With the FDA approval of the global tobacco giant Philip Morris International (PMI) heat-not-burn products IQOS through PMTA, and authorized the sales of heat-not-burn device IQOS, Marlboro cartridges, and Marlboro mint cartridges and other products in the US, the global new tobacco industry has once again witnessed an explosive growth in heat-not-burn products.
This is not only the first time the FDA has approved the listing of heat-not-burn products in the US but also marks that the US market has finally opened, affecting the development of the global heat-not-burn industry, and beefing up the huge advantage of IQOS in the market competition.
However, the question is, does the US approve sales of IQOS and its cartridges for PMI only, and how does it relate to the development of the global heat-not-burn industry?
In fact, the reason is very simple:
1. FDA approval will have a demonstration effect on other new tobacco companies that want to enter the US heat-not-burn market. If IQOS achieves eye-catching results in the US, then other companies can follow the footsteps of PMI;
2. There is a lack of regulatory standards for heat-not-burn products around the world, and the FDA has set clear guidelines for listing of IQOS approvals, which will affect governments’ efforts to develop their own regulatory policies for new tobacco products to a certain extent;
3. With the opening of the US market, IQOS will usher in a new wave of user groups. In addition to the sales report in the third and fourth quarters of this year, it is expected to increase, as well as increase the orders of Chinese OEM factories, and upgrade the whole industry chain.
First of all, let’s taka an example of the growth of IQOS heat-not-burn market in Japan, to understand where this “demonstration effect” comes from.
As the world’s first heat-not-burn device, IQOS is not only the iconic product in new tobacco, but also shaped the impression of traditional smokers on heat-not-burn products. Success of PMI in Japanese market contributed the reputation of IQOS to a large extent.
In 2014, PMI selected heat-not-burn as the main product for the development of its new type of tobacco, and began to sell the first heat-not-burn product “IQOS” with Japan’s Nagoya as an experimental market. In 2016, due to the rising trend of users, PMI began to expand the sales channels of IQOS and plans to cover Japan.
With the active promotion of tobacco merchants, Japanese consumers like to try new things, coupled with the product is very fashionable, IQOS quickly set off a topic among Japanese smokers. The size of the Japanese market in 2017 alone has reached 600 billion yen, which is 2.8 times that of the previous year and accounts for more than 20% of the traditional tobacco market. By 2018, IQOS’s market share in Japan has reached 15.5%. In 2018, the actual terminal market sales volume of IQOS was 44.3 billion pcs, an increase of 93.4%.
According to a survey by the Euromontior, the market share of IQOS in Japanese market is as high as 90%. PMI’s first quarterly report for 2019 also showed that the results were slightly more than expected. According to PMI’s quarterly report, the shipment quantity of IQOS cigarettes was 11.5 billion pcs, an increase of 20.2% year-on-year, and the market sales volume increased by 34.6%. The current global market share of IQOS is 2%, up 0.5% year-on-year. Among them, the Japanese market accounted for 16.9%, indicating that the Japanese market is still growing.
Due to the success of IQOS in the Japanese market, new global tobacco companies have turned their eyes to Japan and used the Japanese market as a touchstone for heat-not-burn products.
In view of this, the US FDA approved the launch of IQOS products. In other companies, it is nothing more than setting IQOS a pioneer in the US market. If the test is successful, the listing of IQOS will become the best demonstration for other heat-not-burn companies to enter the United States.
Let’s talk about the supervision, what kind of guidance will IQOS bring.
In addition to some countries where IQOS has been regulated as tobacco products. IQOS is still in a vague stage in the classification in most regions.
Also, because of the unclear classification which cannot be managed, it not only causes law enforcement difficulties in many areas but also extends a large number of smuggling and the use of public places cannot be administered according to law.
However, the FDA’s review and the decision are based on a rigorous scientific basis. The most important consideration to approve a product for listing, fundamentally, whether it is in line with public health interests. In addition, the FDA’s literature review of 31 studies in the peer-reviewed journal Tobacco Control found that “the nicotine released by heat-not-burn is reduced by 83% compared to cigarettes, and the level of harmful and potentially harmful toxicants is reduced by at least 62%. The particulate matter is reduced by at least 75%.”
Therefore, the FDA’s review mechanism is based on science and is guided by the public interest. This will also play a guiding role for countries that do not know how to supervise heat-not-burn products. According to the Israeli media YNET News: “The Israeli Ministry of Health said that it is likely to take a ‘similar action’ on IQOS following the US FDA decision.” The Singapore Straits Post also published an article calling on the Singapore government to “reflect the current tobacco control policy. It’s based on scientific verification, not simply banned.”
It can be seen that the FDA’s market access decision will give new views to IQOS in various markets or governments around the world, and lay the cornerstone for the new tobacco globalization strategy.
On the other hand, the China State National Tobacco Monopoly Administration issued the “Notice on the Implementation of the Identification and Testing of New Tobacco Products”, which included four types of new tobacco products, such as IQOS, in the cigarette identification inspection catalog. Therefore, the sales of IQOS E-cigarettes are also lying within the provisions of the national tobacco monopoly management laws and regulations should be observed.
According to the Regulations on the Implementation of the Tobacco Monopoly Law, imported tobacco monopoly products can only be operated by enterprises that have obtained the licenses for special tobacco monopoly business enterprises. China has not imported IQOS tobacco products, so any transaction of IQOS tobacco products is illegal. Purchasing more than the limit number of cartridges from overseas and selling in China may be suspected of smuggling and illegal business.
However, it is worth noting that even if the import of cigarettes is illegal, there are still many daredevils in China who are risking for profit, smuggling and heat-not-burn products to domestic sales.
Finally, let’s talk about how does the sales of IQOS in the US increase the order of Chinese OEM factories, and the upgrade of the industry chain.
Intretech is a secondary supplier of PMI heat-not-burn products. The company’s main projects are the development and production of intelligent control components, innovative consumer electronics, and other products, and provide intelligent manufacturing solutions for SMEs. The main products are intelligent control components, innovative consumer electronics, heat-not-burn compacted plastic parts, automotive electronics, and technology research and development services.
Although the company’s first quarterly report for 2019 showed that the proportion of heat-not-burn parts dragged down the gross profit margin due to the increased management expense. But based on Marlboro’s endorsement as the leading traditional tobacco brand in the United States, coupled with Altria’s 230,000 channels of sales network and IQOS as the first new demand for heat-not-burn products, the approval of IQOS from FDA will bring new opportunities for Intretech.
Moreover, as far as the PMI 2018 annual report review is concerned, globally, IQOS cartridges have witnessed a sequential increase in shipment quantity in the fourth quarter, with a significant increase in Europe and Eastern Europe. Among the global IQOS cartridges shipment quantity, the proportion of the East Asian market fell from 90% in 2017 to 65% in 2018, indicating that IQOS global promotion has achieved initial results.
In terms of sales volume, IQOS cartridges sold 44.3 billion pcs in 2018, a year-on-year increase of 93.2%. It shows that with the increase of the user base and the increase of user stickiness, the terminal performance is in a strong state of improvement. The number of IQOS users reached 9.6 million in the fourth quarter, an increase of 2.7 million year-on-year and an increase of 800,000. According to the VPXSL.com, the number of users has already exceeded 10 million marks at the end of March this year.
According to the export data provided by eCigku, the export value of IQOS in the past month is as high as $68.43 million, accounting for 17.29% of the Chinese new tobacco exports, indicating that the global development of IQOS is still continuing. Perhaps in the future, sales in the United States will face the risk of trade friction, but if IQOS is officially launched in the United States, sales may experience explosive growth, and its suppliers will also have an important butterfly effect.
As for the upgrading of the industry chain, the most widely used papermaking reconstituted tobacco method in the global tobacco industry is provided by Schweitzer-Mauduit International ( SWM).
Its unique two-step papermaking process was developed by Schweitzer Paper in the United States in the 1950s. Since its introduction into the tobacco industry in the 1960s, the use of reconstituted tobacco leaves has increased year by year.
At present, with the permission of the board of directors, CTS and SWM have begun to carry out technical exchanges for the production of heat-not-burn tobacco core materials, and through technological transformation, CTS learned the capacity of producing heat-not-burn core products, some samples are initially offered selectively to prospective customers. China Tobacco Schweitzer (CTS) will become the largest remanufacturer of reconstituted tobacco product in the Asia Pacific region.
Therefore, the FDA release of IQOS into the US market is also expected to positively influence the introduction and policy development and promotion of China’s heat-not-burn products. With the rise of foreign E-cigarettes and heat-not-burn products, the new tobacco sector of China Tobacco is also seeking transformation.
It can be seen that the FDA approved PMI’s heat-not-burn products to go on the market, in addition to driving the growth of the global heat-not-burn user base, it also greatly assists in global industrial upgrading and regulatory policies.
However, it is worth noting that although the US allows heat-not-burn products to appear on the market, the FDA-approved products only have “IQOS” a non-combustible product, and PMI has already begun to lay out the US as early as two years ago. The market has not only saved hundreds of millions of dollars in channel development and PMTA and MRTP audits but also built patent barriers around the world to keep competitors out of the ring.
Therefore, if other companies also want to enter the US market, they may not be as simple as entering the Japanese and Korean markets first. They will also test the corporate background, capital and development strategies of the new tobacco brands.