This article first appeared in The Edge Malaysia Weekly on August 21, 2023 - August 27, 2023

BRITISH American Tobacco (Malaysia) Bhd (BAT Malaysia) has joined an intensifying race to turn smokers towards vaping, which is generally considered less harmful than smoking cigarettes. On July 31, it rolled out its own vapour brand, Vuse, making it the first international cigarette company to enter the Malaysian vape market, touted to be worth RM2.49 billion by the Malaysian Vape Chamber of Commerce.

The rollout follows a long-awaited federal government decision on April 1 to exempt nicotine as a controlled substance under the Poisons Act 1952 as part of a move to tax its use in electronic cigarettes and vaping products. But opponents are against the declassification because it effectively legalises the sale of nicotine vapes.

In a span of about five years, sales of vaping products have grown in an unregulated illegal market as vapes are widely seen as products to help smokers quit. However, the country’s biggest tobacco company by sales volume had been hesitant to roll out its vape products, citing a lack of regulation or control with regard to the use of vapes and e-cigarettes in Malaysia.

With the legal status of vapes now clearly spelt out, BAT Malaysia is scrambling to catch up with its domestic rivals that already have a big head start. To close the gap, the company will continue to roll out a new category of products, such as Vuse and glo heated tobacco, says its managing director Nedal Salem.

“We at BAT will only sell something that is legal in a country. That’s why we have only recently introduced Vuse, the number one global vaping brand, in the local marketplace,” Salem, 53, tells The Edge in his first media interview since assuming the top job at BAT Malaysia in September 2021. Today, Vuse is the top-selling vaping brand globally, leading the way in markets such as the US, the UK, France and Canada.

The company has introduced Vuse Go Max, a disposable vape with five e-liquid flavours for starters. “We will introduce two more flavours in September. We are very excited,” he says.

“The reason for bringing in disposable or single-use vapes first is because the modern disposable segment is the largest and fastest growing in Malaysia,” he points out. Priced at RM22, Vuse Go Max contains 4.8ml of pre-filled liquid and 3% nicotine content, which can provide up to 1,500 puffs per device.

“We will continue to roll out different types of vaping products in the market to meet the evolving needs of consumers,” he adds.

Salem notes that global studies carried out so far estimate that vaping is about 95% less harmful than smoking tobacco cigarettes, while heat-not-burn (HNB) tobacco products are up to 90% less harmful than regular cigarettes.

“Many countries like New Zealand and the UK have adopted a tobacco harm reduction (THR) strategy to help them adopt less harmful products. We at BAT want to switch adult smokers to reduced-risk products,” he says.

In a July 28 report, Hong Leong Investment Bank Research (HLIB Research) anticipates that it will take time for Vuse Go Max to be an established brand in the local market, resulting in a minimal initial contribution.

HLIB Research notes that the increasing availability of e-cigarettes and vaping products is expected to gradually erode the market share of traditional cigarettes, which in turn will affect BAT Malaysia’s sales.

Salem concedes that the overall combustible cigarette share of nicotine in Malaysia has declined in recent years. The share of cigarettes, which accounted for 95% of total sales five years ago, had fallen to 75% last year. It has decreased further to 70% this year.

“The legal cigarette market has been declining in terms of volume, as smokers move from cigarettes to vapes,” he says.

Nevertheless, Salem expects the company to offset falling volumes in the legal cigarette segment by capturing existing consumers of illicit cigarettes. The prevalence of illicit cigarettes in Malaysia remained high at 55.3% as at May this year, the latest Illicit Cigarettes Study commissioned by the Confederation of Malaysian Tobacco Manufacturers shows.

“The illicit incidence had declined to 55.3% compared to 64% in 2020 and if it continues to fall, we see these illegal cigarette consumers turning either to legal cigarettes or vaping products. Either way, the opportunity to grow is there for us,” he says.

He adds that BAT Malaysia will mitigate decreases in the sales of its combustible products by efficiency gains through cost and value initiatives. 

Also, the company is banking on the growth of its flagship Vuse product brand to deliver higher sales.

“Our aspiration is that Vuse can become as big as Dunhill in the combustible segment in Malaysia. We have ambitious plans to grow our share of the vape market to that of the combustible category of 50%. My aspiration is to at least match that,” says Salem.

“But it would be unfair of me to give a time frame right now as we just launched Vuse several days ago. Initial results show that it has been well received by local consumers, but I need more time and data points to give a time frame.”

Still, he is optimistic about achieving that goal, given that Vuse is already the No 1 global vaping brand by value. “We have expertise from other markets. We have the know-how. We know what works. We know what the right flavours are. We know what the price points are. It had been tried and tested in 30 markets before it was brought to Malaysia,” he says.

“Right now, we may be a small player in the vape market because we have just entered it, but we have all the expertise to grow our products. And that’s what gives me confidence.”

At the same time, BAT Malaysia says it will bolster its investment in the country’s tobacco heating product (THP) market, which is currently dominated by rival Philip Morris (Malaysia) Sdn Bhd’s (PMM) HNB IQOS sticks.

IQOS, which was launched in Malaysia in 2018, now accounts for 92% of total THP sales. In November 2021, PMM introduced lil SOLID 2.0 at RM99 per device — its first THP priced below RM100.

“The size of the THP category is less than 5% of the total tobacco market in Malaysia. It is still very small and it is growing slowly, whereas vape is much larger and growing very quickly. Last year, the vape industry had around 1.5 million users compared with fewer than 300,000 THP users,” says Salem. To put things into perspective, there are about four million adult smokers in the country.

BAT Malaysia introduced its flagship THP brand, glo, in 2019 but it was later removed from the market “because the THP category was growing too slowly. We decided to allocate our resources in brands like Dunhill to give our shareholders a better return,” he says.

Four years later, in February this year, glo had another chance to shine. BAT Malaysia launched an improved version of the product, called glo Hyper X2, that contains 30% more tobacco to deliver an enhanced flavour and smoking experience. The new device is priced at RM88.

“It is doing relatively well. Today, glo has over 4% market share of the THP category and continues to grow,” says Salem.

Prior to taking on the role of managing director at BAT Malaysia, Salem had been managing director and CEO of Ceylon Tobacco Co plc since May 2019. He had also worked in the Middle East, the UK, South Korea and Indonesia.

“This [Malaysia] is my 10th market at BAT. Obviously, there are peculiarities from market to market. The cigarette market is at a pretty mature age across the globe, but when you talk about new category products, be it THP, vape or modern oral, they are at different stages of progression,” he says.

“At 55.3%, the prevalence of illicit cigarettes in Malaysia remained high versus the 10% to 20% in Sri Lanka. This is causing the government to lose about RM5 billion yearly in uncollected tax revenue. Additionally, there are no control or safety standards for illegal cigarettes.

“But there is an opportunity to bring that number down faster. I urge the government to accelerate efforts to reduce the prevalence of illicit tobacco use here.”

As the legal landscape surrounding vaping continues to evolve, the challenge for players in the vaping market now is the prolonged delay in passing the tobacco bill that regulates tobacco and vape products, which was delayed to the next parliamentary session scheduled for October. It is important to note that there are currently no regulations governing the sale of nicotine vaping products, making them accessible to anyone, including children and teenagers under the age of 18.

“We need sensible regulations from the government on vaping as soon as possible. As the industry continues to grow, it is currently incumbent upon all vape players to self-regulate and identify and prevent minors from buying nicotine-based vape products,” says Salem.

“A fundamental requirement of our marketing principles at BAT Malaysia is that our marketing is aimed at only adult consumers and is not designed to engage with or appeal to children. Tobacco and nicotine products should be marketed responsibly to adult-only consumers and not designed to appeal to the youth.  

“A regulatory framework for vaping will provide a level playing field for all vape companies in following similar guidelines. We are waiting for those guidelines to come from the Ministry of Health (MoH).”

Vape players have spent years calling for the government to regulate the industry. However, they do not agree with the proposed bill on tobacco control, which seeks to ban any form of smoking-related products, including vape products, to anyone born on or after Jan 1, 2007, known as the generational end game (GEG).

The GEG bill was first mooted and tabled by former health minister Khairy Jamaluddin last year which,if it had been passed, would have made Malaysia the first country in the world to ban the sale of tobacco and vaping products to the next generation. However, the bill was referred to the health parliamentary special select committee (PSSC) for fine-tuning due to resistance from several lawmakers over the provisions.

In June this year, the government once again referred the bill to the health PSSC for further study after tabling it for first reading in the Dewan Rakyat. With the bill further delayed, there are no safeguards to prevent the sale of cigarettes and vape products to minors.

“The proposed generational smoking ban is unproven and untested anywhere in the world. GEG is akin to prohibition. History tells us that prohibition does not work but fuels the growth of illegal products even more,” says Salem.

He cites the prohibition of alcoholic beverages in the US from 1920 to 1933, which reportedly was a failure on all counts as it not only removed a significant source of tax revenue and greatly increased government spending, but also gave rise to a flourishing illegal liquor trade.

“The illicit tobacco trade has fallen from 64% to 55%, but the GEG could potentially reverse its effects and take the rate even higher,” says Salem. He points out that it will also have a significant impact on retailers, especially those who rely on tobacco sales for up to 40% of their revenue.

“Also, with GEG, it creates inequality among Malaysians because anyone born on or after 2007 will be prohibited from smoking any tobacco product or substitute tobacco product. It will discriminate against a specific age bracket.”

The main concern with GEG is that it prohibits harm reduction alternatives, which have been proven in a number of countries, such as the UK, New Zealand and Canada, to be effective in reducing smoking rates, says Salem.

“There is a lot of data that show cigarette smoking rates have fallen as smokers switch to vaping. So why won’t Malaysia adopt this as a path forward if it wants to reduce smoking rates?” he asks.

In December 2022, New Zealand’s government passed a world-first legislation to stop the next generation from ever being able to legally buy cigarettes. The law will only go into effect on Jan 1, 2027, when those born in 2009 turn 18. 

Opponents of Malaysia’s GEG have argued that the generational ban in New Zealand only prohibits the sale of tobacco products and does not cover vaping.

Environmental, social and governance (ESG) analysis has become an increasingly important part of the investment process across the globe. BAT Malaysia is not left out of this drive as ESG reporting in Malaysia is also on the rise.

“ESG is front and centre of everything that we do. Compliance is paramount for us. We win multiple awards every year in that space. For example, we will only operate if something is legal in the country like Vuse,” says Salem.

The company is also committed to giving back to the communities it serves, which is part of the group’s commitment to building “A Better Tomorrow”. It has an ongoing community farm garden programme called Beyond Benih, in collaboration with the Department of Agriculture and the residents’ associations of selected communities.

“To date, BAT Malaysia has completed two gardens, in Shah Alam and Tanjung Karang, and has committed to launch more across the nation this year,” says Salem.

In fact, it is for this reason that he rejoined BAT, which he left in 2015.

“In 2017, the key driver for me rejoining BAT was the group’s purpose — to build ‘A Better Tomorrow’ — by reducing the health impact of the business through offering a greater choice of enjoyable and less-risky products for our consumers,” he explains.

He elaborates, “Prior to rejoining the group, the management in London explained that BAT was no longer just a tobacco company. The BAT of tomorrow will be a high-growth, consumer goods company — global, consumer-centric, multi-category, with sustainability at its core. 

“I thought to myself, how often does one have the opportunity to truly transform a business and an industry? How many times in one’s career does someone have the opportunity to be at the centre of transforming not just the business, but an industry? 

“Once I retire, when I look back, that will be part of my legacy … that I played a pivotal role in transforming an industry. This is going to take time. It is not a revolution. But it is happening. That was what really excited me about coming back to this industry.

“Every single market in the world has its own set of challenges, which are different. It is seeing opportunity in adversity. In Malaysia, there is an opportunity for growth, like vape.”

In 2016, BAT Malaysia had shut down its manufacturing plant in Petaling Jaya, Selangor, which affected 230 employees, following a challenging business environment. Today, the company employs 1,500 people in Malaysia. It still has a plant in Johor that produces its Benson & Hedges cigarettes for local consumption, and has started to export to other markets such as Singapore. 

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