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June 18th, 2016:

Tobacco firms take a hit

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.

Rejecting tobacco pact, govt must empower farmers, enforce laws

A much lauded 2015 presidential decree on a national development strategy that aims to reduce the prevalence of smoking, especially among teenagers, by 25 percent over the next five years, heralded a change in tobacco policy.

But on Tuesday, the President proved that people had hung their hopes too high when he announced his refusal to ratify the Framework Convention on Tobacco Control (FCTC) because his administration had not yet carefully considered the fate of the millions of people in the industry.

He has taken this belligerent stand even though he knows that 183 of the world’s 195 (or 196 if you consider Taiwan as an independent state) countries have endorsed the treaty. Indonesia is the only country in Asia that has yet to join the community.

“We don’t want to go with the flow and ratify it simply because most countries have done it. We want to really take the national interest into account,” he said after presiding over a Cabinet meeting.

By “national interest” he means farmers, other people in the industry, the huge market and Indonesia’s status as one of the world’s major tobacco growers.

His populist stance displays his administration’s perplexing policy. After he introduced Presidential Decree No. 2/2015, the Trade Ministry issued a completely different strategy that would allow production to reach 524 billion cigarettes in 2020. This came about despite a Health Ministry warning of the rising number of tobacco-related diseases.

The decree intends to cut the prevalence of smoking among people aged 18 years and younger from 7.2 percent in 2013 to 5.4 percent in 2019.

Jokowi’s reluctance to ratify the convention on tobacco controls is ironic because Indonesia was one of its initial supporters. It is adding credence to his critics’ accusations that the government serves the tobacco industry’s interest at the expense of public health and the wellbeing of the less fortunate.

Controlled by multinational corporations Philip Morris and British American Tobacco, which together command some 65 percent of the domestic market, the cigarette industry has been doing everything to convince the government that signing the treaty would eventually result in Indonesia being dictated to by the WHO and international anti-tobacco activists, as cited in The Jakarta Post’s reportage last week. This could in turn endanger the Rp 145 trillion (US$10.875 billion) the state receives in tax and excise from the industry, and impact some 6 million people in the trade.

The government’s refusal to ratify the convention will make sense only if the President proves his commitment to defend farmers, starting with reforming the tobacco trading system, which is controlled by the cigarette makers via middlemen, graders, loan sharks and traders.

As numerous studies show, it is this “mafia” that rakes in the bulk of the profits. Farmers must be guaranteed the access to sell their tobacco to the cigarette makers directly.

Furthermore, the government should also restrict the mechanization of cigarette production, blamed for massive dismissals in recent years. To support more local products, Jokowi should limit tobacco imports, which still account for about half of local needs.

Statistics from the Agriculture Ministry show that tobacco imports have steadily increased. In 1970, Indonesia imported 2,942 tons worth US$1.6 million and the figures sky-rocketed to 121,218 tons, worth $627.3 million, in 2013. In 2012, Indonesia produced 226,704 tons, making it the world’s fifth biggest tobacco producer after China, Brazil, India and US.

The unfair trading system has put farmers in the least profitable position. They share the “crumbs” of the big pie, as Hasbullah Thabrany from University of Indonesia’s Center for Health Economics and Policy Studies puts it.

However, it would be unrealistic to assume that the number of smokers would automatically drop if Indonesia signed the treaty. The country would still have a long way to go to incorporate the treaty into the local legal system and make it workable. Besides, the convention aims to control production from the farm to the cigarette. One ramification of this could be that the FCTC generates a tobacco cartel that could harm Indonesia as a major producer.

In Indonesia, tobacco and clove — which is blended to make the signature kretek — is more of a regional concern because these plants grow well commercially only in West Nusa Tenggara, East Java, Central Java, West Java and North Sumatra. It is only those five provinces that enjoy the dividends that the central government amasses from tobacco and cigarette tax revenues, but their products affect all 34 provinces, threatening people’s health and burning ever larger holes in their finances.

While waiting for the right time to ratify the treaty, Indonesia should do its best to reduce smoking based on Government Regulation No. 109/2012 on the control of addictive tobacco products. The regulation strictly regulates cigarette advertising; bans smoking in certain public places like schools and hospitals; and forbids the sale of cigarettes to people under the age of 18.

Our biggest problem is not the absence of good laws, but rather poor law enforcement.

Ceylon Tobacco invests Rs. 500m over 10 years empowering rural poor

Ceylon Tobacco Company PLC, one of the country’s richest and most efficient business conglomerates has invested Rs. 500 million over 10 years in a Sustainable Agricultural Development Program (SADP) to empower the rural poor by maximizing the potential of their home gardens.

The program which notches its tenth anniversary this year involves no cash handouts whatever. It offers beneficiaries inputs of planting material and livestock (chickens and goats) and extensive advice to enable beneficiaries to help themselves.

“We concentrate on families below the poverty line, generally living in areas with 10 months of rainfall and owning 20 to 40 perches of cultivable land,” a senior company official said. “It’s all about self-help – helping them to grow the vegetables they need for a balanced diet for their families and produce milk and eggs.”

Stringent independent auditing is done to measure results. A value is placed on even a lime plucked from the garden, everything produced, and it has been found that the beneficiary households generate produce worth Rs. 10,000 to Rs. 12,000 monthly increasing their nutritional levels vastly.

An independent study done by Ernst and Young in July last year indicated that the average monthly income from home gardening of a beneficiary family in the first year topped Rs. 3,000 going up to Rs. 8,875 in between one to two years and Rs. 13,453 when ‘graduating’ after 30 months.

With the livestock component added on, those on SADP for between one to two years earn an average 12,781 monthly while the 30-month group average Rs. 18,251.

“Most of the efforts that go into the home gardens come from the womenfolk,” officials who took a press group to several homesteads in the Galle and Matara districts to demonstrate what had been achieved said. “Often the men help when they can. But you can see that most of the work is done by the women in the family.”

Surplus produce is marketed and neighbors visit beneficiary homes to buy eggs and goat’s milk in addition to vegetables so that there is an element of cash income in the program. Produce is also sometimes marketed at the local pola.

The extension services offered by CTC who use a corps of field officers who frequently visit homes in the program, giving advice and guidance and also providing quality seed stock and planting material and in some cases livestock.

A pilot project with 100 families was started in 2005 and the program proper was launched a year later. It has now grown to cover 16 districts with over 18,000 families accounting for 71,000 beneficiaries.

The selected families are part of the program for two and a half years after which they “graduate” and are on their own. However, field staff do occasionally visit ‘graduates’ and offer advice though there are no material inputs, they said.

Visiting the home gardens was an experience by itself where the potential of the land available and space above it had been maximized with plastic junk like used cans, decapitated bottles etc. have been ingeniously used as hanging pots where crops are grown and ingenious drip watering systems.

The process begins with the compost pit providing organic fertilizer. Natural pesticides from margosa (kohomba) and crushed marigolds among others are used in a process involving no artificial fertilizer or pesticides.

In many homes virtually every inch of available land plus more (hanging pots) have been utilized.

Cultivating mushrooms and bee keeping is part of SADP although it’s not all beneficiaries who are into these areas; so also livestock. CTC sometimes buys goats bred under the program and gives them to other beneficiaries branching into that activity. One of the families visited had sold a pair a few days ago for Rs. 21,000.

Ceylon Tobacco has drawn on its expertise and experience with tobacco out-growers who at one time provided the company with lucrative tobacco leaf export business in addition to meeting its own requirements for the domestic cigarette industry.

Last year SADP was recognized in the Social Empowerment Category at the Asia Responsible Entrepreneurship Awards (AREA) held in Macau.