Elf Bar’ creator, a major Chinese e-cigarette player, floods the US with illegal vapes.

Global Impact of a Shenzhen Tycoon in the E-Cigarette Industry

In Shenzhen, China, on Dec 6, a novel e-cigarette variety has ensnared teenagers and perplexed regulators globally with its enticing flavors like Blue Cotton Candy and Pink Lemonade, all packaged affordably and disposably.

Zhang Shengwei: The Veteran Tycoon of China’s Vape Industry

Zhang Shengwei, a 50-year-old veteran of China’s vape industry based in Shenzhen, stands as the tycoon spearheading this current trend. Despite his relatively unknown status, Zhang has ascended quietly over 15 years, transitioning from a niche exporter to one of the globe’s premier vape manufacturers. His primary venture, Heaven Gifts, now competes with industry giants Juul Labs Inc and British American Tobacco Plc (BATS.L) in markets spanning the United States, the United Kingdom, and Europe.

Navigating Regulatory Challenges: Zhang’s Strategic Maneuvers

Zhang adeptly maneuvered through evolving regulations targeting candy-flavored vapes, widely criticized for enticing teenagers. In the United States, his company sidestepped new product regulations and took advantage of lax enforcement, saturating the market with popular brands like Elf Bar, EBDesign, and Lost Mary. Meanwhile, in the United Kingdom, Zhang adhered to regulations stipulating lower nicotine levels and government registration, simultaneously establishing an unparalleled distribution network, contributing to a significant rise in youth vaping.

China’s Role in the Vaping Industry and Zhang’s Calculated Decisions

In China, the global epicenter for manufacturing over 90% of vaping devices, Zhang strategically avoided domestic sales. Despite the allure of tapping into a colossal market of 300 million smokers, he remained focused on exports. This decision proved astute when Beijing implemented a ban on all domestic sales of flavored vapes last year, dealing a significant blow to some of Zhang’s competitors who had heavily invested in the Chinese market.

China’s Regulatory Power and Unique Conflicts of Interest

Zhang’s success in navigating the regulatory landscape in China, particularly in the face of flavored-vape bans, stems from the communist government’s extensive control over companies and its readiness to impose severe penalties. Recent crackdowns, highlighted by state media, have resulted in significant seizures and arrests, illustrating the government’s firm stance. In China, sales of vapes, now restricted to unpopular tobacco flavors, saw a substantial decline from $2.9 billion in 2021 to $1.7 billion in the following year, with further decreases predicted.

China’s Flavored Vape Ban and Global Implications

China’s ban on flavored vapes aligns with global health concerns related to youth vaping. However, China’s unique situation involves a conflict of interest, given the state’s ownership of a cigarette monopoly, contributing 8.7% of the country’s tax revenue. The state-run China National Tobacco Corp, a major player, sold over 2.4 trillion cigarettes last year, far surpassing the sales of international giant Philip Morris.

China’s Dual Role: Exporting Vapes Amid Domestic Crackdown

Despite domestic crackdowns, China continues to facilitate the export of candy-flavored vapes, helping companies like Heaven Gifts. The country imposed new taxes on e-cigarette manufacturers domestically but exempted those targeting overseas markets. Additionally, authorities streamlined overseas shipping for Chinese vaping companies, contributing to a nearly 30% increase in the value of e-cigarette exports in the first half of 2023.

Contrasting Regulatory Landscapes: China vs. the U.S.

In contrast, the U.S. FDA has struggled to regulate flavored e-cigarettes, and China-based manufacturers like Heaven Gifts have exploited this gap, selling millions of vapes in the U.S. without FDA authorization. These companies gain market share by bypassing FDA compliance, which involves extensive studies to demonstrate a net benefit to public health. The FDA lacks the resources to effectively curb the influx of inexpensive Chinese vapes, and foreign companies are beyond its enforcement reach.

Concerns and Criticisms: Major Players Voice Unease

Concerns about illegal products flooding the U.S. market are voiced by major tobacco players such as British American Tobacco and Juul. Heaven Gifts claims efforts to comply with U.S. regulations but criticizes the FDA’s rules as unclear and incoherent.

Rise of Elf Bar Among U.S. Teens and FDA’s Enforcement Challenges

While U.S. youth vaping rates have decreased, Elf Bar, an offering from Heaven Gifts, has become the most popular choice among teens. The FDA, facing criticism for inadequate enforcement, is urged by advocacy groups to crack down on illegal products and level the playing field for companies striving to comply with regulations.

Corporate Strategies and Outcomes: Winners and Losers

In the competitive landscape of the e-cigarette industry, Zhang’s rapid ascent has left a trail of competitors facing varied outcomes in response to the global wave of regulations.

RLX Technology’s Bet and Compliance Approach

RLX Technology, based in Beijing and founded in 2018, took a different approach, placing significant bets on the Chinese market and adhering to new U.S. regulations. Despite being valued at nearly $35 billion in a January 2021 IPO on the NYSE, the company’s worth has plummeted to $3.3 billion after the Beijing ban. In the U.S., RLX has struggled with regulatory approvals, investing millions in FDA-required studies since 2020 while awaiting a decision from the agency.

Heaven Gifts’ Flouting of Regulations and Soaring Sales

On the other hand, companies like Heaven Gifts, under Zhang’s leadership, have thrived by flouting U.S. regulations. Zhang’s fruity vape products generated over $650 million in U.S. sales in the year ending in mid-October 2023, according to private retail data from Circana. This data, covering purchases from January 2018 through mid-October 2023, positions Heaven Gifts with over 9% of the U.S. e-cigarette market share, trailing only Vuse Alto by British American Tobacco and Juul.

FDA’s Attempts to Block Heaven Gifts’ Shipments and Company Response

In response to increased scrutiny, particularly in May when the FDA targeted Elf Bar, Zhang’s company, Li, the Heaven Gifts spokesperson, noted that none of the company’s shipments had been seized or sent back. However, a review of an FDA database revealed that, on November 6, FDA and customs officials intercepted an unspecified quantity of products from a Zhang company entering the U.S. Li did not provide details on whether shipments under other product names, like Lost Mary, were affected but mentioned that the company has stopped shipping e-cigarettes under the Elf Bar and EBDesign brands. Li also acknowledged concerns about counterfeit versions of their products being widespread.

Dynamic Landscape of Regulatory Struggles

This dynamic landscape reflects the ongoing struggle between companies complying with regulations and those exploiting regulatory gaps, with Zhang’s Heaven Gifts positioned as a major player benefiting from the latter approach.

FDA’s Challenges and Criticisms: A Slow-Motion Cat-and-Mouse Game

The rise of Zhang and his company, Heaven Gifts, in the e-cigarette industry has had a significant impact, with competitors responding differently to global regulations. RLX Technology, for example, bet heavily on the Chinese market and complied with U.S. regulations, experiencing a drastic drop in value from nearly $35 billion to $3.3 billion after the Beijing ban.

Heaven Gifts, on the other hand, has thrived by disregarding U.S. regulations. Zhang’s fruity vapes, including Elf Bar, became top sellers, contributing to over $650 million in U.S. sales. Despite FDA alerts and attempts to block shipments, Heaven Gifts remains a market leader in disposable e-cigarettes.

The FDA, facing challenges in enforcing regulations and lacking resources, has struggled to curb the influx of cheap Chinese vapes, particularly from companies like Heaven Gifts. The agency’s limited ability to assess fees on the industry for enforcement purposes and its need to consult with the U.S. Justice Department before taking legal action further hinder its efforts.

Disposable vapes, such as Elf Bar, have gained popularity due to their higher nicotine content and ease of use. Zhang’s company, Heaven Gifts, has successfully tapped into this market, offering affordable alternatives with a wide range of flavors. The company’s strategy of flouting regulations aligns with a common approach in China’s e-cigarette industry, where compliance is seen as costly and less profitable than entering the U.S. market illegally.

Zhang’s history in the vaping industry dates back to the early 2000s when he operated under the pseudonym “Wayne.” Over the years, Heaven Gifts evolved from an exporter and distributor to a major player with investments across the production chain. Zhang’s company has successfully navigated regulatory environments, capitalizing on the permissive atmosphere in the UK and EU while thriving in markets with fewer restrictions.

The FDA’s regulatory missteps, particularly in exempting certain types of devices from flavor restrictions, fueled the explosive growth of candy-flavored disposables like Elf Bar. The agency’s onerous approval process and the appeal of disposables have led many manufacturers to skip FDA authorization. While the FDA has granted authorization to only a few products, thousands of new vaping products have entered the U.S. 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.”