Marlboro Man in Kazakhstan (fwd)

[Robert Weissman <rob@essential.org>]

KAZAKHSTAN
‘Marlboro Man rides tall across Almaty'

In the first of a two-part series examining the challenges of operating in
Central Asia, Mark O'Neil discovers how multinational tobacco firms succeed
in Kazakhstan.

The Marlboro Man may have been banished from much of Europe and the United
States but you can still see him in action, corralling horses through the
canyons of the Wild West, on late-night television screens in Kazakhstan.

"He does not appear on the screen until after 11pm,. After the children have
gone to bed," explained Robert May, director of corporate affairs of the
Almaty Tobacco Co (ATC) acquired in 1993 by Philip Morris in the first cash
privatisation in the history of independent Kazakhstan.

A giant billboard of the famous Marlboro Man adorns the top of the company's
factory building in downtown Almaty.

Central Asia has become a battleground for the global giants of the tobacco
industry, since the collapse of the Soviet Union in 1991 and the eagerness
of the independent states that replaced it to attract foreign capital.

Kazakhstan, with a population of 15 million, has attracted three of them –
Philip Morris, Gallahers and RJR Reynolds, part of Japan Tobacco – while
neigbour Uzbekistan, with 24 million people, sold its cigarette industry to
British American Tobacco.

Despite a drop in Kazakhstan's gross domestic product each year but two
since its independence in 1991, falling living standards for most of its
people and a declining population, Philip Morris declares itself delighted
with its investment and is expanding its production.

In 1993, it beat two other bids to acquire ATC, then the only cigarette
plant in Kazakhstan, for US$100 million and promised to invest a further
$240 million over 10 years.

Built in 1936, the plant had a capacity of 20 billion pieces but in 1992
produced only nine billion and was short of supplies and parts having lost
its distribution system after the collapse of the Soviet trading system.

But ATC also made the country's four most popular brands, which the plant
continues to produce today, accounting for 75 percent of its output, to
which Philip Morris added international brands such as L&M, Bond Street,
Chesterfield and Apollo Soyuz. It imports Marlboro.

The company invested $30 million to upgrade the country's tobacco industry,
enabling it to source all its tobacco locally. In the harvest season which
began in September, it is buying 13,000 tonnes from 21,000 local farmers.
Last year's output was 19 billion units, about 75 percent of the local
market.

ATC is building a greenfield faactory near the airport on the outskirts of
the city at a cost of $150 million, which is due to start production in the
first quarter of next year, with capacity of 25 billion units. It was given
the land there free and will stop production at the old plant which it will
give back to the government.

Kazakhstanis consume 21 billion to 22 billion cigarettes a year and Mr May
does not expect consumption to rise in future. So the firm plans to export
more from its new plant to Russia, the mainland and Central Asian countries.

This is no easy task. The devaluation of the rouble has driven down the
price of Russian cigarettes here to less than 15 tenge (about 87 HK cents) a
packet. ATC brands sell from 15 to 40 tenge for local brands, 45 to 50
tenge for its international brands and 120 tenge for Marlboro.

The devaluation has also led to widesperad smuggling in both Kazakhstan and
Uzbekistan which imposes tariffs of 237 percent on cigarettes.

Under the pressure of falling budgets, governments in the region have
resorted to emergency measures to protect local producers, such as high
import duties and taxes.

"Central Asia is an extremely competitive market," said an official of a
western tobacco firm. "Consumption is falling with the drop in incomes, a
migration of people from Kazakhstan and the death of elderly smokers [from
natural causes]. The foreign companies see Central Asia as an export base
but this is difficult because of the currency squeeze."

The government in April said the population had fallen from 16.2 million in
1989 to 14.95 million due to the emigration of non-ethnic Kazakhs.

While cigarette packets carry a health warning and the manufacturers have an
agreement among themselves to limit advertising, the social and regulatory
environment is less hostile to smoking than in the West. The coffee shops
and kiosks on the streets of Almaty are covered in advertisements for famous
brands.

A Western diplomat said Philip Morris had succeeded because it entered
first, had a very good knowledge of the local market and had invested
heavily in government relations.

ATC president James Scott said the success of foreign investors in
Kazakhstan depended largely on how they perceived and approached the
government to solve issues.

"We have learned over the past five years that the most beneficial approach
is to address the government directly, as a partner, and find a solution
that works within the Kazakh legal framework. It is often a slow process
but, with patience and perseverance, the right solution eventually does
come." He said.

SOURCE: O'Neill, M., ‘Marlboro Man rides tall across Almaty', South China
Morning Post, June 15th 1999, Page 10.