Special Report: China e-cigarette titan behind 'Elf Bar' floods the U.S. with illegal vapes

RLX Technology

06/12/2023 11:00

(For more Reuters Special Reports, click on  SPECIAL/ )
    By Chris Kirkham and David Kirton
       SHENZHEN, China, Dec 6 (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  BATS.L  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  RLX.N , 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.
    Heaven Gifts and others have thrived by disregarding U.S.
regulations. Zhang’s fruity vapes racked up more than $650
million in U.S. sales over the year ending in mid-October 2023,
according to private retail data from Circana, a Chicago market
research firm formerly known as IRI. The data, which measures
purchases from January 2018 through mid-October of this year,
was shared with Reuters by a person outside Circana who asked
not to be identified.
    Heaven Gifts sales for the year ending September 2023
represent more than 9% of the U.S. e-cigarette market, according
to the data. That put Zhang’s disposable brands behind only the
Vuse Alto, made by British American Tobacco, and Juul, in market
share.
    In May, more than a year after Heaven Gifts started flooding
U.S. stores, the FDA took aim at Elf Bar by sending alerts to
customs officials instructing them to stop shipments of the
company’s products. Li said that none of the company’s shipments
have been “seized or sent back.”
    A Reuters review of a FDA database listing shipments blocked
at the ports showed that FDA and customs officials, on November
6, stopped an unspecified amount of products from a Zhang
company from entering the United States. FDA and customs
officials did not comment about the detained products.
    Li said the firm has stopped shipping e-cigarettes under the
Elf Bar and EBDesign brands, which were named in the May import
alert. Li did not address whether the company has halted
shipments under other product names, such as Lost Mary. He said
“we don’t think we are still a leading brand” in the United
States, and the company believes counterfeit versions of its
products are “rampant.”
    The FDA said it is still assessing information on detained
imports but that such data can’t capture the “true impact” of
its alerts. The agency said it believes the alerts likely cause
“countless firms” to voluntarily stop importing illegal
e-cigarettes.
    Five current and former executives in the Chinese vaping
industry told Reuters that Heaven Gifts’ flouting of FDA rules
follows a common playbook across China’s e-cigarette industry.
Following the rules, they said, costs companies millions of
dollars in compliance expenses and lost profits while
competitors enter the U.S. market illegally with little or no
consequences.
    Elf Bar and other Heaven Gifts brands remained the market
leader in disposable e-cigarettes in the quarter ending in
September, according to the Circana data.
    The FDA’s King said the agency acted on Elf Bar once it had
data showing that the product was a top seller and popular among
youth. He said it takes time to build enforcement cases against
U.S. based suppliers or retailers selling illegal vapes.
    “We can't be everywhere at every time,” King said. “So I've
got to prioritize the resources we do have.”
    The agency has relatively little money to pursue e-cigarette
companies, King said, because it does not assess fees on the
industry for that purpose. It’s now seeking the authority from
Congress to do so. Enforcement is also slowed by the need to
consult with the U.S. Justice Department before suing violators,
King said, and an agency practice of sending distributors and
retailers warnings before taking action.
    After sending warning letters beginning in June to more than
300 retailers selling Elf Bar, the agency has since fined more
than 60 businesses, many of them gas stations and convenience
stores.
    
    MEET ‘WAYNE’
    Disposable vapes such as the Elf Bar typically contain much
higher volumes of nicotine liquid than earlier versions of
e-cigarettes, including those from Juul. And they’re easier to
use: Just open the box and start puffing.
    Before the 2020 U.S. rules, Juul dominated the U.S. vaping
market with a device using “pods” of nicotine liquid in an array
of flavors that were a hit with teenagers, making the company
the prime target of public outrage.
    A Juul pod has about 200 puffs; some Heaven Gifts vapes
offer up to 5,000 drags. A Juul starter kit costs at least $40
for a charger, device and pack of four pods. Zhang’s devices
commonly sell for about $20. 
    Juul pulled popular flavors such as Mango ahead of the 2020
FDA restrictions, which prohibited flavors in pod-based devices.
Heaven Gifts has offered Lemon Drop, Strawberry Piña Colada and
Tropical Rainbow Blast, among many others.
    Sales of disposable vapes including the Elf Bar have
exploded because users consider them a good value, said Becky
Freeman, an associate public-health professor at the University
of Sydney in Australia, which has also seen a sharp rise in
unauthorized e-cigarettes, many from China, and youth use.
    “If you’re a group of kids, you pitch in some money, and you
share it,” Freeman said. “It’s the right product, the right
price, and you can get it in all these flavors.”
    Five years ago, Heaven Gifts made no products of its own,
operating as an exporter and distributor of other Chinese-made
vaping products, such as the Suorin and Smok brands. Zhang
originally exported vaping products made by the Chinese company
Ruyan, which is credited with inventing the modern e-cigarette.
    In the industry’s early days, in the late 2000s, Zhang was
widely known as “Wayne” on online vaping forums. He started the
company in a Shanghai apartment with five other staffers, said
company spokesperson Li. Zhang used the bathroom as his office,
he said. Heaven Gifts was founded in 2007, Li said. The name
evoked the notion that vaping offers a miracle cure for the
afflictions of tobacco cigarettes.
    Trading companies like Zhang’s targeted mom-and-pop vape
stores and regional distributors who couldn’t afford to buy the
large minimum orders demanded by manufacturers in Shenzhen’s
“Vape Valley.”
    Heaven Gifts moved from Shanghai to Shenzhen in 2014 in a
bid to make its own product. Early efforts failed, said Oliver
Kershaw, founder of e-cigarette-forum.com, a popular hub for
industry players and vaping enthusiasts. But Heaven Gifts
excelled in cultivating ties with distributors, particularly in
the UK.
    In 2019, still determined to manufacture his own
e-cigarettes, Zhang started investing heavily across the
production chain. Heaven Gifts took a 14.6% stake in
manufacturer Shenzhen Youme Technology, the maker of Suorin
vaping products, according to Chinese corporate data website
Tianyancha. Shenzhen Youme did not comment.
    Zhang also invested in makers of batteries, heating chips,
nicotine liquid, and a highly automated vape factory in the
nearby city of Zhuhai. Li said such investments were “very
important” strategic moves for Heaven Gifts.
    Li said the company launched the Elf Bar first in the UK, in
2021, and later that year in the United States. Heaven Gifts has
grown from 200 staff around a year ago to more than 700 today,
Li said. At a time when many Chinese graduates struggle to find
jobs, the company presents itself as friendly and international,
with promotional videos showing 20-something staffers
fistbumping and clinking bubbleteas in a bright modern space.
    Two people who work with Zhang describe him as low key. He
dresses simply, despite his newfound riches, in jeans and
collared shirts. He’s a hands-on manager with sales, research
and strategy teams but keeps relatively quiet in meetings.
    He still goes by Wayne, Li said.
    
    SPARKING A UK YOUTH-VAPING BOOM
    Before launching the Elf Bar, Heaven Gifts established a
distribution beachhead in the UK. While operating as a
middleman, moving products from China’s Vape Valley through
local distributors, Zhang also set up his own branded website
called Deepvaping to sell directly to consumers and retailers.
    The UK offered a more permissive regulatory environment. As
the United States debated banning flavors, the UK allowed them,
while setting limits on nicotine levels and requiring vape
companies to register with regulators. Heaven Gifts says it
abided by the UK rules.
    U.S. youth vaping surged with the rise of Juul in 2018 and
2019, but it was more controlled in the UK until the
introduction of the Elf Bar and similar flavored disposables.
Then it jumped: A survey released in June by Action on Smoking
and Health (ASH), a British public-health organization, found
that more than 20% of children aged 11 to 17 had tried vaping by
2023, up from about 14% in 2020. The increase, the survey found,
was driven overwhelmingly by disposables, the Elf Bar being the
most popular.
    Hazel Cheeseman, deputy chief executive of ASH, said
disposable-vape manufacturers such as Heaven Gifts “have not
been taking remotely seriously that their products are so
appealing and so widely used by under-18s.”
    The UK and the European Union both have regulations
restricting nicotine levels, which means the amount of nicotine
in a European Elf Bar isn’t enough to satisfy most cigarette
smokers trying to quit, said Kershaw, the e-cigarette-forum.com
founder. But it’s enough to lure nonsmokers and potentially
addict them.
    In July, consumer-products and vaping wholesaler Supreme Plc
announced a deal to supply Elf Bar and Lost Mary to several
major British supermarket and convenience store chains. Supreme
says on its Elf Bar product webpage that about 2.5 million of
them are sold weekly in the UK. Supreme did not answer questions
about public-health advocates’ concerns with the products, but
said the company expects to generate 40 million pounds ($50.4
million USD) in revenue from the products for the year ending in
March 2024.
    Elf Bar and other flavored e-cigarettes are illegal in some
parts of Europe, including Hungary, where local laws are more
restrictive than EU tobacco regulations.
    Hungary has battled a surge of illegal disposable vapes for
more than a year, according to Tibor Demjen, who leads Hungary’s
anti-tobacco efforts. The government has slowed sales but not
stopped them, he said. He accused the disposable purveyors of
trying to “infiltrate the young population with nicotine.”
    “It’s their job,” Demjen said, “and they do it well.”
    Heaven Gifts spokesperson Li said the company is “paying
great attention” to the issue and blamed illegal smuggling of
products meant for other markets into Hungary.
    
    BOTCHED CRACKDOWN
    When the U.S. FDA tightened e-cigarette rules in 2020, it
made what public health groups would call a monumental blunder
that supercharged production of disposables in flavors appealing
to teenagers.
    In the year before the implementation of those rules, Juul
dominated the market with its flavored pods, the favorite among
teens. The FDA outlawed sweet flavors in pod-based devices — but
exempted other device types, including disposables. The agency
said it didn’t want to restrict options for adults who might use
other kinds of e-cigarettes to quit smoking. All companies would
still need FDA authorization to sell specific products.
    The result: The industry shifted en masse toward producing
candy-flavored disposables for the U.S. market.
    Juul pulled all flavors except tobacco and menthol by late
2019, ahead of the FDA’s 2020 flavor restrictions. The firm’s
market share, according to the Circana retail data, fell from a
peak of 71% in the fourth quarter of 2018 to 21% in the third
quarter of 2023. Flavored disposable brands like those made by
Heaven Gifts climbed from 4% of the market to 43% over the same
period, the data show.
    Mitch Zeller, who retired as the head of FDA’s tobacco
division last year, told Reuters that he was informed in
December 2019 by FDA’s chief of staff, Keagan Lenihan, that the
White House wanted flavor restrictions only on pod-style
e-cigarettes. In September of that year, then-President Donald
Trump had announced plans to ban all e-cigarette flavors except
tobacco because of their popularity among teenagers, a move that
sparked blowback from the industry and adult vapers.
    Zeller said he told Lenihan teenagers would just switch to
flavored disposables, and that the FDA needed to push back on
the White House. “I was hugely concerned that this policy was
drawing a line in the wrong place,” said Zeller, who now advises
a pharmaceutical company developing smoking-cessation drugs.
    Lenihan said the White House’s decision was final, according
to Zeller. Lenihan, who now works as an external-affairs
executive for Philip Morris International, did not comment. A
Trump spokesperson also had no comment.
    In a statement to Reuters, the FDA said data in 2020 showed
teens “overwhelmingly preferred” cartridge e-cigarettes like
Juul, and that the agency “has the ability to shift enforcement
priorities based on new data and information.”
    The bigger problem for the FDA: Its approval process is
considered so onerous that many e-cigarette manufacturers just
skip it, even though sweet flavors remain potentially legal in
disposable vapes.
    On paper, U.S. e-cigarette regulations are far stricter than
those in Europe and the UK, requiring companies to prove a net
benefit to public health. To date, the agency has only granted
authorizations to 23 vaping products, all of them
tobacco-flavored.
    Yet those 23 products combined represented less than 3% of
e-cigarette sales in the United States from July through
September, according to the Circana data. In all, the data show
more than 3,000 new vaping products have been introduced to the
United States market over the past year.
    Heaven Gifts launched the Elf Bar in the United States in
late 2021 without getting FDA authorization to sell. Sales
skyrocketed. Zhang saw weekly sales of Elf Bar and his other
U.S. brands grow from less than $100,000 a week in early
February 2022 to more than $9 million a week in early October
2023, according to data produced by Circana. Heaven Gifts
products rang up about triple the sales of all the
FDA-authorized products combined from July through September,
the data show.
    After launching U.S. sales, Zhang quickly built out his
distribution network and then introduced new brands alongside
the Elf Bar. When the agency issued import alerts in May,
seeking to block Heaven Gifts shipments, it included some brands
but omitted others, including Lost Mary and Funky Republic.
    Lost Mary sales jumped from less than $100,000 a week in
September 2022 to more than $3 million for the first week of
October, putting it among the top 10 U.S. disposable vapes, the
data show.
    Li said Heaven Gifts regularly adds new brands to diversify
its product portfolio.
    “Staying ahead of regulators, honestly, is not on our
agenda,” he said in a statement. “We must work with regulators
instead of tiptoeing around them.”
    The FDA faces a complex challenge in stopping the illegal
vape import surge but has been “unacceptably slow” in
responding, said Kurt Ribisl, a public-health professor at the
University of North Carolina at Chapel Hill.
    “It’s kind of a cat-and-mouse game,” he said, “but the FDA
is a slow-motion cat.”

 (Reporting by Chris Kirkham in Los Angeles and David Kirton in
Shenzhen, China; editing by Vanessa O'Connell and Brian
Thevenot)
 ((chris.kirkham@thomsonreuters.com 
david.kirton@thomsonreuters.com))