Marlboro Country's borderline
with China By Matt Young
The largest tobacco producer in the world
is the Chinese government, and despite loosening
trade barriers, it appears it wants to stay that
way by mastering the game of Monopoly at home and
blowing more local smoke abroad.
The
tobacco trade in China has opened up to some
extent since the country's admittance to the World
Trade Organization in 2001. Yet today, despite
foreign players keen on profiting from the
world's largest tobacco
market, where about 60% of men smoke, their
combined market share there is trivial.
The China National Tobacco Corp (CNTC)
still holds at least a 90% share of the Chinese
cigarette industry, and it appears that won't
change any time soon.
"China will not
approve the establishment of new cigarette
factories, including joint ventures or foreign
tobacco companies establishing their sales offices
in China," Xing Wanli, State Tobacco
Monopolization Administration (STMA) director of
foreign affairs, said in the January issue of the
industry publication Tobacco Reporter, which
publishes a China edition in cooperation with the
STMA.
But China's official word isn't
keeping foreign producers at bay. The industry
smells smoke, and it's salivating, even if what
it's really sensing is only smoke and mirrors.
A coup for Philip Morris In December, Philip Morris
International, a fully owned subsidiary of Altria
Group, announced that it had concluded a major
agreement with the CNTC. While Marlboro cigarettes
have long been imported into China, the deal would
allow the company to
produce Marlboro cigarettes directly at the CNTC's
affiliate factories beginning in the first half of
this year and distribute them in China.
The deal has been seen as a win for Philip
Morris, especially after rival British American
Tobacco (BAT) announced prematurely that it had
its own factory agreement in China before being
told by the Chinese government that no, in fact,
it didn't.
It remains to be seen whether
the Philip Morris deal will hold water, especially
since aside from Xing, a senior Chinese ambassador
to the United Nations office in Geneva reiterated
in a Xinhua story that China would not approve any
new cigarette factories, including joint ventures.
While Philip Morris press officers
declined to comment about their China operations,
a company employee answering press calls said, "as
far as we're aware, there's no change" in the
Morris deal. A press release announcing the deal,
after all, didn't mention anything about
constructing new cigarette factories.
But
even if Philip Morris can flawlessly implement the
CNTC tie-up, the company could be advancing the
Chinese government's control over the country's
tobacco industry even more than its own interests.
"It's a way of learning new technologies and new
capabilities" for the government, said Dayton
Matlick, editor-in-chief of Tobacco Reporter. "You
learn the most by the people that perhaps have an
edge on you."
Beyond intangible learning,
the deal would also help internationalize local
Chinese cigarette brands. That's because the other
half of the agreement, involving a
Switzerland-based joint venture between Philip
Morris and a CNTC subsidiary, would market
Chinese-brand cigarettes globally. Overall,
although the deal does signify Philip Morris
International's partnership with the Chinese
government monopoly, the more significant aspect
may ultimately be that Big China Tobacco will be
poised to grow bigger and faster worldwide because
of the arrangement.
Making deals with
the dragon Other tobacco players besides
Philip Morris have managed to penetrate the
Chinese market in recent years.
For
example, the production of UK-based Gallaher Group
Plc's brand Memphis began last May under a license
arrangement with Shanghai Tobacco Group
(STG). Gallaher also began importing the LD brand
into the market in August. And Imperial Tobacco
recently expanded the West brand to Beijing. Even with its
premature-factory-announcement mishap, BAT was
able to extend the Kent Mintek range, developed in
Japan, to Hong Kong and mainland
China, exceeding expectations in the growing
menthol-lights sector, according to company
officials.
But Luke Falvey, managing
director for Gallaher Asia-Pacific, hinted at how
difficult it still is to get a good deal.
"At the end of the day importation and
distribution [are] regulated and controlled by the
state monopoly," Falvey said. If a company wants
to import tobacco products into China, it first
has to create a demand within a particular
province. Then, he said, the company must
negotiate every fiscal quarter with the Chinese
authorities to get what amounts to a quota.
Authorized volume for a new brand will be small,
he said.
Reflecting what may have clinched
the Morris deal, Falvey said the key to Gallaher's
success in China is a "mutually beneficial
relationship". Gallaher's licensing agreement with
Shanghai Tobacco is actually a reciprocal one, he
said.
"Under this agreement Gallaher's
strategic brand Memphis is locally manufactured
... and distributed by STG, and Gallaher
manufactures ... and distributes STG's Golden Deer
brand in Russia," Falvey said.
Multinational tobacco companies keep
profitability figures from China close to the
vest, but they appear to be interested more in
strategy at this point anyway. They want to
develop better relationships with key players in
China and a better product foundation there should
the market liberalize further in the future.
For the time being, even if companies make
new inroads with China's tobacco gatekeepers, they
face a new foe from outside China: the World
Health Organization's (WHO) Framework Convention
on Tobacco Control (FCTC).
It's
merchandising, not advertising Last August,
China ratified the FCTC, which presents a host of
new difficult challenges to multinational tobacco
corporations. Among its stipulations the treaty
requires China to ban tobacco advertising,
promotion and sponsorship on radio, television,
print media and the Internet within five years,
according to the WHO. It also forbids
tobacco-company sponsorship of international
events.
That leaves Gallaher and other
companies using traditional methods of marketing,
such as running "gift with purchase" promotions
and advertising, Falvey said. In other words, if
you purchase a pack of company cigarettes, you
might get a lighter or cap.
Judith Mackay,
director of the Asian Consultancy on Tobacco
Control, said such promotional efforts still seem
to be effective. During a trip to Xinjiang province in
2001, she said, her tour guide
was wearing a
Marlboro-branded cap. "It was the most stylish hat
available" in the area, Mackay said.
There's also evidence suggesting Western
brands, beyond being stylish, are effective in
hooking new customers. In the 1980s and '90s,
markets in Japan, Taiwan, South Korea and Thailand
opened to US cigarettes. According to the National
Bureau of Economic Research, per capita cigarette
consumption in those countries in 1991 was nearly
10% higher than it would have been had those
markets remained closed to US cigarettes.
China, no doubt, is a unique Asian
country. But the research shows the success
foreign brands can have when unleashed into the
region's market. So if companies can begin to
negotiate better deals with the Chinese
government, they might find their market shares
could grow beyond trivial.
Matt
Young is a Washington, DC-based freelancer and
a staff writer for EyeWorld Magazine and EyeWorld
Asia-Pacific Magazine.
produce Marlboro cigarettes directly at the CNTC's
affiliate factories beginning in the first half of
this year and distribute them in China.
was wearing a
Marlboro-branded cap. "It was the most stylish hat
available" in the area, Mackay said.
