By Jilian Mincer
(Reuters) - Some of the leading U.S. producers of electronic cigarettes are moving their manufacturing to the United States from China in response to growing concern about quality and the prospect of tighter federal regulations.
In recent weeks, some of the best-selling U.S. e-cigarette companies, including closely held Mistic and White Cloud, announced that they would move production to new, highly automated U.S. factories that would enable them to track ingredients and quality more closely. As a fringe benefit, they even expect costs to be lower than in China, the country that invented the battery-powered cartridges that produce a nicotine-laced inhalable vapor.
"People are concerned about quality," said Bonnie Herzog, a senior analyst at Wells Fargo Securities, who expects more manufacturing to shift to the United States.
"There is varying quality among all these different brands," she said. "I think regulation will standardize these products because they will be forced to improve."
The shift has gained momentum since April, when the U.S. Food and Drug Administration proposed rules that would require, among other things, manufacturers that want access to the U.S. market to register with the agency and list the ingredients in their products.
"As a general rule, the FDA regulation will require more control over the manufacturing process," said Bryan Haynes, an attorney at Troutman Sanders, a law firm in Richmond, Virginia, that represents e-cigarette companies. He said more companies plan to move production to the United States because it "could make compliance easier".
Many of these companies already produce the nicotine-laced liquid used in e-cigarettes in the United States and then ship it to China, where the battery-powered devices are assembled. Most batteries will continue to be made in China.
E-cigarettes are considered a crucial business for the three major U.S. tobacco companies, which have bought or developed their own brands in recent years to offset shrinking sales of conventional tobacco cigarettes. Compliance with new U.S. regulations has become a top priority.
U.S. sales of e-cigarettes are expected to outpace sales of tobacco cigarettes by 2020, in part because of the perception they are safer to smoke.
Their advocates say e-cigarettes are a safer alternative to smoking traditional cigarettes since they do not produce lung-destroying tar. But there is little data about the long-term health effects of the products.
Reynolds American Inc (RAI) is the only one of the nation's three largest tobacco companies to make its e-cigarettes in the United States, at a factory in Kansas. It currently sells its Vuse brand in two states but expects to expand nationwide this summer.
Lorillard Inc's (LO) blu brand is assembled in China but the liquid is produced in the United States. Reuters reported earlier this week that Reynolds was in active discussions to buy Lorillard. Blu is the top selling e-cigarette brand in the country, with about half of the market share.
Altria Group Inc (MO) makes the liquid for its MarkTen in Richmond, Virginia, and manufactures the brand in China. It also expects to sell the e-cigarettes across the United States this summer.
To be sure, most e-cigarettes are still made in China. Many companies are pleased with production in China and have no plans to move their operations. NJOY, for example, produces the liquid for its NJOY brand in the United States and assembles the devices in China.
"We adhere to our own 'gold standard,' which covers quality control practices and tests of every NJOY product," Craig Weiss, the company's chief executive, said in an email.
In May, Tarpon Springs, Florida-based White Cloud said it would move manufacturing to an automated plant in the United States that would make production much faster and more precise.
"We can delivery a much more uniform product because we're not reliant on someone's eye," said Rob Burton, director of corporate and regulatory affairs at White Cloud Electronic Cigarettes. The company, like many other manufacturers, has been hand-filling the liquid into the devices in its Chinese facility.
Burton said White Cloud would like U.S. regulators eventually to approve the product as a medical device for smoking cessation. The new design, he said, should provide "consistent vapor delivery".
John Wiesehan, Mistic's chief executive, said his company was moving production even though it was satisfied with the quality of the products made in China. He conceded, however, that there was a perception of inferior quality with Chinese-made products. "I wanted to remove that stigma," he said.
Mistic officials expect to cut costs by moving production to the United States because the company won't have to ship the fluid and could reduce the number of workers it employs.
"You're in the beginning stages of this industry," Wiesehan said. "And we're developing standards as we speak."
(Additional reporting by Malathi Nayak and Toni Clarke; Editing by Frank McGurty and Peter Galloway)