[Intl-tobacco] Thailand: Free trade threat prompts TTM to rethink tactics

[Robert Weissman]

Free trade threat prompts TTM to rethink tactics
by Wichit Sirithaveeporn
Source: Bangkok Post, Monday, 6/18/01

The Thailand Tobacco Monopoly projects that by 2003, the cost structure
for imported cigarettes will dip below domestic production costs as
tariffs fall under the Asean Free Trade Area agreement.

The threat of squeezed profit margins and lost market share is forcing the
state monopoly to adjust its strategies for long-term survival, according
to Suchon Watanapongvanich, TTM's managing director.

Foreign cigarettes now have a 13% market share. But with import tariffs
for Asean-produced cigarettes scheduled to drop to 5% by 2003, retail
prices for foreign brands are expected to fall sharply, eroding the
competitive advantage held by TTM cigarettes in the domestic market, which
is worth 40 billion baht a year.

Complicating the matter is the TTM's own cost base, which is inflated by
the 30% tariff on tobacco leaf imports, maintained to protect domestic
growers.  About 20% of the tobacco used by the TTM is imported leaf from
the US and China, which is blended with crops mostly grown in Northern
Thailand.

Foreign cigarettes, led by brands such as Marlboro, 555 and Mild Seven,
already dominate the high-end market. But the TTM's commanding lead in the
medium- and low-price segments, through its flagship brand Krong Thip, is
expected to erode steadily because of trade liberalisation.

Producers such as Marlboro's Philip Morris, which operates a major plant
in Malaysia, will be able to apply direct pricing for the first time to
build their market share.

The TTM is considering restructuring into different profit centres to
boost its efficiency. The concept would split business operations into
distinct companies overseeing production, distribution, supply procurement
and purchasing. There will be a new early-retirement plan as executives
seek to pare the monopoly's 4,900-strong staff.

Next year, the TTM will take delivery of new equipment in preparation for
the launch of a new high-grade cigarette to compete with foreign brands.
Another strategy is to form a joint venture with an international firm,
where foreign brands would be made by the TTM.