The Future of Cigarette Manufacturing

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The continued decline in cigarette volumes around the world and the rapid progress of next-generation products, with the strengthening prospects of heated tobacco in particular, are two factors that have a serious impact on tobacco companies and on their strategic manufacturing decisions.

The decline in cigarette volumes reinforces the importance of efficient supply chains and the continuous pursuit of optimising the production process. There is also a greater emphasis on agile production facilities and embracing the potential of Industry 4.0. Key industry stakeholders have also gone through a significant shift in thinking, resulting in current equipment being used longer and very high efficiency rates becoming the norm. Furthermore, the growing importance of innovative products calls for the need to adapt existing factories and even build entirely new ones to accommodate the different production requirements. The existing problems related to overcapacity and the introduction of plain packaging in several important markets poses big threats to tobacco multinationals. However, this also opens up opportunities for mass production and ultrafast production lines.

Closing and Downsizing Factories

Often big tobacco multinationals refer to market contractions as the key reason to close or downsize a manufacturing facility. Latest Euromonitor data show volume declines in six out of seven regions, with only the Middle East and Africa expected to grow by 2021. The Asia Pacific region, which traditionally produced strong volume growth figures, continued its decline for a second year in a row. China, the world’s biggest market, plays a huge role in this decline. The 2016 Chinese 6% volume drop is due to increased control of production centrally and a hike in wholesale taxes.

Factory closures and downsizing of existing operations constitute key strategic long-term decisions for big tobacco multinationals. Historically, such announcements have always been significant news because of the huge impact on the local economies. On the one hand, closing a production facility usually means a major rethinking of the entire supply chain, which, in turn, requires allocation of substantial financial resources. On the other hand, communities are often seriously affected by the large-scale lay-offs. This makes such decisions particularly sensitive. The situation becomes more revealing when combining volume with value forecasts. Historically, tobacco companies were able to maintain positive value growth figures despite decreasing volumes. However, the latest Euromonitor data show a decrease in value terms in four of the seven researched regions between 2016 and 2021. This will be a crucial factor when taking strategic factory closure decisions. Alternatively, growing markets, such as Iran in the Middle East, present an opportunity where new factories can be built.

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Manufacturing and Regulation

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A multitude of new tobacco regulations have been imposed around the world. For example, the European Tobacco Products Directive (EUTPD), enforced in May 2016, introduced measures such as prohibitions of cigarettes and roll-your-own tobacco with various flavourings, health warnings that take 65% of packaging, minimum content of unit packs, along with restrictions on e-cigarettes.

There are two ways in which manufacturing is affected by regulation. In a more direct sense, regulations can de facto stop the production process. In 2014, PMI decided to cease cigarette manufacturing in Moorabbin, Australia. The gradual decline of the Australian market nudged the company’s investments in the country towards manufacturing for export. However, the export opportunities were not realised due to the Australian government’s additional production requirements, such as the reduced fire risk standard, that made the product unappealing to consumers in neighbouring markets. This had a direct effect on the production process and ultimately led to the closing decision. The effects of regulations are more indirect. They are related to help making existing facilities inefficient. Similarly, measures related to plain packaging can also make the case for producing in one location rather than many. JTI announced the closure of two factories in Ballymena, Northern Ireland and in Wervik, Belgium directly referring to EUTPD as one of the key factors behind the decision. This can be seen as a typical case where regulations that lead to decreases in volume and value sales make facilities financially unfeasible.

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A Look into the Future

Machine productivity will rise significantly, 95+% efficiency rates and quick format changes will be the norm, Export hubs will continue to grow in importance, Plain packaging will become the norm; opportunities for ultrafast production lines, Heat not burn devices will play a bigger role in shaping the future of manufacturing, Splitting up of brands and production; third party manufacturing, 3D printing.

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