This article first appeared in The Edge Malaysia Weekly on October 7, 2019 - October 13, 2019

JT International Bhd (JTI Malaysia), the country’s second-largest tobacco company by volume, is laying off at least 100 employees as part of a wider restructuring to shed 3,720 jobs worldwide. The company employs about 450 people in Malaysia.

Managing director Cormac O’Rourke says its parent, Japan Tobacco Inc (JTI), is permanently closing its shared service centre for Asia-Pacific in Kuala Lumpur, which will affect around 100 employees.

Under its transformation plan, the tobacco company wants to streamline its global shared service activities to three locations — Warsaw (Poland), Manila (the Philippines) and St Petersburg (Russia). It will take over two years to complete the shutdown of the shared service centre in KL, he says.

While he declines to divulge how many employees in total will be laid off in Malaysia, he says some of those at JTI Malaysia’s headquarters in KL will also be affected in the latest round of job cuts. The Star had reported last month that about 40% of JTI Malaysia’s workforce, which works out to about 170 employees, will be let go.

“The numbers that have been reported are pretty reflective of the type of changes that are needed in this business here,” says O’Rourke.

He adds that the job cuts are in response to JTI’s global transformation plan and, to a large extent, the need to right-size JTI Malaysia, whose business has been shrinking amid the growing illegal cigarette trade. In 2017, JTI Malaysia shuttered its manufacturing plant in Shah Alam, Selangor, and laid off 270 workers.

“Globally, 3,720 employees will be affected by these proposals over the next three years. However, during the same period, 1,300 new positions will be created. The proposed net impact represents about 6% of our global workforce,” he tells The Edge in an interview.

“When we look at the total number of JTI employees impacted [by the latest cuts], it is greater in Malaysia given the state of the marketplace where 60% of the cigarettes sold are illegal. And with the further development of illegal vaping that accounts for another 10% of the market, this essentially translates to 70% of total tobacco consumption in Malaysia being illegal.

“In order for us to remain viable, we have to look at all areas of investments in the country, not just from a human resources point of view, but also, for example, those that we make with our retail trade partners,” says O’Rourke.

He estimates that from 2015 to 2019, retail trade investment by the tobacco industry plunged by about RM600 million, in line with the decline in cigarette sales volume.

JTI Malaysia’s net profit and revenue has been on a decline since 2015. Nevertheless, the pace of decline in its bottom line has slowed in recent years. In FY2018, the company’s net profit dipped 6.47% year on year to RM54.09 million while revenue was down 5.5% to RM1.18 billion.

“While you may have seen the decline in net profit tapering off in FY2018, this is being done through careful management of the business and looking at how efficient we are and our investments across the board,” says O’Rourke.

“It is not that we have seen a levelling off in our business, no, and I don’t think that you will see stability [in the near term]. The only way you will see the industry return to where it should be in Malaysia is if enforcement (against illicit cigarette trade) is stepped up.

“In the absence of proper enforcement, I don’t think it is safe to say yet that the industry has bottomed out. Another new threat is emerging, that is, illegal vaping. That vaping space is coming from people smoking both legal and illegal cigarettes.”

On his projections for FY2019, he expects JTI Malaysia’s net profit and sales volume to be in line with its plans. However, the persistent high level of illegal tobacco consumption has forced the company to revise downwards its sales and net profit forecast for the year.

“We have factored in the deterioration [of the legal tobacco industry]. It is not that we are at an end stage,” O’Rourke says.

He expects JTI Malaysia to finish the year on a softer note after posting a 3% decline in sales volume year to date, but still outperform the legal industry’s 10% decline.

Citing Bursa Malaysia-listed British American Tobacco (M) Bhd’s first- and second-quarter results, he says it is difficult for traditional tobacco companies to maintain their profitability, considering the loss of scale and with tobacco users continuing to switch to cheaper brands, resulting in reduced margins.

“Also, there isn’t price empowerment in the market. I don’t expect prices [of tobacco products] to move up because Malaysia remains the world’s fourth least affordable market for cigarette consumption,” he says.

While the bulk of tobacco users who are looking to trade down to the cheaper-priced legal options have done so, O’Rourke believes it still hasn’t reached the bottom yet. “I think downtrading will continue. Where that levels off, I am not entirely sure. We need to see. It is already quite significant if you look at the proportion of the portfolio now that is in the value-for-money space.”

O’Rourke says there are some quarters, particularly the Ministry of Health, that are calling on the government to raise the excise tax on cigarettes in the upcoming Budget 2020.

“I think that is reckless and senseless in a situation where 70% of consumed tobacco products are already illegal. And under the law, any increase in excise tax has to be passed on to consumers. That will further damage the affordability of legal cigarettes in Malaysia and drive even more people to illegal cigarettes. So, it simply will not serve the public health agenda to put a higher tax on cigarettes and it certainly won’t raise government revenue because what we have seen in the past is that every time you raise the tax, you will reduce the overall tax revenue collected by the government,” he adds.

“What we hope to see in this year’s national budget is a clear commitment from Finance Minister Lim Guan Eng to impose a three-year moratorium on further excise duty hikes and also redouble his efforts to clamp down on illegal cigarette sales.”

O’Rourke says after the three-year moratorium and if the illegal cigarette trade is brought under control, the government can consider looking at “predictable, incremental tax increases over a period of three to five years, which the market can actually withstand”.

“That would give predictable earnings to the government and may also serve the Health Ministry’s agenda.”

Until then, tobacco companies like JTI Malaysia are a frustrated lot as they can’t fathom why they are not seeing more enforcement action from the authorities, especially as Malaysia is now the world’s top consumer of illegal cigarettes.

“Not only is it doing our legitimate industry damage, it is also damaging state finances. While we are encouraged by the police’s action so far this year to seize illegal cigarettes, we need to see coordinated action taken by the government. Thus, if there is a tax increase [on cigarettes in Budget 2020], it means nobody is listening,” says O’Rourke.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.