Cigarettes have been with us for centuries. With consumers becoming ever-more health-conscious, however, tobacco companies are in a race to reinvent them. Their share prices have soared as a result.
For its part, Philip Morris International (PMI) – producer of the world’s highest selling cigarette brand, Marlboro – has declared a long-term goal of replacing combustible cigarettes entirely with smoke-free products. In 2014, it piloted a “heat-not-burn” tobacco product known as IQOS – an acronym that is said to stand for “I Quit Ordinary Smoking” – in Japan and Italy and has since made it available in a total of 26 countries, with the goal of expanding to more than 30 by the end of this year.
PMI’s shipment volume of tobacco filler for IQOS tallied 7.4 billion units in 2016 – versus a cigarette volume of 812.9 billion units. To start closing the gap, the company now aims to ramp up installed manufacturing capacity for IQOS’ tobacco filler to 100 billion units by the end of 2018.
PMI’s stock has surged following the rollout of its cigarette alternative, climbing 48% to US$120.51 from the start of 2015 through June 15 versus an 18.1% jump in the S&P 500 Index.
Competitors have not been far behind in wising up to the smoke-free market. British American Tobacco’s (BAT) heat-not-burn product, branded “glo,” launched in Japan – where IQOS has already captured 10% of the cigarette market – last year and Japan Tobacco is set to bring its Ploom TECH tobacco vapor device to market within days. BAT’s stock is up 55.4% since the start of 2015 and Japan Tobacco’s has increased 22.2%.
Cigarette alternatives have in fact been available for decades. They failed to gain any meaningful foothold, however, until electronic cigarettes – which involve heating an aerosol that typically contains nicotine and various flavorings but does not emit several of the dangerous toxins in tobacco smoke – broke the mold in 2004 and “vaping” took off. Where heat-not-burn products differ is in using real tobacco, which is heated to the point that the user inhales a taste but no actual smoke. Both e-cigarettes and heat-not-burn products are considered “reduced risk products” (RRPs).
Some early findings suggest e-cigarettes are likely to be less harmful than traditional “combustible” cigarettes but their long-term health effects are still being debated. Heat-not-burn products are, similarly, marketed as having the potential to reduce health risk if users fully convert from cigarettes. However there is, as yet, no consensus among researchers on the effects of switching,
In Asia, the outlook for cigarette alternatives is further complicated by the uncertainty among governments on how to regulate them. Governments in markets including Hong Kong, Singapore and Thailand have banned e-cigarettes, for example.
Asia Times invited Martin King, Asia President at Philip Morris International, to share his outlook on the future of the industry in the region.
Asian countries have stepped up anti-smoking regulations in recent years as they seek to close the health gap with Europe and North America. How is this impacting your business in Asia? Do you still see this part of the world as a growth market?
The majority of our business in Asia is combustible cigarettes. However our long-term commitment is to switch all cigarette users who don’t want to quit, to a smoke-free product like IQOS as soon as we can. In the countries where we’ve been able to launch smoke-free products – like Japan, for instance – we’ve seen smokers switch in large numbers and the demand seems to be increasing. So Asia is certainly a growth region for us and it features heavily in our plans.
The shift from cigarettes to smoke-free products will happen more gradually in some Asian countries than others. However the tide is turning and more and more policy experts and regulators are encouraged by the examples of countries where smokers have switched in large numbers from cigarettes to smoke-free alternatives – they can see that this could potentially have a significant effect on reducing smoking rates as well as benefitting public health.
PMI talks about designing a smoke-free future built around a portfolio of revolutionary products like IQOS. As the market leader in traditional cigarettes, why are you prompting this switch?
Throughout our history, PMI has been a customer-focused company. We’ve put quality products at the center of what we do and we’ve built up some of the strongest brands. We’ll continue to do that going forward.
However today’s smokers are looking for less harmful, yet satisfying, alternatives to cigarettes, and this is why we’re continuing to invest significantly in a range of smoke-free products so we can give them that choice. This is a long-term vision and we’ve made a firm commitment to our employees and our shareholders to push forward as fast as we can to design a smoke-free future.
In Asia, IQOS was rolled out first in Japan in 2014 and then in South Korea this year. Can you share more about your launch plans for the rest of Asia?
For commercial reasons we cannot disclose our launch plans. However, we intend to launch in more Asian markets in due course. Ensuring the right market infrastructure and regulatory frameworks are in place is essential to our overall launch schedule for Asia.
Fundamentally, any potentially less-harmful alternative to cigarettes needs to be recognized by regulators and consumers as different from cigarettes – taxed differently, labeled differently, and with the freedom to communicate the product attributes openly; only then can smokers have the information they need to encourage them to switch to a smoke-free alternative.
By all accounts, IQOS has met with great demand so far in Asia. Your competitors have also launched their own versions of smoke-free tobacco products, however. Is the playing field in this space big enough for multiple offerings?
There are over one billion smokers worldwide and roughly 60% of these are in Asia. We know from countries like Japan and now Korea where we’ve launched IQOS, that smokers are looking for potentially less harmful, yet satisfying, alternatives to cigarettes and smoker preferences will mean they may try a number of different products.
Having worked with PMI around the world, including in an earlier role as a managing director in Beijing, what interests you about working in Asia?
Although I am an American, I have spent many of my formative years living abroad. This is my third role in Asia, having previously worked in China and Indonesia – I really enjoy the diversity and the opportunity that this region brings.
To be in Asia working for a company like PMI […] there is pressure to succeed because in many cases we are operating in new territory, yet I firmly believe we have a great opportunity to do something that will truly benefit smokers, public health and also our shareholders.