Friday, April 18, 2014

State of e-Cig Supply Chain in China

Just to share a little bit of my thoughts regarding the state of e-cig supply chain in China; this is after a couple of months of research and experience.  As you are very aware, most of the e-cig factories are stationed in the Shenzhen area.  This is a very typical “Chinese” pattern.  For some reason, Chinese factories (and sellers) like to be around friendly competitors and reside in a conclave.  This is a cultural thing.  You’ll find many different industries with the very same behavior.  There is a huge benefit of this type of social behavior: your competitors (counterparts) can readily become your partners when there’s a big order.  And most of them will need this type of symbiosis in order to get big orders.  While this works out great for these suppliers/sellers, it doesn’t bode too well for the buyer.  It means whatever trade secrets you have will be wide open; everybody in that tight-knit community will know about you.  What you buy, how much you buy, how picky you are, and type of turn-around you need; basically, everything there is to know.  The worst down-side is that when they see your volume steadily increase, some part of the community will start to make knock-offs.  And as you know, they are not going to use the top quality components that you use.  In the end, you lose market-share to the knock offs, and they decrease your profit margin once they start to surface.  Worst of all, the inferior components used in the knock-offs will damage your brand trust and identity.  Such event is very difficult to circumvent as your designated supplier does not have control over this.  Since he may be buying components from all the different members in the community, everybody in the community knows how much you are buying.

And this is what’s going to set us apart as well.  As we’re familiar with this unique Chinese ways of doing things, we have already established a very different type of supply chain from the get-go about a decade ago.  Our supply chain management is more western and much less community-based.  Whatever we are doing, our suppliers will only know a very restricted portion – enough for him to do his job.  And we never buy from a community.  When we find a supplier may possibly belong to a community, we usually dump that supplier.  This way, our buyer’s trade secret remains safer.

Personally speaking, I think the e-cig supplier market in China is headed to an implosion.  Something big will happen soon where a lot of the suppliers will disappear and then a new crop of suppliers will emerge.  The disappearing and re-appearing may mean a lot of buyers will be affected.  Some will lose money since they can’t locate their original suppliers while some will have disruption of product and many need to start brand new with new suppliers.  The root of this problem may just be the very close-knit community they have built.  And…  I think both China and U.S. will start to regulate this e-cig sooner rather than later.  That will have a major impact on the supply-side of things.  Right now, the international express thing is dominant.  Once the loop-hole is closed up, then this trade will be much more normalized and stablized.  This is my personal feeling, we’ll just have to wait and see what happens.