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Bird’s-eye view of the state-of-the-art JTI-AMC factory. Credit: JTI-AMC
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JTI Philippines domestic market head office. Credit: JTI-AMC
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John Freda, general manager, JTI Philippines.
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Practically all JTI brands retailed around Southeast Asia are produced in the Philippines and exported in localized packaging. Pictured here: a Camel hardbox for the Thai market. Credit: Thomas Schmid/duk
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Cigarette smokers in many Asian countries can be quite sure that their cigarettes most likely are coming from the Philippines – provided they are JTI brands.
In 2017, Japan Tobacco International (JTI) formally designated the Philippines as its primary manufacturing and distribution hub for the Asia-Pacific region when the company opened a gigantic factory in the Batangas province on the main island of Luzon, incorporating it as JT International Asia Manufacturing Corporation (JTI-AMC).
Careful considerations
Choosing the Southeast Asian nation was grounded in careful geographical, logistical, and economic considerations, “ensuring overall business sustainability, including supply alternatives,” according to JTI- AMC president, Elena Trusova. “Building the factory [here] should be understood in that context,” she said. “It improved [our] operational efficiencies and helped meet [our] business needs particularly with regards to increased production capacity, enhanced export potential, and ensuring product quality consistency throughout all supplied markets.” The facility currently serves a total 15 markets. Besides the Philippines, that includes South Korea, Malaysia, and Thailand, among others. The most recent additions to that roster were Mongolia and Cambodia, according to Trusova. The hub also handles duty-free volumes for Asia and some other global regions.
Occupying 13 hectares in a special economic zone in Batangas, the state-of-the-art factory employs some 900 people. The recent addition of a leaf warehouse further augmented its already impressive infrastructure. Self-sustainability is playing an important role at JTI-AMC, too, Trusova said. The plant utilizes more than 17,000 photovoltaic solar panels that cover over 27,000 square meters of roof area to comfortably produce enough energy for the factory’s operational requirements by day. And at night, the factory consumes grid electricity, resulting in the facility being green certified.
Business services for 18 countries
In 2020, JTI established a further local subsidiary, JTI-GBS (Global Business Services), in Manila “to serve 26 JTI entities in 18 countries in Asia and the Americas,” according to Akhtar Hannan, its general manager. The subsidiary provides services in areas ranging from finance, marketing and sales, human resources, procure-to-pay (P2P), to customer services, and information technology advice, effectively addressing operational challenges and seamless workflow processes. The center currently employs more than 300 staff (and is still hiring more), which has helped create much needed job opportunities. “We persevered in setting up the GBS center despite the bottlenecks presented by Covid-19 in 2020, proving our continued commitment to job generation in support of national development and highlighting our confidence in the Philippine market,” said Hannan.
Domestically, the business comprises 39 sales and distribution offices nationwide that employ more than 2,700 staff. The Philippines is among JTI’s top 10 markets, as of August 2021, enjoying a local market share of 37%. The country’s top player is Philip Morris’ domestic entity, PMFTC. The remaining 1.6% are divided up among a handful of local companies and also BAT, the latter being represented through a distributor company. However, persistent industry folklore notwithstanding, JTIP attained this rather cushy positioning without buying out local companies left and right. Factually, the very first (and to-date only) acquisition by JTIP was local manufacturer Mighty Corporation (MC), in 2017. “The assets included MC’s distribution network, manufacturing equipment, inventories, and intellectual properties,” John Freda, general manager JTI Philippines, told Tobacco Asia.
Leading a market with only five brands
Furthermore, JTIP’s market share hinges on just five cigarette brands. “We market five JTI brands in the Philippines, namely our global flagship brands of Winston, Camel, and Mevius together with Mighty and Marvels, the latter two formerly owned by MC and both being Philippine-specific brands,” confirmed Freda. According to a Nielsen Retail Audit report released in August 2021, three of these brands are ranking in the country’s top 5 bestsellers by volume: Mighty (with a share of 20.9%), Winston (10.2%), and Marvels (4.1%). The Philippines’ most popular brand is PMI’s Marlboro, commanding 42.9%.
JTI Research data reveals that 28.3% of the Philippines adult population are smokers, of which 71% are males and 29% are females. While flavored cigarettes are not prohibited, Filipino consumers prefer natural tobacco and mentholated cigarettes. Citing the aforementioned Nielsen Retail Audit report, Freda said the average retail price for a standard pack of an international cigarette brand was PHP131.17 (US$2.60), while a local brand such as Mighty retails at an average PHP100.51 (US$2.00).
A straight forward taxation scheme
When compared to some other Asian countries’ extraordinarily complicated tobacco taxation systems, the Philippines employs a rather straight forward flat-rate method. “The current specific tax rate for cigarettes is PHP50.00 per standard pack of 20 sticks,” said JTIP’s corporate affairs & communications director, Mildred Sabarre. “That rate will increase by a flat PHP5.00 every year until [and including] 2023. From 2024 onward, the tax will rise by 5% annually.” Equally simple structures are used for taxing heated tobacco products and vaping liquids.
The Philippines’ tobacco industry is governed and regulated by the “Inter-Agency Committee – Tobacco” (IACT), composed of the heads of several government agencies and chaired by the secretary of the Department of Trade and Industry. “IACT’s principal and exclusive role is to administer and implement the provisions of the Tobacco Regulation Act of 2003 (RA 9211),” elaborated Sabarre. For instance, the act prohibits smoking in all enclosed public places. “However, there also are quite a number of ordinances by local government units that additionally restrict smoking areas, which are above and beyond the scope of the law,” pointed out Sabarre. Meanwhile, the “Republic Act 10643” prescribes the requirements regarding health warnings.
“At least 50% of the front and back surfaces of a cigarette pack must be covered by graphic health warnings,” explained Sabarre. “In addition, there must also be a warning on at least one of the side panels.” Templates of these warnings are prescribed and issued by the Department of Health and must be applied by every cigarette manufacturer. Their designs are replaced every two years.
The eternal scourge: illicit tobacco
Illicit tobacco is of course an issue that affects the Philippines to pretty much the same worrying extent as it does its ASEAN neighbors and many other countries across Asia. “Illicit tobacco remains a huge problem in the country,” conceded John Freda. The illegal cigarette trade in particular has been at the center of several congressional investigations due to its impact on government revenues. Recently, congressman Joey Salceda, chairman of the House Ways and Means Committee, estimated the annual financial losses at PHP30 billion to PHP60 billion (US$0.6bn- US$1.18bn); an enormous amount by any standard.
“Based on previous enforcement operations, it is very apparent that both local and transnational syndicates are involved in the illicit trade,” said Freda. He voiced concerns that the “constant and continuing [tax] increases will only serve to further exacerbate the illicit trade issue.” Hence, JTIP advocates for “moderate, reasonable, and predictable increases in lieu of excessive tobacco tax hikes.” Freda added that in 2020 alone an incredulous half a billion illicit cigarettes were seized by the authorities at the country’s borders. “And that figure does not even include those cigarette shipments that actually managed to enter the market,” he pointed out. “As cigarette taxes keep increasing, it only encourages more smuggling.”
Irresistible profits lure criminals
The trade is irresistibly lucrative. Freda offered a quite eye-opening calculation: before the Covid-19 pandemic struck in the Philippines, a master case (containing 10,000 sticks) of illicit product cost a criminal gang between PHP6,000 and PHP12,000 (US$118-US$236), depending on market demand. By comparison, a master case of a legitimate local brand would cost around PHP50,000 per master case, an international brand even more. When these illicit cigarettes are passed on to consumers at PHP2- PHP3 per stick as they often are, they generate extremely neat profits.
In order to try to stem the illicit tide, local tobacco manufacturers are eagerly collaborating with law enforcement agencies. “At JTIP, we are closely cooperating with the Bureau of Customs, the Bureau of Internal Revenue, and the Philippine National Police, among other entities,” confirmed Freda. And to make the company’s position on the matter even clearer, he stated, “Illegal tobacco makers are directly stealing from the state. As legitimate businesses, we are a very effective tax collector and clearly, we can’t do that if there is an illicit problem. Illegal trade cheats everyone: governments, consumers, and legitimate businesses.”
A Notable Regional Exception
Unlike in most of its regional neighbors, vaping and heated tobacco products are explicitly not illegal in the Philippines, which effectively pre-empted an emergence of the grey or black markets that exist in other countries. Both product categories are formally legitimized by virtue of the “Republic Act 11346” as amended by Republic Act 11467, through the creation of separate excise tax classifications for Vapor Products and Heated Tobacco Products and the creation of the regulatory framework for the category. According to JTIP’s Mildred Sabarre, the product categories were formally legalized by virtue of the “Republic Act 11346” in 2019.
Putting People First
JTI-AMC has recently been recognized as 2020 PEZA “Outstanding Employer.” A second award was presented to the company for its community projects. The two awards are testament to JTI-AMC’s significant efforts in undertaking social welfare programs that greatly benefit the Filipino community. They also signify the company’s contribution in generating employment as well as strengthening employee relations, talent and skills development, workplace health and safety, and improving workforce welfare overall. The PEZA Awards ceremony was held on October
28. The event is owned and organized by the Philip- pine Economic Zone Authority under the Department of Trade and Industry. Additionally, JTI Philippines also has received the “Investors in People” (IIP) accreditation three times in recent years in recognition of its excellent people management practices. The assessment of the IIP entails interviews with a representative sample of employees ranging from top managers to front line employees.