Japan Tobacco grows cigarette sales through FDI

10 August 2018:

Japan Tobacco International (JTI) just announced it has bought United Dhaka Tobacco Co (AKIJ Group), the second largest tobacco company in Bangladesh. JTI will pay US$1.47 billion for this acquisition described as the biggest ever foreign direct investment (FDI) in Bangladesh. This acquisition is JTI’s third in Asia this past 12 months.

While Japan Tobacco’s cigarette sales in Japan have been steadily shrinking, millions of poor and young people in Asia and worldwide are being recruited to prop up its profits. JTI entered the Bangladesh market in 2015 with its Winston cigarette brand and held a miniscule 0.1 per cent market share after two years. Now, this acquisition will enable JTI to secure 20% of the market share which will catapult it to second biggest tobacco company in Bangladesh, after BAT, which controls 80% of the cigarette market share.

Bangladesh is eighth largest cigarette market in the world, with sales exceeding 86 billion sticks and growing at about 2% a year.This acquisition will add about 17 billion sticks to JTI’s growing sales volume.

Recent years have seen the top three transnational tobacco companies (PMI, BAT and JTI) undertake acquisitions and mergers with local tobacco companies in mainly developing countries such as Philippines, Indonesia, Ethiopia and Bangladesh. Unfortunately these transactions will result in more cigarette sales and increase in tobacco use in these countries.

Except for Indonesia, the other countries are all Parties to the WHO FCTC and hence obligated to reduce tobacco use by implementing measures that would reduce the demand for and supply of tobacco. However, these business transactions will run contrary to government efforts to protect public health.

Table 1: Recent Acquisitions and Mergers by Transnational Tobacco Companies

Year  Acquisition & Merger Their Share of Market
Philip Morris International 2005 PMI acquired PT Sampoerna and became the No. 1 tobacco company in Indonesia 36%
2010 Philip Morris International merged with Fortune Tobacco, and became the No. 1 tobacco company (PMFTC) in Philippines 74%
Japan Tobacco 2016 JT acquired 40% stake in Ethiopia National Tobacco Enterprise and in December 2017 acquired another 30% and now own 70%, paying total US$944 of the largest tobacco company in Ethiopia. 44%
2017 JT acquired Karyadibya Mahardhika (KDM) for US$677million and became 6th largest tobacco company in Indonesia. 2.3%
2017 JT acquired Mighty Corporation for US$936 million and became the No. 2 company in thePhilippines. 23%
2018 JT acquired United Dhaka Tobacco Co for US$1.47 billion and will become No.2 company in Bangladesh. 20%
British American Tobacco 2009 BAT acquired PT Bentoel Internasional Investama Tbk for US$494 million and became No.4 company in Indonesia. 7%

In Bangladesh, currently tobacco companies pay 45% corporate tax, reportedly the highest among corporations. In January at aroundtable in Dhaka, national pro-tobacco industry think-tank, Policy Research Institute, (PRI) called for lowering the maximum corporate tax to 25% over a period of 3 years as part of a package reform aimed at boosting the country’s investment climate. The Executive Chairman of Bangladesh Investment Development Authority (BIDA) attended this roundtable as the chief guest and reportedly agreed with PRI that reaching the next level of growth would require “massive reform”.

What corporate tax will JTI pay in Bangladesh – 45% or 25% as recommended by PRI? The Executive Chairman of BIDA was also present at the JTI signing ceremony and welcomed JTI’s acquisition as a good example of FDI that would add at least US$100 million earnings in export. What incentives, if any, will be given to JTI to facilitate this investment was not stated.

On the other hand, it is clear what cost tobacco use has on society. The total direct and indirect costs of tobacco use in Bangladesh was previously estimated to be US$ 855.3 million. Of this amount, US$ 346.1 million was spent on direct health care and US$ 411.7 million on indirect morbidity and mortality from tobacco use. Each year, about 160,000 people die of diseases caused by tobacco use in Bangladesh.

It appears when the expansion of the tobacco business of the transnational companies are welcomed in a country through the FDI channel, this arm of the government is divorced from or unaware of the government’s public health objectives under the FCTC.