As Japanese Smoke Less, Tobacco Giant's New CEO Looks Abroad

(Bloomberg) -- Japan Tobacco Inc.'s Masamichi Terabatake is in the hot seat.

The 52-year-old started off 2018 by taking the helm of the world's third-largest tobacco company. While the view from his new Tokyo office may be different than the one from his previous stint at the international unit in Switzerland, the obstacles the company faces will look familiar to the 28-year veteran: tighter global regulations, slowing cigarette demand and competition to offer high-tech smoking devices.

Terabatake, who becomes the fifth head of Japan Tobacco since it was privatized in 1985, has identified some of the issues he'll have to grapple with. When appointed in November, Terabatake said he wanted to focus on taking more market share in developed countries, entering new emerging markets and further developing the company's next-generation tobacco products.

Here's a closer look at the key factors that will shape Japan Tobacco this year:

Japan Tobacco's geographic footprint is primarily focused on its home market, Russia and Europe, with about 70 percent of its sales volume coming from those regions. Terabatake will have to diversify that footprint to find growth, most likely through smaller deals as opportunities for larger acquisitions are limited following consolidation in the industry.

Japan Tobacco has already been busy snapping up assets in emerging markets. Here are the deals it made last year, when Terabatake was the deputy CEO of Japan Tobacco International. Terabatake was not available to comment, according to the company.

As Japan Tobacco's international presence widens, Terabatake will also have to confront the new regulatory attitude toward tobacco products. The industry was rocked last summer by the U.S. Food and Drug Administration's plan to mandate nicotine cuts in tobacco products to non-addictive levels. Although Japan Tobacco was largely cushioned from the market impact as it has a smaller presence in the U.S., the announcement prompted speculation that more countries around the world will become stricter on tobacco as well.

Health concerns and tighter regulations are part of the reasons for declining global demand for cigarettes.

Faced with dwindling demand, global rivals are aggressively positioning for a future without traditional cigarettes. Philip Morris International Inc. and British American Tobacco Plc have introduced heated tobacco devices, which have pushed down demand for cigarettes in Japan Tobacco's domestic market.

Philip Morris' IQOS device holds 12 percent of the country's tobacco market as of the end of September. Japan Tobacco's own heated device, Ploom Tech, has lagged behind in availability and sales.

The battle over heated devices matters, as the sector is expected to grow rapidly in the next few years. Japan Tobacco said it is currently working on developing another heated device more similar to IQOS and BAT's glo.

Shares of Japan Tobacco fell 5.5 percent in 2017, compared with a 20 percent gain for Japan's benchmark Topix index. The stock dropped as much as 1.2 percent in Tokyo trading Friday.

--With assistance from Daniela Wei

To contact the reporter on this story: Lisa Du in Tokyo at ldu31@bloomberg.net.

To contact the editors responsible for this story: K. Oanh Ha at oha3@bloomberg.net, Jeff Sutherland, Sam Nagarajan

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