Chris Woods, Vice President, JTI Adriatic:

Improvements in Combatting the Illegal Cut Tobacco Trade

Higher seizures of illegal tobacco contributed to an almost 20 per cent increase in tobacco excise collection in the first nine months of 2015, in comparison to same period last year. Further law enforcement measures should be followed by effective action taken by prosecutors and courts

Japan Tobacco International is part of the industry which collectively represents the largest investor in Serbia. The overall investments of the tobacco industry in the past 10 years are worth over €1.2 billion. The industry employs 1,700 people, with about 70,000 people in the chain that includes the retail sector, tobacco growing and distribution. 

Your company alonecontributed to the state budget with 17 billion dinars in 2014, making it the 4th largest tax payer in Serbia. From thatperspective, how do you see the situation in Serbia; is it investor friendly?

We came to Serbia in 2006 by purchasing the Senta Tobacco Industry. Since then we have invested almost 170 million dollars in Serbia, modernised utilities, started cigarette production and exported cigarettes to Montenegro, Bosnia-Herzegovina, Macedonia, Croatia and Albania, as well as exporting tobacco to the EU. So far, the total value of our export is 150 million dollars. These are successes of which we are proud. But a very important factor in this success story is the open dialogue we have maintained with the Government of Serbia. We are thankful to the government for understanding the issues and challenges faced by foreign investors and for being cooperative in dealing with those issues.

One of those challenges is certainly the illegal trade in cut tobacco, which caused the tobacco industry to lose between 30 and 40 per cent of the legal market in 2013 and 2014.

Regarding the illegal trade in cut tobacco, you have said on several occasions that the situation is improving and that the volume of the illegal market is shrinking. Is this trend decreasing steadily?

Illegal trade in cut tobacco is still a major issue. It still has a significant negative impact on budget revenues, jobs, farmers, retailers and the overall Serbian economy.

If you look at publicly disclosed financial results of the industry as a whole, you will see that operations are running at a financial loss. In the longer term, our aim is to turn that into a positive, which represents a challenge for us

However, I am pleased to say that the government has recognised this problem and over the last 18 months genuine improvements are being noted. Higher seizures of illegal cut tobacco contributed strongly to an almost 20 per cent increase in tobacco excise collection in the first nine months of 2015, in comparison to the same period last year. Further law enforcement measures should be followed by effective action taken by prosecutors and courts, and a zero tolerance approach in the fight against illegal trade. This is the way to stabilise the business environment, which is a key factor for the sustainable operations of all companies present on the market.

And what financial results do you expect, given the improvements in fighting the grey economy?

In terms of volume we have seen a good improvement, which is clearly beneficial both financially and in protecting employment. However, our margins have deteriorated due to significant price discounting at the end of 2014. Even more, the price of Winston KS Blue is the same today as it was back in January 2014, despite increasing excise tax and higher costs of raw materials purchased in foreign currency, such as U.S. dollars or euros. So it is very much one step forward and two steps back, but we build our plans with a longer term view and Serbia is regarded as a market where we are willing to invest today in the hope of future returns.

Despite the challenges, JTI is determined to stay in Serbia, grow and keep investing. In 2014 you invested five million dollars in production and operations in Senta. What are your plans for 2016?

Japan Tobacco International came to Serbia with a long term strategy of growing and investing. When we came here, Senta Tobacco Industry had 77 employees. Today we employ over 350 people in the Western Balkan region, which is headquartered in Belgrade, and engage over 380 tobacco growers and seasonal workers. So, our strategy and intentions are clear. And as long as we are doing business in a favourable business climate we will be able to maintain the same level of investment and employment.

Our plans for next year include the expansion of production and storage capacities and further increases in productivity. The plan is to introduce a new production line in Senta next year. This investment amounts to 3.5 million dollars and is part of the investment cycle we started last year. On the other hand, our aim is to reduce imports and replace imported products with those produced locally. We currently import certain pack designs from our factory in Russia, as there are no customs duties for Serbia, and we also import from some EU factories for specialised packs.

Which Japanese skills and knowledge are applied in the factory in Senta and how was this accepted?

Our factory in Senta is the first factory in Serbia that has entirely implemented Kaizen and received 5S certification, modelled on the prestigious Kaizen institute certificate, the business philosophy that is the key to the success of Japanese companies. The basic principle of Kaizen is continuous improvement with optimal use of all available resources, with particular emphasis on the initiatives and ideas of employees. Employees are encouraged to offer proposals for the improvement of their work space and the jobs they perform. The best proposals are accepted and those who propose them are rewarded.

We are very proud of our employees, who don’t lack high quality ideas. One of the best proposals in 2013 brought us savings in the amount of almost 75,000 dollars. This year’s best proposal saved us 42,000 dollars. Since its introduction to the factory, the Kaizen programme has led to a productivity increase of 47 per cent and reduced wastage by as much as 67 per cent. We believe that Serbian-based companies can improve their performance significantly if they involve and motivate their employees to evolve their job better. Financial investments are small, but changes in the way people work and think are huge.

Japan is a country known for its humanitarian work in Serbia. How active is Japan Tobacco International in that regard?

JTI is strategically orientated towards helping the local community in which it operates. We believe that the role of large companies is to invest in the development of society and simultaneously support projects of national and local importance, regardless of the industry in which they operate.

We want to help the social categories that most require help. In that regard, we helped Belgrade open the Day Care Centre for adults with special needs in Zvezdara. We also helped establish two clubs for the elderly in Vračar and New Belgrade. Since we pay equal attention to projects in Senta, we have traditionally supported Caritas in providing food for the local Soup Kitchen, while we also helped with the opening of a day care centre for people with work-related disabilities in Senta.

Alongside philanthropic projects, JTI is one of the main promoters of Japanese culture and tradition in Serbia, endeavouring to bring the best of Japan to Belgrade. Hisakura gardens in Belgrade and Senta, Sakura scholarships and the concerts of Japanese artists, represent just part of the activities we do in that respect, cooperating, of course, with the Japanese Embassy in Belgrade.