More pain in store if excise duties hiked further
LOCAL tobacco players have been hit hard by the 36% excise duty hike last November, with many lamenting that the move taken by Government was not done in a “fair” manner.
And should they be imposed with another round of tax hike later this year, more pain is in store for tobacco firms, as they have a harder battle to absorb costs to sustain their businesses, says JTI International Bhd (JTI Malaysia) managing director Guilherme Silva.
Guilherme, fondly known as Gui, says while the move was taken to curb cigarette consumption, it wasn’t eradicating the illegal cigarette trade. “We are working in an industry that is extremely regulated and we understand the Government’s objective.
“But the way it is being tackled will not solve the issue of high cigarette consumption nor help legal cigarette firms operate in such an environment,” Gui tells StarBizWeek in an interview.
Tobacco players in the country have so far seen three rounds of excise hikes, with the first 14% hike in September 2013, followed by 12% in November 2014 and a massive 36% hike in November 2015.
And two weeks after the announcement, British American Tobacco (M) Bhd and JTI had gone on to hike prices of cigarettes.
“We are seeing the industry declining at a fast pace because of the steep increase in tax. And it’s difficult for us to sustain our business and cover costs in an environment that is already challenging,” notes the 35-year-old Brazilian, who was previously the general manager of JTI Cambodia.
Gui is the youngest so far appointed as JTI’s managing director. He took over from Rob Stanworth, who moved to another JTI market in Asia-Pacific.
The past six months has been tough and the continuous engagement with the various ministries hasn’t been easy, according to Gui.
“If I had to highlight the difference, Malaysia is the probably the eighth country I have lived in and I have never seen such high levels of illicit trade as in Malaysia,” he notes.
JTI Bhd, which lost its listing status after a compulsory takeover offer from its parent JT International Holding BV, has three cigarette brands in its portfolio – Mevius, Winston and Camel.
After the November 2015 excise hike, JTI enforced a 23% to 25% hike on its cigarettes. A pack of 20 sticks of Mevius, Winston and Camel now cost RM17, RM15.50 and RM16, respectively.
Despite the high taxes, he says cigarette consumption has been on an increasing trend.
As of 2015, a study conducted by the Health Ministry showed there were 4.44 million smokers, with an average daily consumption of 15 sticks per day or 24.3 billion sticks a year.
This is against 2011 numbers, which revealed 4.3 million smokers, with an average of consumption of 14 sticks per day, or 22 billion sticks a year.
However, Gui notes the reverse is seen in the industry’s volume where the number of legal cigarettes purchased in 2015 had reduced to 10.5 billion sticks versus 13.2 billion sticks in 2011.
This translates to about 8.8 billion sticks (or 40%) of illicit cigarettes in 2011 and 13.8 billion sticks (or 56.7%) in 2015.
“This goes to show that consumption of illicit cigarettes have increased significantly and this is a pressing issue for us,” says Gui.
While he feels that the Government is not achieving its target of reducing consumption, he says more smokers are now turning to illegal brands in the market.
Earlier in March, it was reported that the excise duty hike had caused smokers to switch to cheaper contraband brands, causing the Government to lose RM4bil in tax collection last year.
Additionally, research also found that 36.9% of cigarettes sold in the country last year were smuggled, which was an increase of 3.2 percentage points from 2014.
On that note, local industry players are of the opinion that the current excise hike strategy is pushing more consumers towards illegal cigarettes.
The industry is expected to be more challenging in the second half of the year.
On the move to implement plain packaging, Gui believes that if this is imposed, it will only make it harder to tackle illegal cigarette trade.
“Where purchasing power is concerned, Malaysia is perhaps the least affordable in the world,” he adds.
Based on JTI’s volume sales estimates from retails, he reveals that the industry’s volume is expected to decline by 28% in 2016 versus 10.5% in 2015.
“This is the biggest decline seen in the industry so far,” he affirms.
Meanwhile, the Confederation of Malaysian Tobacco Manufacturers said in March that the legal industry volumes had been severely impacted, registering a significant decline by about 30% post the unprecedented excise hike. It said excise revenue collection would be considerably lower than before November 2015.
Despite the challenges ahead, JTI has no plans to shut down its manufacturing plant in Shah Alam, as it is the regional hub and exports to 10 countries.
“Since it is the manufacturing hub for other countries, it has enabled JTI to compensate for the volume loss experienced so far in Malaysia,” Gui affirms.
With the rising number of smokers switching to vaping, Gui believes that although the industry is legitimate, it should be regulated.
Perturbed with the gloomy outlook in the second half of the year, Gui urges the Government to adopt a “wait-and-see” approach for the industry to stabilise prior to imposing another round of tax hike.
“We usually notice a strong decline in volume whenever a tax hike takes place and then it recovers a little. But we have not seen any recovery since the 36% hike last year,” he frowns.
JTI Malaysia is the country’s second-largest tobacco firm, with a market share of 20.7% as of May.