China tobacco production

Sanya, the southernmost city of Hainan Island, is as far south from Beijing as you can go and still be in China. It’s a small tropical resort town touted as “China’s Hawaii.” Under the shade of coconut trees, Ah-Jun sells betel nuts, fruits and cigarettes. A former farmer, she moved to the town several years ago to make money off the tourists. “Without selling cigarettes, how could I eat?” she asks.

Indeed, cigarettes are the bread and butter of Ah-Jun and the People’s Republic of China alike. China’s State Tobacco Monopoly Administration contributes an estimated 12 percent to Beijing’s national income, more than any other industry. Since 1982 when the STMA was founded, everything involving tobacco, including production, marketing, imports and exports, has fallen under the jurisdiction of the monopoly.

Needless to say, the STMA has its work cut out. China’s 350 million smokers consumed 1.7 trillion cigarettes last year. Some estimate the actual number to be closer to 2 trillion if unreported production, counterfeiting and smuggling are taken into account. Either way, China’s population is lighting up. “We’ve got 1.2 billion people and they really enjoy their smoke,” says Xu Mingzhong,deputy director of the prosperous Ningbo Cigarette Factory.

>From its central headquarters in Beijing, the STMA makes economic policies for the entire tobacco industry. To implement these policies, the STMA in 1984 created the China National Tobacco Corporation (CNTC). While individual manufacturers and suppliers are given a degree of autonomy, all major business transactions must be approved by the CNTC. Owned by the state, each Chinese tobacco company pays the STMA taxes, but keeps its individual profits. FOUR MODERNIZATIONS.

STMA’s main goals are: to acquire new technology, internationalize, diversify and consolidate.

Typically, new technology is acquired from abroad. Foreign suppliers have been operating in China since the mid-’80s. In exchange for technology, they are offered special access to the Chinese market. While such agreements often favor the Chinese, they allow foreign companies to establish the essential guanxi (relationships) for the future. Also, any unbalanced terms are often offset by the additional business generated.Forexample, international leaf merchants have entered into Compensation Trade
Agreements with the CNTC and the CNTC’s China National Tobacco Import & Export Corporation (CNTIEC). StandardCommercial and DIMON both supply processing technology, such as threshing, redrying and packing equipment, to Chinese companies. In exchange, the foreign merchants receive discounts on tobacco until the value of the equipment has been realized. In these deals, the CNTC gains access to up-to-date technology; promotes its tobacco abroad; and does not have to spend its foreign currency reserves.

The Chinese tobacco industry has made progress on STMA’s second goal, internationalization. As of April 1999, China’s year-to-date tobacco industry trade surplus was up 35.6 percent to us$90.7 million. International leaf merchants sell Chinese leaf abroad. China’s powerhouse Yuxi Hongta Group produces several brands of American-blend cigarettes for export to Southeast Asia. Even domestic suppliers, traditionally thought to lack the technical know-how of foreign companies, are exporting their machinery and services. A representative of the Kunming Shipbuilding Equipment Company, a large producer of tobacco-related machinery, says that his company supplies manufacturers in Southeast Asia, especially Vietnam and Indonesia.

China’s diversification is making headway, as well. The Yuxi Hongta Group, for example, produces more than 135 billion sticks a year, or 12 percent of China’s total. Its popular premium brand Hongtashan and medium-priced brand Hongmei are found throughout the country. Aside from cigarettes, Yuxi Hongta has been branching out into other business ventures. Yuxi Hongta is involved with an automobile factory, banks, several four-star hotels, a highway and even a hydroelectric power plant. The STMA is urging other tobacco manufacturers to follow Yuxi’s example.

At the same time, consolidation is changing the playing field. According to the China National Tobacco Corporation Economic Center, there are 136 cigarette factories currently operating in China, compared with 180 in 1997. Of those 136, 121 are reportedly profitable. To further improve efficiency and competitiveness, STMA aims to reduce the number of factories to approximately 100 by early in the next century. While some factories have undoubtedly been forced to close, others have come under the control of other companies. Large companies like Yizhong Tobacco Group and Yuxi Hongta Group have been incorporating smaller factories into their operations. Sometimes, factories producing better-selling brands will license their brands to other factories. Not everybody is excited about consolidation. Machinery suppliers, for example, have seen a significant drop in demand since the early ’90s due to this trend. Heike Kungel, public relations manager of the German machinery maker Hauni, states, “The market for tobacco equipment in China will not grow in the future as steadily as it grew in the beginning of the ’90s.” She says that foreign companies that are looking for business opportunities in China will need to practice patience.

China is the largest tobacco and cigarette producer in the world, with the largest number of smokers, and the largest number of annual tobacco deaths, constituting respectively 1/3, 1/4, 1/5 of the world totals. In 2005, 1.95 trillion cigarettes were smoked by 320 million Chinese smokers of whom 50 million were under-age. By 2050, the annual tobacco death toll will increase to 3 million.

The government-owned national tobacco monopoly has had a near-total market share for 50 years. But since the 1990s, China has been aggressively targeted by the multinational tobacco companies, joint ventures have been established which produce foreign brand cigarettes, along with advertisements and sponsorships, and illegal trade.

New challenges are coming from China’s joining the World Trade Organization, ratifying the FCTC, the increasing illegal production and sales of counterfeit cigarettes, smuggling and related crimes.

Recently, drastic measures have been implemented to meet these challenges. New cigarette factories are not permitted, and hundreds of smaller factories have been shut down. Reorganization and merging has resulted in several giant companies. Popular brand names are promoted while numerous smaller ones have been abandoned. Major crackdowns of illegal businesses are frequently reported, some involving multimillion US dollars.

In the next decade, the protection of the high customs barriers will diminish. Partnerships with multinational tobacco companies will increase. The global market share of Chinese cigarettes will expand with some Chinese brands becoming international. The epidemic of smoking will expand and spread, although the FCTC might pose some constraints.

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