April 27, 2024

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[THE INVESTOR] The tobacco industry is gearing up for a battle to capture the market for smoke-free alternatives to traditional cigarettes. 

Marlboro maker Philip Morris made the first move on May 18 with the announcement that its heated-tobacco system IQOS will be making its Korea launch on June 5. Based on research that the majority of smoking-related disease comes from the chemicals produced during combustion, IQOS focuses on delivering nicotine by heating tobacco and creating vapor using an electronic device, rather than burning it and creating harmful smoke.

 

The IQOS system and HEETS sticks from Philip Morris. Philip Morris.

Switching to IQOS reduces exposure to harmful and potentially harmful chemicals by up to 90 percent, according to Philip Morris. 

“For those who continue to smoke, we believe switching to IQOS is the better choice,” Dr. Moira Gilchrist, who heads communications for Philip Morris International’s reduced risk products team, told reporters on May 18.

Philip Morris’ announcement of the IQOS release is now putting pressure on other tobacco makers to enter the heated tobacco segment. 

Dunhill maker British American Tobacco has been considering the release of its Glo heated tobacco product, with its Korean release expected in early August, according to an industry source.

Korean tobacco company KT&G also created a task force specifically for heated tobacco products last May. According to news reports, the Korean company has purchased machinery for creating the heated tobacco sticks and is developing its own product, although a spokeswoman for KT&G says there are “no concrete plans yet” for the release of a heated tobacco product.

The heated tobacco market offers growth potential for tobacco companies here that have been continuously hit with regulatory measures over the past two years. In 2015, taxes on cigarettes sharply rose to nearly double the price of cigarettes per pack. Last year, the Health Ministry began requiring cigarette packs to display graphic warning labels depicting various diseases that could result from smoking.

Currently, heated tobacco sticks are not required to have graphic warning labels on their packaging, although the Health Ministry is currently reviewing regulations. In addition, since heated tobacco products are not combustible, they are subject to a different, and potentially lower tax rate. Under the current law, the IQOS system’s heated tobacco sticks, called HEETS, are categorized as electronic tobacco products using solid tobacco.

There are a variety of taxes included in the price of cigarettes in Korea, including the excise tax, a local education tax, an individual consumption tax, and a tax for the health promotion fund. The National Assembly has yet to pass a law establishing the individual consumption tax for heated tobacco products, meaning that tobacco companies must take potential tax changes into consideration when deciding their product prices.

Philip Morris’ HEETS will be sold at 4,300 won ($3.82) for a pack of 20 sticks. Philip Morris Korea CEO Chong Il-woo told reporters on May 18that the company will maintain that price even if the individual consumption tax is set at a higher rate than expected. Spokespersons for BAT and KT&G said that potential price points for their own products are still “under review.”

“It is unclear how popular these products will be in Korea, where liquid-based electronic cigarettes have already taken up some market share,” said an official with a tobacco company here, noting that liquid-based e-cigarettes were not present in the Japanese market, where IQOS and Glo saw explosive demand. “However, it is definitely a global development in the tobacco industry that companies will not be able to ignore.” 

By Won Ho-jung/The Korea Herald (hjwon@heraldcorp.com)