Category: Also in TR

Advances in processes, materials and technologies are reducing requirements for spare parts.

By George Gay

In publishing a magazine such as Tobacco Reporter, certain subjects are covered regularly—in some cases, on an annual basis; in others, more frequently. But perhaps it will soon be time to pension off one of these regular features, the one we refer to internally as “spares,” by which we refer to tobacco machinery replacement and wear parts.

Why? Well the people at Aiger tell me that spare parts constitute a “nonsubject” these days. “In the past, there was clearly a spare parts dedicated activity that involved replacing wear-and-tear or standby parts,” said Arek Druzdzel, the company’s business development director. “Today, however, the quality of the parts has improved, thanks to new processes, materials and technologies. Reliability is much higher. Customers are willing to pay a bit more for machines that include advanced-technology, high-end, long-lifetime parts instead of having to manage inventory, machine shutdowns and spare parts replacement. In fact, today it is every supplier’s obligation to deliver products that are engineered in a way that guarantees low maintenance, reduced spare parts consumption and increased reliability.”

Courtland Macduff, Aiger’s sales director for Asia, used an automobile analogy to drive home this point. “People don’t want to hear about spare parts,” he said. “They want us to engineer a solution so that they don’t have to replace parts as previously—like in the case of cars, where these days they’re serviced after 20,000 km, not after 2,000 km.”

Interchangeability is one strategy that can be used to good effect in reducing the number of parts and the logistical issues that go hand in hand with them. “These days, machines use programmable drives rather than mechanical gearboxes to synchronize speeds and positions,” said Macduff. “And some special motors are driven by a programmable inverter. Now instead of having one dedicated inverter for each drive, it is possible to have an empty inverter that Aiger can, from a distance, load with a qualification logic that makes it functional for a particular part of the machine identified by the customer. We don’t have to deliver any spare parts; they don’t have to carry one of each.”

Parts will not disappear entirely, of course. They will be part of service contracts between the machine supplier and the machine user, of which there will be many forms to suit different customer needs. And such contracts and the relationships that they engender between the machinery supplier and machinery user will probably tend to reduce the use of locally made parts. “What I see is that clients don’t want to use local parts with the new-technology machines,” said Macduff. “They want the [original equipment manufacturer] to provide a very special service.”

Druzdzel acknowledged, however, that local manufacturing of machine parts was still happening and would probably happen in the future. But in the case of advanced-technology machines, this was not the way forward, he said. Aiger had invested in manufacturing parts so that they extended the service life and improved the performance of machines in a way that was beneficial to the customer. “To me, there is no way back from the progress that we have made into higher technologies and quality parts,” he said.

Teleservice

One service area Aiger is investigating covers a teleservice for distance diagnostics: troubleshooting by engineers based at Aiger’s plant in Plovdiv, Bulgaria, directly in a customer’s facility located almost anywhere in the world. Such a teleservice can embrace also distance training and maintenance supervision, for example, by webcam.

“As we use more drives and programmable inverters/PCs, we sell directly through the net upload programs, new-configuration production specifications and dedicated drive function programs,” said Macduff. “Soon, instead of supplying a spare part to our customer, we will sell the key lock to have the part duplicated at the customer’s facility on a 3-D printer.”

Such a system sounds like it manages to combine the advantages of quality spare parts and local manufacture, where there is no need for shipping and the delays involved in such activities. The question is, how far are we away from this? In theory, we’re there. In practice, there are still some matters to iron out. Firstly, the machine supplier and the machine user must be operating at similar advanced levels of technology.

Aiger, for its part, is almost there. Well over 90 percent of the parts used in the company’s machines have been fully digitalized, said Druzdzel, which means the company’s systems contain 3-D models of just about all parts. And the process of digitalization is expected to be completed later this year, which means Aiger is on the threshold of being able to apply 3-D printing technology across the board.

Of course, 3-D printing covers a range of technologies, and some technologies are more applicable to the tobacco machinery industry than are others. For instance, Druzdzel said, Advanced Manufacturing services included 3-D technology that allowed for printing hard, durable mechanical parts. It was at an early stage, but it was coming. And, as Macduff added, the advantages of machinery users not having to carry stocks of spare parts and of there being no handling issues were such that much pressure was likely to be applied to advancing the technology quickly.

Of course, matters of timing would still arise, and administrative issues, some of them new, would have to be tackled. 3-D printing would not be an almost instantaneous process as it is when printing a document. With today’s technology, printing could take a couple of hours or so, depending on the complexity of the part and the materials used. And once the technology was in place at both the supplier’s and user’s premises, contracts would have to be drawn up to cover issues such as whether single- or multiple-use was covered. In addition, arrangements would have to be in place to pay for tariffs in those countries where import duties applied. Security, it seems, would not be unduly worrisome. Key lock systems come from banking and refer to safe—as safe as anything can be—data-transmission protocols that allow for sending digitized data.

Developing relationships

I wondered, however, whether, despite the best intentions of machinery suppliers, tobacco manufacturers wouldn’t have to carry even more parts in the future as their product portfolios expanded to include new-generation products. But Druzdzel said Aiger’s intention was the opposite; it was to reduce its customers’ spare parts stock holding. “Some spares are vital and a customer will carry them anyway, or [they] will have in place a reliable and fast supply, as Aiger offers with its fast-track contract,” he said. “Aiger offers also a spares supply program: a one-year supply program under which spare parts manufactured by Aiger are supplied at pre-defined time slots.”

It is all about developing a service relationship that suits the customer. Under a fast-track contract, Aiger works very closely with customers’ maintenance teams. In this case, Aiger delivers parts according to an agreed schedule, and the customers’ engineers carry out the maintenance under the supervision of Aiger engineers “accessing” the machine through a webcam. This is said to be a way of ensuring that machines have the least possible downtime. When Aiger supervised a maintenance program by webcam, said Macduff, it guaranteed that on the day the customer stopped his machine, he would have a crate with everything needed to do the maintenance under supervision. This was where service came in and spare parts became integrated into a new area of business.

Meanwhile, Druzdzel said it was essential for machinery suppliers to become smarter because some customers simply didn’t want to do anything with their machines. And this meant it was necessary to offer a complete contract that delivered machines with long-life parts and included a teleservice for diagnostics, service and stock management. All of this was possible as part of Aiger’s package of services.

But this is not to say that the days of the peripatetic engineer are over. Druzdzel said that Aiger has a group of technicians who traveled around the world almost constantly. Sometimes visits were connected with normal installation services, sometimes with maintenance services.

It is necessary to keep in mind, though, that as we head into the future, nothing is really “normal” anymore—nothing is going to stay the same. One of the next steps is probably going to see virtual reality glasses used as an aid in maintaining machinery. “Aiger is not far away from offering that level of service,” said Macduff.

Aiger Engineering thrives as new products continue to disrupt the traditional tobacco business. 

By George Gay

During an interview at the end of July, I asked Arek Druzdzel, Aiger Engineering’s business development director, if the tobacco machinery business had been tough in recent years, what with falling cigarette sales in many Western markets and much consolidation having taken place and still taking place within the tobacco manufacturing sector. His answer was illuminating. Yes, it had been tough, he said, but not for Aiger.

Aiger had been the fastest-growing tobacco machinery supplier, with an average annual growth of 18 percent during the past three years, he said, and this year it was promising to deliver a sales growth of 20 percent. Aiger would double its size before 2020, he added.

So, what is driving such growth? Ideas and their progeny: innovation. Indeed, Aiger says it is following a strategy aimed at positioning the company as the most innovative supplier of flexible machinery for the production of cigarette filters and cigarette packing, as well as the development of novel quality-assurance management systems, such as its Matrix Neo.

But the ideas and innovation don’t stop with traditional tobacco machinery; they stretch out to include heat-not-burn (HNB) requirements and to imagine a future with other next-generation products.

OK, every company says that it is innovative, but Aiger has some history in this respect. Aiger was formed 23 years ago, and Courtland Macduff, the company’s sales director for Asia, said that for most of its history the company had been working with multinationals on special projects—what he described as complex engineering projects. So there need be little surprise that in 2015 Aiger took home to its base in Plovdiv the award for Bulgaria’s most innovative company.

Focus on innovation

Perhaps something dynamic has built up in the air around Plovdiv, which has 8,000 years of history and which, from the end of the 19th century to World War II, was known unofficially as a tobacco city. In 2019 Plovdiv will enjoy being a European Capital of Culture, while today it is Bulgaria’s fastest-growing business, technology and economic center, attracting investment from international businesses and employing more than 100,000 people in the machinery and components sectors.

Aiger employs about 220 people at its 7,000-square-meter Plovdiv production facility (about another 20 people are employed at the Aiger Group’s Swiss base) that is set on a site of about 18,000 square meters. It has a diversified workforce within which most of its employees are designers and engineers with master’s degrees, but that includes also assembly and installation engineers, as well as fitters because it produces most of its mechanical parts in-house. The company sources its qualified employees mainly from technical high schools and universities in Bulgaria, and, three years ago, it started its own internal education program called “Aiger Professor,” which is based on the German model of hands-on training during the education of young professionals.

Aiger’s focus on innovation can be inferred from the fact that more than 50 of its employees are engineers working as part of R&D, mechanical, electrical and software teams. And, in turn, this focus on R&D and design reflects Aiger’s business, which is based on building customized, application-based equipment, including the types needed to produce specialty packs and complex cigarette filters.

Such equipment includes also that needed for the manufacture of HNB product components. Already, Aiger supplies a number of pieces of equipment for HNB production lines, such as filter plug platform machines and modular packers. However, it has been involved also in R&D, design and production projects for HNB base filter plugs.

Overall, Aiger supplies what it describes as a Flex-HNB-making platform—machinery elements into which a specific Flex platform has been integrated. “The benefit of using a proven process enables us to minimize industrial risks but mainly allows our customers to limit their investment risk by providing the possibility of reconfiguring machines to conventional equipment,” said Macduff.

While it does not provide any equipment for the e-cigarette sector, which, unlike the HNB sector, includes no traditional tobacco industry elements, Druzdzel said that, as an engineering-to-order company, Aiger would look at such developments if there were a partner or customer to work with.

Cross-fertilization

Again, Aiger has history here—in this case working outside the field of tobacco—experience that has allowed it to benefit from a cross-fertilization of ideas and that could help it in coming to grips with the challenges of developing machinery to manufacture next-generation products. Although 90 percent of its business involves the tobacco industry, it also builds specialized equipment for clients in the pharmaceutical industry.

“Currently, we focus on fine dosing small quantities of powder and granulate materials into small vessels and precise, on-line measurement of the dosed masses,” said Druzdzel. “This includes compliance to pharma regulations. Also, based on our experience in the tobacco industry, we build pharma-specific, bespoke inspection systems that allow for online registration of key parameters. Both industries converge as the search for successful new-generation products intensifies on both sides.”

HNB and other new-generation products certainly constitute one of the areas where Aiger sees its focus on innovation coming to the fore. “Look around,” said Macduff. “Everywhere you see new products that, through the application of new, exciting technologies, have advanced out of sight. There has been a sudden and fast rise of the driverless, electric car, and new tobacco products will move in a similar manner. By 2025, many people will travel in driverless cars, and most big cities will not allow anything but electric vehicles on their streets. Nobody can see into the future of the tobacco industry, but when HNB products are accepted by bodies such as main regulating administrations, international organizations and legislators as being, as claimed, more than 90 percent less risky than are traditional cigarettes, it is likely that soon these products only will be allowed to be [for] sale. It will be like the introduction of seat belts in cars—no ifs and no buts.”

At that stage, sales of these devices—and therefore sales of the equipment needed to produce them—will take off. And here again, Aiger is prepared—open for future challenges, as Druzdzel puts it. While most of the company’s employees are engineers, the sales team has recently grown to account for 10 percent of the workforce. Aiger has established offices in Brazil, Switzerland and the U.S. It has also recently opened a Moscow office and is in the process of reorganizing its Asia business, something that will involve the opening of another office, probably in Southeast Asia, by the end of this year.

And with sales agreed, Plovdiv is well-positioned geographically for Aiger to buy in the materials it needs and to send out its machines. The factory is about 3 kilometers from the nearest railway station and 2 kilometers from a major motorway that connects the airport in Sofia, Bulgaria, which is 140 kilometers away, with the Black Sea port of Burgas, which is 250 kilometers away. And there is a good international road network connecting Plovdiv with all neighboring countries and the rest of Europe.

Fast adapters

Aiger says its equipment portfolio is focused on two types of flexible and “fast-adapting” machinery: Flex filter makers and EON 300 cigarette packers. It offers a modular “plug and play” machine platform that allows operators to change from simple to complex filters in less than an hour. The Flex modules include those that can insert capsules, flavors and granular materials, and those that can process nonwrapped and paper filters. Each Flex module performs a dedicated function, such as inserting capsules (objects) into the moving tow or rod cavity, while, at the same time, handling the filter plugs and transferring them to an upstream module or to a desired position, defined by a final rod specification.

In addition, Aiger has developed a twin capsule inserter. The company says that the inserter offers a gentle and cost-effective method of including two different capsules—perhaps capsules of different sizes or containing different flavors—in a single rod, or cigarette.

Some Flex filter platforms, meanwhile, have been installed for development use in response to customer requests for unique modules to add to their existing complex-filter capabilities. “Moreover, we are introducing our bespoke micro-dosing solution for medical capsule-filling machinery,” said Druzdzel. “This opens a new chapter in the tobacco industry where extreme cleanliness meets extreme, six sigma dosing precision requirements.”

One of the things that Aiger keeps its eye on is what it terms “legislative drivers,” such as the EU’s revised Tobacco Products Directive (TPD2). The company says that it was the first in the market with a full-size modular packer—the EON 300—that could be converted from conventional to TPD2 compliant packs in two shifts. And down the line, it offers a TPD2-ready compact stamper that can be converted to or from TPD2 format within less than 2 1/2 hours.

“For packing, we offer a convertible, modular fast-fit system that allows customers to change from simple hinge-lid boxes to complex multichamber boxes—packs that are TPD2 compliant, and ‘Handy Packs’—in under three shifts,” said Druzdzel. “Packs include super-slims, 5-50s, round, square and everything in between.”

Handy Packs are hinge-lid packs with an inner divider. “We have a TPD2 compliant packer, the Eon 300, that allows inner-divider insertion to create two separate compartments,” said Druzdzel. “This is especially useful for [other tobacco products]. In fact, our most recent innovative machine is the versatile Eon 300 packer for Handy Packs and for MYO applications. This clearly demonstrates the flexibility of our Eon 300 packer, on which we can make a three-cavity box and then feed three different and complex-shaped items into the box.”

In fact, Aiger has recently sold the Eon 300 for producing limited-edition packs so that the consumer marketing teams of a large manufacturer can test new pack designs in limited production runs.

As is mentioned above, for quality assurance, Aiger offers its Matrix Neo, which reports via Scada, ERP-SAP or Microsoft Dynamics to ensure constant product quality and data on which management can base corrective actions. It has been installed on filter and cigarette machines to check for dimensions, density, photo recognition, carbon fill, and capsule placement and damage, with explicit management data reporting. Although Aiger no longer offers cigarette makers or rebuilt machinery, it says the Matrix Neo can be retrofitted to any single-rod maker.

Looking ahead, Aiger is intending to establish a new web shop for its established clients and to prepare for “Industry 4.0”—the fourth industrial revolution. “We have already achieved 90 percent-plus digitalization of all our data and systems,” said Druzdzel. “Aiger has recognized these ongoing processes and the associated business potential, and we have started preparing the company for these new realities.”

And it is already well-prepared. It has a young workforce, with the average age of its employees being 34—people Macduff describes as brimming with excellent, challenging design ideas and the software skills to implement them.

David Sweanor shares his thoughts on the taxation of next-generation products

David T. Sweanor is an adjunct professor in the faculty of law at the University of Ottawa in Canada. As a public health advocate, he has worked at reducing global cigarette smoking since 1983. Tobacco Reporter asked Sweanor for his views on the taxation of next-generation products.

Tobacco Reporter: The scientific community agrees that the method of nicotine delivery, rather than the nicotine itself, is the culprit with regard to smoking-related diseases, with tobacco combustion carrying the greatest risk. In The New England Journal of Medicine, you argued that taxing products according to their risk level would maximize incentives for tobacco users to switch to less harmful products. Where on the risk continuum do you see taxes on e-cigarettes?

Sweanor: The goal of public health—not to be confused with those with other agendas claiming to be advocating public health—is the reduction of death, diseases and disability. Where we find risks, we seek to reduce them. Prices impact consumption, and differential prices shape choices. The bigger the price differential, the greater the shift between substitutable goods.

Anything other than a zero rate of tax on alternatives to cigarettes will result in less incentive to switch, both because of price differentials not being as great and because of the implicit message about the risk differential not being as significant. I would recommend no tax on most noncombustibles and a higher tax on combustibles as the most sensible starting point.

Some argue that there need to be taxes on noncombustibles to prevent use by nonsmoking youth. But that means accepting a theoretical and preventable long-term health concern taking precedence over the virtual certainty of greater consumption of cigarettes and the resulting diseases in the immediate future. We should prefer alternatives that protect youth without imperiling the lives of their parents.

What about nicotine-free e-liquids, which are currently also taxed? Does this make sense?

It doesn’t. It is like identifying someone who gave up excessive drinking for jogging and deciding to tax her running shoes.

Where on such a differentiated tax scale would tobacco-heating products come in?

The key thing from a public health perspective is to get people off combustion-based delivery. At this point, discussion about the relative risks of vaping, heat-not-burn, snus, pharmaceutical nicotine, etc., and the potential taxes for each category misses that key point. It is like arguing about whether it is more dangerous to juggle oranges or apples or coconuts when people are currently juggling live hand grenades. The priority needs to be on replacing the truly deadly activity by offering a wide range of low-risk options, and we can discuss the relative merits of those alternatives later.

While, in the EU states that tax e-cigarettes, a trend is emerging toward taxation on the basis of e-liquid volume, there is no unified policy on taxing e-cigarettes in the U.S. Some states and counties have opted to group e-cigarettes or liquid containing nicotine in the same tax category as “other tobacco products” that only have the wholesale price as a common taxable base. In the case of Pennsylvania, this has led to e-cigarettes being taxed based on the wholesale price, inclusive of the liquid and devices. What should be the taxable basis for e-cigarettes?

E-cigarettes should not be subjected to excise taxes. Such taxes discourage switching from cigarettes and create compliance issues that disadvantage smaller suppliers, thus harming innovation and protecting the cigarette market. The Pennsylvania tax was a gift to the cigarette trade and would be the equivalent of the state putting a massive tax on clean water when rancid water is readily available and widely used.

The EU is presently reviewing the rates and structures of excise duty applied to manufactured tobacco and for the first time plans to include vapor products in its tax regime. In the U.S., the hopes of vapers are on the new FDA commissioner, Scott Gottlieb. What’s your advice for them regarding taxation of next-generation tobacco products?

Put a sign on your wall saying, “It’s the smoke, stupid,” and read it every day. We have an extraordinary opportunity to make one of the greatest-ever breakthroughs in public health by simply giving viable low-risk alternatives to the repeated inhalation of the products of combustion. Keep your eye on the prize. Don’t fail a “vision test.”

Recent attempts at taxation of vapor products—such as those in California, which no longer differentiates between combustible cigarettes and e-cigarettes—seek to prevent people from switching to e-cigarettes. Obviously, the idea of a risk continuum isn’t plausible to Californian fiscal policymakers, and they are only some among many who think that way. What would be a suitable strategy to convince such fiscal lawmakers of a differential tax strategy?

Efforts to “prevent switching”—and campaigners for such measures are usually open about that being their goal—are ideologically driven abstinence-only measures. They have been tried on a wide range of issues where there is an absolutist rather than public-health orientation. One need only look at prohibitionist policies on alcoholic beverages, the war on drugs, sex outside of heterosexual marriage, etc., to see the same sort of thinking, the same sorts of harm to health and human rights, and, ultimately, the same abject failure. What is surprising is that ideologues could have pushed through such policies in a place like California despite the presence of very effective advocates there who successfully battled such policies in dealing with AIDS and, lately, drug policies.

Public Health England was the first health authority to make an official and clear statement about the reduced harm potential of vapor products. How much could more such statements contribute to appropriate legislation and ultimately help answer the question of appropriate taxation of vapor products?

The U.K. has long been a global leader in pursuing pragmatic strategies to deal with public health issues. Given the history of alcohol, birth control, illicit drugs, workplace safety, etc., it is encouraging but not surprising to see U.K. leadership on nicotine issues. In other jurisdictions, it is often a small group of people with absolutist ideologies who impede progress in reducing risks. As with Wayne Wheeler of the Anti-Saloon League, they are energetic, loud, often very nasty, and wrong.

Cigarette manufacturers, such as Philip Morris International (PMI), claim they want to design a smoke-free future. What role do tax-based price differentiations play in stimulating the market for reduced-risk products and eventually, perhaps, achieving PMI’s goal?

Differential pricing is huge, and decisions on taxation shape those differentials. As evolving technology allows the noncombustion products to get ever more acceptable to smokers, price will play a huge role in shaping the market. Tax policy can literally stop a global pandemic of cigarette-caused disease. Finance officials around the world can play a huge role in doing what D.A. Henderson did to smallpox, or Norman Borlaug to reduce famine, and should be no less honored for making it happen.—S.R.

New filter technologies are helping cigarette manufacturers set their products apart.

By Patrick Meredith

As with most industries, consumer expectations and industry demands are constantly evolving, leading to new trends and continuous innovation. This is no different in the filters market, with many external factors and different consumer preferences coming into play. As the amount of industry regulation and legislation grows—with increasing restrictions around tobacco content, marketing and packaging, among other things—manufacturers must turn to the filters themselves to differentiate their products and create greater appeal for consumers.

This has led to numerous exciting innovations, such as different filter diameters, lengths, shapes, flavors and colors. One type of specialist filter that has seen particularly strong growth over the last five years is the capsule filter. Having grown almost exponentially from its first entrance into the market in 2008, the current global capsule market is estimated to be approximately 150 billion sticks per year. Demand for capsule filters has increased significantly as they fulfill changing customer preferences and meet their evolving tastes—capsules provide flexibility, variety and personalization. Capsule filters enable a concept widely known as “mass personalization”; the different filter options allow customers to personalize their experience by choosing which flavors they wish to smoke and when during their consumption they want to release the flavors. In response to this strong customer demand, filter manufacturers around the world have expanded their capsule offerings, providing various new flavors and innovations.

These innovative capsules can vary in terms of flavors, ranging from the more traditional, such as menthol, to the more exotic, such as rose or green tea. With an audible “pop” when the integrated capsule is crushed, capsule filters enhance the customer experience through the addition of sound as well as taste. At Essentra, a leading global supplier of filters and scientific services, the entry-point capsule filter is the Sensation filter. The Sensation currently comes in a wide range of flavors, including grape, apple, spearmint and osmanthus.

Leveraging the market’s increasing popularity of products with smaller circumferences, capsule filters are now readily incorporated into slim and super-slim sizes, normally in more premium products. The overall trend toward super-slim products has also been particularly strong in Africa and the Middle East, which saw an increase in sales of almost 12 percent in 2016.

Capsules can also be incorporated into dual-segment filters to add extra features. For example, capsules can be embedded in dual-segment carbon filters, or they can be included in filters that incorporate a tube segment. By including capsules in these special filters, consumers can enjoy the benefits of both interesting flavors and the more innovative variants. Essentra’s creatively designed Dual Sensation filter provides a number of different combinations for consumers to choose from, including either a capsule segment with a carbon segment or a capsule segment with a visually distinctive filter segment. These combinations present consumers with the choice and ability to personalize their product through several unique taste, smell and visualization options.

Similarly, dual-segment filters with capsules in both segments mean consumers can enjoy a bespoke experience. A filter with two capsules means consumers only need one filter but can get twice the flavor, on demand—as can be seen with one of Essentra’s most recent proprietary innovations, the TwinSense. Filters with two capsules are seen to be the filter type that offers the customer the most control; consumers can choose not to burst the capsules at all, to burst one for one flavor or to burst both capsules for a combination of the two. An assortment of flavor combinations are available, such as menthol and strawberry or menthol and grape.

For all variants, to maximize flexibility, the filter tip’s length, circumference and pressure drop can be varied to suit taste and design requirements. As consumers become more discerning, manufacturers must be able to offer flexibility and the ability to create the exact products and services that meet user needs.

However, with further legislation due to be implemented, there may be limitations within the capsule market. For example, in accordance with the revised EU Tobacco Products Directive (TPD), menthol cigarettes will be banned in the EU by May 2020. Article 7 of the TPD states, “Member states shall prohibit the placing on the market of tobacco products with a characterizing flavor.” In addition, in the U.S., a ban on cigarettes containing certain characterizing flavors (excluding menthol) went into effect, authorized by the Family Smoking Prevention and Tobacco Control Act, as part of a national effort by the U.S. Food and Drug Administration to reduce smoking in America. According to the act, “a cigarette or any of its component parts (including the tobacco, filter or paper) shall not contain, as a constituent or additive, an artificial or natural flavor (other than tobacco or menthol) or an herb or spice … that is a characterizing flavor of the tobacco product or tobacco smoke.”

Until this legislation is realized, it is therefore still possible to use capsules and capsule filters to differentiate brands. It is also partly why there are now so many variants being introduced into the market. For example, although it’s a slightly different technology, a “water capsule” was recently launched in Japan to show potential different applications and functions that are being investigated. The water capsule itself modifies the taste but in a different way, by cooling rather than imparting a flavor. Water is also known to have some filtration properties if it is present in the appropriate quantities, so there may also be an additional benefit in this regard.

Therefore, not only do capsules help manufacturers cater to consumer tastes, but they also add value in terms of brand differentiation. As industry regulation and legislation continues to grow with increasing restrictions around tobacco content, marketing and packaging, manufacturers continue to turn to the filters themselves to distinguish their products. Leveraging the capsule in this way creates an opportunity for brands to add value and offer something that their competitors do not. It will be interesting to see how capsules continue to develop and what new innovations are created that can add the same flexibility and personalization that current capsules do but can also comply with any new regulations that come into place.

Scandinavia’s market for combustible tobacco continues to shrink as consumers look for less harmful alternatives.

By Stefanie Rossel

Among the Scandinavian countries, Sweden and Norway stand out when it comes to low smoking rates. With only 7 percent of its population using cigarettes, cigars, cigarillos or pipes, Sweden remained best in class in 2016, according to www.statista.com, whereas Norway’s smoking prevalence stood around 12 percent, according to Statistics Norway. With a smoking prevalence of 20 percent, Denmark trails its northern neighbors but is still comfortably below the EU average of 25 percent.

The record-low figures are attributed to widespread health consciousness and the popularity in Norway and Sweden of snus, a pasteurized oral tobacco that is available as loose leaf and in pouches. In Sweden, snus has been used for 200 years. Throughout the rest of the EU, however, the product is banned. (Norway is outside the EU.)

Snus is believed to be significantly less harmful than smoking, but that knowledge hasn’t stopped Norway from subjecting the product to strict regulations. When it recently became the fourth European country to introduce standardized packaging for tobacco products, Norway explicitly included snus in the new legislation.

With the exemption of e-cigarettes, chewing tobacco, cigars and pipe tobacco, cigarettes and all other tobacco products are now sold in drab brown-green packaging, bare of manufacturer logos and with brand names in a standardized font. In addition, Norway’s Standardized Packaging of Tobacco Products Law (2017) requires packs to feature large health warnings with text and images showing, for example, diseased lungs.

Retailers have a transition period of one year to comply with the new legislation, the purpose of which is to prevent children and young people from starting smoking and using snus. Legislatures justified their decision by pointing to the dramatic increase in snus use among young people over the past 10–15 years. During the same period, they claim, many new snus products with appealing packaging designs entered the market. Swedish Match, which leads the snus and moist snuff category in Sweden and Norway, on July 7 filed for a temporary injunction, saying that the measure is disproportionate and inappropriate for the protection of public health.

In Sweden, the snus news has been more positive. In May 2017, Sweden’s Karolinska Institutet published a study that dismissed the causal relationship between snus and pancreatic cancer. The findings might support the pending legal challenge of the EU snus ban. In July 2016, Swedish Match had brought the challenge to the U.K. High Court; the company was joined by the New Nicotine Alliance, a nongovernmental organization acting as a third party in the public interest. In January 2017, the High Court referred the case, as the litigants had hoped, to the European Court of Justice (ECJ).

Given the low risk of snus compared to other tobacco products on the market, the plaintiffs argue that the ban is incommensurate and contravenes the EU’s right to a high level of individual and public health protection. While the legal challenge of the EU snus ban follows two earlier, unsuccessful attempts, it’s the first time that infringement of human rights is being brought forward as an argument.

EU member states and other stakeholders had until July 7 to make a submission to the ECJ commenting on the legal issues. In contrast to earlier occasions when the EU snus ban was challenged, the Swedish government this time chose not to submit an opinion, according to a press release from the New Nicotine Alliance Sweden, which was published in early August. Previously, Sweden’s government had pointed out health risks associated with snus; its opinion was believed to have influenced the ECJ to uphold the ban. The country’s silence may now facilitate a repeal. A ruling by the ECJ is expected in the first half of 2018 at the earliest.

A legendary love of snus

In both Norway and Sweden, the snus segment continued to grow in 2016, with pouched snus increasingly outselling traditional loose-leaf products. At the end of last year, portioned snus had a market share of 80 percent throughout Scandinavia, according to Swedish Match.

In Sweden, the number of snus users surpassed that of cigarette smokers in 2012. Approximately 1 million of the country’s 9.9 million inhabitants now consume the moist snuff. Swedish Match estimated the market comprised about 375 million cans in 2016, up by approximately 4 percent from the previous year. Some 56 percent of the snus market last year was dominated by premium products, but the economy and mid-priced segments continue to grow. Excise tax hikes for the product category stayed moderate; rates were virtually unchanged in January 2016 and saw a less than 1 percent rise in January 2017.

With a market share of 67.4 percent, Swedish Match dominated the domestic moist snuff market in 2016, followed by Imperial Tobacco Group (ITG), British American Tobacco (BAT) and Japan Tobacco International (JTI). Swedish Match leads the premium-priced snus segment with its General snus brand. The company’s other brands in Sweden include Goteborgs Rapé, Ettan, Grov and Catch.

Despite its dominance, Swedish Match has been losing market share in the snus category. In the premium category, its share shrank by 1.3 percentage points to 91.8 percent in the first six months of 2017 compared to the first half of 2016. In the economy segment, Swedish Match lost market share to smaller manufacturers. Its share decreased from 38.8 percent in the first half of 2016 to 36.5 percent during the same period this year.

Shifting categories

Snus manufacturers have kept busy making their portfolios comply with the requirements of the revised EU Tobacco Products Directive (TPD2). Sweden’s parliament adopted the bill for transposing TPD2 into national law on April 6. In addition to stipulating graphic health warnings for cigarette packs, the law now mandates two health warnings on snus containers and bans the specification of the amounts of tar, nicotine and carbon monoxide on the packaging of tobacco products.

The value of Sweden’s entire tobacco market shrank from $3.34 billion in 2015 to $3.33 billion in 2016, according to Euromonitor International. The individual product categories experienced significant shifts in 2016. In value terms, cigarettes remained the leading category with sales of $1.94 billion, down from $2.04 billion in 2015. JTI, which is present in Sweden with popular brands such as Blend, Right, Camel and Level, continued to lead the category in 2016 with a market share of 39.6 percent, followed by PMI (31.4 percent) and BAT (26.8 percent).

Cigars, cigarillos and smoking tobacco decreased to $122.2 million in 2016 ($157.8 million in 2015), whereas the smokeless tobacco category, the majority of which is snus, rose to $1.21 billion in 2016 from $1.14 billion in 2015.

The Swedish vapor market has recorded solid growth since the product became legal in February 2016, after the country’s Supreme Court rejected pharmaceutical licensing. Its retail value was estimated at $47.7 million in 2016.

Sales ban on vapor products lifted

Developments in Norway have mirrored those in Sweden, albeit on a smaller scale. The overall tobacco market retail value shrank from $2.07 billion in 2015 to $2.01 billion last year, according to Euromonitor statistics.

Increasingly strict regulation and the stigmatization of smokers combined with long-standing health concerns about combustible tobacco contributed to a further decrease in Norwegian cigarette consumption. The cigarette market was valued at $1.03 billion in 2016, down from $1.08 billion one year earlier. The majority of the 2016 market was held by BAT, with a share of 51 percent, followed by PMI (33.6 percent), ITG (11.2 percent), JTI (2 percent) and Scandinavian Tobacco Group (0.5 percent).

The cigars, cigarillos and smoking tobacco category shrank to $334.9 million in 2016 from $362.8 million in 2015.

The country’s smokeless tobacco market, by contrast, rose from $595.7 million in 2015 to $629.9 million last year. In 2016, Swedish Match again led the category, with a share of 53.5 percent, followed by ITG and BAT. Just like in its domestic market, Swedish Match has been losing ground in Norway. In the first six months of 2017, the company’s share of the Norwegian market dropped to 51.9 percent, down from 54.1 percent in the same period of 2015.

For the vapor products category, Euromonitor noted a retail value of $13.4 million in 2016. It will be interesting to see how Norway’s tobacco and vapor markets will develop following the introduction of plain packaging and the legalization of e-cigarettes in December 2016.

Danes love cloud-chasing

Although its smoking prevalence is higher than those in other Nordic countries, Denmark’s tobacco trends are similar to those experienced by its neighbors. Due to declining cigarette consumption, anti-smoking campaigns and growing health awareness, the retail value of Denmark’s entire tobacco market contracted to $1.95 billion in 2016 from $2.12 billion in 2015, according to Euromonitor.

While still representing a majority of the market, the cigarette category declined from $1.78 billion in 2015 to $1.7 billion last year. With a 72.5 percent market share, BAT led the market in 2016, followed by PMI (17.4 percent) and JTI (7.9 percent). ITG and Von Eicken held market shares of 0.2 percent and 0.1 percent, respectively.

Smokeless tobacco products shrank by $1 million in 2016 from $13.9 million in 2015. The decrease in the segment is due to a new law banning Swedish-style snus from Jan. 1, 2016. Just like Sweden, Denmark had received an exemption when the EU banned snus in 1992 but only for the sale of loose snus, not portioned snus. Following several warnings and, in 2014, a lawsuit by the European Commission, the Danish government prohibited sale of pouched snus. Sales of loose snus are still allowed. The ban effectively wiped out a subcategory that, according to Euromonitor, in 2015 was worth dkk20 million ($3.16 million).

The only category that bucked the downward trend in the Danish tobacco market was vapor. Its retail value rose to $70.4 million in 2016 from $41.8 million in 2015. The boom was driven by the legalization of nicotine-containing vapor products in June 2016.

The impressive growth rates in the segment set Denmark apart from its Nordic neighbors. According to Euromonitor, e-cigarettes are emerging as a direct competitor to combustible cigarettes in the small country.

In the absence of a clear category definition, next-generation products are subjected to a bewildering array of tax policies.

By Stefanie Rossel

As next-generation tobacco products (NGPs) continue to gain popularity, developing an appropriate taxation policy for novel cigarette alternatives remains a complex issue around the globe. It’s a subject that involves many conflicting interests: Governments are looking for new revenues to make up for “losses” brought about by shrinking cigarette sales. In the absence of long-term studies, policymakers are reluctant to embrace the idea that NGPs might benefit public health and hence need to be promoted by appropriate taxation. Others argue for zero taxation of NGPs to prevent ex-smokers from switching back to combustibles and to encourage current smokers to switch to less unhealthy alternatives.

Lacking a unified policy on how excise taxes on vapor products should be structured, several member countries of the European Union and an increasing number of states and lower authorities in the U.S. have been going it alone. Recent examples bear witness to the widely varying policy rationales that have developed around the NGP category in the absence of clear definitions. Are vaping devices just as bad—i.e., as hazardous to health—as combustible cigarettes and therefore deserve an equally high punitive tax? Californian voters seem to agree, although scientific evidence suggests that vapor products are a significantly less harmful alternative to tobacco products. In November 2016, voters in the Golden State approved a ballot initiative to increase taxes on cigarettes to $2.87 per pack of 20 and to tax vaping devices at an equivalent rate.

Other questions relate to whether vaping is a gateway to smoking, especially for young people, and whether nicotine is just as much a cause for smoking-related diseases as are the byproducts of combustion. While both theories have been debunked by now, Finland’s fiscal policymakers, like many of their colleagues in other countries that currently tax vape products, still had them in mind when introducing an excise duty of €0.30 ($0.34) per milliliter of e-liquid on Jan. 1.

In December 2016, Finland amended its tobacco excise tax act to define e-liquid as a tobacco product. The new tax applies to all e-liquids, even those without nicotine. Sales of nicotine-containing liquids had become legal in the Finnish market only in mid-November 2016. Fittingly, Finland now permits only one flavor for e-liquids: tobacco.

Proof that vapor product taxes are unlikely to compensate for declining cigarette revenues comes from Pennsylvania. In October 2016, a 40 percent tax hike on the wholesale price of e-cigarettes, including devices and liquids, as well as a tax on retailers’ inventories, came into effect. The vapor tax was projected to bring in $13.3 million in revenues but had a devastating effect—more than 100 vape shops across the state went out of business. By the end of March, with three months left in the 2016–2017 fiscal year, Pennsylvania’s Department of Revenue had collected only $7 million in e-cigarette taxes.

In the focus of EU tax policy

Among the EU member states that have taxed NGPs, a clear trend is recognizable: E-cigarettes are taxed based on liquid volume. Excise tax on e-liquid is presently levied in Italy and Portugal (since 2014); Latvia, Romania and Slovenia (since 2016); and Hungary, Greece and Finland (since the beginning of this year). In June, Poland’s health ministry released a proposal to impose a tax on vapor liquids.

Hungary, Latvia, Portugal, Romania and Slovenia have also introduced excise taxes on tobacco-heating products. While it does not tax e-cigarettes, Slovakia joined these states in May. Acknowledging that tobacco-heating products, despite containing tobacco, do not fit into existing classifications, most of these countries created new tax categories.

The excise tax is typically based on the weight of the heated tobacco mixture, with rates ranging from €62 per kg in Latvia to €88 per kg in Slovenia. Hungary, by contrast, uses tobacco sticks to calculate the rate.

Guidance in NGP tax matters may eventually come from Brussels. The European Commission is required to review the rates and structures of excise duties applied to manufactured tobacco every four years and propose changes where necessary. This review is currently underway, and for the first time the inclusion of vapor products is being discussed.

If e-cigarettes were to be included, the commission would have to set a common excise regime for vapor products across all 28 member states. Vapor trade organizations have already cautioned against imposing additional costs and administrative burdens that would make the end product more expensive and act as a disincentive to switching from smoking to vaping.

In late 2016 and early 2017, the commission held a public consultation about e-cigarette taxation. Asked whether e-cigarettes and liquids should be subject to an additional tax, 89.88 percent of respondents said no. Many fear that hiking taxes on NGPs will increase cross-border sales and cause some users to return to combustibles. The commission is currently assessing the results of the consultation.

Significant variations

In the U.S., there is no federal levy on vapor products. States, counties and cities levy taxes, and the methods and levels vary considerably. Among the jurisdictions that currently tax vapor products, four charge excise based on wholesale price. Minnesota has implemented a tax of 95 percent of the wholesale price on tobacco products, including e-cigarettes. California and the District of Columbia tax vapor products at a rate equal to the tax imposed on cigarette packs; in the case of D.C., this means a 67 percent tax. Kansas, Louisiana, North Carolina and West Virginia tax e-cigarettes based on the volume of consumable liquid solution.

Several cities tax e-cigarettes even if their state does not. Chicago, for example, levies a tax of $0.80 per unit plus a per milliliter rate of $0.20.

The implementation of high taxes on NGPs in the U.S. has driven smaller vape shops out of business and encouraged vapers to either shop online or out of state. Kansas recently tried to turn this development around. In July, the state reduced its tax per milliliter of e-liquid from $0.20 to $0.05, bringing it in line with the tax in North Carolina and Louisiana.

While the tax structure and rates for vapor products in those states have now been harmonized, it will be a while before tax authorities around the globe will be singing from the same sheet.