[Intl-tobacco] Murky future for China's tobacco industry (fwd)

[Robert Weissman]

FEATURE: Murky future for China's tobacco industry
by Geoffrey Murray / Source: Kyodo News Service/Associated Press Publicatio=
n=20
date: 2000-06-02
Source: Brown & Williamson Industry Watch, Saturday, 6/3/00


  BEIJING, June 3 (Kyodo) -- By: Geoffrey Murray Despite
contributing 10% of the country's tax revenue and enjoying a
long-standing domestic monopoly, China's tobacco industry faces a
murky future after China enters the World Trade Organization (WTO).

And this is in addition to existing problems of fighting the
inroads into revenues achieved by fake brands and smuggled
cigarettes.

According to the Economic Research Institute of the State
Tobacco Monopoly Bureau, China's 310 million regular smokers
account for 25% of the global total.

A bureau official reels off a list of impressive figures. From
1995 to last year, China purchased an annual average of 2.2 million
tons of tobacco to produce 33.4 million cases of cigarettes, each
case containing 50,000 cigarettes.

On average, China's annual production of leaf tobacco makes up
some 35% of the global total while cigarette production and sales
account for 32%.

In 1999, the tobacco industry contributed 98.9 billion yuan
($11.9 billion) in industrial and commercial tax, 10% of state
revenue, and has been the state's top revenue generator for 13
consecutive years.

The industry is massive, and it has fostered a number of large
enterprises such as the Yuxi, Shanghai and Changsha cigarette
factories whose technologies and equipment are world-class.

So, one would imagine, all is well.

Not so, according to industry analysts, who firstly point out
China's long-standing restrictions on tobacco imports and exports
ensure the country currently has little presence overseas.

During the 1995-1999 period, for example, total imports and
exports of leaf tobacco averaged only about 4.5% of domestic
purchases, and total cigarette imports and exports made up 0.8% of
domestic output. China's leaf tobacco exports account for just 3.5%
of global exports and cigarettes for only 1.8%.

Thus, development of China's tobacco industry has clearly
depended on the domestic market. This does not accord with its
position as the world's No. 1 tobacco producer and makes it
difficult to integrate that industry into the world economy in line
with current emphasis on globalization.

China's WTO entry will mean all domestic tobacco products now
under the national monopoly will face increasing foreign
competition they are ill-equipped to meet.

Last year, the government imposed a 40% import tariff and a 64%
consolidated tax, which increased prices of imported leaf tobacco.
This ensured the price of the domestic product was only one-third
that of imports, ensuring it can be highly competitive in price
terms. Much of that advantage, however, will be lost when the
tariff is lowered to 17% in 2004, as the government has agreed in
the negotiations to achieve WTO entry.

China began to slash import duties on cigarettes in 1997 from a
high of 150%. In 1999, the rate fell to 36%. Meanwhile, China's
consolidated tax on imported cigarettes came to 218% in 1999, down
26 percentage points from 1997.

As the government has committed itself to a large-margin cut of
the average tariff on all imported commodities, a high tariff on
cigarettes violates that promise.

If the rate drops to the average for all imports -- 15% in 2000
-- as is widely expected, one packet of imported cigarette that now
sells for 11 yuan will be 2-3 yuan cheaper after the tariff
reduction, making them much more competitive on the domestic
market.

Most of the adverse effect of cigarette imports on the domestic
market after China's WTO entry will not come from tariff
reductions, but from the relaxation or even abolition of nontariff
barriers. Permitted a long transition period, China's tobacco
industry must gradually relax and finally abolish the quota and
license controls that are now in force.

Inevitably, a large influx of foreign cigarettes will result.
Since there is a huge potential demand for mixed cigarettes,
because foreign tobacco enterprises are strong enough to exploit
the market and since foreign cigarettes are higher in quality and
possibly somewhat less harmful to smokers' health, it is likely
that after China joins the WTO, imported cigarettes will attract a
large portion of Chinese smokers.

Some analysts believe domestic cigarettes could lose 10% to 20%
of their market share within five years, while net imports of leaf
tobacco will also grow rapidly. Imported leaf tobacco, especially
that of high quality, will account for some 10% of domestic demand.

As if these problems were not enough, the mainland also seems to
be losing the battle against counterfeit cigarettes, which are
making deep inroads into cherished tax revenues.

Seizures by the State Tobacco Monopoly (STM) are soaring, while
the number of brands being copied has increased from 30 in 1997 to
more than 100 last year. There are, for example, 35 different kinds
of counterfeit Marlboro, China's favorite foreign brand.

The abundance of fakes, along with weakening demand for the
domestic product, saw sales from state plants -- the only legal
producers -- fall 8.6% last year.

In recent years, the STM has spent 1.57 billion yuan on fighting
counterfeiters, seizing more than 5,000 cigarette-making machines,
but its efforts are failing.

Copyright 2000 by Kyodo News Service
All Rights Reserved

The information contained in the KNI news report may not be published,=20
broadcast, rewritten or otherwise distributed without the prior written=20
authority of The Associated Press as agent for Kyodo News Service.

Publication date: 2000-06-02
=A9 2000, YellowBrix, Inc.