1 of 5
Despite attracting both international and local cigarette manufacturers, lax law enforcement leads to a flourishing illicit market in Cambodia.
2 of 5
Street hawker display in Phnom Penh showing illicit cigarettes. Credit: JT International (Cambodia) Co. Ltd.
3 of 5
Roy Manalili, general manager, JT International (Cambodia) Co. Ltd. Credit: JT International (Cambodia) Co. Ltd.
4 of 5
5 of 5
Cambodia hosts all large internationals – and quite a few local manufacturers, too. But, the country also struggles against a tremendous tide of illicit product.
When compared to its other Southeast Asian neighbors, Cambodia may be a relatively small market for cigarettes and other combustibles, but it nevertheless attracts all the large global players. In addition, the country hosts myriad local manufacturers, many of them either Chinese-owned or financed. But, as law enforcement in the country is notoriously lax, tax-not-paid cigarettes smuggled across land and sea borders or produced domestically create a flourishing illicit market that severely hampers legal brands. Meanwhile, the tiny nation (like practically all of ASEAN) is strictly off limits for vaping and heated tobacco products, all of which are banned.
JTI: Serving Cambodia from the Philippines
Japan Tobacco International (JTI) established a representative office in the Cambodian capital of Phnom Penh as early as 2008. That office was upgraded to a fully incorporated entity in 2016, operating under the name JTI International (Cambodia) Co. Ltd. However, JTI Cambodia does not maintain a local manufacturing facility, according to the outfit’s general manager, Roy Manalili. Instead, all merchandise imports from other regional countries such as Myanmar, Taiwan, Indonesia, and – perhaps most importantly – the Philippines, where JTI operates a huge regional manufacturing and distribution center. “The Philippines play a crucial supplier role [for us], as JTI Cambodia takes delivery of substantial quantities [from there] via purchase orders,” confirmed Manalili.
JTI brands take market lead
Mevius and Winston – both JTI brands – are among Cambodia’s best-selling cigarette brands. That positioning also helped JTI attain one of the top spots as per total market share. Manalili added that in order to further secure its comfortable market lead, the company on August 2, 2021 launched Mevius Fizzy Dew in the country. “It’s a new innovative capsule flavor that already is selling well in some of our other APAC market territories.” Other popular international cigarette brands sold in Cambodia include Fine (made by Imperial-owned Huotraco Co.), as well as 555 and Ara (both from BAT). Meanwhile, the two most popular local cigarette brands are Luxury and Cambo.
Wide retail price gap creates challenges
“Based on our internal market research, the majority of domestic cigarette brands retail between KRH1,000-2,000 (US$0.25-0.50) per standard pack and account for nearly 50% of total cigarette consumption in Cambodia,” said Manalili. Accordingly, the other half is shared among international companies. “International premium cigarette brands quite uniformly cost KHR6,000 a pack,” Manalili explained. However, it is understood by Tobacco Asia that these figures only account for the legal market and disregard the huge illicit market.
The current tax applied on tobacco products in Cambodia is ad valorem. A cigarette pack’s retail price incorporates 20% excise tax and a “public lighting tax” of 3%. Imported products are subject to import duty, which helps to partly explain the relatively higher retail prices in the marketplace. However, consumers regard these imports as high- quality products worth their costs when compared to local brands.
Price parity is not an option
The price difference between local and international cigarette brands creates a quite challenging market. In a country where unskilled laborers often earn as little as US$300 per month, the price of a premium pack is out of reach for many smokers. But, down-adjusting retail prices of premium brands is not a solution either. “If we played at price parity [with local brands], it would be impossible for us to sustain our business in Cambodia,” pointed out Manalili.
Still, JTI’s own research shows that with better job opportunities and rising income levels –especially in Phnom Penh and other main cities – many consumers became more discerning, seeking better quality by migrating to premium brands. “We already have seen this happening with the phenomenal growth of Mevius over the past years; and now Winston has been gaining considerable ground as well,” claimed Manalili.
Market contraction and advertising ban
Despite shifting consumer preferences towards higher-quality products, the total market shrinks nevertheless. While a study by Cambodia’s National Institute of Statistics (NIS) stated that in early 2021 about a quarter of the country’s adult population (age 18 and over) smoked, research conducted by JTI suggests that the market for combustibles will contract by 3% every year.
All forms of direct end-consumer advertising and promotional campaigns are strictly prohibited in accordance with Cambodia’s tobacco control law (which, by the way, is an almost exact blueprint of the respective law in neighboring Thailand). This makes product marketing difficult for local and international brands. The implication is that the only promotional activities allowed for tobacco products, including cigarettes, are non-public brand marketing and trade programs offered to retailers and merchants.
The illicit tobacco menace
Yet, these restrictions seem mild compared to the scourge of illicit cigarettes that is afflicting Cambodia. “The country is swamped with illegal products, which are available literally everywhere and quite openly so, too,” lamented Manalili, “They avoid paying government taxes and their packaging is non-compliant, carrying neither tax stamps nor the mandated health warnings.” Consequently, illicit cigarettes are peddled at fractions of the retail prices of legal merchandise. “This deeply concerning situation creates many challenges for legitimate businesses in Cambodia, as well as an unfair playing field,” said Manalili.
Illicit product availability cheats everybody
He argued that the illegal trade cheated just about everybody: the government, the consumers, and legitimate businesses. “It robs the government of much needed tax revenue while consumers are smoking cigarettes that are not subject to quality controls,” said Manalili. “Furthermore, organized crime infiltrates communities, generating huge profits with very low risk of being caught – and even if there are arrests, the penalties meted out are often insignificant.” Alas, no Cambodian government data exist as per the extent of the problem. But the fact that illegal cigarettes are available at virtually every street corner in Cambodian cities and villages strongly suggests that the issue must be gigantic.
The contraband situation is so severe that JTI and other tobacco companies have on numerous occasions called on the government to enforce existing laws covering the tobacco industry in order to reduce the amount of illegal trade in the market. Alas, this so far proves to be an uphill battle. Although the government acknowledges the problem from time to time with promises to take concerted action, industry observers note that this constituted little more than window dressing.
Dialogue must continue
However, Manalili is adamant that continued dialogue between governmental authorities and businesses is essential for tobacco industry regulations to be effective, proportionate, and – even more crucially – enforced consistently. “Tobacco industry regulations that follow internationally accepted principles can both meet public policy goals and ensure that business interests are respected,” he asserted.
One further step into that direction was the creation of the Association of the Tobacco Industry in Cambodia (ATIC), a private sector body whose members currently comprise JTI, BAT, PMI (in the form of their local outfit, I.Q.P.Q), and Imperial (as local company Huotraco). It is compulsory for ATIC members to be fully compliant with all relevant tobacco laws and regulations – and Tobacco Asia notes the conspicuous absence of virtually every local manufacturer from the membership list (except the two subsidiaries detailed above). Honi soit qui mal y pense.
Joint survey may lead to a resolution
With ATIC presently chaired by JTI, the organization very recently initiated the anti-illicit trade joint survey tasked with “identifying and tackling the illicit trade issues in Cambodia and propose an action plan to the government to combat the illicit trade in the country.” The survey is endorsed by Cambodia’s deputy prime minister, the ministry of economy and finance, as well as the co-chairman of a governmental working group on tax law and good governance.
Although the intentions of ATIC and the involved government parties are commendable, the joint survey’s success will ultimately and solely rely on the Cambodian authorities’ willingness and capability of taking concerted action against the illicit trade. And, as the past has shown on countless occasions, things don’t always proceed according to plan in this Southeast Asian nation.