• BAT South Africa is shutting down its only manufacturing plant by 2026 due to the collapse of the legal cigarette market
• No clear legal supplier is positioned to fill the production void, as high excise taxes and weak enforcement make formal cigarette manufacturing economically unsustainable across the region
• Zimbabwe’s cigarette production capacity is rising sharply despite stagnant domestic demand, raising concerns that excess output may be feeding the regional black market through informal channels

Harare - British American Tobacco South Africa (BATSA) one of the country’s most established manufacturers is winding down cigarette production and will close its Heidelberg plant by the end of 2026. The decision reflects not just corporate strategy but a structural collapse in the formal cigarette market, overwhelmed by an expanding illicit trade that now claims the vast majority of cigarettes sold locally.

The development reverberates across the region  South Africa’s fiscal losses to the competitiveness of tobacco industries in neighboring states like Zimbabwe and raises deeper questions about enforcement, taxation, global supply chains, and cross‑border smuggling.

BATSA’s announcement noted its only local manufacturing plant has been operating at roughly 35% capacity due to plummeting sales of legal cigarettes. The company estimates that illicit cigarettes now account for about 75% of the total South African market a dramatic reversal from a legitimate manufacturing base that once dominated domestic demand.

Historical market data, including industry research prior to 2020, placed BATSA as the leading cigarette manufacturer in South Africa, with Euromonitor estimating it controlled more than 70% of the legal market prior to the illicit surge.

Exact annual volume figures and market share losses over the past five years are hard to pinpoint given the opacity of illicit trade, but multiple independent reports show dramatic declines in tax billings and official volumes. South Africa’s Revenue Service has repeatedly flagged that stagnant cigarette excise collections  amid stable or rising smoking prevalence  indicate illegal products displacing legal sales, a trend exacerbated since the COVID‑19 lockdown and tax‑induced price hikes.

The closure underscores how pervasive the illicit cigarette market has become. Analysts estimate that 60%–75% of cigarettes sold in South Africa are illicit, costing the government billions of rand in lost excise revenue annually. Estimates range from roughly R27 billion to R40 billion per year, depending on the model and agency cited.

Smuggling and illegal manufacture are driven by a simple economic dynamic: massive tax differentials and enforcement gaps. Illicit cigarettes  whether smuggled across borders or produced locally without excise compliance  are sold at prices far below licensed products, attracting price‑sensitive consumers and eroding legal market share.

History shows that illicit cigarette activity in South Africa escalated sharply after the COVID‑19 cigarette ban in 2020, which created a vacuum that organised crime networks and small‑scale smugglers quickly filled. Once established, these networks proved difficult to dismantle, with leaks in logistics and enforcement enabling a persistent black‑market ecosystem.

With BATSA’s exit from domestic manufacturing, the question arises: who if anyone will fill the formal production void? Historically, South Africa’s regulated market included other major international producers such as Japan Tobacco International (JTI) and Philip Morris International (PMI), alongside local companies.

However, those companies face the same structural headwinds, when illicit products command three‑quarters of market share, continuing domestic production becomes uneconomic. There is no obvious replacement waiting in the wings to resume large‑scale legal manufacturing at the same scale as BAT once did especially if enforcement and border control remain weak.

Instead, BAT plans to supply the South African market through imports from other regional production hubs where it retains manufacturing capacity. BAT’s shift to an import model has several implications. These include lower production cost regions BAT may route supplies from jurisdictions where taxable costs or wages are lower, and where enforcement of cigarette taxes can be better managed. For example, some African affiliates or non‑African plants could produce more cheaply than South Africa, albeit offset by transport, tariff, and inventory costs.

Whether imported cigarettes reach South Africa cheaper than domestically produced ones depends on freight, tariffs, and exchange rate volatility, but import cost efficiencies could offset some domestic fixed‑cost disadvantages. What has tipped the balance, however, are not production costs alone but the near collapse of legal sales volumes, making any local plant uneconomic regardless of labour or input costs.

South Africa’s illicit cigarette problem is not purely local. Smuggling networks have extended for decades, often using porous borders and weak customs coordination. Research suggests that significant quantities of illicit tobacco products in South Africa originate from neighbouring countries, including Zimbabwe, Mozambique, and Eswatini, before they enter township retail channels.

In Zimbabwe, tobacco is a major agricultural commodity, with production at times ranking among Africa’s highest. While much of this is leaf for export, cigarettes themselves have historically flowed across borders via informal channels both smuggled into South Africa and into other markets.

Despite the growth in cigarette manufacturing capacity in Zimbabwe, the country’s domestic market is both small and saturated with total consumption estimated at just 2.5 billion sticks annually. Yet recent investments, including a new Harare-based factory reportedly capable of producing over 7 billion sticks per year, clearly exceed local demand.

While these projects are often justified under the banner of “value addition” and economic beneficiation, the sheer scale of capacity suggests a more export-oriented ambition. In reality, Zimbabwe’s two major manufacturers  BAT Zimbabwe and Pacific Cigarette Company  already have the means to oversupply the local market, making new capacity hard to justify on domestic grounds alone.

If legal exports were the primary goal, the economics would be questionable. Exporting into high-excise destinations like South Africa or Namibia through formal channels significantly raises costs, leaving Zimbabwean products uncompetitive against domestic or untaxed alternatives.

The more plausible rationale lies in the opportunity created by widespread illicit trade across the region. With 75% of South Africa’s cigarette market now dominated by untaxed brands, manufacturers in low-cost jurisdictions such as Zimbabwe are strategically positioned to flood the region  whether through legal exports or via porous borders and informal routes. This dynamic creates a shadow trade ecosystem where manufacturing growth is sustained not by market fundamentals, but by enforcement failures and tax arbitrage opportunities.

Notable companies in and around Zimbabwe have occasionally faced allegations of involvement in the informal export trade. One such example is the Pacific Cigarette Company, whose product is widely associated with illicit channels in South Africa according to historical reporting (though formal market share estimates vary and responsibility for smuggling is often contested).

The dominance of illicit cigarettes in South Africa has wider economic consequences. For South Africa itself, lost excise revenue undermines public finances. For Zimbabwe’s retail sector, similar dynamics have played out: cheap imports  both formal and informal  have undercut local traders and manufacturers across product categories, from clothing to household goods.

In the case of cigarettes, cheaper smuggled products undermine legitimate producers, reduce formal tax revenue in destination markets, and can depress demand for licensed imports and domestic manufacturing alike. This creates an environment where formal industrial capacity erodes over time, as seen with BATSA’s planned closure.

Addressing the illicit cigarette trade requires coordinated policy solutions, stronger border enforcement, improved tracking of tobacco products, enhanced customs cooperation regionally, and targeted anti‑smuggling operations. South Africa’s government has acknowledged the scale of the problem, but enforcement remains a challenge given resource constraints and the embedded nature of smuggling networks.

Tax policy also plays a role. High excise taxes, while useful for public health objectives, can inadvertently create price incentives for illicit trade when enforcement is weak. However, some research disputes a simple causal link, pointing instead to the importance of tax administration and enforcement efficiency.

BAT Zimbabwe has long been the market leader in the country’s formal tobacco manufacturing sector. The company benefits from low labour costs, access to contracted leaf, and an efficient production line. However, its operations are largely tailored for the domestic market and some formal exports, not high-volume regional supply. Additionally, as part of a listed multinational group, BAT Zimbabwe is held to strict compliance standards, limiting its flexibility to exploit grey or informal channels the way smaller regional players might.

Even if factory-gate production in Zimbabwe is cheaper than in South Africa, distribution costs, tariffs, and foreign exchange volatility make it difficult for BAT Zimbabwe to compete against smuggled alternatives. At an estimated 75% of total South African cigarette sales now illicit, even imported legal brands struggle to gain traction. Without significant investment in capacity, logistics, and regulatory navigation, BAT Zimbabwe may be unable to capitalize on the opportunity left by BATSA’s retreat.

BAT’s exit from cigarette production in South Africa is both a symptom and a signal  symptomatic of an industry hollowed out by illicit competition, and a signal of broader regional tobacco market shifts. With illicit products capturing the majority of the market, formal manufacturers face untenable economics.

For South Africa, the priority is clear, without effective enforcement and multi‑sector cooperation, legal markets may continue to shrink. For Zimbabwe and other neighbouring states, improving regional customs coordination and formalising cross‑border commerce will be key to protecting legitimate industry and capturing tax revenues that currently vanish into informal channels.

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