• BAT's Heidelberg closure exposes a regional tobacco economy where the most rational business decision is to manufacture illegally.
• Nobody in Southern Africa has a credible plan to change the status quo
• In a results call with analysts, BAT PLC, responded to questions by Equity Axis regarding the South African market and the closed Heidelberg plant.

The most revealing number in the BAT South Africa story is not 75%, the illicit market share that has become the headline figure in every commentary on the subject. It is 35%. That is the capacity utilisation rate at which Heidelberg was running before BAT finally pulled the plug. A factory built and engineered to run at full capacity, serving what was once one of Africa's most organised and compliant consumer markets, limping along at barely a third of its potential output before the economics of continued operation became indefensible. The 75% figure describes a market problem. The 35% figure describes a manufacturing crisis. They are related but distinct, and conflating them obscures something important about what comes next.

What comes next is the question that previous coverage of this story, including our own, has not fully answered. The closure of Heidelberg has been well documented. The role of the 2020 cigarette ban in accelerating the structural shift toward illicit products has been examined. The governance failures, the excise miscalculations, the enforcement gaps, all rehearsed. What has received less attention is the supply-side question: who, if anyone, fills the formal manufacturing void? And what does the answer to that question tell us about the regional tobacco economy that is quietly organising itself in Heidelberg's absence?

Start with the arithmetic of regional capacity, because it is striking. Zimbabwe's domestic cigarette market consumes an estimated 2.5 billion sticks annually. A new Harare-based factory, reportedly operational or near-operational, has production capacity exceeding 7 billion sticks per year. BAT Zimbabwe and the Pacific Cigarette Company already possess the means to oversupply the Zimbabwean domestic market many times over. The gap between what Zimbabwe can now manufacture and what its domestic consumers can absorb is not a rounding error, it is approximately 4.5 billion sticks per year of unexplained production rationale.

The standard corporate justification for this kind of investment is "value addition" and export ambition, the language of beneficiation strategies that African governments have embraced across sectors from tobacco to minerals to agriculture. It sounds credible enough at a press conference. It does not survive contact with the economics of legal cigarette exports. Exporting into high-excise markets like South Africa or Namibia through formal, compliant channels significantly raises the landed cost of Zimbabwean cigarettes, making them uncompetitive against both domestic brands, and crucially, the untaxed alternatives that already dominate the shelves. The formal export rationale, in other words, only works if the destination market is functioning legally. South Africa's destination market is 75% illegal. There is no formal export business case for 7 billion sticks of Zimbabwean production capacity.

There is, however, an informal one. And this is the insight that the BAT management response read carefully against the regional production data makes impossible to ignore. The regional tobacco economy has reorganised itself around enforcement failure, and it has done so with impressive efficiency. The BAT results call response noted, with careful corporate understatement, that BAT will supply South Africa through "multiple BAT factories globally." What it did not say, but what the regional picture makes plain, is that the manufacturing vacuum created by Heidelberg's closure will not go unfilled. It will simply be filled by producers whose business model does not depend on excise compliance, customs declarations or the regulatory frameworks that made Heidelberg uncompetitive.

The Pacific Cigarette Company, whose products have historically been associated with illicit channels in South African market reporting, though, as our previous coverage acknowledged, formal attribution of smuggling responsibility is contested, represents a category of regional manufacturer whose production economics are entirely different from BAT's. Operating in a lower-cost jurisdiction, selling into a market where enforcement is weak enough that excise payment is optional rather than mandatory, such manufacturers face none of the structural cost disadvantages that made Heidelberg untenable. The factory gate price of a cigarette produced in Zimbabwe for informal regional distribution does not include South African excise duty. That, and only that, is why it is cheap enough to command 75% of the South African market.

This is not a new observation. What is new and what the capacity numbers make concrete, is the scale at which this regional shadow economy has developed. A factory capable of producing 7 billion sticks per year, in a country whose domestic market absorbs 2.5 billion, is not a cottage industry. It is industrial-scale production organised around a business model that treats regional enforcement failure as a competitive advantage and regulatory arbitrage as a revenue strategy. The investment is going in, in size, precisely because BATSA is going out.

For BAT Zimbabwe specifically, this creates a competitive problem that does not get enough analytical attention. BAT Zimbabwe is, as the company's own regional documentation makes clear, a publicly listed entity subject to group-level compliance standards. It cannot, as a matter of corporate governance and legal obligation, exploit informal export channels in the way that unregulated regional competitors can. Its production costs may be lower than Heidelberg's was, but its compliance costs are real, its export channels are formal, and its products must compete in legal markets against competitors who face none of these constraints.

The result is a peculiar kind of competitive disadvantage: BAT Zimbabwe is compliant in a region where compliance is optional, listed in a market where listing disciplines do not apply to its competitors, and subject to group-level audit standards in an industry where the dominant regional players operate in the shadows. The opportunity that BATSA's closure theoretically creates, a Southern African supply vacuum for legal cigarettes, is simultaneously undermined by the same forces that created it. If 75% of South Africa's market is illicit, there is no meaningful "legal supply void" to fill. There is only the 25% of consumers still purchasing legal product, a segment that BAT can serve through imports without the overhead of a local factory.

This is why BAT management's response was so precise about the import model: it is not a makeshift solution. It is a rational response to a market in which the economics of formal manufacturing have been destroyed. Importing finished product from efficient global factories, paying South African excise at the border and selling into the residual legal market, is more profitable than running a factory at 35% capacity while three-quarters of your consumers buy from someone who pays no tax at all.

The revenue loss to South African public finances is a number worth sitting with. Estimates of lost excise revenue range from R27 billion to R40 billion per year, depending on the methodology and the agency providing the estimate. To put that in context: South Africa's entire 2025 budget for the Department of Basic Education was approximately R300 billion. The illicit tobacco trade is costing the country between 9% and 13% of the basic education budget annually, siphoned from public revenues into criminal networks, some of which are regional, some domestic, and some that are neither small nor unsophisticated.

SARS has been admirably candid about this more candid, arguably, than the policy response warrants. The revenue service told Parliament's Portfolio Committee on Health that proposed new tobacco legislation would worsen the illicit trade problem. This is a remarkable institutional moment: the agency responsible for collecting tobacco excise revenue formally advising the legislature that a health-motivated policy will further erode the tax base it is supposed to protect. That this advice has not produced a fundamental rethink of tobacco policy suggests that the various organs of South African government are not, in fact, coordinating toward a coherent outcome. They are each pursuing their own institutional mandates in ways that collectively produce results none of them would endorse.

The regional customs coordination failure is worth examining beyond the standard observation that borders are porous. SADC has a framework for customs cooperation, shared intelligence, harmonised procedures, joint enforcement protocols, that exists on paper and underperforms in practice. The tobacco trade illuminates exactly why. Coordinated enforcement requires that officials in multiple jurisdictions share information in real time, act on that information consistently, and do so without the intervention of the corruption that, in several regional jurisdictions, has embedded itself into customs operations as a de facto revenue model for underpaid officials.

Zimbabwe's customs infrastructure, to take the most obvious example, operates under constraints that are not primarily technical. The incentive structures facing border officials, who are processing goods in a country whose formal economy has been severely compressed, whose civil service wages have frequently been paid in a currency of questionable value, and whose institutional oversight has been inconsistent, are not the same incentive structures that sustain customs compliance in, say, Botswana or South Africa. The regional tobacco problem is, at one level, a regional governance problem, and regional governance problems are not solved by any single country's enforcement efforts, however well-intentioned.

BAT's call for a "sustained, co-ordinated, whole of government response" within South Africa is correct as far as it goes. But the management response was notably quiet on the regional dimension, perhaps because a company with operations in multiple SADC countries is not positioned to publicly accuse neighbouring governments of enabling smuggling networks. The diplomatic constraints on what a multinational can say in an earnings call should not constrain the analytical conclusions of those examining the same evidence.

There is a scenario, not implausible, in which the formal tobacco manufacturing sector in Southern Africa essentially ceases to exist as a meaningful economic category. BAT has exited domestic South African production. JTI and PMI face the same structural headwinds. BAT Zimbabwe can serve the Zimbabwean domestic market and some formal exports but cannot compete against untaxed regional alternatives. No new formal manufacturer is positioning to enter the South African market at scale. The economics do not support it, and will not support it until the illicit market share falls significantly from its current level, which requires enforcement improvements that have not materialised in the five years since the COVID ban created the current crisis.

In that scenario, the region's cigarette supply is increasingly dominated by manufacturers in low-compliance jurisdictions, producing at volumes that cannot be justified by legitimate domestic demand, distributed through informal channels that deprive multiple governments of tax revenue simultaneously. The legitimate consumer goods industry contracts. The criminal networks that have invested in illicit tobacco infrastructure diversify, as they have historically, into other contraband categories, using the distribution systems and border relationships built on cigarettes to move other products.

This is not an inevitable outcome. But it is the direction of travel if the current policy trajectory continues. And the window for changing that trajectory is narrowing. Every month that the illicit market holds at 75% is a month in which consumer habits solidify, criminal infrastructure embeds more deeply, and the economics of legal manufacturing deteriorate further. The threshold BAT has set for reopening Heidelberg, substantial and sustained improvement in the illicit trade environment, becomes harder to meet the longer the current situation persists, because the structural conditions producing it become more entrenched.

What makes this story genuinely novel, against the backdrop of previous coverage, is the explicit connection between investment and illegality. The Harare factory capacity figure is not a rumour or an inference, it is a documented investment in production infrastructure that exceeds any plausible legitimate demand. Combined with BATSA's exit and the known dynamics of regional illicit trade, it describes a situation in which capital is being actively deployed in anticipation of demand that can only be met through channels that formal manufacturers cannot use.

This is the regional tobacco economy as it actually operates: not as a set of discrete national markets with occasional leakage across borders, but as an integrated informal system in which manufacturing investment, distribution infrastructure and consumer demand are all calibrated around enforcement failure. BAT's Heidelberg closure is not just the end of a South African factory. It is the clearest possible signal that formal manufacturing has conceded the field, and that the field is now being organised by those whose business model was built for exactly this moment.

Heidelberg will reopen, BAT management said, if conditions change substantially and sustainably. That is a reasonable corporate commitment. The honest regional analysis suggests those conditions are getting harder to meet, not easier. The factory sits in Heidelberg, ready. The market it was built to serve is three-quarters gone. And somewhere north of the Limpopo, a new factory with capacity for 7 billion sticks a year is presumably considering its distribution options.