China e-Cigarette Titan Floods the US With Illegal Vapes
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China e-Cigarette Titan Behind 'Elf Bar' Floods the US With Illegal Vapes

By Chris Kirkham and David Kirton

December 07, 2023

SHENZHEN, China (Reuters) - A new breed of e-cigarette has addicted teenagers and confounded regulators worldwide by offering flavors like Blue Cotton Candy and Pink Lemonade in a cheap, disposable package.

The tycoon dominating this latest wave is Zhang Shengwei, 50, a veteran of China's vape industry in the southern manufacturing hub of Shenzhen.

Most people have never heard of him. Zhang quietly rose over 15 years from a boutique exporter to become one of the world's largest vape manufacturers. His main company, Heaven Gifts, now competes with industry giants Juul Labs Inc and British American Tobacco Plc in the United States, the United Kingdom and across Europe.

Zhang has navigated shifting regulations in countries cracking down on candy-flavored vapes, which many health advocates say are designed to hook teenagers. In the United States, the firm simply ignored regulations on new products and capitalized on poor enforcement. It has flooded the U.S. market with flavored vapes that have been among the best-selling U.S. brands, including Elf Bar, EBDesign and Lost Mary. In the United Kingdom, by contrast, Zhang has complied with regulations requiring lower nicotine levels and government registration while building an unmatched distribution network — and driving a surge in youth vaping.

In China — where more than 90% of the world's vaping devices are manufactured — Zhang steered clear of domestic sales, resisting the temptation of a gargantuan market with 300 million smokers who might be converted to vaping. His focus on exports looked prescient when Beijing last year banned all domestic sales of flavored vapes, crushing some of Zhang's competitors that had bet heavily on the China market.

Zhang, who also does business under the corporate name Shenzhen IMiracle Technology, declined requests for an interview. A Heaven Gifts spokesperson, Jacques Li, said the company does not market to children and takes youth-vaping concerns seriously. He acknowledged the company's flavors could attract teens but said the company is modifying its packaging to be less appealing to youth and discontinuing some flavors, such as "rainbow candy."

Flavored vapes are more effective in helping smokers quit than those that mimic cigarettes, he said.

"Adults like flavors, too," Li said. "Flavored e-cigarettes shouldn't be demonized. They're not evil."

Zhang's deft maneuvering illustrates the difficulty of curtailing youth vaping despite a global effort to halt a new wave of teenage nicotine addiction. It also highlights how China's domestic candy-vape crackdown is proving to be a rare success — even as its homegrown e-cigarette industry continues to dominate manufacturing and exports.

China's enforcement wins owe to its communist government's greater power over companies and willingness to levy stiff penalties. Chinese state media has trumpeted crackdowns including a March raid on a nationwide distribution network, in which authorities seized e-cigarette inventory valued at 150 million yuan ($21 million USD) and arrested 10 people. Sales of vapes, now permitted only in unpopular tobacco flavors, plummeted from $2.9 billion in 2021 to $1.7 billion in China last year, according to market research firm Euromonitor International. Sales are predicted to fall much further this year.

In banning flavors, China cites the same health concerns with youth vaping as other governments. But Beijing has a unique conflict of interest in the crackdown: It also runs a state cigarette monopoly, which accounts for 8.7% of China's tax revenue and directly benefits from strict e-cigarette regulation. China National Tobacco Corp, according to Euromonitor, last year sold more than 2.4 trillion cigarettes, nearly four times as many as U.S.-based tobacco giant Philip Morris International reported selling last year.

"Everything about the regulations is about protecting cigarettes," said Geoff Fong, founder of the International Tobacco Control Policy Evaluation Project at Canada's University of Waterloo, which evaluates the impact of tobacco regulation across 31 countries.

China National Tobacco and the State Tobacco Monopoly Administration, which regulates cigarettes and e-cigarettes, did not comment.

As China cracks down on e-cigarettes at home, it continues to help vape manufacturers including Heaven Gifts export millions of candy-flavored vapes. With the domestic flavor ban, China also levied new taxes on e-cigarette manufacturers, importers and domestic distributors. But those taxes don't apply to e-cigarette manufacturers targeting overseas markets. Authorities also smoothed the way last year for overseas shipping by "white-listing" Heaven Gifts and many other Chinese vaping companies at Shenzhen's airport, requiring fewer export inspections, according to Heaven Gifts and a post last year from China's e-cigarette association.

In the wake of China's domestic flavored-vape ban, the value of the nation's exports of e-cigarettes and related products jumped 29.9% to $5.48 billion in the first half of 2023 from the same period a year earlier, according to data from China's General Administration of Customs.

The U.S. Food and Drug Administration (FDA), by contrast, has had little success curtailing flavored e-cigarettes under restrictions implemented since 2020 amid public outrage over youth vaping. Heaven Gifts and many other China-based manufacturers are selling millions of vapes in the United States without getting FDA authorization for their products, which is required of any foreign or domestic e-cigarette purveyor.

By moving forward with illegal sales, the Chinese firms are grabbing market share from companies trying to comply with the FDA's lengthy and expensive approval requirements. The FDA requires extensive studies to prove any vaping product is a net benefit to public health by helping adults quit smoking without addicting new users to nicotine.

Brian King, who heads FDA's Center for Tobacco Products, which regulates e-cigarettes, said in an interview the agency can't levy penalties or file lawsuits against foreign companies. The FDA, he said, also lacks enough enforcement resources to stem the tide of cheap Chinese vapes once they reach U.S. shores. Asked what he knows about Zhang, King declined to comment on any individual or company but said the agency is "obviously aware of the Elf Bar product."

In a statement, British American Tobacco called on the FDA and law enforcement to crack down on illegal products from Heaven Gifts and others that have "overrun" the U.S. market. These manufacturers, it said, are "flagrantly violating virtually every rule and guidance FDA has issued. These products continue to pour across our borders and target youth."

Juul said in a statement that "inadequate enforcement" against illicit disposable products "undermines FDA's ability to oversee a properly regulated marketplace."

Company spokesman Li said Heaven Gifts is "trying our best to stay compliant in the U.S." but did not answer questions about whether the company had filed required FDA applications. He called the FDA rules incoherent and unclear as to "what standards you have to meet," without citing specifics.

The FDA had no comment on Li's critique.

U.S. youth vaping rates have dropped significantly since the coronavirus pandemic. But Elf Bar has quickly grown into the most popular product among teens. A June study released by the U.S. Centers for Disease Control and Prevention (CDC) found that Elf Bar was the number one U.S. disposable e-cigarette brand in December 2022, about a year after it went on sale. A separate national survey of youth tobacco use released last month by the CDC and FDA found Elf Bar was the brand of choice for 56.7% of middle- and high-school vapers.

Matthew Myers, who recently retired as president of advocacy group Campaign for Tobacco-Free Kids, said the government's failure to enforce the law is allowing companies like Heaven Gifts to make "massive profits," while putting "anybody who tries to do the right thing" at a disadvantage.

The open sale of products without FDA authorization "is about the most blatant thing that I've seen," said Myers, who worked for four decades as a tobacco regulator and anti-smoking advocate. "What you've got is a guy who's thumbing his nose at the United States government."

Li said in a statement Tuesday that the company was "working with regulators in the U.S. to solve the issue," without elaborating on those communications. The FDA did not immediately comment on whether it has interacted with the company.

WINNERS AND LOSERS

Zhang's meteoric rise has left a trail of damaged competitors who responded differently to the global regulation wave.

Beijing-based RLX Technology, founded in 2018, made the opposite moves: Betting big on the Chinese market and complying with new U.S. regulations.

The company was valued at nearly $35 billion in a January 2021 initial public offering on the New York Stock Exchange. Now, after the Beijing ban, it's worth $3.3 billion.

In the United States, RLX has been mired in regulatory approval processes. It has spent millions on extensive FDA-required studies since 2020 but still awaits an agency decision. RLX declined to comment for this report.

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