If Big Tobacco has a future, it's in Asia. Heck, if it has a present, it's in Asia, too.
Smoking rates are the highest in the world in Indonesia, where 76% of adult men smoke. Whenever I travel there, I'd say that's 100% of the ones still walking and talking.
Laos (56%) and South Korea come next in Asia, with 50% of the dudes lighting up. Whether it's emerging China (48%) and Vietnam (47%) or developed Japan (34%), cigarettes still have a surprisingly strong grip on society.
Asian men smoke -- in places like China, a pack of cigarettes is a common icebreaker when you start a working relationship. I don't know if it's a lack of health education, little regard for lifespan, or hefty government ownership of the tobacco industry, but it is what it is.
Cheap smokes might sell extremely well for now across the region. But even in Asia, the future of the cigarette will be electronic.
One of the reasons I took a quick trip to Seoul was to check out the smoking situation. Philip Morris International (PM) invited me to visit one of its five branded IQOS stores and check out its infrastructure on the ground there.
Philip Morris hasn't released figures on IQOS adoption in Korea yet -- the first update after the product launched in May will come with the company's earnings on Thursday. But the company clearly thinks it's on to a winner. My own observation was that, out of any group of smokers, about one in three would contain an e-cigarette user. The IQOS store serves about 200 new customers a day, after an initial around-the-block rush.
IQOS has already caught on like non-wildfire (the whole point is it doesn't burn) in Japan, its leading market, and Korea shares many of the same cultural and corporate characteristics. In fact, in Japan sales of cigarettes for PMI are declining fast, while Heets, the cigarette-like tobacco stub that goes into the IQOS machine, have claimed 10% of the "cigarette" market. IQOS launched in September 2015 in Japan, and has one million Japanese users and counting.
British American Tobacco (BTI) , or BAT, has a competing product, Glo, that's also proving popular in Korea and Japan. The Glo device costs 90,000 won ($80) compared with the 120,000 won ($106) that an IQOS will set you back, although you get a discount to 97,000 won ($86) if you watch a 2-minute explanatory video on your smartphone. The device costs ¥9,980 ($89) in Japan.
The domestic incumbents have been very late to the game, with Japan Tobacco (JAPAY) finally unveiling its own e-cigarette products in a test at first. It now sells Ploom Tech and its capsules of granulated tobacco in Tokyo and Fukuoka, and Logic Pro and its liquid refill capsules in nine countries as well. Korea Tobacco & Ginseng KR:033780 hasn't got going yet, although it says it has something in development.
There's sure to be a first-mover advantage. E-cigarette systems require you to buy some hardware, and if they're smart the manufacturers make it attractive, if not impossible, not to continue buying their own replacement nicotine.
I'm a vaper myself, although I don't consider that smoking. I gave that up back in 1998, when I lived in North Carolina, Tobacco Central, and a cigarette hasn't crossed my lips since. I took to vaping when I cut out another vice, drinking. You can't be all good, all the time!
I know which one feels healthier to me -- I lost 30 lbs after going on the wagon. But the jury is still out on what kind of long-term damage vaping and exposure to non-smoke nicotine does you. I'm sure it's not good for you. At the same time, it doesn't feel all that bad.
There's a whole new terminology to learn, sometimes even to invent. Saying you're going outside to "use your e-cigarette" doesn't have much of a ring to it. So you can "vape" by using a device that heats liquid so it evaporates. Or you can use a "heat-not-burn" device that heats tobacco to the point where it emits vapor but doesn't combust. In Korea, they call both going to "steam."
The liquid-based vaping systems are a different beast altogether than the heat-not-burn devices, which are generally designed to approximate smoking a cigarette as much as possible. Vaping seems safer to me, but no one really yet knows -- not even the manufacturers. What's for sure, though, is that both devices are much "less bad" for you than smoking: heat-not-burn devices produce vapor that contains 90% less harmful substances than an old-fashioned cigarette.
There's an interesting health argument playing out. Some folks are all for eliminating smoking altogether, so they want tougher taxes and laws on that, and don't want vaping introduced, either. Nicotine is a Class 1 poison here in Hong Kong, and I'm not allowed to use anything other than a cancer-causing cigarette that contains it. Go figure.
Other people, some in the health community included, see the benefits of switching people off cigarettes that are definitely very bad for you and onto devices that deliver nicotine in a less-harmful way.
Interestingly, Asian consumers don't seem to care. The vapers/e-smokers I polled in Seoul, in a totally non-scientific way, generally said they've switched because of the smell. Vaping has almost no odor at all, and heat-not-burn devices have a slight smell when you heat and then when you eject the tobacco stick. One consumer said his wife was worried about his health as well, but he didn't seem that bothered. It was a secondary concern.
South Korea is an interesting market to watch, because both liquid-based and heat-not-burn devices are legal. Only the tobacco-based heating products are legal in Japan.
Philip Morris has taken the unusual step of saying that it wants to get out of its core business -- basically, selling Marlboros -- altogether. It would like to see all cigarette smokers switch to devices like IQOS (rumored but not confirmed to stand for "I quit ordinary smoking").
Will Marlboro go the way of the dodo? I don't know. PMI originally branded the short, filtered tobacco sticks for the IQOS as Marlboro HeatSticks. But everyone called them Heets, so in Korea it just switched to that name instead. They are "Recommended by Marlboro," it says in the small print on the box.
I can't think of another major company that has just said that it wants all consumers to stop using its top-selling product, and to switch to doing something else entirely. But that's what Philip Morris is doing, and if they're sensible, the other tobacco companies will get on board.
BAT's next-generation products are so far the closest competition. It has unveiled its Vype vapor-based devices in Britain and then nine other markets, including France, German and Italy. In my part of the world, you can find Vype in the Philippines, which is pretty much the Wild West of vaping: there's no law against selling those products to kids.
And Glo has launched in Tokyo, Osaka, and Miyagi Prefecture (around Sendai) in Japan, as well as Korea. You can also glow with Glo in Vancouver and Switzerland.
I use a Juul device, made by what was originally called Pax Labs (which now calls itself Juul Labs), which is privately held. It uses a nicotine salt to deliver its special kick, a system competitors are also racing to catch up to provide. Juul in June 2015 got $47 million in Series C funding from Fidelity, Sivia Capital and private investors.
Juul is legal in the States, where the pods I use come from, via China. IQOS isn't. Within the United States, Altria Group (MO) , which spun off PMI in 2008, has filed with the Food & Drug Administration to get IQOS approved for sale, either with or without claims about what it does for your health.
Eastern Europe and the Middle East run Asia a close race on the share of men who smoke. But of course, Asia is where the big numbers, in population terms, kick in. The continent contains 60% of the world's smokers.
So it'll be interesting to see how markets like Korea develop. The legal framework is at least in place for the government to tax and handle both conventional and "next-generation" nicotine products. That's yet to play out elsewhere -- Japan still classes the heat-not-burn devices as pipe tobacco, for some reason, and there's no rhyme or reason as to why that should be legal, and not vaping. The government does own one-third of Japan Tobacco, though!
There's a question as to whether consumers in developing Asia are going to fork out the better part of $100 to get their hands on an e-cigarette or vaping device. But just about everyone stumped up with the money for a mobile phone, and many for a smartphone, too.
We'll soon see if they'll switch to "smart cigarettes" next.
