Philip Morris looks to smokeless cigarettes to revive fortunes

Company has invested RM13b in its proprietary smoke-free technology

By MARK RAO

Tobacco company Philip Morris International (PMI) plans to introduce smokeless cigarettes to the Malaysian market as a defence against smuggled cigarettes and legislation that have decimated earnings.

Philip Morris, which has invested US$3 billion (RM12.9 billion) in its proprietary smoke-free technology, the company plans to make Malaysia its next market for the cigarette alternative.

The company said the system, which eliminates combustion and is totally smokeless, is marketed in 25 countries.

Philip Morris (M) Sdn Bhd MD Kang Tae Koo said the smoke-free technology will be a key driver for the company going forward in Malaysia, amid a shrinking market resulting from the rapid rise of illicit cigarette trade.

Kang said the introduction of smoke-free products will suit the Malaysian market at this time.

“When it comes to smoke-free alternatives, countries are at different stages and the shift from cigarettes to smoke-free products may happen more gradually in some countries than others,” he told The Malaysian Reserve.

“It is clear that in changing times we have set a new course for our company and that smoke-free products are the future.”

The legal cigarette market in Malaysia has dwindled by more than 50% over the last 13 years, as illegal cigarette consumption rose to a record 57.1%, or 10 billion out of 18 billion sticks, consumed in the country last year.

In comparison, smuggled cigarettes were only 14.4% of total in 2004.

Smuggled cigarettes are far cheaper than legal cigarettes which are highly taxed in Malaysia, where it is the third-highest priced in South- East Asia, and one in two Malaysian smokers them.

Contraband cigarettes are three to four times cheaper, between RM4 to RM5 per pack, compared to retail brands at typically RM17 per pack.

While Philip Morris Malaysia managed to grow its market share to 19.2% in the second-quarter this year, the higher share represents only a larger slice of a significantly smaller pie.

Priced at RM12 per pack, the company’s competitively priced Chesterfield brand was a key driver resulting in the higher market share. However, the bulk of the retail price is made up of excise, goods and services, and import duties, leaving very little left in terms of revenue and profit.

The IQOS product stands to bypass some of these cost obstacles, as the smoke-free technology is unlikely to be liable to the same category of taxes that traditional cigarettes are currently affected by.

Though a longshot, the product could also be in line with the government’s mandate to discourage smoking in the country.

“It is clear that smoke-free products can have a massive impact on smoking rates in a very short time,” Kang said.

“As such, making these types of products available can complement and enhance existing tobacco control measures.”

In 2016, PMI sold 7.4 billion of its IQOS tobacco filler, representing only 0.9% of the total 812.9 billion units of cigarettes the tobacco the company sold that year across its 180 markets.

However, CEO Andre Calantzopoulos said the smoke-free technology could comprise 50% of the company’s business in the next 10 to 15 years, which could spark a radical shift in the tobacco industry as a whole.

“Our existing competitors won’t have a choice (but to follow suit). Otherwise, they are handing the market to us,” Calantzopoulos was quoted as saying in Asia Times in July this year.

Though ambitious in scale and goal, how the IQOS is received by the Malaysian market.remains unclear, especially with an industry seemingly on the edge of collapse.

 

*CLARIFICATION*

In the article titled “Philip Morris looks to smokeless cigarettes to revive fortunes” dated Sept 6, 2017, we wish to make the following correction to a factual error made in the second paragraph of the story: Philip Morris International is not presently selling its proprietary IQOS smoke-free technology in Singapore. The error is regretted.