[Intl-tobacco] Controversy over BAT/China Joint Venture (fwd)

[Robert Weissman]

CHINA PRESS: Officials Question BAT Cigarette JV
by China Bureau, Dow Jones Newswires; 8610 6588-5848;
djnews.beijing@dowjones.com
Source: The Wall Street Journal Interactive Edition, Monday, 5/28/01

BEIJING -- Chinese government and industry officials are questioning plans
to open up the tobacco industry to foreign investment through a joint
venture with British American Tobacco PLC (BTI), Business Weekly reports.

The government may be feeling pressure from local producers worried about
foreign competition.

Zheng Fuqiang, deputy secretary general of the China Tobacco Society, told
Business Weekly that he has heard plans for the joint venture call for an
annual output of 2 million cases, an amount he said would be "too big
compared with domestic factories."

BAT has already signed a deal securing land-use rights for its planned
factory.

Foreign investment isn't allowed in China's tobacco industry, but an
official at the State Tobacco Monopoly Administration acknowledged that
the government is considering a partnership with BAT.

Int'l tobacco firms seek to light up China market

by JIA HEPENG

CHINA; Source: China Daily, Tuesday, 5/29/01 Four hundred years after
Jesuit and Portuguese missionaries introduced tobacco into China, foreign
tobacco makers are seeking to take root in the country once again.

But the cigarette makers' efforts are not without frustrations.

Early this month, Martin Broughton, chairman of British American Tobacco
Group (BAT), announced that the company and the Chinese Government were in
discussions to establish a joint venture in China, and that the State had
granted its approval for the signing of an agreement this month.

The announcement led media to report that BAT would become the first major
international tobacco firm to establish a joint venture in China.

However, an official with the development and planning department of the
State Tobacco Monopoly Administration, watchdog of the industry in China,
told Business Weekly that the agreement to set up a joint venture was
baseless.

"So far the Chinese tobacco industry is not open to foreign investment,"
said the official, who declined to give his name.

But the official did admit that the State was seeking a long-term
partnership with BAT.

"Besides what has been released, there is no further information," said
Liu Haiming, manager of corporate affairs of BAT China.

However, according to a BAT news release, an agreement was signed on May
10 to secure the company the right to use a 237-acre property in Mianyang
of Southwest China's Sichuan Province.

But no official comments are available on the land deal, and Liu also
declined to comment on the agreement.

As the largest tobacco market in the world, China holds one-fourth - more
than 300 million - of the world's smokers, and its tobacco industry
contributed a total of 105 billion yuan (US$12.7 billion) in taxes, or 10
per cent of the total State revenue, last year.

"The market is very promising, and we have been committed to a long-term
co-operation with China," Liu said.

But worries that foreign tobacco will seriously impact the domestic market
pressure the government to keep overseas giants from producing tobacco in
China.

"I have heard the BAT's proposed annual output would be 2 million cases if
it is allowed to establish a joint venture, which is too big compared with
domestic factories," said Zheng Fuqiang, deputy secretary-general of China
Tobacco Society.

Despite the industry's significant contribution to the State's revenue,
more than 90 of the 170 tobacco factories nationwide are of small scale,
with an annual output lower than 100,000 cases.

International competition may also frustrate the BAT's efforts to become
the first major international player to produce cigarettes in China.

Earlier this month - in the period the BAT had said the agreement would be
reached - Ni Yijin, minister of the State Tobacco Monopoly Administration,
met heads of the Asia Pacific division of Philip Morris, the world's
largest tobacco maker. The two sides agreed to further and strengthen
their co-operation.

On May 16, the day after the meeting, representatives from Japan Tobacco
Inc, the third largest tobacco firm in the world, also visited the tobacco
administration.

Experts say if the BAT is allowed to establish a factory in China, it
could replace Philip Morris' leading position.

Liu said BAT has co-operated with China in various projects, including
leaf growing, technological exchanges, low-tar product development and a
joint effort to prevent youth smoking.

Establishing a factory in China would be the best return for BAT's
investment.

According to Zheng, if a popular foreign tobacco brand is to be produced
in China - which would enable tobacco makers to relieve the high cost of
duties and capitalize on cheaper Chinese labour and materials - the
brand's price on the domestic market could drop 40 per cent.

Moreover, the 12-mg tar content in each foreign cigarette is better for
health than the average 15-mg content of domestic ones.

It seems that time is still needed for Chinese tobacco makers to become
strong enough to compete with foreign giants.

"The State administration and my society are pushing restructuring of the
tobacco industry to develop several industry giants capable to compete
globally after China enters the World Trade Organization," Zheng said.

But the restructuring is difficult as many local governments heavily rely
on taxes from local tobacco factories and are reluctant to close or move
small domestic firms, required by the restructuring.