Up In Smoke?

TA01455Are anti-tobacco campaigns and e-ciggies smoking out the tobacco industry?

In the last few decades, the Malaysian government pushed its national anti-smoking campaigns a notch higher. This coupled with rising consumer health consciousness contributed to the fall in the volume sales of cigarettes sold legally in retail stores. However, this fall in sales volume, may not reflect the full picture as the indices showed the fall in the sales volume of cigarettes sold legally, while the sales volume of cigarettes sold illegally is not accounted for.

Apart from anti-smoking campaigns, a multitude of initiatives by the government to reduce or deter smoking by increasing excise duties, increasing sin taxes has affected sales and impacted the industry.

Adding to that the new culture of using electronic cigarettes or ‘vaping’ which has been proven to be at least 100 times safer than smoking has shoved the industry into a new terrain it has never been before.

To showcase the tobacco companies’ fight against the new vaping culture, Reynolds American Inc (Reynolds) and Altria (formerly Philip Morris in the US) chose to develop and manufacture only e-cigs that are known as ‘cigalikes’ that are designed to look, feel, and taste like traditional cigarettes.

In an effort to fight against the rising number of small vape and e-liquid manufacturers, Reynolds also has asked the American Food and Drug Administration (FDA) to ban all vape modes and e-liquid products as well as most flavoured vapor products.

To put it into layman’s term, a company that made US$4.6 billion in profits in 2013, selling traditional tobacco products that are linked to a multitude of illnesses including cancer, asked the FDA to ban the products that are both preferred by consumers and proven to help people quit smoking.


Malaysian tobacco scene: Government intervention

The Malaysian tobacco industry is a wide ranging industry that encompasses leaf production and curing, product manufacturing to product marketing and distribution. Hence, it is not surprising that the industry contributes substantially to the country’s economy, British American Tobacco (BAT) posted in its website, adding that tobacco is the country’s most widely cultivated non-food crop.

But at the local front, Malaysia, being a signatory of the World Health Organisation Framework Convention on Tobacco Control (hereinafter the WHO–FCTC) which states under Article 5.3 that parties to the Convention should ensure that policy is protected from vested interests of the tobacco industry and tobacco industry interference.

This however has not slowed down big tobacco’s efforts to further strengthen itself, as a quick Google search of the Board of Directors of any large tobacco company will reveal names of highly influential persons, recognisable names that make tobacco lobbying just that much stronger.

The government has no doubt tried to reduce the amount of smokers, as at the moment 46 per cent of working males in Malaysia are smokers, but thus far it has been less than successful in that endeavor.

Besides the hike in excise duty during 2013, the Ministry of Health launched a series of new regulations starting from January 1, 2014 in a bid to deter consumers from smoking.

Firstly, tar content was lowered from 18mg to 15mg while nicotine content was reduced from 1.5 per cent to 1.3 per cent. Secondly, pictorial graphic warnings were enlarged from 40 per cent to 50 per cent in the front of cigarette packs, with six new pictorial graphic warnings being included.

Thirdly, the Ministry of Health specified its definition of public places to include the whole of an air-conditioned building, its five-foot perimeter and areas covered by the permanent roof linked to the main building. Adding to that, the Health Ministry will also raise the minimum age for purchasing tobacco products, including cigarettes, from 18 to 21.

A new tobacco bill is being drafted to include a ban on displaying products.

“The thing that make us sad and worried is that these smokers are adults and parents and their children become passive smokers due to being exposed to the cigarette smoke,” said Assistant Minister of Public Health, Datuk Jerip Susil.

As part of the effort to reduce tobacco consumption, he said the government will maintain the high taxes on cigarettes, making them costly especially for children and teenagers.

He said a survey by World Bank and World Health Organization (WHO) proves that the high price of cigarettes is one of the reasons for low demand among children.

“Based on this reason, Malaysia Health Ministry(KKM) in collaboration with other government agencies will continue to ensure the high prices of cigarettes, to limit it from the targeted group,” he pointed out.

He added that tobacco related diseases killed almost six million people annually including 600,000 non-smokers due to exposure to cigarette smoke.

“If we do not act now, this epidemic will kill more than eight million people by year 2030. Over 80 per cent of the deaths involved people from low income nations,” he said.

According to the Global Adult Tobacco Survey (GATS) Malaysia conducted in 2011 Dr Jerip said 23.1 per cent or 4.7 million Malaysians are smokers.

He said the government spends billions of ringgit yearly to treat tobacco related diseases.

“A smoker or non-smoker suffering from tobacco related disease will have to spend RM42,287 a year for lung cancer, RM32,172 for chronic lungs diseases and RM21,172 for heart coronary disease.

“This is the cost at government hospitals and the price may be higher at private hospitals,” he disclosed.

He said the government and the community must collaborate to overcome the smoking problem.

“This is vital as WHO has declared tobacco as the number one killer of this era,” he pointed out.

The external pressure from the government thus far has only exacerbated problems for the tobacco industry as they also have to face the issue of illicit cigarettes.


Illicit Cigarettes: Impact on Tobacco Players

BAT in its fourth quarter financial year 2014 (4QFY14) report noted that the group saw a decline of 3.7 per cent in domestic and duty free sales volume in the face of falling legal consumption in 2014 versus 2013.

In last week’s BizHive Weekly’s quotes, Stefano Clini’s statement was taken from an old media report, and do not in any way represent the current situation. From the company’s more recent report on its website, the managing director for BAT did state that “Contract manufacturing volumes for export also saw a decline of 14.8 per cent in 2014, resulting from a partial reallocation of volumes and a generally weaker demand. In spite of this overall domestic and export volume decline, the Group demonstrated a solid performance by delivering total revenue growth of 6.2 per cent.”

BAT closed the year (2014) with 61.2 per cent share of market, witnessing a decline of 0.7 percentage point versus same period last year, as a result of down trading and weaker performance from PALL MALL, amongst other brands.

DUNHILL remains the number one brand in the market with 47.0 per cent share of market on a full year basis, despite a decline of 0.6 percentage point.

“The 2014 overall performance showed resilience despite affordability concerns amongst consumers and the burgeoning illegal cigarette trade that continues to jeopardise the future of the legal industry.

“Nonetheless, we are extremely encouraged by the efforts of law enforcement agencies, especially the Royal Malaysian Customs, which embarked on a game-changing strategy in 2014 to step up on enforcement and push for harsher penalties such as jail sentences on those caught selling illegal cigarettes.

“We are also heartened to see law enforcement agencies working cohesively to increase enforcement on illegal cigarettes at the retail and consumer level,” the report said.

“These enforcement efforts in 2014 have undoubtedly made significant headway in tackling the pervasive problem of illegal cigarettes. The recent Illicit Cigarette Study (ICS) by Nielsen indicated an unprecedented 6.6 percentage point drop in illegal cigarette incidence, marking the biggest decline in the history of Malaysia in two decades.

“We are confident that with further intensified enforcement, coupled with stronger deterrent penalties, and widespread public awareness, the infestation of illegal cigarettes can be further diminished,” added Clini in the report.

Clini’s statement has highlighted an obvious problem plaguing Malaysia that lacks an obvious solution.

The Malaysian customs have done much in trying to hinder the trade of illegal cigarettes but yet it is obvious around town that packets of untaxed illegal cigarettes are available all over coffee shops and mamak stalls.

“With the implementation of the Goods and Service Tax from April 1, 2015, and its subsequent impact on consumer spending, coupled with further subsidy cuts and the continued threat of the illegal cigarette trade, it is certain that the industry will be facing tougher times ahead,” Clini noted in the report.

But thus far for the first half of FY15, BAT revenues recorded a decline of 14.6 per cent on quarter due to a correction off the back of pre GST stocking in 1Q15 and the subsequent vacuum in domestic volume in following period.

The group was also penalised due to their uncompetitive price position post GST implementation, being the first tobacco player to raise prices said Hong Leong Investment Bank Bhd’s research arm (Hong Leong Research).

“Consequently, we anticipate that illicit cigarettes would greatly benefit by the price disparity and lackluster consumer confidence post GST implementation. We would not be surprised should the Wave 1 2015 of illicit cigarettes’ would report an increase in market share, from 32.8 per cent in Wave 3 2014,” said the research house.

The illicit cigarette market, at present, accounts for about one-third of the total industry volume and while there have been some improvement in enforcement, the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Research) thinks that there is still a lot of room for improvement to remove the accessibility of cheap illicit cigarettes.

“Until then, raising the floor price, in our view, will continue to spur the illicit cigarette market,” Affin Hwang Research wrote in its report.

It noted in its report that the legal mandated price for cigarettes was raised to RM9 per pack from RM7 previously and would be further increased to RM10 per pack next year.

“While this will narrow the retail price disparity between the smaller cigarette players versus the three cigarette giants, we believe that it is unlikely for BAT, Philip Morris and JTI to see any uptrading activity,” Affin Research said.

“This is because we believe that consumers who were paying RM7 per pack are more likely to down-trade to illicit cigarettes,” it added.

Potential Further Increase in Price

Affin Hwang Research opined that there could be an increase in the excise duties on cigarettes in Malaysia under the upcoming Budget 2016, as the Government sought to raise revenue to tackle the country’s fiscal deficit.

“We believe that the tobacco sub-sector could potentially be in for another round of tax hikes as tobacco excise duties are an easy avenue for the government to boost tax revenues.

“Even though some may argue that higher tobacco taxes could lead to reduced tax revenue and further fuel the illicit market, we believe that if implemented in a moderate and gradual manner, this will allow consumers to adjust to the price changes and contain the probability of any down-trading activities,” it pointed out.

Maybank Investment Bank Bhd’s research arm (Maybank Research) also commented on the matter in its report stating that the big three players’ products are still very much above the revised minimum retail price of RM9 per box at RM13.80 per box for premium brands and RM12.30 per box for value for money (VFM) brands.

“While this move narrows the gap between the low priced and VFM cigarettes, the pricing disparity is still large and is unlikely to encourage any up-trading activity,” it stipulated.

“The implementation of the new non-smoking areas will be under ‘educational enforcement’ for now, with full enforcement possibly by January 1, 2016. While this is an added inconvenience to smokers, we do not expect a significant impact to volumes, especially since most air-conditioned eateries are already smoke-free.”

New Vape Culture: A Healthier Alternative?

So posed with potentially higher taxes, illicit cigarettes and a losing war on vaping shown via Reynold’s attempt to enforce a ban, tobacco companies are now seeking ways to maintain margins any way it could which includes joining the vaping side.

Bloomberg noted that British American Tobacco Plc (BAT UK) said it’s forming a research alliance with Reynolds and agreed to buy Polish e-cigarette maker Chic Group as the tobacco company moves to expand the development of products beyond traditional cigarettes.

BAT UK and Reynolds plan to share so-called vapor technology, which supplies nicotine to consumers via aerosols, through 2022.

Chic, with brands such as Volish, is the e-cigarette leader in Poland.

That market ranks as one of the world’s largest markets for the cigarette alternative. The Polish vapor market will probably grow 31 per cent to US$572 million this year as tobacco tax increases have led smokers to forsake traditional cigarettes, according to market researcher Euromonitor.

RHB Research Institute Sdn Bhd (RHB Research) added that, “these agreements followed a study by UK Depoartment of Health concluding that e-cigarettes, including vape devices, are about 95 per cent less harmful than tobacco cigarettes, while the Action on Smoking and Health (ASH) Organization estimates that e-cigarettes have a penetration rate of 18 per cent among current cigarette users.

“However there has been a mixed reaction by authorities in countries such as Singapore and Brazil, both of which have banned e-cigarettes.”

RHB Research noted that the argument is largely on e-cigarettes’ nicotine addiction against traditional cigarettes’ debilitating effects of tobacco combustion.

On the local front, local authorities have acknowledged the prominence of e-cigarettes, while the ministry of health due to release a finding on e-cigarette risks this month.

At BAT’s most recent analyst briefing in July 2015, the company management’s stance was to await official regulations from authorities on e-cigarettes before taking any measures.

Despite the multitude of fear mongering tactics by certain parties to stop the new vaping culture, Public Health England (PHE) expert Professor Gerry Stimson said in a media report that substantial international research on the toxicology of e-cigarettes — summarised in the recent Public Health England report — showed that they were significantly safer than smoking tobacco.

“Electronic cigarettes are attracting very few people who have never smoked.

“The sale of e-cigarettes containing nicotine is illegal in Malaysia, but that ban is clearly unenforceable and not working.

“Banning e-cigarettes is not a good policy option as the government has no control over safety and quality,” he said.

Stimson — who was keeping track of the issue in Malaysia — said most of the chemicals causing smoking-related disease were absent and the chemicals that were present posed a limited danger.

Stimson pointed to existing e-cigarette standards from the British Standards Institution and Afnor, the French standards organisation.

“Within a year, all European countries will be able to approve e-cigarettes on the market. The UK and Ireland now have codes of advertising practice for e-cigarettes.

“E-cigarettes are a sensible choice for smokers who can’t do without nicotine. Proper consumer standards will give Malaysian e-cigarette users assurance about the products they buy,” he said in the media report.

New Business Opportunities

The birth of the vaping culture has sprouted a multitude of home e-liquid ‘breweries’ as well as a myriad of shops catering to the demand.

This in turn has generated a new small economy and created an opportunity for home grown businesses to make a little extra especially in current uncertain economic times.

Looking at the world’s largest vape market, namely the US, the retail vape store segment has grown to a US$1 billion market, according to Wells Fargo data.

Locally, according to local media reports, Malaysia’s half-a-billion ringgit vape industry is the second largest in the world after the US, and the biggest in Asia, according to Ibrahim Mohamed, co-organiser of the recent Vaporizer Convention Kuala Lumpur 2015.

His estimates are based on the demand for Malaysian-made vaping items.

E-liquid brewers such as ‘Fcukin Flava’ are now not only selling their products locally but also internationally with vape stores in France as well as England carrying their product.

The small brewery is just one among many of today’s younger generation taking advantage of a new demand that is viewed as a positive change as well as a potential win against smoking.

The brewery on its website noted that at the moment demand is overwhelming to the point it had to temporarily closed down to restructure and upgrade its system to handle the demand among other issues.

End Note

So with the rise of e-cigarettes, what does it mean for traditional tobacco companies that have yet to join in the fray? Thus far it is too soon to tell on the local scene as authorities have yet to make a formal decision on the matter.

With the industry already being pressured by anti-smoking groups, government agendas to reduce smoking, the increasing plight of illicit cigarettes, it is safe to say the pressure on companies like BAT, JTI and Phillip Morris are pilling higher than before.

However, despite the negative sentiments and potential loss in revenue for the government in terms of taxes, the rise of the new vaping culture it has contributed indirectly into the economy by creating new entrepreneurs that are venturing regionally as well as internationally.

Research into the long terms effects of e-cigarettes are still in its infancy, preliminary research have been mostly positive, as it has shown limited to negligible negative effects on the body.

The outlook is still uncertain but perhaps there is a silver lining in the clouds of vape that is being puffed.

Is Vaping Dangerous?

Fresh research funded by BAT UK has suggested inhaling nicotine vapor could be as safe as breathing air.


The tobacco giant teamed up with the MatTek Corporation, used a ‘smoking robot’ to expose these lung cell replicas to tobacco smoke, the vapour from two different brands of e-cigarettes as well as plain air.

The cells when exposed to tobacco smoke for six hours died while those exposed to ‘ aggressive and continuous’ dose of vapor suffered the same damage as plain air.

This may be an exaggeration as experts concurred that vaping is not neutral but commenting on its potential effects but Dr Thomas Susan from John Hopkins did note that e-cigarettes have 100 times lower free redicals than cigarette smoke.

Among at the main points that anti vaping/e-cigarettes groups are harping on includes the dangers of exploding devices, not knowing what is contained within the e-liquid itself and that there is formaldehyde formed when vaping.

Exploding e-cigarettes

Upon further research, exploding e-cigarettes are usually the result of the user’s disregard for battery safety as well as the lack of ‘know how’ on keeping the e-cigarette from short circuiting.

Modern variable voltage vape mods’ now are equipped chips that can detect and update the user should there be a short circuit, weak battery, overheating and so on, making it much safer than the ‘mechanical mods’.

Some of the more recent ones even allow temperature control that could detect and maintain a specific temperature on the coils on the mod itself when using coils made of nickel which in turn showcases the ability of these new devices to regulate, detect as well as control the power outages.

E-Liquid ingredients are not a mystery

On the second issue that touches on e-liquid, contrary to popular belief, the ingredients used to make the e-liquid are far from a mystery.

E-liquid begins with the main base, vegetable glycerin and propylene glycol both of which are found in everyday food items.

Propylene Glycol is an organic compound produced from Propylene Oxide. It is colorless, nearly odorless, and retains low viscosity. Food grade Propylene Glycol is recognized safe by the US Food and Drug Administration with the main application being solvents, humectants, preservatives in food, pharmaceutical products, and of course e-liquids.

Vegetable Glycerin is an all natural liquid generally extracted from plant oils and is typically clear with little hint of color, odorless, in some cases sweet, and relatively viscous.

Like Propylene Glycol it is considered safe by the US Food and Drug Administration with applications in food production, and e-liquids.

Alarmists tend to cite Propylene glycol as being a ‘main ingredient in antifreeze. This is incorrect, as they’re willfully confusing it with diethylene glycol

The other two ingredients includes flavoring that can be found in cakes and other food products as well as the optional ingredient of nicotine.

Formaldehyde in e-cigarettes?

The last issue is that the chemical reaction in vaping produces high amounts of formaldehyde, a highly toxic chemical as shown in earlier studies on e-cigarettes.

However based on a more recent study dated January 21, 2015, Greek cardiologist, Konstantinos Farsalinos, published an article on E-Cigarette Research titled ‘The Deception of Measuring Formaldehyde in E-Cigarette Aerosol’.

The research proclaimed that, “There are many major issues in that study. The authors failed to realize that voltage levels provide no information about the thermal load of an e-cigarette device. As a result we do not know how many watts were applied to the atomizer. However, there is a way to approximate this, through the information provided about the liquid consumption per puff.

“Based on the information provided at 5.0v the energy was around 14-16 watts. That would be extremely high for most commercially-available atomizers. Thus it is more than obvious that once again the atomizer was overheated, which of course would result in very high levels of formaldehyde production.

“In fact, overheating results in an unpleasant taste that none can withstand. As a result, no vaper is ever using the e-cigarette at such conditions and, thus, will never be exposed to such levels of formaldehyde.”