Cracking Into the Korean Tobacco Manufacturing Market
Korea is one of the two countries in Asia that allow the manufacturing of cigarettes by foreign companies. Tobacco Asia takes a closer look at the current business landscape for the industry in this competitive market.
Asia is growing wealthier. Its already large population is rising fast. For c.e.o’s of multi-national tobacco firms, a strategy for breaking into and staying firmly entrenched in this large and growing market is a must.
For British American Tobacco (BAT), there was no better Asia strategy than to physically plant themselves right in Asia’s backyard, and they had the foresight to do this nearly two decades ago.
In 2002, the world’s second-largest cigarette manufacturer sent executives from their London high-rise office to a discrete town in South Korea no one had ever heard of, called Sacheon. It was here that they would accomplish something no tobacco company had ever done before: build a foreign-owned manufacturing facility on the Korean peninsula, entrenching themselves in the region and tapping into a Korean market that was on its way to becoming the world’s 12th largest economy.
“BAT Korea marks its 30th Anniversary this year since the local business launch in 1990, while its manufacturing facility opened in 2002 as the first foreign investment of a tobacco production factory in Korea,” said a corporate affairs manager for BAT Korea.
Before BAT broke ground in South Korea in 2002, it was considered one of the hardest markets to crack for tobacco industries. South Korea was a proverbial hermit kingdom, its doors closed to many of the world’s foreign enterprises — especially tobacco companies.
Until 1988, state-owned Korea Tobacco and Ginseng Corporation (KT&G) held a 100% monopoly over the tobacco industry in Korea. But even after the doors opened to imports, foreign companies had to battle with bureaucracy and nationalistic ideas. A ‘buy Korea’ theme running through the country kept foreign cigarette sales at only 14% of the total market – just half what they were in neighboring Japan.
The solution that BAT sought was a simple one: if they made their cigarettes in Korea, they could be a part of that ‘buy Korea’ sentiment, instead of trying to fight it.
Last year, in 2019, BAT celebrated its 300 billionth cigarette manufactured on the Korean Peninsula. Its factory in Sacheon employs nearly 1,000 local workers. It has been lauded by local leaders as a job creator and a cornerstone of the local economy.
“The success of the Sacheon factory is the pride of BAT Korea as well as the City of Sacheon and its citizens,” said Congressman Yeo Sang-Gyu on the eve of the 300 billionth cigarette milestone.
But after two decades entrenched in Korea and 300 billion cigarettes, BAT Korea is still fighting for market share. Their Korea wing has seen a steady drop in sales in recent years as rival brands worked to maintain or take a larger slice of Korea’s tobacco market. Sales for BAT Korea dropped from US$357 million in 2016 to US$217 million last year.
Naturally, a large part of that competition is domestic. KT&G may no longer have a monopoly propped up by the Korean government. But since it went private in 2002, the brand has exceeded all expectations and become a heavy hitter not just in Korea, but across the Asia-Pacific region.
“Despite fierce competition from foreign tobacco companies after the opening of the tobacco market, KT&G has maintained its number one position in Korea,” a spokesperson from the company told Tobacco Asia.
For global tobacco firms looking to localize in Asia or elsewhere, KT&G’s dominance underscores the advantage local brands have in understanding what makes their customer base tick. With over 60% of the Korean market share, KT&G is the only tobacco company in the global market to hold more than half of its domestic market against foreign competition.
Perhaps coming to terms with the importance of local talent, BAT Korea announced in summer 2019 that it was appointing its first Korean CEO to the post. Former CEO Matthew Juery, who spent two years in the position, was replaced by Kim Eui-Soung.
But not all competition in Korea is local. Fellow foreign tobacco giant Philip Morris owns some 23% of the market share. And they’ve done more than just rely on their name to keep a foothold in Korea.
In 2017, PM showed a penchant for staying ahead of the curve when they became the first to release a heat-not-burn e-cigarette in the country, the iQOS. They product sold out shortly after, and a new trend was born.
BAT Korea followed up with their own heat-not-burn, the glo. And then KT&G came out with the lil.
For a time, the heat-not-burn and e-cigarette market in Korea enjoyed unprecedented growth, drawing the attention of major players like JUUL, which brought manufacturing here in 2019. Firms claimed these products were safer than regular cigarettes and sales climbed fast.
But then in 2018, the Korean e-cigarette market took its first real hit when the Ministry of Food and Drug Safety announced the results of an 11-month investigation into the safety of heat-not-burn cigarettes. Their findings confirmed that heat-not-burn cigarettes were not safer than their traditional counterparts, a claim the tobacco companies refuted and claimed would confuse consumers.
The market also turned quickly on JUUL, and five months after entering Korea, JUUL was already pulling out.
Major convenience stores in Korea including chain GS25 said in October 2019 that they would halt the sale of three of Juul’s flavors (mango, vanilla crème. and fruit) along with KT&G’s similar product the Siid Tundra. This came only one day after Korea’s Health Ministry made a recommendation to Korean citizens that vaping could be just as harmful as cigarettes, and that they should stop vaping until more studies were done.
Of particular concern was the health of teenagers, who health ministries the world over have worried are buying into flavored e-cigarettes and vaping without understanding the health risks.
But innovation in the heat-not-burn space had already taken place, and while global firms had been looking for ways to penetrate the Asian market via Korea, KT&G was looking for ways to get outside the peninsula.
Then, a rare pact between rival tobacco firms early this year made global distribution of Korean made devices even easier. In January 2020, Philip Morris and their domestic rival the KT&G established a strategic alliance to expand the market worldwide for KT&G’s heat-not-burn cigarette brand, lil. Under the new alliance, PMI will now oversee distribution globally of three products in KT&G’s lil series, as the historic Korean born brand looks to expand its reach and become a bigger player on the global tobacco stage.
“KT&G has been growing solidly with brands like ‘ESSE’ and ‘PINE’ in Russia and the Middle East. We’ve also been expanding our market by launching customized products in emerging markets such as Africa and Latin America,” a spokesperson from KT&G told Tobacco Asia.
For tobacco firms looking to invest in Asia, Korea proved a strong point of entry and a market open to innovation. Lax government standards may be a thing of the past, and nationalist sentiments may still influence consumer preferences. But for brands willing to localize and learn their customer base, the example of Korea shows global firms the advantages of a strong overseas presence.