Int'l Tobacco Firms Seek to Light Up China Market

Four hundred years after Jesuit and Portuguese missionaries introduced tobacco into China, foreign tobacco makers are seeking to take root in the country once again ,according to Business Weekly newspaper But the cigarette makers' efforts are not without frustrations.

Early this month, Martin Broughton , chairman of British American Tobacco Group (BAT), announced that the company and the Chinese Government were in discussions to establish a joint venture in China , and that the State had granted its approval for the signing of an agreement this month.

The announcement led media to report that BAT would become the first major international tobacco firm to establish a joint venture in China.

However, an official with the development and planning department of the State Tobacco Monopoly Administration, watchdog of the industry in China, told Business Weekly that the agreement to set up a joint venture was baseless.

"So far the Chinese tobacco industry is not open to foreign investment, " said the official, who declined to give his name.

But the official did admit that the State was seeking a long-term partnership with BAT.

"Besides what has been released, there is no further information, " said Liu Haiming, manager of corporate affairs of BAT China.

However , according to a BAT news release, an agreement was signed on May 10 to secure the company the right to use a 237-acre property in Mianyang of Southwest China's Sichuan Province.

But no official comments are available on the land deal, and Liu also declined to comment on the agreement.

As the largest tobacco market in the world, China holds one-fourth - more than 300 million - of the world's smokers, and its tobacco industry contributed a total of 105 billion yuan (US$12.7 billion) in taxes , or 10 per cent of the total State revenue , last year.

"The market is very promising , and we have been committed to a long-term co-operation with China ," Liu said.

But worries that foreign tobacco will seriously impact the domestic market pressure the government to keep overseas giants from producing tobacco in China.

"I have heard the BAT's proposed annual output would be 2 million cases if it is allowed to establish a joint venture, which is too big compared with domestic factories," said Zheng Fuqiang, deputy secretary-general of China Tobacco Society.

Despite the industry's significant contribution to the State's revenue, more than 90 of the 170 tobacco factories nationwide are of small scale, with an annual output lower than 100,000 cases.

International competition may also frustrate the BAT's efforts to become the first major international player to produce cigarettes in China.

Earlier this month - in the period the BAT had said the agreement would be reached - Ni Yijin , minister of the State Tobacco Monopoly Administration, met heads of the Asia Pacific division of Philip Morris, the world's largest tobacco maker. The two sides agreed to further and strengthen their co-operation.

On May 16 , the day after the meeting, representatives from Japan Tobacco Inc , the third largest tobacco firm in the world, also visited the tobacco administration.

Experts say if the BAT is allowed to establish a factory in China, it could replace Philip Morris' leading position.

Liu said BAT has co-operated with China in various projects, including leaf growing, technological exchanges, low-tar product development and a joint effort to prevent youth smoking.

Establishing a factory in China would be the best return for BAT's investment.

According to Zheng, if a popular foreign tobacco brand is to be produced in China - which would enable tobacco makers to relieve the high cost of duties and capitalize on cheaper Chinese labour and materials - the brand's price on the domestic market could drop 40 per cent.

Moreover, the 12-mg tar content in each foreign cigarette is better for health than the average 15-mg content of domestic ones.

It seems that time is still needed for Chinese tobacco makers to become strong enough to compete with foreign giants.

"The State administration and my society are pushing restructuring of the tobacco industry to develop several industry giants capable to compete globally after China enters the World Trade Organization," Zheng said.

But the restructuring is difficult as many local governments heavily rely on taxes from local tobacco factories and are reluctant to close or move small domestic firms, required by the restructuring.






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