Taiwan: A Tough, Mature Market

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When Taiwan’s state tobacco monopoly was abolished in 2002, competition between the local TTL Corp. and foreign tobacco companies started heating up. But a plethora of tough regulations make the country a difficult place to handle for everybody.

By Thomas Schmid

After China’s Qing dynasty had ceded the island of Formosa (modern Taiwan) to Japan in 1895, the new rulers introduced an informal state monopoly on all tobacco and alcohol products three years later. In 1901, that monopoly was officially incorporated as “Monopoly Bureau of the Taiwan Governor’s Office”, effectively the precursor entity of current Taiwan Tobacco & Liquor Corporation (TTL), which is still state-owned. To this day occupying the original premises, a beautiful art nouveau edifice in downtown Taipei, TTL remains Taiwan’s only domestic manufacturer of tobacco products.

ALSO: Miscellaneous Taiwan Data

Stiff Restrictions And Heavy Fines

End of an era opens market

In 2002, the state monopoly system that had endured for almost a century was eliminated, the sudden market liberation triggering a strong push by foreign tobacco companies to secure market shares and setting up local manufacturing plants or distribution networks.

“Japan Tobacco International (JTI), Imperial Tobacco (IMP), British American Tobacco (BAT), and Philip Morris International (PMI) are our main market competitors,” said Roger Tien, manager of TTL’s department of international business. “But we are aware that some cigarette brands of Korea’s KT&G Corporation are now also becoming popular. Though their market share is still negligible, they might become a threat [to TTL] in the future.”

Surrendering market shares

After TTL lost its cushy monopoly, it had to relinquish considerable market share to its newly emerged competitors. But the company still claims to presently hold on to about 27%.

“As more and more multinationals entered the market, some consumers, especially young people, were attracted by their world-renowned brands,” Tien explained the development. At present, most of TTL’s loyal consumers are of the older generation - and they are gradually fading out. “In order to counteract that predicament, we’ve launched two new brands in 2015, Vesta and Mars. Their taste and package designs are different from our existing products and they were developed particularly for consumers who have no preference for our traditional brands.”  Sales of Vesta and Mars have been going “quite well”, according to Tien, and with their help the company is “confident to wrest back some market share from the competitors”. The target is to reach 28% in 2017.

China imports no big threat

Meanwhile, cigarettes imports from Mainland China appear to have very little impact in Taiwan. TTL estimates the total market share of Chinese brands to be less than 0.5%. “And we don’t think it will increase, as the taste of China-produced cigarettes generally does not appeal to Taiwan’s smokers,” Tien asserted.

Yet the company, which is presently operating three manufacturing plants, is successfully exporting its own products to China, as well as North Korea and some countries in Southeast Asia and the Middle East, the most popular brands being LongLife, 520, and Oner. Also, news was circulating in 2016 that TTL planned to enter the Singapore market, although the company would neither confirm nor deny that when queried by TOBACCO ASIA. “But we highly welcome any business opportunities worldwide, no matter in which region,” Tien said rather ambiguously.

JTI encounters mature market

JTI Taiwan was established in 1999, launching its iconic brand Mevius in Taiwan in the same year. Subsequently, the market opening of 2002 provided a welcome opportunity to introduce further brands, among them Winston, LD and, most recently, Camel. But according to Jessica Chan, vice president of corporate affairs & communications at JTI Taiwan, the country “can be characterized as a mature market.”

“There is a gradual reduction in consumption and a down-trading from higher priced to lower priced cigarettes partially driven by an aging population, stagnant income levels and excessive tax increases,” said Chan. Still, the Taiwan National Audit Office reported that a respectable 34.9 billion sticks were sold across all tobacco companies and their brands in 2015, of which 59.67% were produced locally and 40.33% were imported. This might explain why JTI Taiwan plans to continue investing in its brands.

Tough challenges for every player

Yet there are further challenges to be tackled not only by JTI Taiwan but every other company represented in the market. For example, illegal have recently been increasingly entering Taiwan, sometimes concealed in lawful imports. This surge is probably the direct result of criminals taking advantage of the already mentioned stiff tax hikes on the background of stagnant income levels. Also, different local authorities appear to interpret and enforce existing regulations inconsistently and unpredictably, a situation that suspends tobacco companies in a limbo of insecurity.

More legislation on the horizon?

Furthermore, Chan said, there is a threat emanating from “further legislative proposals seeking to introduce extreme tax and regulatory measures that would not achieve the intended public policy objectives, but risk serious negative consequences including exacerbating the illegal trade problem.” And Chan might be quite right. Further tightening the tax and regulations screw might indeed only play into the hands of an already blossoming illicit market. Additionally, existing laws concerning tobacco advertising and promotion (see side box) have evidently not led to any substantial decrease in smoking prevalence. Neither have the smoking bans currently enforced in practically all indoor places and increasingly also extended to outdoor locations. Instead, Chan argued, “high-quality regulation” can only be achieved if the government can be encouraged to adopt the OECD’s “better regulation” principles, which are endorsed by numerous international organizations, such as APEC.

JTI scoops market leader position

Despite all adversities, JTI Taiwan hardly finds itself in a corner position, though. The company claims to have consistently held market leadership since 2005, its market share in 2016 clocking in at a very comfortable 40%, putting it ahead even of native TTL (see table 2). “We are motivated by our core values – ‘enterprising, open, and challenging’ – which help us to maintain the highest standards and act with integrity in all that we do,” Chan said. But corporate mantras aside, TOBACCO ASIA has a hunch that the ready availability in Taiwan of many of JTI’s globally very well-known and popular brands also might have something to do with the company’s success.

BAT advocates OECD principles

British American Tobacco entered the market in 1995 in the form of B.A.T. Services Limited (Taiwan Branch). Today the company sells such global favorites as Lucky Strike, Pall Mal,l and Dunhill, but also less well known ones like Vogue and others. Having held a rather consistent market share of around 10% since at least 2014, BAT Taiwan currently has no immediate plans to launch any new brands, according to company spokesperson Sophia Yang. She also echoed what JTI Taiwan had observed, namely that a further tightening of the tax and regulatory structure would exacerbate illicit trade, and that the government should adopt the OECD’s “better regulation” principles for a legislative process that takes into account openness, participation, accountability, effectiveness, coherence, and proportionality.