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Big Tobacco Moves on Thailand (fwd)
June 18, 1998
Foreign Firms May Partner
With Thai Tobacco Monopoly
By PICHAYAPORN UTUMPORN
Staff Reporter of THE WALL STREET JOURNAL
BANGKOK, Thailand -- Several international tobacco
companies are in
talks with the state-owned Thailand Tobacco Monopoly to
set up one or
more cigarette-making joint ventures.
The companies include Philip Morris Co. and R.J.
Reynolds Tobacco
International Inc. of the U.S., and U.K.-based B.A.T
Industries PLC,
according to government officials overseeing the Thai
monopoly. Philip
Morris makes Marlboro and Benson & Hedges cigarettes;
R.J. Reynolds,
a unit of RJR Nabisco Inc., makes Camel, Winston, and
Salem; and a
U.S. unit of B.A.T makes Lucky Strike and Kool.
Since 1943, the Thailand Tobacco Monopoly has been the
only company
allowed to make cigarettes in Thailand, manufacturing
brands such as the
top-selling Krongthip. If joint ventures materialize,
foreign tobacco
companies might be able to grab market share by
avoiding the 60% duty
charged on imported cigarettes.
Bid for Self-Preservation
For the tobacco monopoly, its interest in possible joint
ventures is partly
driven by a desire for self-preservation. The Thai
government is under
pressure to eventually sell off many state-run
businesses, partly at the
behest of the International Monetary Fund. So the
monopoly is eager to
offer alternatives to privatization, and that way,
perhaps, to decide its own
fate.
No matter what happens, any action probably will have to
wait at least
until the end of August. That's when the government is
set to issue a
so-called privatization master plan, as part of the $17.2
billion IMF
requirements for reviving the Thai economy.
The Thai market has been a tough one for foreign
cigarette makers to
crack. The ban on manufacturing and the steep taxes have
kept foreign
cigarette makers at the market's margins. According to
tax records, they
sold only 5% of the 2.4 billion packs of cigarettes
smoked in Thailand last
year.
Sizable Market
Still, Thailand, with its population of 60 million, is a
substantial market for
the companies. R.J. Reynolds sold 760 million cigarettes
in Thailand in
1997, representing a 1% market share, company officials said.
But that's not to say Thais are paying a 60% duty on
every Lucky Strike
they light. Foreign cigarettes smuggled into Thailand
without duties are
widely available.
Tobacco companies consider a deal with the Thailand
Tobacco Monopoly
a way to build sales amid Thailand's economic crisis,
which is sharply
curtailing local spending power. "Excessive taxation,
from our point of
view, always hits those who can afford less," said Axel
Gietz, senior
director for external relations at R.J.Reynolds
International BV in Geneva,
Switzerland. "Local manufacturing would be a more
interesting proposition
to us."
On the other hand, he says that "people tend to continue
smoking as the
only luxury they can afford" in times of economic crisis
such as these. "I
wouldn't say they smoke more, but they don't seem to cut
down on
smoking consumption so much."
'Like a Beauty Contest'
Mr. Gietz described the talks with the monopoly as "a
little bit like a
beauty contest" among tobacco companies, held by the
monopoly to find
the best deal.
In a faxed response to questions, a Philip Morris
official confirmed that
"over the past several months, Philip Morris and Thailand
Tobacco
Monopoly officials have held exploratory discussions
about the possibility
of (a) cooperative commercial relationship." He declined
to provide further
details.
Officials from B.A.T's Asia operations couldn't be
reached for comment.
The steep import duty serves two purposes. It keeps the
monopoly firmly
entrenched in the lucrative market. And since the duty
was increased to
60% from 30% in January, it has supplied the government
with a steady
stream of income at a time when the economic crisis has
slashed
government revenue.
The monopoly's revenue from sales and duties totaled 44
billion baht
($1.02 billion) in the year ended Sept. 30, said Ong-ard
Champoonta, the
monopoly's managing director. Of that amount, the
government was given
"more than four billion baht" as a commission from the
monopoly, he said.
Talks With Many Firms
The chairman of the tobacco monopoly, Somchainuk
Engtrakul, said,
"We've been talking with many companies, and may pick
more than one
partner for the project." According to Mr. Ong-ard, the
monopoly is
looking to hold the majority stake in the venture or
ventures, preferably
"more than 51%."
Before any deals can be struck, the plan must be approved
by the Finance
Ministry, and if the investment is large enough, by the
Thai cabinet.
The IMF requires Thailand to privatize some of its 70
state agencies as
part of the conditions attached to the IMF-led $17.2
billion economic
bailout package. The government is currently drafting its
privatization
master plan, which will outline privatization procedures.
Agencies subject to privatization this year include Thai
Airways
International, Bangchak Petroleum PCL, the Telephone
Organization of
Thailand, and the Electricity Generating Authority of
Thailand. The Finance
Ministry now owns 100% of the tobacco monopoly.
The monopoly began considering joint-venture
possibilities before the
government accepted the IMF-backed bailout. "We prefer
this type of
joint venture" to a sale of the government's stake, said
Mr. Somchainuk,
who is also director-general of the Customs Department.
"But if the
government wants to sell part of us -- like they're doing
with other
agencies -- we'll have to accept it."
Bangkok Fears Revenue Loss
Privatization of the monopoly could be more
time-consuming and more
difficult than privatization of other state agencies,
given the profitability of
the business. Finance Minister Tarrin Nimmanhaeminda said the
government isn't in a hurry to privatize the monopoly,
because of concerns
that it will lose a significant chunk of revenue.
Any move toward privatization could prompt vigorous
resistance from the
agency's employees, Mr. Tarrin said in a brief interview.
The union
representing the agency's more than 7,000 workers is one
of the country's
most powerful. "We don't want to move too swiftly in
changing the way of
life there," Mr. Tarrin said.
Freeing the monopoly from government's control could be
controversial
because of public-health concerns, as well. "We don't
think the tobacco
monopoly should be privatized at all," said Hatai
Chitanondh, president of
the Asia Pacific Association for Control of Tobacco, a
Bangkok-based
antismoking group that submitted a petition against such
a move to the
government in May. "This isn't a kind of agency whose
efficiency the
government should improve. I think it's even better that
the management of
the tobacco monopoly remains inefficient, so that they
wouldn't be so
good at what they're doing."