Why BAT is ending local manufacturing

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JIMMY MOYAHA: British American Tobacco [BAT] today announced that after many years they are finally closing down their South African production facility. The chief reason cited for this is that the illicit cigarette market has grown so much in South Africa that it is now no longer financially viable for them to continue these operations.

This is going to have some serious implications on jobs in the South African context, but also, I’d imagine, on the BAT operations. For more on this I’m joined on the line by the head of Corporate and Regulatory Affairs at British American Tobacco sub-Saharan Africa, Johnny Moloto, to look at this and see what we make of it.

Johnny, thanks so much for taking the time. Lovely to have you on the show. The statement coming through from BAT concerns the reason behind the decision to close manufacturing in South Africa – something that we’ve known about in the past, something that we’ve known has been a problem in the past. Is it that much of a problem that this is the only measure?

JOHNNY MOLOTO: It is that much of a problem, Jimmy, because if you’re looking at a facility that can produce almost the total size of the market for cigarettes in this country, but is only producing 35% of its total capacity, that is that serious.

And if you look at the market currently at 75% and climbing, which means that two-thirds of the market is sitting in the illicit space, there is no way that you can fairly compete.

There is no level playing field, especially if the legal industry pays its full due and its fair share of taxes and the illicit market does not.

That market has a disproportionate advantage over us.

JIMMY MOYAHA: Now, Johnny, I can imagine this decision was not arrived at lightly and from a business perspective other measures would have been explored prior to taking this decision. Can you perhaps take us through some of those processes that a company like British American Tobacco would go through – assessing the market, reviewing almost how big an impact you have on the market, how much of the market you supply; just some of the factors that were taken into account here.

JOHNNY MOLOTO: Thank you for that. You are raising a very important point. BAT has been speaking to SAfm over the years, raising these very concerns.

For the past decade we’ve tried to introduce efficiency measures, staff reductions, improving our production to make sure that we’re as efficient as possible …

Even going into efficient energy generation which, even though is a good thing from a business perspective, has also impacted the local municipality in a sense, where even what they used to generate from us as revenue has declined very sharply.

The amount we used to contribute towards that municipality has significantly declined. And this is a landmark in that community that has been there since 1975 and was started as a project to uplift that community.

Where we are today, where we are producing and the number of staff that we’ve been laying off over the years – no amount of efficiency can allow you to compete where there’s a complete market failure.

JIMMY MOYAHA: Johnny, you mentioned ‘complete market failure’, and that is quite a statement to make – particularly for, as you said, a facility that has been in operation for more than 50 years and a company in the form of British American Tobacco that doesn’t just service the South African market, but services other markets internationally as well.

Why characterise it as a complete market failure at this stage? How is it different from the Covid pandemic – or prior to the Covid pandemic to perhaps over the last 10 years? How has the market got to the point of failure?

JOHNNY MOLOTO: Where 75% of the product that is being sold is non-compliant and you are still expected to compete equally with taxes increasing year on year, these are the things that we’ve been calling for from government year on year – to say that you cannot continuously increase excises above inflation where only a small segment of that industry will contribute to the fiscus.

On top of that, you add what was the unconstitutional sales ban in 2010 which only impacted the legal industry, by the way, because that’s where the illicit trade really shot up because the illicit players continued to sell; over 90% of the market still had access to cigarettes.

That was not just information from Vat; that was independently verified by third parties and sources not really friends of the tobacco industry.

If you add to that regulation – such as the new Tobacco Control bill that is on the cards and will control only 25% of that market, and regulate a smaller percentage of that market – that is why we call it a ‘market failure’.

Because on top of everything else that is not working, you continue to burden the compliant players with more regulations, more taxes.

That is what I would regard as a market failure.

JIMMY MOYAHA: Johnny, is too late to remedy the situation from an intervention point of view? I understand British American Tobacco may have taken a decision, but we’ve seen in the past companies have taken business decisions and where government has intervened it has potentially allowed companies to rethink the decisions. Is it too late for some form of intervention and, if not, what would that intervention look like to restore this market?

JOHNNY MOLOTO: Thank you for that question, and let me be very clear on this point.

We remain committed to South Africa. We are not exiting the market. It’s just the local production that we are stopping.

We are shifting our model to an import model so that our consumers still have access to the products that they’ve got to know over the years.

What we are saying is, if government can substantially and sustainably reduce illicit trade, we will definitely reinvest in local production.

But for now, unfortunately, we have come to that point where we’re over the precipice. This decision at this moment cannot be reversed until we can see a positive trend towards enforcement.

We’ve been hearing very positive signals from government. The revenue authority and the border management authority have been doing their best to try and stem the tide of illicit [activity].

But that’s not enough.

You would need a whole-of-government approach, end to end, from disruption and enforcement in the market to enforcement against the local players.

[As much as] 80% of these products is produced locally. Once we see enforcement in that, right up to prosecutions, you’ll start building confidence and see that tide reverse.

But at the moment we haven’t seen any big fish being put behind bars, or any whose operations have been stopped as a result of enforcement. At the moment we are not seeing any of those signs.

JIMMY MOYAHA: Now, Jonny, I understand that British American Tobacco is currently in a closed period, and that that means we cannot discuss the financial impact of this decision.

But I would like to take a look at the social impact of a decision like this.

To shut down a facility that has been in operation for more than five decades is going to have a ripple effect on communities, particularly the communities that you’ve mentioned earlier in this conversation.

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Take us through the envisioned impact of this shutdown and what it potentially means – not just for those communities, but for the tobacco industry in South Africa.

JOHNNY MOLOTO: Let’s look at the Lesedi Municipality and Heidelberg itself – where the factory is located – to demonstrate the seriousness of this matter to you. Over the past few years, we have engaged with the local municipality and the mayor himself has been at the forefront of supporting us in this fight, whether by draconian regulations or unsustainable tax increases.

He has been very cognisant that, as the mayor of that community, he has a duty to make sure that he protects the investment that he has so that he protects the jobs that he has. Even yesterday we had a conversation with him to give him the courtesy of notifying him, because he has been a critical stakeholder for us.

Now, what you are seeing is we estimate around 230 or so employees being impacted. But over the years we have significantly scaled down the number of employees that we’ve had in that community.

Every employee who is impacted supports extended families. You also have third-party providers like your logistics providers, contractors and all other economic activities that revolve around it [the operation].

So [we] and another manufacturer across from our factory have been the main contributors to the economy of Heidelberg.

Heidelberg has a high incidence of unemployment at 43%. So if you combine this, all those factors are going to have a devastating impact on that economy.

We really, really are regretting what government has actually failed to do to protect even the employees that we’ve had who are professional, who have not done anything wrong, but have always showed up and done the best that they could to support their families.

But today they’ve become victims of a lack of action from government.

JIMMY MOYAHA: The real world impacts of illicit markets are being felt far and wide as British American Tobacco confirms it will be shutting down its South African factory after 51 years in operation.

We’ll leave the conversation on that note. Thanks so much, Johnny Moloto, area head of Corporate and Regulatory Affairs at BAT sub-Saharan Africa, for joining us to take a look at this and providing us with some clarity.

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