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New windfall in the e-cigarette industry - targeting the Southeast Asian market

2022-11-14 15:07:12

How hot is the Indonesian e-cigarette market

It is easy to see how hot Indonesia is from the recent movements of new global tobacco companies.

Indonesian tobacco company HM Sampoerna has invested US$166.1 million to provide tobacco production facilities for IQOS' HEETS brand of cartridges, according to media reports. The high-tech factory in Karawang, West Java, Indonesia, will start operations in the fourth quarter of 2022.

Vassilis Gkatzelis made a public appearance at Sampoerna on 1 November 2022. He said:- "These production facilities will focus on supplying the domestic and export markets in the Asia-Pacific region." IQOS tobacco products, commercialised under the HEETS brand, will complement Sampoerna's product line for domestic sales, particularly for exports in the Asia-Pacific region.

For Sampoerna holding company Philip Morris International (Filmore International, PMI), this new plant becomes the seventh in the world and the second in Asia after South Korea.

In addition to being a major player in the country, Sampoerna is also one of the cigarette manufacturers that continues to export. in the first nine months of 2021, Sampoerna exported to around 40 destinations worldwide.

JINJIA said in an institutional survey this month that it has set up a subsidiary in Indonesia, Indonesia Yunpu Xinghe, to provide local production of new tobacco, OEM and supply chain business, and has made some progress in the selection of partners, business direction and business qualifications, and has now obtained the corresponding local tobacco production license in Indonesia.

Tobacco flavouring and flake leader Huabao International, on the other hand, has taken Indonesia Huabao as the spearhead of the overseas strategy of the Huabao Group. The construction of the Indonesia project was fully opened at the end of 2020, and according to official news it has completed the construction of the plant and equipment installation, and in March this year the whole line with material commissioning successfully, has the formal production capacity.

According to relevant reports, Yueh Keng entered the Indonesian market in 2019, and in order to meet Indonesian users' preference for clove flavours, Yueh Keng has iterated over a hundred versions internationally and has now become the head brand in the bullet-changing category in the Indonesian market. In addition, Yuekei also announced in 2021 that it will introduce the common domestic shop opening subsidy to Indonesia, Yuekei will provide support worth Rp 100 million (about Rp 4.7W), including shop design, furniture, products, marketing and promotion, and franchisees can become official Yuekei agents for only Rp 100 million.

Ono also announced the launch of its sub-brand vimizi in February this year to lay out the Indonesian market; in addition, the new factory of solid-state e-cigarette company Lomei International in Batam, Indonesia, opened in July; SMOK launched the SOLUS 2 series for the world at its new product launch in Indonesia on 28 July; on 24 September, INNOKIN sub-brand OKINO held a brand launch in Indonesia and started On 24 September, INNOKIN sub-brand OKINO held a brand launch event in Indonesia and started to expand into the Southeast Asian market. Even IECIE, an electronic cigarette exhibition, chose Jakarta, Indonesia, as its first stop in the world.

It is clear that Indonesia has become a bridgehead for new tobacco companies to expand into Southeast Asia and the global market, from supply chains to brands. However, it is worth noting that since Indonesia has not yet formed a complete industry chain for new tobacco, both supply chain companies and brands are focusing on enhancing the influence of Chinese companies in the global new tobacco sector. For example, the supply chain is more interested in Indonesia's relatively lower labour costs, while the brand is looking at its potential consumer market and exporting a tried and tested competitive playbook.

Why Indonesia's e-cigarette market is so hot

There are at least four reasons why Indonesia has become a bridgehead for the new tobacco industry.

One is the potential of its new tobacco consumer market; as of September 2020, Indonesia has a population of 262 million, making it the fourth most populous country in the world. Indonesia's smoking population is 70.2 million, accounting for 34% of the total population, and the "smoker rate" is the highest in the world. In terms of e-cigarettes, electronic atomised products entered Indonesia in 2010 and began to grow rapidly in 2014. Figures show that the market value of e-atomisation in Indonesia reached US$239 million in 2021 and is expected to continue to grow potentially over the period 2020-26.

Indonesia introduced its tax on e-cigarettes on 1 July 2018, recognising their legal status and requiring only an application for a sales licence. In particular, e-cigarettes containing nicotine oil are considered "other processed tobacco" or "products containing tobacco extracts and flavours" and are subject to a 57% excise tax, while the main unit of an e-atomiser, atomiser and nicotine-free oil are considered consumer products. In comparison, the average excise tax rate on traditional tobacco products in Indonesia is 23%; this is due to the strength of the tobacco lobby in Indonesia.

Secondly, Indonesia's tariffs are low and its policies are tilted; Chinese e-cigarette exports to Indonesia are not subject to export tariffs; and the Regional Comprehensive Economic Partnership Agreement (RCEP), which was officially signed on 15 November 2020 and came into force on 1 January this year, is an important element of the "commitment to reduce tariffs to zero within ten years". According to the Ministry of Commerce website data at the time, the seven countries that can sell e-cigarettes tariffs were 30% in Vietnam, 24% in South Korea, 10% in Indonesia, 5% in Malaysia, 5% in Laos, 3.4% in Japan and 3% in the Philippines.

This is also reflected in Indonesia's support for the e-cigarette industry. According to sources, Indonesia has planned a large e-cigarette industrial park and has invited some Chinese companies to move in. Some time ago, Indonesia announced that it would raise the tax rate on e-cigarettes, and practitioners believe that this move is to promote new tobacco companies to build local factories and purchase local tobacco oil to achieve a win-win situation.

Third, Indonesia's e-cigarette industry is currently in a weak regulatory state; Indonesia is the only country in Southeast Asia that allows television and media to publish tobacco advertising; data shows that of all the countries that share e-cigarette content on Instagram, Indonesia is the second in number; and e-cigarettes have not yet been "disconnected", and their e-commerce sales accounted for 35.3% of the total. The share of e-commerce sales was once 35.3%.

So, even with the high excise tax rate, Indonesia's e-cigarette market size is still growing at a CAGR of 34.5% from 2016-19. According to the Indonesian Ministry of Industry 2020 data, Indonesia has as many as 150 e-cigarette distributors or importers, 300 vape oil factories, 100 equipment and accessory companies, 5,000 retail shops, and 18,677 types of vape oils on sale.

Fourth, driven by multinational tobacco companies; British American Tobacco acquired an 85% stake in PT Bentoel Internasional Investama Tbk, Indonesia's fourth largest cigarette manufacturer, for US$494 million in June 2009, and has since begun to invest more and more in Indonesia (for example, by sending talented Indonesian staff to other country offices to gain experience in key roles). As of 2019, British American Tobacco's Indonesian business unit employs around 6,000 people, operating in tobacco farming, cigarette production, marketing and distribution, and has become the largest contributor to the British American Tobacco Group's global driver brands (Dunhill and Goodwill).

For its part, Filmore International acquired a majority stake in Zambalin in 2005 for US$5.2 billion and has since invested a further US$330 million to boost Zambalin's growth. According to the Jakarta Post in 2006, one year after its acquisition by Fimo International, SampoLin saw a 19% increase in net revenue, a 20% increase in cigarette sales and a rise in market share of up to 2.8% in Indonesia. In addition, Japan Tobacco International also acquired an Indonesian clove cigarette manufacturer and its distributor in 2017 for US$677 million, thereby expanding the group's market share in Indonesia.

Indonesia's attraction to multinational tobacco companies is not unrelated to its complex tax laws. According to a previous World Bank report, more than half of Indonesia's tobacco industry is made up of small-scale factories that rely heavily on hand-rolling. In order to ensure the interests of small-scale factories to a certain extent, Indonesia has developed a more advantageous tax advantage for small-scale factories, which has resulted in a win-win situation where large multinational tobacco companies sign contracts with small-scale factories to enjoy tax breaks and small-scale factories add a large number of jobs.

The successive entry of various multinational tobacco companies has also created a sort of spur and cluster effect, making Indonesia a bridgehead for more multinational tobacco companies to enter Southeast Asia and Asia as a whole.

About the Southeast Asian market, LANA pre-empted the market in 2014. LANAVAPE has managed to take a large share of the market through various types and flavours of e-cigarette products. The LANA brand now accounts for 80% of the market in Malaysia!

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