Big Tobacco Might Get Burned by Hong Kong's E-Cig Ban

A ban by Hong Kong on electronic cigarettes shouldn't be a big deal for tobacco companies. Hong Kong's market isn't particularly large, and the population has one of the lowest incidences of smoking anywhere in the world. Nevertheless, the action is predicated on the growing appeal of e-cigs among teenagers, and Hong Kong's decision to ban the manufacture, importation, and sale of these smoking alternatives could inspire other governments to follow its lead.

U.S. Food and Drug Administration (FDA) Commissioner Scott Gottlieb says e-cigs can be useful in reducing traditional cigarette smoking among adults, but he's not willing to allow their proliferation at the expense of luring in teens. He's already begun moving against e-cig manufacturers for their lack of action in preventing teen use and has said that he's willing to pull e-cigs from store shelves if necessary.

Regulators elsewhere in the world might become more emboldened, too, damaging the potential for e-cigs and other alternatives to replace declining sales of tobacco companies' legacy products.

A surprise move

Hong Kong's move came as a surprise to the industry. This past summer, authorities there seemed to be moving toward regulating e-cigs as they do traditional tobacco products: banning sales to minors, prohibiting advertising of the products, and banning manufacturers from sponsoring events.

Hong Kong already regulates electronic cigarettes that contain nicotine as a pharmaceutical product. That's how Japan largely regulates e-cigs, with the e-liquids the devices use classified similarly. Japan's regulation of e-liquids is the reason Philip Morris International (NYSE: PM) has come to own the Japanese e-cig market with its iQOS heated-tobacco device, which creates a nicotine-infused vapor by heating actual tobacco instead of using e-liquids. It's why PhilipMorris is able to ship more of its heated tobacco units to the country than traditional cigarettes. With other forms of e-cigs effectively banned, it has the market almost to itself.

But Hong Kong's ban covers more than just electronic cigarettes. It also bans heat-not-burn devices like the iQOS and British American Tobacco's (NYSEMKT: BTI) iFuse glo as well as herbal cigarettes. Hong Kong Chief Executive Carrie Lam believes there is "a lack of sufficient evidence to prove the products can help quit smoking," though numerous studies and testimony from users would say the opposite. These studies are among the primary reasons the FDA has chosen to become more accommodating of the devices here.

Teen use is a sticking point everywhere

In fact, the ban might be related to the fact that cigarette smoking in Hong Kong has fallen dramatically over the past few decades, down to just 10% of the population from 23% in the 1980s. In comparison, about 15% of adults smoke in the U.S.

Those remaining recalcitrant smokers might be more difficult to convert to e-cigs, as Philip Morris is finding in Japan. Having won over large swaths of early adopters to its heated-tobacco product, it is now facing slower sales and higher marketing costs in Japan because older smokers are harder to convince. It might be why Hong Kong is saying the products are not that effective in helping smokers to quit.

At the same time, Hong Kong seems to be facing an explosion of e-cig use among students in primary and secondary schools. By implementing the ban, it seeks to prevent those students from becoming habitual users.

The key takeaway

Some 27 countries ban electronic cigarettes, and numerous others are considering how best to regulate their use. With Hong Kong now joining the ranks of those banning the devices -- when its citizens don't even have a significant problem with smoking -- it could deliver a blow to big tobacco's vision of a smoke-free future.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.