[Intl-tobacco] Impt: Analysis of China's Tobacco Industry, Market After WTO Entry

[Robert Weissman]

Analysis of China's Tobacco Industry, Market After WTO Entry
Source: Tobacco China, 2002-04-18, via tobacco.org
URL: http://www.tobaccochina.com/english/new.asp?id=3041



It deserves great concern whether the tobacco industry of China -
the largest generator of profits and taxes - can meet the powerful
impacts from China's entry into the World Trade Organization (WTO)
in November last year.

I. Along with the process of economic globalization, the structure
and direction of the world's tobacco industry will greatly impact
the development of China's tobacco industry after China's WTO entry
and will also inevitably influence the future direction of China's
tobacco industry.

1. The world's tobacco industry is in an accelerated process of
globalization and monopolization.

The control of the world's tobacco markets by a few transnational
tobacco companies has become increasingly obvious over recent years.
The world's three leading tobacco giants - Phillip Morris, British
American Tobacco and Japan Tobacco Inc. - are in control of 60
percent of the world's tobacco market shares. The annual output of
the three is larger than that of all the tobacco manufacturers in
China by nearly 20 percent.

2. The world's tobacco industry is in an accelerated process of
incorporation, trade liberalization, privatization and general
adoption of the market principle.

In particular, the process of incorporation has developed at an
unprecedented speed over the past more than 20 years. Transnational
companies have been playing a leading role in promoting the process
of incorporation.

As the Chinese economy is increasingly integrated into the overall
economy of the world, the process of incorporation as a kind of
great change driven by external forces will inevitably occur in the
Chinese economy. China's WTO entry has contributed to opening the
door for such change, though it might not be totally satisfactory.

3. Blend-type, low-tar-level-type and lightly-fragrant-type
cigarettes have taken the bulk of the world's tobacco market
shares.

4. The world's tobacco industry and major tobacco markets are in an
accelerated process of transfer to developing countries.

The tobacco industry has increasingly shown all signs of a sunset
industry in developed countries. Therefore, it has become a matter
of vital importance to the world's leading tobacco giants whether
they will be able to fully or partially transfer their operation to
developing countries, particularly China as the world's largest
tobacco market. For them, it is imperative to break into the China
market.

II. The status quo and direction of China's tobacco industry:

1. China is a large, but weak tobacco producer.

China is the world's largest tobacco producer, with the country's
tobacco leaf output, cigarette output and number of smokers all
ranking the first in the world. Meanwhile, China is also a weak
tobacco producer, with the annual national tobacco sales income and
profits unmatchable with those of Phillip Morris. Besides, China
lags far behind the world's leading tobacco giants in terms of the
structure, grades and brands of cigarette products. As far as the
scope of the world's tobacco industry is concerned, the tobacco
industry of China basically can neither influence nor represent the
direction of the world's tobacco industry.

2. China's tobacco industry is in a situation of decentralization,
disorder, poor efficiency and small scope.

"Decentralization" means that there are 146 tobacco manufacturers in
China operating in a decentralized way. The existence of local
protectionism and regional trade blockade has contributed to
increasing the cost of large tobacco manufacturers in developing
markets and restricting their development. The counterfeiting and
smuggling of cigarettes and the production of cigarettes without
authorization and in excess of production quotas have thrown China's
tobacco market into a situation of chaos and disorder.

"Poor efficiency" means that tobacco manufacturers in China are
generally operating at a very low efficiency, with 50 percent of all
the enterprises of the tobacco industry making losses.

"Small scope" means that tobacco manufacturers in China are
generally of a small scope of production, with the single-brand
output difficult to match competitive foreign rivals.

3. Traditionally advanced tobacco manufacturers are on the decline
or are being phased out of the tobacco business while small regional
tobacco manufacturers are on the rise.

Yunnan, Guizhou and Shanghai are three traditionally advanced
tobacco-producing regions in China. Today, Yunnan is still
well-known and highly reputed on markets of medium- and high-grade
tobacco products, taking a very large market share of medium- and
high-grade tobacco products in China. For Shanghai, its tobacco
products can be marketed mostly within the region. The most
disadvantaged of the three is Guizhou, which heavily relies on other
Chinese regions to market its tobacco products. The tobacco products
of Guizhou sold to other Chinese regions are mostly low- and
medium-grade cigarettes, in direct conflict with the sales of local
products of the regions concerned.

Since the mid-1990s, small regional tobacco manufacturers have
silently risen in economically developed Chinese regions. After a
period of only a few years, small regional tobacco manufacturers in
parts of China developed at a surprising speed, making rapid
progress in reforming the structure of products, promoting the
reputation of brands, raising the single-case amount of profits and
increasing market shares.

4. Flue-cured-type, high-tar-level-type and heavily-fragrant-type
cigarettes are still the mainstay items on domestic markets of
cigarette products.

In China, flue-cured-type, high-tar-level-type and
heavily-fragrant-type cigarettes still take great market shares.
Such a situation will likely remain unchanged for a very long period
of time following China's WTO entry.

5. Competition among tobacco manufacturers is gradually shifting
onto the production of medium- and high-grade cigarettes, with
cigarette factories gradually reducing or stopping the production of
low-grade cigarettes, while activities of merger, acquisition and
investment on the part of tobacco manufacturers keep increasing.

The Chinese government reformed system of consumption tax on
cigarette products in 2001. Because of this reform, the production
of low-grade cigarettes is almost unprofitable. For most of the
small cigarette factories each with an annual output of not more
than 100,000 cases, they can hardly avoid the fate of being phased
out. The tax system reform has also generated relatively great
negative impacts on medium-size and large tobacco manufacturers with
a relatively large output of low-grade cigarettes.

As a result of the tax system reform, the market concentration ratio
of grade-four and grade-five cigarettes will rise to an
unprecedented high level while their output will decline gradually.
The process of decline will be accelerated along with the elapse of
time following China's WTO entry and rapid economic development in
the country.

In an effort to continue their survival and realize continued
development following China's WTO entry, Chinese tobacco
manufacturers are all focusing on the production and sales of
medium- and high-grade cigarettes as a means to sharpen their
competitiveness. In the next few years, competition among Chinese
tobacco manufacturers in this respect will become all the more
intense. Under the effect of government policy and impacts from
China's WTO entry, most of the small cigarette factories in China
will have to turn themselves into processing factories or
subsidiaries of large tobacco manufacturers. Enditem

TobaccoChina Online-04/18/2002