How Will A Ban On Foreign Tobacco Investment In India Affect Philip Morris?

Philip Morris’ place in the Indian tobacco space may be under threat if the documents seen by Reuters, which state the Indian government’s intentions to further tighten foreign investment rules in the sector, are proved to be true. Foreign investment in cigarette manufacturing has been outlawed in India since 2010. However, tobacco firms are still allowed to invest through technology collaborations, licensing agreements, and trading companies. The decision to allow these is reported to be under consideration, in a bid to safeguard public health interests. As per letters seen by Reuters, from Philip Morris to the trade minister and an influential government think tank NITI Aayog, the tobacco company called the proposal “discriminatory” and “protectionist,” and cited how it would be a blow to the company’s future launch of new products and investments in India.

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Key Market For Philip Morris

India can be considered to be a key market for the company, where the tobacco market is valued at $11 billion. While Philip Morris does not disclose revenue by country, it is estimated that a large portion of its $74 billion revenue is from India. While tobacco consumption is on the wane in much of the world, India is an exception to the fact. According to BMJ Global Health, the number of male cigarette smokers between the ages of 15 and 69 years has gone up three times between 1998 and 2015, and now stands at over 40 million. Besides these, there are 48 million others who smoke the traditional hand-rolled cigarettes, called beedis. According to Euromonitor, India is home to the second highest number of tobacco users, at more than 275 million. However, in 2015, it was reported that cigarette sales dropped to 88.1 billion sticks, which was a 15-year low, and a decline of 8.2% from a year prior. Cigarette sales have been declining since 2011, with the fall in 2015 being the steepest. The main reason for this is thought to be the presence of a massive illicit market in the country, which is estimated to be the fourth largest in the world. Illicit trade volume in cigarettes increased to 21.3% in 2015, from 19.2% in 2014. Other factors such as steep tax increases on cigarettes and pictorial warnings on cigarette packs have also contributed to the decline. However, given the government’s aim to reduce tobacco use in the country by 20% by 2020, and by 30% by 2025, something more needs to be done. The purported government proposals seem to be a step in that direction.

Marlboro faces stiff competition in the Indian market from the premium brands supplied by the country’s largest cigarette maker – ITC Ltd. – which is part owned by British American Tobacco (BAT). Despite this it has doubled its market share between 2012 and 2015 to 1%, according to Euromonitor. Citing the importance on the region to the company’s plans, Philip Morris stated in its letters that it has spent $460 million, over the past five years, on tobacco leaf, and over $200,000 on corporate charities in the country, with more than 90 people employed in its India unit. The company also stated how the new rules would give an unfair advantage to the domestic firms, such as ITC, which already has a market share of almost 80%.

What Happens To Philip Morris’ Plans?

Philip Morris currently operates in the country through a wholesale trading company with Godfrey Phillips India Ltd and an investment firm. Under the arrangement, Godfrey manufactures Marlboros, while PM’s trading firm helps to promote them. Hence, this part of the operations will not be affected if the new proposal comes into effect. However, what will be impacted is the company’s future investment plans, as any new investment or collaboration will be outlawed. This would include the possible launch of its heat-not-burn tobacco product called iQOS. According to the company, this is a reduced-risk product, which would provide health benefits to its consumers, including those in India. Since the device heats the tobacco, it generates no smoke or ash, just a vapor containing nicotine. This device is already available for sale in over a dozen markets, including Japan, Italy, Switzerland, and the UK. Chief Executive Andre Calantzopoulos has recently claimed that conventional cigarettes could become a thing of the past, and predicted a “phase-out period” for cigarettes. The new iQOS product, with fewer toxins, could eventually replace cigarettes in the long term.

Japan is the only country where the national roll-out of iQOS has occurred, and it has witnessed exceptional performance. The market share has steadily climbed since it was first introduced in the country. During FY 2015, the iQOS launch was expanded in Japan to reach 60% of the adult smoking population, and the national roll-out was completed in the beginning of the second quarter. For the third quarter, the HeatSticks market share increased to 3.5%, an increase of 1.3 points, compared to the second quarter. Furthermore, the share in the last week of September reached an estimated 4.3%, and an even higher 7.3% in Tokyo, despite limited expansion due to supply constraints. According to the latest data supplied by the company, the weekly market share increased to 4.9% in October.

Have more questions on Philip Morris? See the links below:

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• Forecasting An End Of Cigarettes, Philip Morris Launches iQOS In The UK
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• Philip Morris Q3 2016: Flat Earnings Driven By Shipment Volume Decline
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• Philip Morris Disappoints Investors With Its Dividend Hike
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