to smart phones, all the popular electronic products have flowed from here to Huaqiangbei, and then to the whole country and even the world. Behind the myth of Huaqiangbei is Shajing and some towns around it. The wealth source code of China’s electronics industry is hidden in those ugly industrial park plants.

The latest sand well wealth story revolves around e-cigarettes. At present, more than 95% of the world’s electronic cigarette products come from China, and nearly 70% of China’s output comes from Shajing. Hundreds of e-cigarette related enterprises have gathered in this suburban street town, which covers an area of nearly 36 square kilometers and has a population of about 900000 and is crowded with factories of all sizes. In the past 20 years, all kinds of capital have flocked to create wealth, and myths have emerged one after another. Marked by the listing of Smallworld (06969.hk) in 2020 and rlx.us in 2021, the capital Carnival reached its peak.

However, starting from the sudden announcement of “e-cigarettes will be included in the monopoly” in March 2021, the “e-cigarette management measures” were issued in March this year, and the “national standard for e-cigarettes” was issued in April. A succession of big news from the regulatory side brought the carnival to an abrupt end. The share prices of the two listed companies have fallen all the way, and are currently less than 1/4 of their peak.

The relevant regulatory policies will be officially implemented from October 1 this year. At that time, China’s e-cigarette industry will completely bid farewell to the brutal growth of the “gray area” and enter a new era of cigarette regulation. Facing the increasingly imminent deadline, some people are looking forward to, some exit, some change the track, and some “increase their positions” against the trend. The Shenzhen Bao’an District Government of Shajing Street gave a positive response, shouting the slogan of building a 100 billion level e-cigarette industry cluster and the global “fog Valley”.

A world-class emerging industry born and growing in the Great Bay area of Guangdong, Hong Kong and Macao is ushering in a major change that has never been encountered before.

Starting from the sand well, build a 100 billion level industrial cluster

Shajing central road was once called “electronic cigarette Street”. In this street with a total length of only about 5.5 kilometers, all the accessories required for electronic cigarettes can be easily equipped. But walking on this street, it is difficult to see the relationship between it and e-cigarettes. E-cigarette related companies hidden between factories and office buildings often hang signs such as “Electronics”, “technology” and “trade”, and most of their products are exported overseas.

In 2003, Han Li, a Chinese pharmacist, invented the first electronic cigarette in a modern sense. Later, Han Li named it “Ruyan”. In 2004, “Ruyan” was officially mass produced and sold in the domestic market. In 2005, it began to be exported overseas and became popular in Europe, America, Japan and other markets.

As an important industrial town rising in the 1980s, Shajing began to contract manufacture electronic cigarettes about 20 years ago. With the advantages of the electronic and foreign trade industry chain, Shajing and its Bao’an District have gradually become the main position of the electronic cigarette industry. After the global financial crisis in 2008, some e-cigarette brands began to make efforts in the domestic market.

In 2012, major foreign tobacco companies such as Philip Morris International, Lorillard and Renault began to develop electronic cigarette products. In August 2013, “Ruyan” e-cigarette business and intellectual property rights were acquired by Imperial Tobacco.

Since its birth, e-cigarettes have been growing rapidly. According to the data provided by the e-cigarette Professional Committee of the China Electronic Chamber of Commerce, the global e-cigarette market reached US $80billion in 2021, with a year-on-year increase of 120%. Over the same period, China’s e-cigarette exports reached 138.3 billion yuan, an increase of 180% year-on-year.

Chen Ping, who was born after 1985, is already an “old man” in the electronic cigarette industry. In 2008, he founded Shenzhen huachengda Precision Industry Co., Ltd., which is mainly engaged in the electronic smoke chemical core, in Shajing, and now accounts for half of the whole market. He told first finance that the reason why the e-cigarette industry can take root and develop in Bao’an is inseparable from the local mature electronic industry supporting system and experienced staff in Bao’an. In the highly competitive entrepreneurial environment, Bao’an electronic people have developed a strong innovation ability and rapid response ability. Whenever a new product is developed, the upstream and downstream industrial chain factories can produce rapidly. Take e-cigarettes for example, “maybe three days is enough.” Chen Ping said that this is unimaginable in other places.

Wang Zhen, deputy director of the Institute of regional development planning of China (Shenzhen) Academy of comprehensive development, summarized the reasons for the agglomeration and development of e-cigarette industry in Bao’an as follows: first, the early layout advantage of the international market. Due to the relatively high price of cigarettes abroad, the comparative advantage of e-cigarettes is relatively prominent, and the market demand driving ability is strong. In the initial stage of the e-cigarette industry, driven by the international market demand of the United States, Japan and South Korea, the processing and trade enterprises in Bao’an District, represented by labor-intensive enterprises, took the lead in undertaking a steady stream of international market orders, which led to the rapid agglomeration and scale expansion of the e-cigarette industry in Bao’an District.

Second, complete industrial ecological advantages. The materials and equipment needed for the production of electronic cigarettes can be easily found in Bao’an, which reduces the search cost of enterprises, such as lithium batteries, control chips, sensors and LED indicators.

Third, the advantages of an open and innovative business environment. E-cigarette is an integrated innovation type of product. In recent years, Bao’an District government has actively supported the development of atomization technology industry represented by e-cigarette, forming a good industrial innovation and business environment.

At present, Baoan District has smoothcore technology, the world’s largest e-cigarette manufacturer and the largest e-cigarette brand enterprise. In addition, the major enterprises related to e-cigarettes, such as batteries, hardware, packaging materials and testing, also basically take Bao’an as the core, and are distributed in Shenzhen, Dongguan, Zhongshan and other Pearl River Delta regions. This makes Bao’an a global e-cigarette industry highland with a complete industrial chain, core technology and industry voice.

According to the official data of Bao’an District, there were 55 e-cigarette Enterprises above Designated Size in the region in 2021, with an output value of 35.6 billion yuan. This year, the number of Enterprises above designated size has increased to 77, and the output value is expected to further increase.

Lu Jixian, director of the investment promotion agency of Bao’an District, said at a recent public forum: “Bao’an District attaches great importance to the development of e-cigarette enterprises and plans to build a 100 billion level e-cigarette industry cluster in the next two to three years.”

On March 20 this year, Bao’an District issued several measures on promoting the high-quality development of advanced manufacturing industry and modern service industry, in which Article 8 proposed to encourage and support the “new electronic atomization equipment” industry, which is the first time that the electronic atomization industry has been written into the industrial support document of the local government.

Embrace regulation and embark on the road of standardization in disputes

E-cigarettes can develop rapidly, and “harm reduction” and “help quit smoking” are important reasons for their supporters to vigorously promote and widely accepted by consumers. However, no matter how it is publicized, it cannot be denied that its principle of action is still that nicotine stimulates the brain to produce more dopamine to bring pleasure – this is no different from traditional cigarettes, but reduces the inhalation of harmful substances produced by combustion. Coupled with doubts about various additives in cigarette oil, e-cigarettes have been accompanied by huge medical and moral disputes since their introduction.

However, this dispute has not stopped the spread of e-cigarettes in the world. Lagging regulation has also objectively provided a favorable market environment for the popularity of e-cigarettes. In China, the long-term regulation idea of classifying e-cigarettes as consumer electronic products has given a “heaven sent opportunity” for the rapid rise of e-cigarette manufacturing industry. This is also the reason why opponents regard the e-cigarette industry as a “gray industry dressed in the cloak of the electronic industry”. In recent years, as all circles have gradually formed a consensus on the characterization of e-cigarettes as new tobacco products, the state has accelerated the pace of bringing e-cigarettes into the supervision of the tobacco industry.

In November 2021, the State Council issued the decision on Amending the regulations for the implementation of the tobacco monopoly law of the people’s Republic of China, adding Article 65: “new tobacco products such as electronic cigarettes shall be implemented with reference to the relevant provisions of these Regulations”. On March 11, 2022, the State Tobacco Monopoly Administration formulated and issued the measures for the administration of electronic cigarettes, which is scheduled to be officially implemented on May 1. The measures proposed that “electronic cigarette products should meet the mandatory national standards for electronic cigarettes”. On April 8, 2022, the State Administration of market supervision (Standardization Committee) issued GB 41700-2022 compulsory national standard for electronic cigarettes, which mainly includes: first, clarify the terms and definitions of electronic cigarettes, aerosols and other related terms; Second, put forward the principle requirements for the design of electronic cigarette and the selection of raw materials; Third, put forward clear technical requirements for electronic cigarette set, atomization and release respectively, and give supporting test methods; The fourth is to stipulate the signs and instructions of electronic cigarette products.

Considering the practical difficulties in the implementation of the new deal and the reasonable demands of relevant market players, relevant departments set a transition period for policy switching (ending on September 30, 2022). During the transition period, the production and operation entities of stock e-cigarettes can continue to carry out production and operation activities, and should apply for relevant licenses and product technical reviews in accordance with relevant policy requirements, carry out compliance design of products, complete product transformation, and cooperate with the corresponding administrative departments to carry out supervision. At the same time, all kinds of investors are not allowed to invest in new e-cigarette production and operation enterprises for the time being; The production and operation entities of existing e-cigarettes shall not build or expand production capacity temporarily, and shall not set up new e-cigarette retail outlets temporarily.

After the transition period, the production and operation entities of e-cigarettes must carry out production and operation activities in strict accordance with the tobacco monopoly law of the people’s Republic of China, the regulations for the implementation of the tobacco monopoly law of the people’s Republic of China, the measures for the administration of e-cigarettes and the national standards for e-cigarettes.

For the aforementioned series of regulatory actions, most of the business people interviewed expressed their understanding and support, and said they were willing to actively cooperate to meet the compliance requirements. At the same time, they generally believe that the industry will bid farewell to high-speed development and embark on the track of standardized and steady growth. If enterprises want to share the cake of the future market, they must settle down and invest in research and development, quality and brand work, from “making fast money” to making quality and brand money.

Benwu technology is one of the first batch of e-cigarette enterprises to obtain the license of tobacco monopoly production enterprises in China. Lin Jiayong, general manager of the company, said in an interview with China business that the introduction of regulatory policies means that the domestic market with great potential will be opened. According to the relevant report of AI media consulting, in 2020, American e-cigarette consumers accounted for the largest proportion of smokers, accounting for 13%. Followed by Britain 4.2%, France 3.1%. In China, the figure is only 0.6%. “We continue to be optimistic about the industry and the domestic market.” Lin Jiayong said.

As the world’s largest manufacturer of electronic atomization equipment, Smallworld has already set its sights on the broader blue ocean of medical treatment, beauty and so on. Recently, the company announced that it had signed a cooperation agreement with Professor Liu Jikai of the school of pharmacy of Central South University for Nationalities to research and develop new big health products around atomized drugs, atomized traditional Chinese medicine, cosmetics and skin care. The relevant person in charge of SIMORE international told the first financial reporter that in order to maintain the technical advantages in the field of atomization and explore the scene application of atomization technology in the medical and health fields, the company plans to increase the R & D investment to 1.68 billion yuan in 2022, more than the sum of the past six years.

Chen Ping also told first finance that the new regulatory policy is good for enterprises that have the strength to do a good job in products, respect intellectual property rights and have brand advantages. After the official implementation of the national standard, the taste of e-cigarettes will be limited to tobacco flavor, which may lead to a short-term decline in sales, but will gradually increase in the future. “I am full of expectations for the domestic market and am ready to increase investment in R & D and equipment.”