[Intl-tobacco] China: International Tobacco Giants in Process of Establishing Ventures in China

[Robert Weissman]

International Tobacco Giants
in Process of Establishing Ventures in China
Tobacco China Online
16 June 2002
http://www.tobaccochina.com/english/news.asp?id=3218

International tobacco giants have been in a process of establishing ventures
in China since the country's entry into the World Trade Organization (WTO)
in November 20.

Officials with the Foreign Investment Department of the Chinese Ministry of
Foreign Trade and Economic Cooperation confirmed recently that a draft of
policies on foreign acquisition of China's State-run enterprises has been
worked out and that an official document to this effect is being finalized.

The policies concerned will provide that the general public utilities in
Chinese cities, including facilities for the supply of water, heat and gas
and for the treatment of sewage and garbage, will be open to foreign
investors on a full scale.

While Chinese government authorities are busy making policy preparations in
this respect, international tobacco giants are quietly stepping up efforts
to enter the China market, with some choosing the southwestern province of
Yunnan - known as the kingdom of tobacco in China - as the breakthrough
point.

On May 10, Yunnan Tobacco Binchuan Burley Co., Ltd. was established in
Binchuan County of Dali Region in Yunnan Province. The newly established
company has power backing of Dimon of the United States, which is the
world's second largest tobacco leaf supplier. The company was established
under the technical guidance of Dimon. Dimon permanently stations
technicians in the company to guarantee that the tobacco leaves produced by
the company will be same as those produced by Dimon's America-based
enterprises.

Yunnan Tobacco Binchuan Burley Co., Ltd. has been the second of its kind
established with support from Dimon in China, after the establishment of a
similar venture in central China's Hubei Province.

According to Huang Guangyao, the chief of the General Office of Yunnan
Tobacco Binchuan Burley Co., Ltd., the company has 10 million yuan (1.2
million U.S. dollars) in registered capital, with 30 percent of its shares
held by Dali Region Tobacco Company, 25 percent by Yunnan Provincial Tobacco
Leaf Corporation, 25 percent by Yunnan Provincial Tobacco Import-Export
Corporation, and 20 percent by Binchuan County Tobacco Company.

Data provided by General Manager Zi Zhengdong of Yunnan Tobacco Binchuan
Burley Co., Ltd. show that the company is growing 18,000 mu (1,200 hectares)
of burley, and that this area will be extended to 40,000 mu to 50,000 mu
(2,667 hectares to 3,333 hectares) over the next few years - almost the same
size as that of flue-cured tobacco in Binchuan County.

According to experts, burley has a relatively low content of tar and is
safer to consumers. For the tobacco industry of China that traditionally did
not put safety first, the start of burley production in the country
might be
a prelude to the reform of its tobacco markets. An expert with Yunnan
Provincial Tobacco Science Research Institute said, "The establishment of
the two burley producers in China with the support of Dimon might be a new
start in the history of tobacco production in China."

Although Dimon holds no shares of the two burley companies in China, the
production of burley by both is fully in compliance with technical standards
of Dimon. Upon threshing and curing, the tobacco leaves produced by both are
sold to Dimon, which in turn distribute them to tobacco manufacturers around
the world. In reality, Dimon has taken roots in the business of burley
production in China.

In promoting the production of burley in China, Dimon and a few
international tobacco manufacturers have appeared to be more active than
their Chinese counterparts. According to reports, at least 10 Chinese
regions, including three in Yunnan, have received technical and economic
assistance from Dimon in the production of burley. Besides Yunnan, Enshi of
Hubei Province, Daxian County of Sichuan Province and an another county in
Guizhou Province - both in southwest China - are also in the process of
growing and promoting the production of burley on a trial basis.

Dimon's entry into the China market is mainly based on the consideration of
interests in the following two respects - firstly cheap labor in China, and
secondly, more significantly, increasing demand for blend-type tobacco
products of lower tar content.

For Yunnan, the development of burley production is more significant.
General Director Li Dehua of Yunnan Tobacco Binchuan Burley Co., Ltd. said,
"The development of burley production in Yunnan is only a start. As the
tobacco leaves produced in Yunnan and even the rest of China are basically
of the flue-cured type, the development of burley production in Yunnan will
contribute to improving the structure of products of tobacco leaves. In this
respect, we should take precautions. Namely, we need to fill the gap of
burley production in our efforts to sharp the competitive edge of the
tobacco industry of Yunnan."

Like Binchuan County of Dali Region, Gaoliang County in Qujing City of
Yunnan Province is also suitable for the growth of burley. But the person
providing technical guidance here is Mr. Smith of the agriculture department
of Philip Morris - the world's largest tobacco manufacturer - rather
than a
technician from Dimon.

As the production of burley in Gaoliang has not reached a large scale,
Philip Morris directly extends assistance to local tobacco growers. For any
local tobacco growers who grow burley, they can have the total production
costs born by Philip Morris and can receive 700 yuan (84.3 U.S. dollars) in
income for growing every mu (0.067 hectare) of burley, an amount
significantly higher than that for producing flue-cured tobacco. In Qujing
City which produces tobacco leaves of relatively high quality, the income
for producing every mu (0.067 hectare) of flue-cured tobacco is 450 yuan
(54.2 U.S. dollars) in the maximum. Because of such a disparity of
interests, a growing number of tobacco growers in the region are
choosing to
grow burley.
.
China's entry into the WTO makes it easier for foreign tobacco companies to
enter the China market.

Relevant agreements on China's entry into the WTO provide that China will
gradually lift quota restrictions on the import of foreign tobacco products
and sharply reduce tariffs on tobacco imports. According to China's
commitments on its WTO entry, the average rate of tariffs on imports of
cigarettes will decline from the current level of 65 percent to 25 percent
in 2004, and the average rate of tariffs on imports of tobacco leaves will
decline from the current level of 40 percent to 10 percent in that year, a
level significantly lower than the average rate of 17 percent on general
goods. Consequently, the competitiveness of foreign cigarettes on the China
market will go up by 40 percent and tobacco leaves by 30 percent.

China's formulation of new policies on foreign acquisition of China's
State-run enterprises has provided international tobacco giants with an
unprecedented opportunity to enter the China market. The promotion of burley
production in China has enabled such international tobacco giants as Philip
Morris and Dimon to develop a market of raw materials in the country, which
is a fundamental condition for them to localize their production. Through
this market, international tobacco giants like Philip Morris will pose a
serious challenge to the market of flue-cured tobacco in China. Enditem

SOURCE FROM: 21st Century Economic Review