Tobacco and tobacco products are part of the deal. Indeed, the potential impact on the tobacco sector is actually much larger than on many other industries, because existing duties are substantial. Under the agreement, for which ratification is expected without undue difficulty, these tariffs will disappear.
For instance, as regards the sale of EU-made tobacco products to South Korea, existing 40 per cent tariffs on cigars, cheroots, cigarillos, filter tip cigarettes, pipe tobacco, chewing tobacco, snuff, plus tobacco extracts and essences will be phased out over the next ten years. There is an identical schedule for phasing out the 32.8 per cent duties now charged in South Korea on EU-processed tobacco sheets.
It is the same story for tobacco products manufactured in South Korea only better for the industry, because the EU’s tariffs will be phased out faster. In the five years following ratification, EU duties of 26 per cent on cigars, cheroots and cigarillos; 74.9 per cent on smoking tobacco; 41.6 per cent on chewing tobacco and snuff; 16.6 per cent on homogenised or reconstituted tobacco; and 57.6 per cent on cigarettes will be phased out in either three or five years.
Furthermore, there is more good news for the South Korea sector, because the EU will also phase out duty on South Korean tobacco leaf. Here, duties of between EUR 22 and EUR 24 on 100 kg net of leaf are to disappear over five years for South Korean-grown flue-cured leaf, partly or wholly stemmed Virginia leaf, light air-cured Maryland, and fire-cured tobacco leaf. The same duties will disappear over three years for exports of flue-cured leaf and partly or wholly stemmed light air-cured burley tobacco (including burley hybrids). Meanwhile, EU duties of between EUR 22 and EUR 56 on 100 kg net of leaf for other light air-cured tobacco; sun-cured oriental tobacco; dark air-cured tobacco; other flue-cured tobacco; other tobacco and tobacco refuse will be phased out over five years.
Beneficial for other goods, too
And it is not just the tobacco. The trade deal is very wide-ranging and all kinds of packaging materials and equipment are covered by its terms. As regards Europe, most paper and card is already imported into the EU duty free, but that is not the case for other packaging materials, such as plastic film. Upon ratification, duties on EU imports of most South Korea-made plastics will disappear immediately; they are currently mostly 6.5 per cent.
Regarding packaging machinery, duties are lower but, given the cost of the equipment, these 1.7 per cent duties are still significant. The tariffs include offset printing presses, machinery for filling, closing, sealing or labelling boxes or other containers, and other packing or wrapping machinery and machines for making cartons, boxes and cases.
Similarly, South Korea’s tariffs on EU-made exports of packaging materials and machinery will also disappear once the agreement is in force (on equipment they are higher – often eight per cent).
Looking at the deal generally, its text proclaimed the deal “will create a new climate for the development of trade and investment between the parties”. And a European Commission communiqué said: “The agreement will create substantial new trade in goods and services (up to EUR 19 billion for EU exporters, according to one study). The additional market access provided by the agreement will further strengthen the position of EU suppliers.”
Strong tobacco sales
Despite following the global trend of increasing anti-smoking campaigns and placing stronger warning labels on cigarette packets, tobacco sales in South Korea are not declining. In fact, the industry has seen a slow but steady rise in total sales over the last few years.
According to Euromonitor International, total expenditure on tobacco in the country during 2008 was USD 5.1 billion (EUR 3.4 billion), an increase from USD 4.8 billion (EUR 3.2 billion) in the previous year. Market leader KT&G’s total net sales in 2008 were KRW 2.5 trillion (EUR 1.45 billion), up from KRW 2.3 trillion (EUR 1.3 billion) in 2007.
KT&G had long held an effective monopoly in South Korea’s tobacco market. In 2003, the dominant player’s market share stood at 82.8 per cent. Six years on, there has been significantly increased competition, and the company’s portion has dropped to around 66 per cent. So, with the new South Korea-EU trade agreement allowing European manufacturers easier market access, does KT&G face losing more of its predominant cut?
“In South Korea, multinational tobacco companies have had a presence for over 20 years,” said Kim Tae Hoon, a representative from KT&G Corporation. “KT&G has experienced fierce competition with them. Due to their very active marketing, we have lost market share.”
Kim pointed out that multinational companies such as Philip Morris International (PMI) and British American Tobacco (BAT) already have factories in South Korea – in order to avoid tariffs –, therefore, he believes the new trade deal will have little impact in the short term.
However, Daniel Cusworth from PMI in South Korea welcomes the new deal. “It will lower the barriers for trading cigarettes, leaf and other products. We welcome this change, since it will benefit consumers and level the playing field,” he told Tobacco Journal International. A spokesman for Imperial Tobacco said the company “has no interest in South Korea”, adding that it was not probable that this would change following the trade deal.
Another area with potential for growth was tobacco leaf because, at present, noted François Vedel, delegate secretary of the International Tobacco Planters’ Union (UNITAB), South Korea does not import very much tobacco leaf from Europe. “A lot comes from China and there are manufactured tobacco products from Europe, but it is not a big market.”
Cigars to profit
One area where European companies might expect gains in time is in cigars. Dutch company Agio is the biggest exporter of cigars to the country. “We sell a lot there but it’s not our biggest market,” the company said, with a spokesman saying the trade deal could help its informed representative in Singapore gain new sales.
Overall, in 2007, South Korea was the EU’s tenth-largest tobacco export market, taking 2.1 per cent of EU exports, indicating room for growth for sure, but also that there are trading relationships that can be built upon. The main export suppliers of cigarettes to South Korea in recent years have been the Philippines, with about three quarters of total imports, followed by Malaysia and France and Japan some way behind.
European companies may have already established a presence in South Korea but South Korea has yet to secure market share within Europe.
KT&G’s European focus to date has been mainly in eastern Europe, namely Russia and Ukraine (outside the EU and its trade deal, of course). But the company hopes to expand its reach. “KT&G [has completed] studies to broaden European markets,” said Kim. “For example, KT&G has participated in duty-free products exhibitions, hosted by the Tax Free World Association, to meet new buyers and publicise its products, since 2006.”
Kelvin Chan, a research manager at Euromonitor International, predicts the entry of South Korean tobacco products into Europe will not be smooth. “In Korea, cigarettes that are ultra-low tar cigarettes are the most popular. However, European consumers are not big fans of ultra-low tar cigarettes at the moment. So, while there is a potential, Korean ultra-low tar cigarettes will find it hard to break into big European markets in the next few years due to different consumption patterns.”
Besides possible sales in Europe, under the FTA, Kim also noted that KT&G imports leaf tobacco and materials from many countries. “Because there is a possibility that tariff for tobacco leaves will be reduced, we can consider changing our source for importing leaves.”
KT&G may have retained its leading position – with a 65.7 per cent share of the market – but it has not been easy. Other players, such as PMI, have been steadily chipping away at KT&G’s slice. According to AC Nielsen, PMI’s market share increased from its 11.6 per cent hold in 2008 to a 13.7 per cent share in the second quarter of 2009. BAT still holds second place, with a 16.5 per cent cut, and Japan Tobacco International (JTI) has just a 3.7 per cent share.
KT&G believes its commitment to introducing new brands will help the company keep (and maybe even re-build) its market share. “In a bid to change the trend [of declining market share], KT&G has released many new products. Especially, its strength lies in a low-tar segment and slim segment,” said Kim. “KT&G also develops high-class products in the high-tar and regular segment that provide stiff competition.”
In 2007, KT&G released the Bohem Cigar series, an innovative cigarette containing 30 per cent cigar leaves. The series consists of three different classes, each with a different tar and nicotine content. “[Bohem Cigar’s] current market share is about 1.7 per cent,” said Kim. “But it has been gaining its market share gradually.” Esse remains KT&G’s most popular brand with 25 per cent market share.
New products launched
Like KT&G, PMI has expanded its South Korean business through new product launches. The company’s latest releases match Korean smokers’ preference for low tar with names such as Parliament Mild and Lark Superslims. The multinational also successfully introduced Marlboro Flavor Plus and three limited edition brands: Marlboro Nite Edition, Marlboro Tin, and Parliament Platinum.
South Korea-based tobacco manufacturers have also been boosting sales through exports. In 2008, exports of tobacco products totalled USD 506.1 million (EUR 340.7 million), according to Euromonitor International. In 2007, exports stood at USD 413.7 million (EUR 278.6 million), while in 2003, exports only amounted to USD 237.2 million (EUR 159.7 million). KT&G’s flagship brands Pine and Esse have had the most success overseas so far, especially in the Middle East and central Asia.
Although not to the same extent, imports have also increased. In 2003, imports totalled USD 249.2 million (EUR 167.8 million), while in 2008 they stood at USD 280.7 million (EUR 189 million).
As for legal controls, tobacco companies in South Korea have faced a number of new regulations over recent years, although most have had little impact on business. “While health warnings on cigarette boxes have been enlarged recently, sales of cigarettes have been growing slowly but steadily since 2005,” said Chan. “Smokers are getting used to the warning labels as well as the restrictions in smoking.”
On the other hand, he added, “the slight reduction in tax (the tobacco stabilisation fund contribution of KRW 15 per pack of 20 sticks was waived from 2008) did not drive up demand sharply in 2008”.
Kim commented: “Even though the environment for smoking has not been favourable – schools, medical institutes, hospitals, etc, have been designated as smoke-free areas – Korea’s tobacco market has not drastically decreased yet.”
In 2010, the South Korean tobacco market will see stronger attempts to deter smokers. Tax on electronic cigarettes will increase in 2010 as the South Korea government places e-cigarettes in the mild cigarettes tax category. It also hopes to reduce the nation’s smoking rate by ten per cent over the next five years by implementing a number of World Health Organisation (WHO) measures, including enforcing bans on tobacco advertising, promotion, and sponsorship, providing more help to people trying to quit, raising tobacco taxes, and warning people more about the dangers of tobacco.
Although South Korean manufacturers have not strongly felt the brunt from increased awareness of tobacco’s dangers yet, the country’s four main players are not taking a back seat when it comes to keeping at the top of smokers’ minds. Along with releasing a slew of new products each year, companies are also investing heavily in corporate social responsibility programmes to help foster a positive image.
Given the strength of the tobacco industries in both South Korea and the European Union, there is clear opportunity for growth coming from the trade agreement. One question is: when? The deal will require formal ratification from both parties before it comes into force – and that could delay implementation for many months. And even then, the tobacco provisions involve the phasing out of duties, rather than immediate abolition. Maybe because of this, the largest European Union exporter to the country, British American Tobacco, was rather coy about its plans. A spokesman noted both the need for ratifications and the tariff elimination schedule. “Therefore, it is still an early stage to talk about the prospects for increased sales of tobacco and tobacco-related products to South Korea,” said the company.
Karryn Miller, Keith Nuthall and Alan Osborne
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