The deeming dragon

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The deeming dragon

December 1, 2015

China, too, is trying to determine how to regulate vapor products. As the world’s largest tobacco market, its decisions will reverberate far and wide.

By Azim Chowdhury, David Ettinger and Yun Chen

Tobacco and tobacco-related products have been popular in China for centuries. In the 1600s, tobacco was brought into mainland China through the South China Sea by European merchant ships. Today, China has the world’s largest smoking population. According to statistics from Bloomberg, Euromonitor and the World Health Organization (WHO), one-third of all cigarettes manufactured globally every year (approximately 2.5 trillion) are smoked in China. This is more than 10 times greater than the number of cigarettes smoked in the U.S. Not surprisingly, China also has an extremely high fatality rate due to tobacco use. Each year, approximately 1 million deaths in China are caused by tobacco, which translates into 3,000 deaths every day or one death every 30 seconds.

The Chinese tobacco business is controlled by China National Tobacco Corp. (CNTC). According to Bloomberg and Euromonitor, CNTC has a global market share of 43.2 percent, which is more than its four largest competitors combined (Philip Morris International has 14.3 percent of the global market, British American Tobacco 11.6 percent, Japan Tobacco International 9.4 percent and Imperial Tobacco 4.9 percent). To put its size into perspective, among the top 10 global cigarette brands, seven belong to CNTC.

CNTC’s dominant global market share, however, is almost entirely the result of its monopoly of the domestic Chinese tobacco industry. More specifically, CNTC operates under the State Tobacco Monopoly Administration (STMA). STMA/CNTC is a government-granted monopoly under China’s Tobacco Monopoly Law, which gives the STMA control over virtually all stages of the production, sales, import, export and distribution of tobacco products in China. This would be analogous to the U.S. Food and Drug Administration (FDA) becoming the only authorized drug manufacturer and seller in the U.S. Simply put, by being both the central planner and the regulator in China, STMA/CNTC is entitled to all rights and benefits enjoyed by both a monopoly business and a government agency.

Whether the e-cigarette and vapor industry can grow and gain influence in China will depend in large part on how these products are viewed by STMA/CNTC. Although the most recent reincarnation of the e-cigarette was invented in China, history reveals that others had previously invented products similar in kind. In fact, as early as the 1930s, the original vaporizer concept for medicinal compounds was patented by Joseph Robinson from New York, USA. While this device was not intended to be a tobacco alternative, its design is very similar to the modern e-cigarette. Some 30 years later, in 1963, Herbert A. Gilbert, a scrap yard worker from Pennsylvania, USA, filed a patent for a “smokeless nontobacco cigarette,” intended to replace burning tobacco with heated, moist, flavored air. This time it was designed to resemble a cigarette. Two years later, a patent was issued to Gilbert, but the product was never commercialized.

A maker but not a user

It was not until 2003 when Hon Lik, a Chinese pharmacist and a heavy tobacco smoker, invented the modern e-cigarette in Beijing. The company he worked for was then renamed Ruyan, which means “like smoke” in Chinese. In 2006 and 2007, e-cigarettes officially entered the European and U.S. markets and soon became a huge success. From 2010 to 2014, the sales of e-cigarettes grew almost fortyfold in the U.S. In 2015, the sales estimate for e-cigarettes is nearly $3.5 billion. Ironically, although e-cigarettes were “reinvented” in China and more than 95 percent of today’s worldwide e-cigarette production takes place in Shenzhen, a city in southern China, most Chinese people outside of Shenzhen have never even heard of e-cigarettes. This is because almost all of the e-cigarettes manufactured in China are for export rather than domestic sale. In short, China, the world’s largest market for tobacco products, is still a virgin market for e-cigarettes.

Why is the e-cigarette relatively unknown to Chinese consumers? To start, smoking is an ingrained part of Chinese culture. Cigarettes are often provided as gifts at business meetings. Most restaurants in China do not have a separate smoking area because smoking during social gatherings is tolerated and even desirable to most Chinese people, including nonsmokers. Older generations of Chinese smokers are often very loyal customers to their favorite CNTC cigarette brands and unwilling to trust or switch to non-CNTC products.

In addition, many of the Shenzhen e-cigarette manufacturers believe e-cigarettes are banned from commercial sale in China. Such misbelief may well come from the concern that, in the future, STMA/CNTC could exercise monopoly power over e-cigarettes. If that happens, then the Shenzhen companies can only legally sell e-cigarettes in China if they are licensed to do so by STMA/CNTC. Faced with such regulatory uncertainty, most Chinese vapor companies are hesitant to explore their home market, betting instead on the foreign markets for exporting their products. These factors likely contribute to the poor reception of e-cigarettes in the Chinese market in the past decade.

As noted earlier, STMA/CNTC derives its authority over tobacco products from China’s Tobacco Monopoly Law. What is the legal definition of a “tobacco product” under that law? Pursuant to Article 2 of the current Tobacco Monopoly Law, the following tobacco and tobacco-related products are subject to the STMA’s monopoly control: cigarettes, cigars, cut tobacco, redried leaf tobacco, leaf tobacco, cigarette paper, filter rods, cut tobacco and equipment exclusively for use in the manufacture of tobacco products. Notably, neither e-cigarettes nor e-liquid is currently subject to the Tobacco Monopoly Law, as these products do not fit within the current definition of a “tobacco product.” However, such a regulatory vacuum will not last long, as various sources indicate that the Chinese authorities are considering regulating e-cigarettes by potentially seeking to expand the tobacco product definition. It remains to be seen if the law will be revised to include e-cigarettes and vapor products.

Smoking bans—an opportunity for vapor?

Despite the continued popularity of smoking in China, health regulators from agencies such as the Chinese National Health and Family Planning Commission (NHFPC) and the Center for Disease Control and Prevention have been pushing to educate Chinese consumers about the dangers of smoking. Cigarette smoking bans in public places are being established throughout the country, although they have been difficult to implement and enforce. For example, although the local government of Shanghai adopted a public smoking ban in 2010, a survey conducted by the Shanghai Municipal Statistics Bureau found that only 26 percent of those polled consider the city’s ban effective, while 36.7 percent attributed its failure to the poor enforcement of the law. It remains to be seen how effective the recent bans prohibiting smoking in all indoor public places and work places in Beijing, where about 23 percent of the population smokes, will be.

If enforced, these smoking bans might actually provide a unique opportunity for e-cigarettes in China, considering vapor products are generally far less harmful than combustible cigarettes. Smokers who are unable to smoke in public places could be more likely to turn to e-cigarettes as a less-harmful alternative. Of course, if e-cigarettes become more popular, the smoking bans could be extended to include vaping, unless the Chinese health regulators can be convinced that doing so could actually harm the public health in the long-run.

STMA/CNTC is well aware of the global e-cigarette phenomenon and is exploring opportunities to enter this industry. At China’s National Tobacco Conference held in January 2014, Ling Chengxing, the general director of STMA/CNTC, noted for the first time that “the tobacco sector should pay attention to the development of new tobacco products, including e-cigarettes.” In response to Ling’s comment, several provisional affiliates of CNTC took action to develop such products. For example, Jilin Tobacco Industrial Corp., together with three business partners, announced the joint development of the new e-cigarette brand Changbaishan Cigarette Mate. In July 2014, Yunnan Tobacco Industrial Corp. opened a public bidding for a “new tobacco product sample making and processing project.” Additionally, recently a number of e-cigarette-related patents have been disclosed by China’s State Intellectual Property Office.

Filling the regulatory vacuum

While tobacco products are heavily regulated in most developed countries due to many safety and health concerns, e-cigarette regulations are still in the early stages of development. In some countries, e-cigarettes are treated as tobacco products, in other countries as medicines or medical devices, and in some countries they are not regulated at all. In the U.S., for example, e-cigarettes (and e-liquid) that contain nicotine derived from tobacco fall under the broad definition of “tobacco product” as set forth in the Family Smoking Prevention and Tobacco Control Act (known simply as the Tobacco Control Act), which amended the Food, Drug and Cosmetic Act to give the FDA authority over tobacco products.

Although such e-cigarettes are considered tobacco products, the Tobacco Control Act only gave the FDA the immediate authority to regulate certain types of tobacco products, such as cigarettes, cigarette tobacco, smokeless tobacco and roll-your-own tobacco. Other tobacco products—including e-cigarettes, cigars, hookah, etc.—will not be considered regulated tobacco products until the FDA finalizes its proposed deeming regulation, expected later this year. At that time, e-cigarettes will likely be required to comply with the same regulatory requirements as cigarettes, including warning statements, age restrictions, ingredient and product disclosures, testing requirements for harmful substances and premarket authorization. E-cigarettes and e-liquid that do not contain tobacco-derived nicotine, an increasingly popular segment of the industry, would not fall under the FDA’s tobacco authority (but could still be considered drugs by the FDA based on the agency’s historical stance on nicotine-containing products).

In the European Union, e-cigarettes that contain nicotine (regardless of whether it is derived from tobacco) would fall under the new Article 20 of the Tobacco Products Directive (TPD). Generally, e-cigarettes with nicotine levels of less than 20 mg per milliliter and that do not make any health or therapeutic claims would be considered consumer tobacco products subject to a premarket notification procedure and other TPD requirements, as implemented by the member states. Other e-cigarettes would be considered medicinal products subject to the member state laws on pharmaceuticals.

We are likely going to soon have some clarity as to how China will regulate e-cigarettes. This was made apparent when the spokesman for the NHFPC stated during the 16th World Conference on Tobacco or Health in Abu Dhabi, United Arab Emirates, this past March that the Chinese authorities are planning to develop e-cigarette regulations. The NHFPC is the administrative agency directly under the State Council of China that is in charge of all health-related issues, including drafting laws and regulations related to public health. Historically, the Tobacco Control Office under the NHFPC has not reached a consensus with STMA/CNTC on smoking-control policies. It will be interesting to see how the NHFPC moves forward with the regulation of new vapor products that are currently not governed by the Tobacco Monopoly Law. However, this will be quite a different story if STMA/CNTC is authorized to exercise monopoly power over such new products in the future.

 

Azim Chowdhury, David Ettinger and Yun Chen are attorneys at Keller and Heckmann, a law firm specializing in regulatory law, litigation and business transactions, with offices in Washington, Brussels, San Francisco and Shanghai.

 

 

 

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