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In the span of 10 years (2014-2024), the global tobacco market witnessed its biggest shift not from the exit of Marlboro, but rather from a shift and contagion of tobacco users' perceptions. This shift refers to a significant change in consumer awareness that surpasses the understanding of traditional tobacco industry professionals.
Disruptor Philip Morris International (PMI) has positioned its factory in Southeast Asia, investing in a new heated cigarette factory in the Philippines, expanding into countries along the "Belt and Road" initiative. Within the next 5 years, it is anticipated that the global traditional cigarette market will face the impact of heated cigarettes.
Awakening of Smokers
"Harmful" is both the original sin of tobacco and the legal basis for the legislative control of tobacco by government agencies. However, in the balancing act between the benefits of addiction and tax revenue, regulatory bodies in the tobacco, health, and other sectors are constantly baffled and cannot find the best solution.
For over a century, smokers' "dependence" and "acceptance" of the "harmful effects" have made their choice of cigarettes seem natural. Cigarettes are a monopoly business worldwide, with 90% of the supply controlled by fewer than 10 major tobacco companies. In the market, there is essentially only one type of cigarette available: one with similar harmful effects. Smokers have no choice but to passively accept this habit and willingly endure the health risks, lacking any resistance.
The world's largest cigarette brand "Marlboro" introduced a substitute called "IQOS" (it is not referred to as a cigarette brand because there is no better symbol to express "heated cigarettes", IQOS has become a generic term for heated cigarette products, known to smokers worldwide). The appearance of IQOS gives smokers another option, leading them to awaken and also influence those around them.
It can be said that smokers are becoming more aware that the right to health and freedom of choice are the biggest challenges to traditional cigarettes. Legislators and enforcement agencies in any country cannot stand in opposition to consumer health and freedom.
Legal Reform
The World Health Organization's Framework Convention on Tobacco Control (FCTC) has been unsuccessful in controlling traditional cigarette consumption: the number of global smokers has increased, tobacco consumption has risen, and taxation and price increases have had minimal impact on reducing tobacco use. It is clear that countries' tobacco regulations do not strictly adhere to the rules of the FCTC, despite efforts to combat the harm caused by "counterfeit" products in the global tobacco trade.
However, tobacco companies around the world, as legal providers of tobacco products protected by law, must confront the "awakening" of new smokers: the choice of healthier, less harmful heated tobacco products. We do not deny that there are still controversies surrounding the low harm of heated tobacco products, but the scientific review by the FDA and the millions of new smokers choosing these products are undeniable facts.
The FCTC will definitely consider major revisions to its regulations, making new technologies a means of tobacco control rather than simply following each country's "freedom to regulate" tobacco control policies. This is similar to how global factory emissions of carbon dioxide contribute to the greenhouse effect. The heating of alternative tobacco products such as heated tobacco has been proven to reduce harmful substances in cigarettes. From 2014 to 2024, in just 10 years, the substitution rate for heated tobacco products in Japan, South Korea, Europe, and the United States (currently underway) has already exceeded 30%. The centuries-old culture and habits of cigarette smoking are being overturned by a new generation of smokers driven by technology, who are changing their perceptions and choices.
In countries where the sale of heated tobacco products is restricted, smuggling is rampant. The phenomenon of new smokers "vaping" with ILUMA heated sticks can be seen everywhere. It is not an exaggeration to say that the popularity of emerging pleasures may spread like the "COVID-19" virus, without needing any reason, simply through the voluntary choice and influence of new smokers.
However, the revision of laws not only lags behind new technologies and markets, but also faces more than just consumer health issues. For countries heavily reliant on tobacco taxation and revenue, revising laws must also consider all aspects of the tobacco industry, as any small change could have significant repercussions. This places a great deal of pressure on legislative bodies to demonstrate wisdom in their decision-making.
It is foreseeable that consumers and antitrust laws, like water spilled on the ground, will find their way through any gaps. With the rise of heated tobacco products, tobacco lawsuits in various countries, including those funded by anti-smoking organizations, are expected to take on a new dynamic, involving claims of infringement and product supply monopolies.
Traditional tobacco regulations and standards have been inadequate in dealing with the challenges brought by new forms of tobacco. New technologies have disrupted the underlying logic of traditional tobacco laws, and in new tobacco enforcement cases around the world, old laws are facing serious challenges in regulating tobacco products, controlling substances, setting ingredient and quantity standards, and providing evidence of harm. Lawyers specializing in tobacco law and technology regulation are familiar with these laws and regulations, while enforcement agencies are also facing limitations imposed by other laws on their enforcement powers.
Just like the US FDA, in this new round of revolution in tobacco and e-cigarette, it represents the world's most authoritative tobacco legislation, scientific review, and enforcement agency, is being grilled, is expected to eventually influence the legislative trend of FCTC: using open, scientific evidence to bring the conflict between tobacco control organizations and the tobacco industry onto a scientific, fair, and compliant track.
Therefore, the challenge presented by heated tobacco to traditional cigarettes is the most difficult to solve, as it involves legislative, technological, and commercial considerations for businesses, industries, consumers, intellectual property, and national finances.
Industrial Restructuring
The traditional tobacco industry has long established a large and heavy asset system known as "agriculture-industry-commerce". From tobacco farmers to the complex cigarette production chain, as well as the supporting equipment and materials industry, it has formed a fixed industry. The habits of industry workers, like those of traditional smokers, are deeply ingrained.
Marlboro has spent over 20 years toppling this industrial system, rebuilding a new intelligent manufacturing system for "HEETS" and "HeatSticks," and granting intellectual property rights. This is the biggest obstacle and barrier for followers choosing a production route. Other tobacco companies are almost unable or face great risks in finding the best industrial route to complete the reconstruction, unless Philip Morris International (PMI) completely opens its patents to "standardize" the global cigarette industry. This has also become a constraint in PMI's global strategy, making it difficult for conservative regions to hand over the traditional tobacco market to PMI. However, we will see that the demands of tobacco control and smokers will drive some countries and regions to accept PMI's technology in exchange for market negotiations and find a win-win strategy.
The restructuring of the industrial system cannot be completed automatically or spontaneously. The ingrained industrial mindset and habits of cigarette industry management personnel and workers are even more difficult to shake than revising laws. It tests the wisdom and courage of reformers and can lead to massive investment losses, unemployment, and idle assets.
Here, we can use the "butterfly effect" to describe how the cutting off of the supply of acetic fiber strands from an exporting country in the Russia-Ukraine war immediately led to a cigarette shortage in Russia, illustrating the traditional cigarette industry's dependence on the supply chain.
Looking back, today's IQOS, like last century's Marlboro, is expanding globally. China's national brand "Hongtashan" is leading the way by relying on the upgraded cigarette industry system, with a model of direct sales by over ten thousand brands, surpassing Marlboro.
History is always astonishingly similar. IQOS relies on patents and a brand new industrial system, investing billions, even tens of billions, in a direct sales model for its "heating device." This allows them to circumvent the various countries' laws that restrict cigarette advertising and promotion. They have successfully implanted heated tobacco products into smokers' minds and their success has been included in a marketing case study at the Stanford Graduate School of Business.
In its industrial system, the allocation of tobacco raw materials and the production of cigarettes have shifted from a "heavy artillery" model to a globally diversified, lighter equipment and low-cost model. The high cost of heaters will be covered by the increased sales volume and profits of heated cigarettes, reducing their percentage.
The challenges it brings include weakened investment in the traditional cigarette industry chain, lack of motivation for enterprise innovation, increasingly conservative thinking, and the potential impact on a country and region's GDP, tax revenue, and employment behind the cigarette industry system, depending on its proportion.
Finally, if we also factor in e-cigarettes, nicotine pouches, and cannabis products, the challenges faced by traditional tobacco will become even more complex. In five years, the landscape of the global tobacco industry will likely present a new picture.
ABOUT THE AUTHOR:
Tang Shunliang is a partner at Tianyuan Law Firm with extensive experience in the legal field of tobacco and e-cigarette. With over a decade of professional experience in patent disputes, legal legislation, and compliance, Tang has a deep understanding of the technology trends and patent situations in the tobacco and e-cigarette industry. He has successfully represented clients in handling numerous compliance issues both domestically and internationally, particularly achieving significant accomplishments in complex patent infringement cases. In addition, he has also served as a legal advisor for well-known e-cigarette and tobacco companies in China.
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