With a growing number of smokers switching to IQOS, a tobacco-heating device which delivers a nicotine hit without actually burning the tobacco, the Papastratos production facility in Aspropyrgos is playing a significant role in turning the country into a major export center for Philip Morris International, Andre Calantzopoulos, the chief executive officer of US multinational Philip Morris International (PMI), who was born and raised in the southern Greek city of Pyrgos, Ileia, tells Kathimerini in an interview.
Calantzopoulos is the driving force behind the 6-billion-dollar transformation of the US multinational tobacco company toward a smoke-free future, with the aim of cigarettes ultimately being replaced by products that produce no smoke. As part of that transformation, he has turned PMI’s Greek subsidiary Papastratos into a producer of IQOS heat sticks through an investment of 300 million euros, which has also boosted employment in Aspropyrgos, western Attica. Calantzopoulos sees great development potential, as well as the need for regulatory work internationally, saying that it is no secret that Greece is not an easy place to do business. “But, at the end of the day, it is a fact that we usually work things out,” he notes. He also underlines that “in today’s world, if a company does not constantly improve itself, another will come along and render its business model obsolete.”
How important is Greece for you and how important is the Papastratos factory in Aspropyrgos? Is there any room for further development there?
The Greek factory is certainly important. However, the decisions concerning the factories are not reached based on their geographical location alone – they’re also based on geopolitical and regulatory factors. So, if I look at the greater picture – i.e. from a global point of view – I believe that we will have factories that will produce only IQOS products and factories that will produce both products, as we must keep producing cigarettes. However, the production of cigarettes will gradually decrease, as both our group and smokers themselves will gradually abandon conventional means of smoking. We don’t need new production facilities everywhere, but we don’t want to lay people off either. On the contrary, we want to keep employment levels as high as possible.
Therefore, some factories, such as that in Aspropyrgos, have been transformed into facilities that exclusively produce heat sticks (HEETS), and we will do the same with others as well. So, the good news is that this new product needs more people than the traditional cigarette-making facilities. We have already seen that in Aspropyrgos. Given that the international uncertainty caused by trade wars is a threat – and the return of protectionism that that entails – we can say, with relative certainty, that at least the European market will remain important for us in any event – at least for as long as the European Union continues functioning as it does today and Greece continues being a member of it. Since Papastratos covers this market, and not just that, we see nothing on the horizon that could threaten our production business in the country. Therefore, Aspropyrgos will clearly have an important role to play, especially considering that, as the penetration of IQOS among smokers increases, there will be new needs for increased production. And of course we don’t want to go and build new factories when we already have capacity available.
How easy has the whole process of investing in the Papastratos factory been? And, given your international experience, do you think that Greece is a business-friendly environment?
To answer your question both generally and specifically, we could say that it is known that Greece has historically not been the most business-friendly environment. That is no revelation. But, at the end of the day, it is a fact that we usually work things out. And that is why we have always supported Papastratos. Therefore, it is reasonable to say that there have been both good and bad moments on that front. What I would like to stress at this point is that I would like the country to acquire the appropriate regulatory framework for the said product, as our factory in Aspropyrgos, and the country in general, will gradually become a major export center for us and the product will gain an increasingly important share in the market. Of course, as we have found out internationally, health ministries are usually slow to take action. We would like to see some movement there.
You have already invested 6 billion dollars in IQOS and 300 million euros in transforming the Aspropyrgos facilities. What are your aims and what will come next?
In today’s world, if a company does not constantly improve itself, if it doesn’t improve its products and services, tomorrow morning, another one will come along and render its business model obsolete. So, we must always ensure that we constantly lead the way. Therefore, yes, we will certainly continue investing both in reducing the risks entailed by its take-up for the smokers, as well as in its usability for the consumers, its interface with them, since this product has been designed with an emphasis on user comfort. It is an established fact that, when a smoker is convinced and makes the shift from smoking cigarettes to heated tobacco, they will use that product every day – they will live with it. The more innovative and handy it becomes, the closer its connection to the users will be.
In your opinion, when will these investments pay off, and are you developing any other products?
I generally expect that we will invest in the improvement of the heated tobacco device once a year and in the radical improvement of the system as a whole once every two to three years. So, investments will continue, even though they will probably not be so capital-intensive as previously. A great part of the funds you have mentioned were spent on the pre-clinical and clinical trials and assessments of the IQOS system. Besides, this was a period of research and development that is typically front-loaded in terms of investment costs. Another major part of the funds was spent on infrastructure. Production plants, networks of IQOS stores, reverse supply chains, the digital commercial presence, operation and support, call centers. When a company acquires these elements, it can continue using them for increasingly higher volumes, as well as new products and new platforms. So, if we proceed with our entry into the market of conventional vapes, known as electronic cigarettes, under the IQOS trademark – which, by the way, we will start doing gradually at the end of the next year in various international markets – we will be able to do so through our infrastructure and our greater organization that has already been evolved and knows how to do that through IQOS. The initial cost of entry to the market will be much lower for us. So, the profit margins are improved.
How well is IQOS doing in the market?
IQOS is profitable in any market where it is present. And it becomes profitable in any market within a year to 18 months of its launch. It depends on the market, the volumes and conditions of each period, as well as the tax scheme it falls under.
Why are the heat sticks cheaper in some markets than in others?
First of all, no country has classified the product as a cigarette. So, by default, this product either creates a new category on its own or falls within another category of tobacco products that are usually subject to less tax than cigarettes. The ideal scenario would be that all heated (not combustion) tobacco products fell within a new category, that of non-smoke tobacco products, which would accordingly be subject to different tax rates – of course lower ones. However, we still need to have the category of non-smoke tobacco products determined according to international, not national, parameters, which, for the time being, takes place nationally and with great differences. So, a supranational entity, such as the EU, must make a comprehensive effort toward that direction.