Kate Wang, 39, jumped into the ranks of the world’s richest when her vaping company RLX went public on the New York Stock Exchange in January. Now the Procter & Gamble and Uber veteran faces looming threats from Chinese regulators and skeptical investors.
In a period of 55 hours starting on the morning of March 22, shares in Chinese vaping company RLX Technology collapsed 54%, slashing more than $16 billion from the startup’s market cap. The slump continued through the week as investors sold on the news of a potential industry crackdown by China’s tobacco regulator and the Securities and Exchange Commission’s announcement that it would start enforcing a law to require Chinese listed companies to provide audits or risk being delisted.
It was just another twist in the rollercoaster history of a company that rose from nothing to become the largest e-cigarette brand in China in three years. Just two months prior, it raised $1.4 billion in a blockbuster IPO on the New York Stock Exchange that catapulted four of its cofounders into the ranks of the world’s wealthiest.
Among them was CEO Kate Wang, 39. One of a record 57 self-made women billionaires from China, Wang was worth $9.1 billion on the day of the IPO, thanks to her 20% stake in RLX. Now worth $2.9 billion, she claims to be utterly unfazed by the stock gyrations. “That doesn’t bother me,” she told Forbes earlier in March, noting that she doesn’t even have a brokerage account. “Every day I focus on my work, which is problem solving.”
Wang has had her hands full guiding RLX from an idea in 2017 to a behemoth that has grabbed more than 60% of China’s burgeoning e-cigarette market, according to Shanghai-based China Insights Consultancy.
Despite growing mistrust of vapes by regulators and a global pandemic that puts vapers and smokers at higher risk, RLX’s sales grew 147% to $585 million in 2020, with a small net loss of $20 million. That caps off a meteoric rise from the $19 million revenues RLX reported in 2018, its first year of operation. With only slightly more than 2% of China’s 308 million smokers using e-cigarettes—compared to nearly a third of the 34 million smokers in the U.S. in 2019—RLX has plenty of runway.
“This [sector] will continue to grow at least for the next 20 years,” says Tristan D’Aboville, executive director and analyst at brokerage firm William O’Neil. “Given the size of the population, China will be the next big market.”
Yet serious threats lie ahead: In late March, Chinese regulators published draft rules that would classify e-cigarettes as tobacco products and potentially bring them under the control of the state monopoly, China Tobacco. That could cause RLX’s hard-fought market share to evaporate if authorities choose to regulate vapes in the same way as cigarettes, rather than as ill-defined tech devices.
“Stricter regulation would decimate the domestic e-cigarette market,” says Patricia Kovacevic, a lawyer who specializes in compliance for tobacco and vaping companies.
RLX counters that it’s still unclear how or even if the rules will change, and that it plans to submit feedback to regulators by April 22. Last year, the company also established a bioscience lab to study the health risks of e-cigarettes. Besides, it’s still too early to know how far the regulations will go, with analysts outlining a range of potential outcomes, from a consumption tax—almost certain to happen and unlikely to have a large impact on RLX’s fortunes—to a state-controlled licensing and quota system, which is less likely but would drastically reduce the scope of the company’s market.
“In the traditional tobacco industry, cigarette sales volume and prices are all set by China Tobacco,” says Charlie Chen, head of consumer research at Beijing investment firm China Renaissance. “If this is applied to e-cigarettes, then that will remove all the value of the e-cigarette companies, but that is a very unlikely scenario.”
While Wang doesn’t claim to have all the answers, she is unbowed. “It’s not like I’m a superwoman,” she says: “Tough problems inspire me.”
Wang grew up and went to college in the central Chinese city of Xi’an, home to the famed terracotta warriors. She describes a quiet life spent reading books ranging from financial textbooks to philosopher Erich Fromm’s The Art of Loving. After graduating with a degree in finance at Xi’an Jiaotong University in 2005, she took a job as a management trainee at consumer goods giant Procter & Gamble in the southern metropolis of Guangzhou.
She spent three years as a project manager in the beauty and personal care sector before decamping to Hong Kong, where she cofounded a small investment firm. But the restless Wang didn’t stay there for long: By 2011 she was half the world away in New York, pursuing an MBA at Columbia Business School. That experience turned out to be transformative for the Xi’an native suddenly thrust into a completely different world.
“I was overwhelmed by the opportunities,” she recalls. “It was so different from Xi’an, which was very slow paced. In New York, it’s very hard to slow down. It gave me a very different mindset.”
“I realized the solution should be something else, rather than forcing my father to quit. That’s the moment it caught my interest.”
Her next stop after Columbia was a one-year gig at consulting firm Bain & Co. in Beijing. Then came a four-year stint at Uber China and Chinese ride-hailing service Didi Chuxing, which merged with Uber’s Chinese business in 2016. One of her tasks at the time was to help launch Uber in Hangzhou, a city of 10 million people south of Shanghai where ride-sharing was still uncommon.
“Uber was there but people didn’t know. Drivers weren’t interested in becoming our partners, so every day I was figuring out how to communicate with them,” she says. “It required me to work as an entrepreneur and overcome challenges that employees normally don’t need to.”
By 2017, e-cigarettes were everywhere in the U.S.: San Francisco-based Juul Labs had scored more than $100 million in early stage funding and was gaining traction. But it was still a rare sight in China, where less than 0.5% of the country’s more than 300 million smokers used vapes at the time. In Beijing, the then-36-year-old working mother was struggling to quit her habit of smoking the occasional cigarette. Embarrassed by the smell of tobacco on her clothes, Wang would rush to the bathroom to change after getting home from work.
Worse still was the fact that her father smoked two packs a day, a habit that was taking a toll on his health. So she turned to e-cigarettes. “I just tried out all the [vaping] products, but most of them were terrible,” she says.
It didn’t take long for Wang to sense a market opportunity and strike out on her own. Plenty of China’s legions of smokers, many of whom were older, were struggling to quit—like her father—and she decided to build a brand that could appeal to them in a way that none of the others could.
“I realized the solution should be something else, rather than forcing him to quit,” she says, recalling the conversation where she confronted him about his habit. “That’s the moment [e-cigarettes] caught my interest.”
Wang gave her two-weeks’ notice at Didi the next day and set about recruiting five of her colleagues to join her at her new venture, which launched in January 2018. Among those who joined her, and got plenty wealthy: David Jiang, who was also at P&G at the same time as Wang and now leads RLX’s sales and distribution in China; he is worth $1.3 billion. Wen Yilong, another Didi alum, heads RLX’s supply chain and product development and has a net worth of $870 million. Du Bing, who overlapped with Wang at Didi for one year and also worked at P&G rival Unilever, is the CEO of RELX International—a separate entity set up to sell RLX products overseas—and has a net worth of about $370 million. Brand marketing lead Yang Yangzi and head of strategy and growth Tony Tang round out the team of six cofounders.
Room To Grow: A Tiny Fraction Of Chinese Smokers Use E-cigarettes
To get the company off the ground, they initially turned to crowdfunding on the e-commerce site JD.com—mostly to find early adopters—before raising about $6 million in seed funding from IDG Capital and Beijing VC firm Source Code Capital in June 2018. The selling point was simple: sleek, easy-to-use vapes with a handful of flavors, targeted at China’s vast population of older smokers. The company hired young graduates and pitched itself as a tech startup, sourcing parts for its devices from partners including Smoore, the world’s largest maker of vaping devices led by recently minted billionaire Chen Zhiping. (Smoore made more than 70% of RLX’s products in 2019).
At the time, the vaping market in China was almost entirely unregulated—unlike cigarettes, which are sold almost exclusively by China Tobacco—and RLX grew quickly. By the first half of 2019, after little more than a year in operation, the upstart had snagged nearly half of China’s domestic vaping market. In April 2019, RLX secured $75 million in a Series A round from Sequoia China and billionaire investor Yuri Milner. In September that year, the company opened a sprawling 215,000-square-foot factory in the southern city of Shenzhen where more than 4,000 workers toiled to make RLX vapes.
A year earlier, the company had also expanded its range of flavors beyond the staid tobacco and mint to more unconventional offerings like ‘Ludou Ice,’ a mung bean-popsicle-flavored pod that Wang says is designed to evoke nostalgia among older users who used to eat the sweet treat as children.
“There was an older customer who took a scooter six miles across Beijing to visit our headquarters, because the store he used to go to didn’t have the flavor he needed,” says Wang, acknowledging just how important this demographic of older users is to her brand’s success.
Up In Smoke: More Chinese Smokers Switch To E-cigarettes Every Year
It wasn’t all smooth sailing. In October 2019, Chinese regulators began to crack down on the nascent industry and banned online sales of e-cigarettes in an effort to curb underage vaping, a move that wiped out 20% of RLX’s business. So Wang and co. pivoted: in January 2020 they opened a flagship store in Shanghai, part of its already growing network that today has more than 5,000 branded stores across more than 250 cities in China. The company also installed ID and facial recognition tech to prevent minors from shopping at its outlets and launched an e-cigarette with a child lock function operated through a mobile app.
More than a year since overcoming that challenge, Wang now finds herself having to convince investors that the Chinese government won’t grab control of the e-cigarette industry for itself. Adding to those concerns is the Holding Foreign Companies Accountable Act, signed into law by President Donald Trump in December. The law threatens to delist foreign companies trading on American stock exchanges if they refuse to allow the SEC’s audit watchdog, the Public Company Accounting Oversight Board (PCAOB), to inspect their audits every three years—a practice currently shunned by the Chinese government and ignored by the vast majority of U.S.-listed Chinese companies, including heavyweights such as billionaire Jack Ma’s Alibaba.
“I was overwhelmed by the opportunities. It was so different from Xi’an, which was very slow paced. In New York, it’s very hard to slow down.”
“Three years from now, they will have to delist unless China lets the PCAOB examine China-based audits,” says Ehud Kamar, a law professor at Tel Aviv University in Israel. “What will happen to the stock price of these companies? My guess is that it will stay high until all of a sudden, boom. And then there’s going to be a rush to the door.”
RLX declined to comment on the prospect of delisting, pointing to its SEC filings instead, which include a remarkable 50 pages of potential risks specifying that new e-cigarette regulations in China and enactment of the new law in the U.S. could have a “material and adverse effect” on the company’s business.
Outside of China, RLX vapes are sold by RELX International, a separate, privately-owned company with an opaque structure in which Wang is a director but appears to have no ownership stake. According to Chen of China Renaissance, RLX may have separated the two businesses to maximize benefits and reduce risks: If the Chinese market keeps growing, then it will be far more attractive to U.S. investors on its own rather than bundling it with the smaller international business, which makes up only 10% of overall sales. Conversely, if publicly traded RLX were to be shut out of China by the state monopoly, RELX International’s 18 markets—including Russia, South Korea and the U.K.—would remain independent of the Chinese business.
RELX International is plotting expansion to the U.S.: The firm hired former Juul scientist Donald Graff in February 2020 to lead its plans to submit a premarket tobacco product application (PMTA) for its e-cigarettes to the Food and Drug Administration. The U.S. market has its own cautionary tale in the dramatic fall of Juul, which hit its own high when it sold a 35% stake to Philip Morris’ parent company Altria in December 2018, a deal that valued the company at $38 billion; two years later, Altria wrote down the value of Juul to $4.6 billion, amid public health concerns. It’s unlikely the U.S., still dominated by Juul and the tobacco giants, will be a boon for RELX International—even if its products are approved, which won’t happen any time soon.
“The PMTA submission has almost the same complexity level of a drug approval,” says Kovacevic. “Their best case scenario is end 2023, or never.”
Still, time is mostly on RLX’s side: It could take up to two years for Chinese authorities to step up vaping regulations, which seem likely to fall short of a total crackdown. The SEC is probably also years away from enforcing any violations of the new law, which RLX could make up for by following in Alibaba’s footsteps and cross-listing in Hong Kong. In the meantime, China’s vaping population already doubled in 2020 and is set to quadruple to 10% of smokers by 2023—31 million people, nearly triple the size of the current U.S. market— creating tens of millions of potential RLX customers.
In the nightmare scenario, Wang will be faced with an existential threat at home and delisting in the U.S. But for now, business is booming and the 39-year-old billionaire seems confident she can keep leading her young company to new heights.
“It’s not an easy job,” she says. “I have a lot to learn and I have a gap to close.”