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As I had previously done for Philip Morris and BAT, I would like to provide JTI an
assessment on issues that could adversely affect the operating environment of the tobacco
industry in the Philippines in the following areas:
I. Business
Yet the business remains highly-profitable. There are only five major players in this highly-
protected industry. Fortune Tobacco and Philip Morris Philippines Manufacturing Inc.
(PMPMI) corner over 90% of the local market. The smaller players include Mighty Corp., La
Suerte Cigar & Cigarette Factory, and Associated Anglo-American Tobacco Corp.
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Common interests, such as taxes and other laws that affect the entire industry, compel them
to close ranks and move as one. This has resulted in a virtual monopoly that keeps other big
players, like British American Tobacco or Japan Tobacco International, out. This is crucial
for an industry that requires heavy capitalization. With taxes and other production costs
eating into revenues, the lure of smuggling for those who profit from the tobacco trade has
become stronger. In 2006, the country lost P29-B in revenues due to smuggling. The cost of
production in the Philippines is relatively lower compared to other countries so that today,
smuggling, according to some experts, is actually more outward bound. China’s underground
manufacturers and its trillion-stick-a-year market is a present threat. From the present to the
long-term, the tobacco industry has to regard the gray market as its third or fourth biggest
competitor. This doesn’t help a new player like JTI compete fairly.
II. Litigation
Rumors of the falling out between Tan, 74, and Tanenglian, 69, have been swirling in the
Chinese community since February after Allied Bank Director Tanenglian sued the bank’s
security chief and his men for grave coercion after his car was stopped and prevented from
entering the bank building. The feud has largely been kept out of the mainstream media, but
the first public confirmation that the amicable settlement was going nowhere was when
Allied Bank was forced to make a disclosure last April that it was withdrawing Tanenglian
from the board nomination in the May 20 stockholders’ meeting.
After 22 years of litigating Tan for getting rich allegedly on Marcos money, the Presidential
Commission on Good Government (PCGG) said last April that it will finally present its
evidence in the multi-billion peso lawsuit against Tan. Expected to testify is former First
Lady Imelda Marcos, who claimed that her family rightfully owns some 60% of several
companies “held in trust” by Tan. These are: Fortune Tobacco Corp., Asia Brewery Inc.,
Allied Banking Corp., Foremost Farms, Himmel Industries, Inc. Grandspan Development
Corp., Silangan Holdings Inc. Dominum Realty & Construction Corp., and Shareholdings
Inc.
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After having been identified as a possible witness earlier, PCGG Commissioner Ricardo
Abcede confidently announced that the testimony of Mariano Tanenglian will boost the
government’s efforts in the ill-gotten wealth cases against Tan last May 24.
Inside information from the Marcos family revealed that Mariano has been in talks with
Imelda. The prosecution of the case depends on the political will of this administration or
the next. This could mean serious trouble for Lucio Tan and Fortune Tobacco in the short
to medium-term with a change of ownership in the cigarette firm. While this could level
playing field for JTI, this could be either be a threat or an opportunity unless younger
brother Harry Tan’s mediation efforts succeed.
III. Regulatory
Long-term - FCTC is tightening the noose on the industry and will raise serious
health issues again within 10 years.
While the publicly-stated main objective of a tracing-and-tracking regime is to facilitate
investigations into tobacco smuggling and identify the point where tobacco products are
diverted to an illicit market. The reality is that it is designed to complement a two-pronged
approach that will eventually link health issues to manufacturing. Sicpa’s trace-and-track
system will not only enable WHO-FCTC to accurately monitor and control tobacco firms’
manufacturing capacity and distribution but also their health liabilities. This is an internal
assessment from a DOF source who is cognizant of the fact that JTI is committed to further
establishing mutually beneficial cooperation arrangements with governments across the
world to address contraband and related counterfeit trade.
From the SICPA website, its Secure Trail system is explained in the following manner:
The first and the third points reveal the real intent of the system and its adverse impact on
the industry. Beyond counterfeit crimes, Sicpa will help the FCTC alliance to gather legal
evidence against public health hazards. In fact, the Framework Convention Alliance “The use
of technology to combat the illicit tobacco trade” paper concluded:
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being considered as one of the obligations in the FCTC protocol on illicit trade in tobacco products. The
challenge in the tobacco sector is that cigarettes are a mass consumer product, and the coding should apply to
290 billion cigarette packs that are sold globally each year.”
With all these, it is evident that the technology infrastructure for correlating health/
mortality statistics with cigarette production will be in place globally within the next decade.
Cigarettes are a legal but controversial product. But the FCTC wants to further punish
tobacco firms by moving cigarettes closer to an illegal product. Certainly, this is a long-term
threat that is imperative for the industry to prepare for. Possibly, the single global “solution”
to the tobacco controversy.
IV. Legislation
In the Senate, SB 2377 is now being discussed in the plenary on second reading. Senators are
deliberating on it and amendments are being introduced. But in Congress, HB 3364 has not
passed the committee level because of the opposition from legislators. Rep. Raul Daza – its
main author – said, “It is being blocked because of fears that it would kill the tobacco
industry.” An economic reason to counter a health concern has been the customary House
tactic to delay or kill a measure. Dr. Franklin Diza of the Department of Health’s (DOH)
National Center for Disease Prevention Control said that aside from the Northern bloc of
lawmakers, the lobby of the tobacco industry “is also strong.” With ardent allies in the 14th
Congress, passage of HB 3364 won’t be seen until probably the 15th Congress at the earliest.
There are fears that the Senate’s preoccupation with the sex video scandal and the ethics
probe on Senator Villar will derail its focus on the passage of SB 2377 by the June 5
adjournment. When both houses reconvene by late July, the legislative agenda will be on re-
election in 2010.
At the extreme, there is a 640% tax differential between low-priced and premium-priced
brands. Based on a study by the IMF, the Philippines has the lowest tobacco excise tax in the
Asia-Pacific region. Teves said that the proposed simpler tax system could raise P20-B to
P30-B on the first year, P30-B to P40-B on the second year, and P40-B to P50-B on the
third year. These revenue assumptions were based on DOF’s proposal submitted to the
House last year and Senator Lacson’s measure - SB 2980. Quite simply, this is a case of
shooting for Mars but expecting to land on the Moon. At best, proponents expect the 2-tier
system to be more acceptable than the 1-tier system.
The lobby against this proposal is formidable. Legislation on it certainly will not pass in the
14th Congress because congressmen and senators will already be focusing on the 2010
elections when congress resumes this July. This assessment from a DOF source is based on
past experience on tax legislation since the 1990s. In 5 to 8 years, we can realistically expect
the 2-tier system to be implemented. Perhaps a combination of political will in the 16th
Congress and a diminished lobby from Fortune Tobacco due to successful litigation on an
ailing Lucio Tan will be the breakthrough. The passage of a 2-tier tax system will favor JTI
because it levels the playing field for new players.
V. Conclusion
These are the opportunities to consider in the local market:
1. The 1998-2003 Food and Nutrition survey reported that cigarette smokers in the
country rose from 33% to 35%. (Understanding that JTI doesn’t encourage smoking
among youth because smoking is an informed adult choice, let me just cite that the
2005-2006 Tobacco and Poverty Study in the Philippines reported that smoking prevalence
among Filipino youth has increased from 15% in 2003 to 21.6% in 2007);
2. Moreover, industry insiders disclosed the country ranks among the Top 10 or 12 in
the world in terms of per capita consumption of cigarettes, with 80-Billion sticks sold
annually. It has also earned the distinction of being a predominantly “stick sales”
market, with sticks (as opposed to packs) accounting for about 70% of cigarette
sales; and
3. Finally, cigarette prices here are among the cheapest. For example, a pack of Winston
sells for about $.50 or P20-plus, whereas in other countries, this could sell 10-fold
for as much as $5 or $6.
For these reasons, it comes as no surprise that the Geneva-based headquarters of JTI is
counting on the Philippine operations to eventually play a key role in the region. Asia looms
to be the biggest market among the other new frontiers of tobacco profitability: Latin
America, Eastern Europe, Russia, and Africa. Looking back on the identified issues in the
following fields:
• Business – Smuggling, Fortune Tobacco partnership;
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These factors indicate that there are big silver clouds of opportunity followed by dark storm
clouds gathering in the background. The short-medium-long term threats will combine to
create an increasingly restrictive operating environment.