[Intl-tobacco] Tobacco TNCs Look to China

[robert weissman]

SMOKING ROOM
New York Post

By HILARY KRAMER

August 29, 2004 -- The Marlboro Man, symbol of the Wild West, needs to
ride into the Far East to survive.

Here in the U.S., Philip Morris International and the rest of the
tobacco industry faces enormous pressure with tax increases, litigation
risks, rampant counterfeiting and bans in places like New York bars.

As quickly as the number of smokers decline in the U.S., though, they
are increasing in developing countries - especially in China, the
biggest tobacco consumer in the world, with 25 percent of the world's
smokers.

But to reach those consumers, Philip Morris, a division of Altria, must
navigate delicate negotiations with the Chinese government, which is
eager to hold on to its $90 billion cigarette monopoly. So far, no
foreign tobacco company has gotten permission to enter China.

"China is one of our greatest long-term opportunities," said David
Sylvia, an Altria spokesman. "Our hope is that the Chinese market will
be liberalized to allow the sale of Marlboro, but we expect that the
distribution will be handled by the Chinese state monopoly."

Even with that limitation, the potential is tremendous. Just 10 percent
of China's market share would equal $17 billion in revenue - more than
all of Philip Morris' U.S. sales in 2003.

The sales also could offset the enormous legal judgments that have been
levied against Altria and others in the U.S. and Europe. The companies
face yet another court case on Sept. 21 - a $280 billion federal health
suit.


In all, 350 million Chinese smoke - 50 million of which are teenagers.
Sixty-two percent of Chinese men smoke, but fewer than 7 percent of
Chinese women do, which could change as social pressures ease.

This translates into huge money for the Chinese government. The tobacco
business, op erated through the State Tobacco Monopoly Administration
(STMA), recently announced that the Chinese tobacco industry's total
profit was more than $12 billion - along with additional tax receipts of
more than $8 billion.

"There's resistance by the Chinese government to allow in foreign
competition," said David Adelman, a food and tobacco analyst for Morgan
Stanley "The Chinese enjoy the $80 to $90 billion in sales as well as
tax income. This is a profitable business and they're naturally hesitant
to jeopardize its future."

The Chinese also are touchy about negotiations. Last month, British
American Tobacco announced that it would be the first foreign company to
manufacture cigarettes in China. BAT publicly stated that China Eastern
Investments was its local partner in the building of $1.5 billion
factory capable of producing 100 billion cigarettes annually.

But the Chinese government, annoyed by the announcement, denounced the
agreement as false and, according to industry insiders, BAT's punishment
"for jumping the gun will be a decade or two of waiting outside the gates."

But there's hope for the tobacco companies, Adelman said.

"Ultimately, China will allow foreign companies to come in and compete
on what will eventually be a level playing field. There have been many
prior monopolies privatized in the world and the consistent sight is a
foreign manufacturer gaining market share," he said.

As for the Marlboro man, he could ultimately be a dominant player in
China. Today, no Chinese brand has more than a 2 percent share, with no
main brand. Analysts are bullish on Philip Morris's prospects for dominance.

Global prospects have U.S. analysts changing their minds about
once-stagnant tobacco stocks. Merrill Lynch analysts project Altria will
pop from $49 to $63 a share in the next year - a potential return of 38
percent. Smith Barney Citigroup recommends Altria with a $65 stock target.

As for the lawsuits, Adelman said Altria has managed its cases well, and
doubts that the company is heading for future trouble with foreign
governments.

"Internationally, there are no opportunistic plaintiff attorneys and no
class action capacity," he said. "The Chinese government is also in the
cigarette business and won't sue itself . . . and many countries won't
want to give up the tax revenue."

http://www.nypost.com/business/27690.htm