[Intl-tobacco] China: Tobacco giant forms alliance to stave off foreign rivals

[Robert Weissman]

January 14, 2003
Tobacco giant forms alliance to stave off foreign rivals
Hill of the Red Pagoda seals a deal with a German firm to create a western
foothold
Mark O'Neill
South China Morning Post

Fearful of foreign competition, China's top cigarette company said yesterday
that it had signed an agreement with Germany's third biggest maker to
produce one of its brands in Germany and was discussing joint production of
a new brand in China.

"The pressure from foreign competition is very strong," said an official of
Hill of the Red Pagoda (HRP) in Yuxi, in the southwest province of Yunnan.
"It is better to co-operate with the foreign companies than be eaten by
them."

Under the agreement, Reemtsma will produce in Germany an HRP brand named
West, mostly for sale in Eastern Europe. The company ranks third in market
share in Germany, after Philip Morris and British American Tobacco , and is
the largest German-owned tobacco company. The two firms are also discussing
joint development of a new brand, to be produced in Yuxi using Chinese
tobacco , for sale to the mainland market. "We are still in the negotiation
stage. We will need to obtain a production licence and agree on the new
brand and how to produce it," the official said.
HRP is the top company in China, with a market share of about 7 per cent.

National output last year was 344.49 million cases, the second highest on
record after 348.5 million in 1995. China is the world's largest cigarette
market and one of the few major ones that is growing. Its more than 300
million smokers consume a third of the world total and production has more
than doubled since 1980.

According to official estimates, foreign brands account for less than 5 per
cent of sales but industry estimates put the figure at closer to 10 per
cent, led by Marlboro, which is widely available on the streets of China's
cities. Foreign brands are imported legally or are smuggled in, selling for
about 10 yuan a packet, against two to five yuan for cheap and middle range
domestic brands.

The production costs of Marlboro are very low, the HRP official said. It has
been on the world market for many years and most Chinese smokers like it.
Production costs in China are high.
Of China's 300 million smokers, about 14 per cent, or 42 million, like
blended cigarettes.
Under the terms of its membership of the World Trade Organisation, Beijing
agreed to cut the duty on imported cigarettes from 60 per cent before entry
to 40 per cent, 25 per cent and 10 per cent in succeeding years. At the end
of this year, it has promised to abolish a system of licencing that enables
the state tobacco monopoly to tightly control legal retail sales of imported
brands.
One industry source said that the authorities are preparing non-tariff
barriers to reduce the inflow of foreign cigarettes after the abolition of
this licencing system and protect local manufacturers.