[Intl-tobacco] China: World;s Biggest market remains fortified against the advance of Big Tobacco (but not for long)

[Robert Weissman]

January 11, 2003
Biggest market remains fortified against the advance of Big Tobacco
Mark O'Neill
South China Morning Post

China announced yesterday that cigarette production increased for the
seventh successive year last year, but that the door remained closed to
foreign companies who wanted to manufacture there.

The People's Daily said output last year was 344.49 million cartons, up from
340.21 million in 2001 and 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.
This has whetted the appetite of the multinational firms whose brands, like
Marlboro, 555, Hilton and Kent, are widely available on the streets of
China's cities, either imported legally - through the State Tobacco Monopoly
(STM) - or smuggled in.

But, despite Beijing's entry into the World Trade Organisation (WTO), they
cannot produce in China.

Zhou Ruizeng, spokesman for the State Tobacco Monopoly (STM), said yesterday
that, while he had no specific figures on the market share held by foreign
brands, it did not exceed 5 per cent.
"Foreign companies are not allowed to produce or set up factories in China,"
he said.
Last August, an official newspaper reported that British-American Tobacco
(BAT), the world's second biggest producer, would set up China's biggest
cigarette factory in Mianyang, Sichuan province with an annual output of
three million cartons.

Neither BAT nor the STM confirmed the report at the time and Mr Zhou
yesterday dismissed it as a rumour. BAT and Philip Morris - the world's top
producer - yesterday declined to comment on their sales and future plans in
China.

Mr Zhou said last year was a good year for the industry, with the number of
producers cut to 123, from 185 in 1997, and the abolition of 100 brands.
These are part of the STM's efforts to cut surplus capacity and build up
firms with a high national share. The country's top producer, Hill of the
Red Pagoda, has a market share of only 7 per cent, while the global big
four - Philip Morris, BAT, Japan Tobacco and Imperial Tobacco - account for
44 per cent of the world market.
"Last year we raised the quality of our cigarettes and increased the
competitiveness of our companies," Mr Zhou said. Nonetheless the shadow of
foreign competition hangs heavily over the industry, which fears an
increasing tide of foreign brands. A survey of domestic cigarette producers,
published last week, found that WTO entry was the greatest challenge they
faced.
A total of 51 per cent said their management methods were not suitable for
the post-WTO market and one third said that they lacked strong brands and
were not competitive enough.
The reason for Beijing's protectionism is clear from the amount of
industrial and commercial tax paid by the tobacco industry last year - a
record 140 billion yuan (about HK$131.85 billion), up two billion yuan on
the year before, and the 15th year in a row it provided more tax revenue
than any other industry. Brian Richards, a business consultant, said the
anti- tobacco lobby in the west made it difficult for governments to lobby
hard for their cigarette firms in China and for the firms themselves to
publicise what they are doing here. "But the fact is that foreign cigarettes
are popular in China and will become more so, as incomes rise . . . The
question is what access the government will give them and how successfully
the black market operates," he said.