In a rare move in the competitive tobacco industry, South Korea’s KT&G established a strategic alliance with Philip Morris International on Wednesday, to expand the market worldwide for its heat-not-burn cigarette brand lil.

The unusual partnership secures a global distribution network for KT&G, which has been domestic-centric until recently, while it would help PMI enhance its campaign of “smoke-free” cigarette products with the added portfolio.

During the commemoration ceremony in Seoul, KT&G President Baek Bok-in and PMI CEO Andre Calantzopoulos signed the supply contract and explained their collaboration would lead their shared goal of a smoke-free future for the cigarette industry.

Under the contract, KT&G will provide PMI with three of its heated tobacco products -- lil Hybrid, lil Plus, lil Mini -- and one e-vapor product, lil Vapor, for distribution. They did not reveal the specific dates and countries for the first release. KT&G calls its heated tobacco products heat-not-burn (HNB) cigarettes, while PMI calls the category tobacco heating system (THS).

The two sides are also in discussions for parallel branding of lil and PMI’s Iqos for overseas markets, KT&G said. The size and shape of the devices, and cigarettes for the lil products for export will be the same as the ones sold in the Korean market, the company added.

“This strategic collaboration with the global industry leader PMI is an important opportunity for us to be recognized once again for our brand competitiveness and innovative product development capabilities.” Baek said. “We will set a new industry standard for the future tobacco market, and lead the industry.”

Calantzopoulos said KT&G’s HNB and hybrid products go in line with PMI’s vision for a smoke-free future and that the company will share its resources, knowledge and infrastructure to leverage the Korean products.

“Our agreement will benefit adult smokers in the world by providing a wide array of better choices,” Calantzopoulos said. 

Over concerns that introducing lil and Iqos together in a market would lead to cannibalization, PMI stressed that KT&G’s product portfolio would be more complementary.

“Iqos is in available more than 50 markets (around the world) and plans to go further,” Deepak Mishra, the chief strategy officer for PMI, said during the ceremony.

“As we progress we believe the KT&G’s product portfolio would be very complementary to our products in terms of Iqos, providing a wider choice for adult smokers and minimalize cannibalization as a result.”

The contract is based on royalty payments. KT&G will provide its products at the supply price, and receive royalties from PMI. The agreement will be in place for three years, and it may be extended, the companies said.

KT&G, aims to join the ranks of “Global Big 4” tobacco companies by the year 2025, the company said. The leading tobacco maker has been making efforts to expand its business overseas. It currently supplies its products to over 80 companies, and plans to enter into 20 more countries this year. In the third quarter last year, KT&G’s revenue was 723.4 billion won ($614 million), of which 205 billion came from exports.

The market for heated electronic cigarettes is growing in South Korea. In 2019, 360 million packs of such e-cigarettes were sold, taking more than 10 percent of the total cigarette sales of 3.45 billion 20-cigarette packs, according to the data released by the Ministry of Economy and Finance last week.

By Jo He-rim (herim@heraldcorp.com)