Tough Times in Asia for Western Cig. Companies? (fwd)

[Robert Weissman <rob@essential.org>]

Asia has half of the world's smokers and few of its kooky tort suits. So why
aren't the cigarette companies raking it in over
there? 

Where there's smoke . . . 

By Andrew Tanzer 

U.S. TOBACCO COMPANIES, the object of litigation and opprobrium at home, are
hoping to find their growth abroad. It
won't be easily found. Look at Asia, home to half of the billion smokers in
the world. The state-owned China National
Tobacco Corp. produces as many cigarettes as the three leaders of the
Western market—Philip Morris, British American
Tobacco and RJR Nabisco—combined. China National employs 500,000 workers,
operates hundreds of plants scattered
inefficiently around the country and keeps more than 10 million tobacco
farmers employed.

The state takes in nearly $12 billion a year in taxes and revenue from
tobacco, its largest single source of loot. It is not about
to cede a millimeter more of that market than it has to. China imposes an
import duty of 200% on cigarettes, requires vendors
to distribute through the state monopoly and licenses international brands
for sale in only a limited number of outlets. 

Elsewhere on the continent, the news is not much better. Financially pinched
consumers are abandoning expensive smokes
like Philip Morris' Marlboro, B.A.T's State Express 555 and RJR's Salem.
"There's a degree of trading down from premium,
high-margin brands to cheaper local sticks," explains Martin Feldman,
Salomon Smith Barney's tobacco analyst. 

Feldman says that Philip Morris' market share in South Korea has slumped
from 6% to 7% precrisis to less than 3% today
and that the cigarette giant's volume in Hong Kong and the Philippines fell
by about 10% in 1998. In Asia as a whole Philip
Morris had flat sales last year and B.A.T and RJR probably saw declines. 

Tobacco products are a $6 billion U.S. export industry, but don't expect the
tobacco-bashing U.S. government to pry open
trade barriers. "The Clinton Administration has made it clear that tobacco
is not politically correct," explains Laura Knight,
head of consumer and regulatory affairs for B.A.T Asia-Pacific. Last year
the U.S. government sent a circular to its overseas
embassies and trade missions instructing them to stop promoting U.S. tobacco
products. Tobacco is one of several industries
exempt from negotiations over China's proposed entry into the World Trade
Organization. 

In the mid- to late 1980s, the Reagan and early Bush Administrations forced
open tobacco markets in Japan, Korea, Taiwan
and Thailand in the name of free trade. But even in these ostensibly opened
markets, the tobacco companies face a variety of
tariff and nontariff barriers. All four countries still operate
state-controlled tobacco monopolies and don't allow foreign
investment in cigarette plants. A decade after market opening, foreigners
control less than 10% of the Korean market. 

Thailand, which maintains a 70% duty on imported cigarettes, banned tobacco
advertising just in time for the market "opening"
in 1990. "It's hard to launch a brand when you can't advertise," grumbles
François Stettler, Hong Kong-based vice president
for external affairs of RJR International. Perhaps to keep the foreigners
off balance, the Thais have repeatedly changed
tobacco marketing rules, such as packaging specifications. Today the
combined market share of foreigners in Thailand is less
than 5%. 

In Japan, where the playing field is almost level, Philip Morris has
methodically built a market share of 18% since the business
was liberalized in 1987. In Taiwan, where the local monopoly's bestselling
brand is—can you imagine?—Long Life, the
foreigners have done better, taking a third of the market. 

Through tax and investment barriers, the Indian government continues to
protect beedis, a local handrolled-cigarette industry
that employs millions of rollers. Indonesia, Asia's third-largest cigarette
market after China and Japan, is controlled by the
local kretek (clove and tobacco cigarette) makers. 

Even in economies without strong domestic tobacco interests to protect, such
as Singapore and Hong Kong, the cigarette
companies confront rising taxes and tighter restrictions on advertising and
promotion. "Free trade" Hong Kong should know
better, but it has raised taxes on cigarettes so steeply this decade that
contraband now accounts for 40% of the market,
according to RJR International's Stettler. The contraband, some of which is
counterfeit merchandise, undercuts dutied
cigarettes by more than 50% on price and eats into the tobacco companies'
distribution margin. 

At the end of the 19th century James B. Duke, founder of the forerunner of
B.A.T, dreamed of what a giant Chinese
consumer market could do for an American exporter. His company came close to
realizing that dream: By the 1930s
B.A.T-branded cigarettes were easily the most widely marketed and best
distributed foreign products in China. Today the
Chinese market is just a dream again.

|This story, published in Forbes Magazine (www.forbes.com) on March 22, 1999.