Thailand Tobacco Monopoly: Bravely Soldiering On

In a rare exclusive interview, Thailand Tobacco Monopoly’s managing director Daonoi Suttiniphapunt grants Tobacco Asia some insights into the organization’s future plans and the manifold challenges that lie ahead for the state-owned outfit.

By Thomas Schmid

Established in 1939 as a department under the Ministry of Finance, the Thailand Tobacco Monopoly (TTM) remains today the sole legal entity in the country to commercially produce tobacco products, primarily cigarettes. While this may sound like it should put the organization in a rather comfortable and carefree situation, the path has recently become strewn with numerous rocks: revamped excise tax structure disadvantages TTM’s own cigarette brands against imports, the increased tax burden drives away consumers, and the onslaught of multinationals wrestles away market share. But TTM soldiers on; sometimes with more, sometimes with a little less success. One measure to mitigate unfavorable impacts and to also expand the business base is TTM’s impending reforming into a new juristic entity, expected to be concluded in April 2018.

Tobacco Asia (TA): Can you tell me a bit more about your new corporate setup?

Daonoi Suttiniphapunt (DS): It is going to help us expand our product range. For example, we will begin dealing in cut rag, leaf, and expanded tobacco, also in the international market.

Furthermore, we are planning to start producing and marketing our own smoking accessories like cigarette tubes, filter tow, rolling machines, and others. However, we are still studying if all of that is viable.

TA: I’ve also heard of a plan to set up one or several hemp plantations…

DS: Indeed. We are going to establish our own hemp farm. But please don’t confuse that with news reports that Thailand may or may not legalize the growing of medicinal marijuana.

We are talking about hemp strains with a very negligible THC content. Their fibers will be used in the manufacture of cigarette papers and also for producing filter tow. Additionally, we are studying the extraction of hemp oil to see if we will be able to produce a flavoring additive for tobacco conditioning.

TA: How many different cigarette brands does TTM currently have in its product portfolio?

DS: We have 16* brands. [*actually it is only about half that, because several of the brands come in two or more flavor/tobacco variations, generally American blend, and menthol; see our side box]

TA: And all your brands are manufactured only at one location here in Bangkok for the whole country?

DS: No. We currently operate a total of seven facilities across the country, encompassing a total land area of 7,000 rai [11.2 square kilometers]. Cigarettes are manufactured at three locations in Bangkok and also at our new facility just north of the capital, in the province of Ayutthaya.

In Bangkok, we also do all our printing at one specific location, using Bobst gravure and KBS lines as our main printing machinery set-ups. Then we maintain two facilities for primary processing, one in Den Chai in the north of the country and the other one in Khon Kaen in the northeast. However, we are going to close down all cigarette factories in Bangkok by 2020 and move the entire manufacturing to the Ayutthaya facility, which has already been handling part of our production output since last year.

TA: This will require some heavy investment, also under consideration that you intend to expand your product range into other areas and want to become more active in foreign markets. Is the government going to finance all this?

DS: The new corporate entity will remain under the authority of the Ministry of Finance, but the restructuring will allow for investment from the private sector in the form of partnerships. So we are looking for mixed investment from both the government and the private sector.

TA: Is the private sector willing to pour investments into a government-owned monopoly without being able to have considerable say in the decision-making and management process?

DS: Well, private sector investment will flow into subsidiary companies that we are going to set up.

TA: What is the maximum annual cigarette production capacity of all your current locations combined?

DS: We are currently producing only about 65 billion sticks per annum, which means our manufacturing facilities are utilized at less than half their actual capacity.

TA: Does that mean you could easily accommodate cigarette production orders from other companies, for example from abroad?

DS: Not exactly, at least not at this moment. We can currently only accept OEM orders from private companies, but not cigarette production orders. As a state-owned monopoly we are at this point not yet in a legal position to deal with private sector production orders of this kind. That will change once we are restructured into a juristic entity, though. But to come back to OEM deliveries: we are already in talks with four companies from Asia and the Middle East who want us to supply them with OEM products like cut rag and expanded tobacco.

TA: You manufacture your own expanded tobacco?

DS: We do. I even believe that we currently are the only tobacco company in the whole of ASEAN that has its own DIET plant, which we got from Danish firm, AircoDIET.

TA: According to newspaper reports, TTM feels that the new excise tax structure, which came into effect only in September 2017, is unfair and that it puts the monopoly at a disadvantage against importers of foreign cigarette brands. Can you elaborate on that, please?

DS: The new tax structure is two-pronged. Firstly, there is a fixed tax amount levied per stick, set at THB1.20 (US$0.035) per stick. Secondly, an additional staggered excise tax rate is applied, which is calculated on the declared retail price of a cigarette pack. If the declared retail price of a pack is above THB60.00 or above, that rate is 40%, and it is 20%if the declared retail price is below THB60.00.

TA: So what are your concerns?

DS: The retail price is determined and declared to the excise department by the individual manufacturer. This creates a situation where the gap between the total tax burden faced by foreign manufacturers that import their cigarettes into Thailand and what we pay for our locally manufactured cigarettes is very broad.

While the importers’ net tax burden de-facto accounts for only about 15% of the per-pack retail price, ours works out at close to 80%. That is a great difference and puts us at a disadvantage. Before the current tax structure was introduced, excise taxes were calculated on the base price, the C.I.F., which leveled out the tax burden and was fairer to both the importers and us.

TA: I fail to understand. Isn’t the exact same tax structure applied to both imports and locally produced cigarettes? What is the issue?

DS: Well, the problem is the declared retail price. A foreign company may declare any retail price they wish, and importers take advantage of that. Let’s say, a certain imported brand in the past retailed for THB100.00 per pack in local stores.

But now [under the new excise tax structure] the same importer may have decided to declare a retail price of only THB60.00 per pack. That entitles them to the lower excise tax rate of 20%.

TA: Interesting. And I also can see a possible impact on your consumer base.

DS: Indeed. Now suddenly many foreign brands have become surprisingly cheap [compared to local brands], so many smokers for whom imports were previously too costly switch to imported brands. That also creates a lot of competitive pressure for us, because under the old tax structure the situation was exactly the other way round: Imported brands were invariably more expensive than local ones.

TA: Can you please break down for me a cost-and-tax example so I can understand the issue better?

DS: (as she draws a simple diagram on a piece of paper): Certainly. Let’s say one of our brands is sold in a store for THB60.00 per pack. Of that amount, the total tax proportion would account for THB48.00, including other taxes such as 7% VAT, which leaves us with only THB12.00 per pack. For marketing expenses, we have to deduct another THB6 or so per pack. And that ultimately leaves us with just THB6.00 per pack to cover the manufacturing cost per pack and turn a very modest net profit.

TA: So how can foreign brands be retailed so cheap here? I mean, there must be additional cost for shipping merchandise to Thailand, for paying import taxes and customs duties, and so on…

DS: We are primarily talking about the large global multinational tobacco companies. To them, securing and expanding their individual market shares here in Thailand is more important.

But they can produce very cheaply also.

TA: What is TTM’s current total market share?

DS: In 2017, we held about 80%. That’s up 2% from the roughly 78% we had in 2016. But for 2018 we expect a slump of about 15% due to the tax and market situation I described.

TA: The Thai government has for several years strongly increased its efforts to lower the number of smokers in the country through numerous methods including steep tax increases. How does this interfere with the viability of TTM’s business?

DS: We unconditionally support the government’s policies and strategies. We don’t want to encourage people smoking. But as long as there is tobacco consumption, we want to maintain our market share.

The market size is not important; it’s the market share. Because when we sell less product due to a shrinking market, so do the multinationals.

TA: Let’s talk about Thailand’s stance on electronic smoking and next-generation products like heat-not-burn devices. Why has Thailand banned these alternatives altogether when in many other countries in the world they are freely available?

DS: Electronic cigarettes and vaporizers utilize e-liquids, whose various components may be dangerous to health. And heat-not-burn devices are likewise dangerous, even if a little less so than e-cigarettes.

TA: And conventional combustible cigarettes are not?

DS: You are missing the point. The government is concerned that e-smoking and heat-not-burn devices are encouraging consumers – especially young people – to take up the nicotine habit. We don’t want to promote that.

These devices are “beginner’s devices”, so to speak. They may lead people to eventually switch to regular cigarettes later on as their habit progresses. And that is why we have banned them.

TA: But how about regular smokers who would like to try and quit with the help of such devices?

DS: From what I have seen, the vast majority of regular smokers who try out these devices, in the long run, are not satisfied with the taste experience nor the general smoking experience.

They sooner or later will revert back to combustibles because of that. Thus said, I am not convinced about the argument that these devices generally are very helpful for smokers to quit for good.

TA: So this total ban has absolutely nothing to do with protecting the business of the Tobacco Monopoly in an already difficult, very competitive domestic market?

DS: No, it hasn’t.

TA: There are harsh penalties, including jail terms, not only for commercial selling of these devices in Thailand, but also for their import and even their mere personal possession. The country is a very popular destination for foreign tourists and many of them might not be aware of the ban. Wouldn’t it create an uncomfortable situation for Thailand if scores of foreign vacationers received hefty fines or were even imprisoned just for bringing their own personal device?

DS: Yes, but it is up to the authorities [like the Tourism Authority and Immigration Bureau] to better communicate this ban to make visitors fully aware of it.

TA: To wrap up our interview, can you disclose your approximate total turnovers for 2016 and 2017 and how much you expect to take in this year?

DS: I cannot recall the exact figures, but in 2016 it was more than THB72 billion (US$2.1 billion). In 2017, our revenue dropped slightly to a bit over THB70 billion, although our market share increased by about 2%. And for 2018 we expect to earn below THB70 billion due to the projected market share losses.

TA: Thank you very much for your time. Is there anything else you would like to mention before we close?

DS: It is going to be a very interesting 2018 because of all the challenges that await us in terms of organizational changes, tax management, our impending production relocation [to Ayutthaya] and our business expansion plans.