Far East Econ Review: Tobacco in China

[Robert Weissman <rob@essential.org>]

TOBACCO: Smoke and Mirrors
Far East Economic Review
26 November 1998: 62-64
By Jason Dean In Beijing

It's midnight at the Agogo in east Beijing, and Zhao Shen is
holding forth on the class distinctions of cigarettes. 
"Cigarette brands sort of represent a person's status," says
the stocky 17-year-old, decked out tonight in a silver
jacket and a pair of clip-on earrings in his left ear.

Despite the Camel ads in the club's lobby, Zhao's brand of
choice is Hilton.  "They're the masses' cigarettes.  The
average person smokes them.  People with money smoke
Marlboros.  And the bosses, 555's."

Zhao's table, like most in this cavernous disco, is littered
with foreign cigarette packets.  He and his friends estimate
that about 20% of their monthly spending goes on cigarettes. 
"I'd smoke more," says the second-year student at the
Beijing People's Police Academy, "but they're very strict
about it at school."

Zhao and his cohorts are part of a generation of young urban
Chinese consumers for whom smoking is not just a habit, it's
a fashion.  Raised as only children after the start of the
one- child policy and the advent of economic reforms in the
late 1970s, they are both wealthier and more attuned to
foreign products than generations that preceded them.

Experts say that such factors are leading to a significant
rise in young smoking.  Among males aged 15-25, it increased
by 6% between 1984 and 1996, according to government
figures, and 46% of Chinese college students now indulge in
the fiery vice.

Young smokers make up only a fraction of a gargantuan
cigarette market on the mainland.  The World Health
Organization estimates that almost 40% of all Chinese aged
15 and above are smokers.  At 1.7 trillion cigarettes, or 85
billion packs, per year, they're responsible for roughly a
third of the world's total consumption.  Over 750,000
Chinese die annually from smoking related illnesses, but
with an estimated 3 million new smokers per year, there are
plenty to take their place.

The mainland's 320 million puffers are an enticing prospect
to foreign manufacturers, especially when their domestic
markets are being eroded by potent anti-smoking movements. 
"As the biggest tobacco market in the world," says Francois
Stettler, vice-president for external relations with R.J.
Reynolds Tobacco International, "China clearly represents an
attractive long-term opportunity for RJR."

The Chinese government, meanwhile, is in a bind over
smoking.  It has a huge public-health problem.  But the
domestic tobacco industry was the largest source of tax
revenue in 1996 (the last year for which figures are
available), paying in more than 10% of the total.  "The
finance people know very well there is a problem, but they
are thinking about profits for the industry, " says Lu
Rushan, a former director at the Chinese Academy of Medical
Sciences.

Lu is an adviser to the organization charged with tackling
the mainland's smoking epidemic, the China Association on
Smoking and Health (CASH).  Zhang Yifang, secretary general
of CASH, touts his organization's successful lobbying for
stricter government regulations on smoking, such as a
widespread ban on tobacco advertising in 1995.  But, as
China's only institution at the national level devoted to
tobacco control, CASH seems to be trying to empty the ocean
with only a teaspoon: Its seven employees operate with an
annual budget of only $60,000, a tiny fraction of the
estimated $13 million spent in China on cigarette-related
ads in 1994.

Despite the 1995 ad ban, increasingly shrewd cigarette
marketing messages, mostly from foreign tobacco companies,
continue to reach consumers, British American Tobacco, for
example, has promoted its 555 brand by sponsoring
traditional dragon-boat races beginning at 5 p.m. on the
fifth day of the fifth Chinese lunar month.

With the government disinclined to tighten regulations any
further, China looks some way off from banning tobacco
sponsorship of sports events.  BAT has even drawn favourable
press notices for its 555 races -- though American
manufacturer Philip Morris came under attack in the Chinese
media for offering smokers free Marlboro sportswear in
exchange for empty Marlboro packs.

Experts say that these high-powered promotional strategies
have been strikingly effective.  A Sino-American survey of
almost 2,000 Chinese college students, published recently in
the journal Tobacco Control, found that Marlboro was the
most recognized cigarette brand, foreign or domestic, in
China.  Market-leader British American Tobacco's 555, Hilton
and Kent were also among the eight brands best known by
students.

This level of brand awareness is even more impressive given
the relatively small market share of foreign companies. 
China's cigarette market remains tightly regulated, limiting
legal imports and imposing tariffs on foreign brands of over
200%.  The vast majority of Chinese smokers-particularly
those in the countryside puff away on the products of the
government's own tobacco monopoly.

Even so, a lot more foreign cigarettes are smoked by Chinese
consumers than one would ever know by looking at official
numbers. "The legal imports are tiny -- they're completely
irrelevant," says Martin Feldman, tobacco analyst for
Salomon Smith Barney. Smugglers bring the overwhelming
majority of foreign brands to mainland markets,

Feldman, who recently completed a two-week research trip to
the mainland, estimates that actual market for foreign
cigarettes is close to 4% -- as much as 100 times the
official imports.  "Those are the volumes that are actually
meaningful to the companies," he says.  Feldman predicts
that, despite a recent government crackdown on smuggling,
total foreign-brand volumes in China will continue to grow
at a steady 1.5% per year.

Tobacco companies categorically deny involvement in
cigarette smuggling, and say that it impedes their ability
to control quality.  But critics accuse them of complicity,
asserting that at the very least they wilfully ignore
evidence that their wholesale customers are planning to
smuggle.  The reason?  Dr. Judith Mackay, a leading
antismoking activist based in Hong Kong. argues that cheap
smuggled imports make foreign brands more affordable to
young smokers.

A legally imported pack of Marlboros costs a Chinese
consumer more than $2.50. Smuggled, it is just over $1. 
Zhongnanhai, a popular domestic brand which shares its name 
with the guarded compound of China's senior leaders, costs
just 50 cents.  According to Mackay, who was recently
appointed to chair a committee on tobacco control for the
WHO, young smokers are particularly sensitive to price. If
they had to pay full price for foreign cigarettes, she
argues, many wouldn't smoke them.

Regardless of who is ultimately responsible for smuggling,
one need not go far to see just how easily available
contraband cigarettes are for Chinese consumers.  Across the
street from the offices of CASH in Beijing, vendor Liu
Ganghui makes his living hawking cigarettes and the odd can
of Coca-Cola. 

Though he himself smokes the Chinese brand Baisha, or White
Sand, Liu says only two of his five best-selling brands are
domestic.  Half of the cigarette brands he sells -- neatly
arrayed in a Marlboro display case -- are foreign brands,
and all of these are smuggled. 

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end