Are there contradictions between governments’ regulations and what’s really happening in the tobacco world?
　　
　　The Marlboro Man, notorious in American ads for coolly dangling a cigarette from his lips beneath the shade of a cowboy hat, may be riding to a new home in China this year, on the horseback of Phillip Morris International. This is despite the Chinese Government’s announcement on February 7 that China will not approve any new cigarette factories, including joint ventures, in its new efforts to cut down on smoking.
　　Production and distribution of the Marlboro brand in China, reached by way of a December deal between Phillip Morris and the Chinese Government and slated to begin in the first half of this year, is a sign of the tobacco multinationals’ redoubled efforts in lassoing the largest cigarette market in the world.
　　Aside from Marlboro, Gallaher Group Plc.’s brand Memphis began production in May 2005 under license with Shanghai Tobacco Group. The company also began importing the brand LD into the market last August. And Imperial Tobacco recently expanded the West brand to Beijing. Marlboro had previously been imported into China, but was not produced there.
　　Some industry-protective voices say Western brands aren’t expanding into China. Rather, they say, they’re only shifting around in a zero-sum game that only the Chinese Government truly wins by learning Western manufacturing and marketing virtues but maintaining its monopoly. Meanwhile, although China’s admittance to the World Trade Organization (WTO) in 2001 may have opened up the country to the cigarette trade somewhat, the country ratified the World Health Organization’s Framework Convention on Tobacco Control (FCTC) last October, which has an opposite effect.
　　But if you believe either company representatives or their adversaries, tobacco multinationals are successfully building a foundation in China to win more lungs.
　　
　　Determined to come in
　　
　　Today, Phillip Morris sells many more cigarettes abroad than it does in the United States, and with increasing volume overseas as well. In 2004, the company’s U.S. volume was down slightly to 187 billion units, compared to a 3.5-percent volume increase overseas to 761 billion units.
　　That’s one clue about where the company’s future lies and that’s despite a shrinking number of U.S.-bound cigarettes, Phillip Morris still pointed to its success in gaining more U.S. market share thanks to the world’s best-selling brand. You guessed it, Marlboro.
　　“Shipment volume and retail share performance since the fourth quarter of 2002 have been outstanding for Marlboro,” according to the company’s most recent annual report.
　　Of course, that’s the same brand the company struggled vigorously to get into China. Not long after British American Tobacco announced prematurely that it would build a cigarette factory in China (only to be later denied government permission in 2004), Phillip Morris officials said they sealed their own deal for Marlboro. China National Tobacco Corp. (CNTC), which has at least a 90-percent share of the Chinese cigarette industry, reached an agreement with Phillip Morris to produce Marlboro cigarettes at the CNTC’s affiliate factories beginning in the first half of 2006 and distribute them in China, according to Phillip Morris officials.
　　Phillip Morris also is embarking on a 50/50 joint venture with a CNTC subsidiary that would expand exportation of tobacco materials from China and sell Chinese brands globally, according to the December deal.
　　“Essentially [the Marlboro deal] gives them a foot in the door and a joint venture will ease their passage,” said Judith Mackay, Director of the Asian Consultancy on Tobacco Control. “They will be seen as partners with the national monopoly.”
　　While Phillip Morris representatives declined to discuss their designs on China, their intentions are clear: China will be the new Marlboro Country, if not Morris Country entirely.
　　But the FCTC isn’t making things easy for Phillip Morris and the rest of the tobacco industry.
　　At a February FCTC conference in Geneva, Sha Zukang, Chinese Ambassador to the United Nations office in Geneva, said that China would not approve any new cigarette factories including joint ventures in order to reduce consumption, according to the official Xinhua News Agency. Xing Wanli, State Tobacco Monopolization Administration Director of Foreign Affairs, said a similar thing--according to industry publication Tobacco Reporter’s January issue--with a slight twist: “[The] STMA has reiterated that China will not approve the establishment of new cigarette factories, including joint ventures or foreign tobacco companies establishing their sales offices in China.”
　　But a Phillip Morris press release about the deal mentioned nothing about new factories--only that Marlboro would be produced under license at the CNTC’s affiliate factories. The release also mentioned that the Marlboro/CNTC joint venture would be set up in Switzerland, not China.
　　While a press officer could not be reached for comment soon after the senior Chinese diplomat’s pronouncement, a Phillip Morris International employee answering press calls said, “As far as we’re aware, there’s no change” in the Morris deal. Phillip Morris probably would have learned from British American Tobacco not to make any premature announcements with the Chinese “before it got to the finishing post,” Mackay said.
　　Long-time tobacco industry analyst Bonnie Herzog said Phillip Morris has been seriously trying to break into China for 10 years, and the December agreement is a “first step into this market.”
　　“We feel it is very important and it establishes a long-term partnership,” she wrote in a Citigroup report.
　　With the world’s largest population of 1.3 billion people, it’s clear that China is the most attractive potential market for cigarette multinationals. But only recently has that pie in the sky begun to look more like smoke.
　　Since the Chinese tobacco industry began to open in 2001, around the time of its admittance to the WTO, barriers to foreign tobacco have been lowered. Import duty into China reduced from 35 to 25 percent, said Luke Falvey, Managing Director for Gallaher Asia-Pacific. The Chinese also removed the need for retailers to have a special license to sell international imported tobacco products, although importation remains highly controlled and regulated, he said.
　　Today, both Gallaher and Imperial Tobacco have cigarette-licensing agreements with the CNTC.
　　“The international tobacco community are focusing on building relations and brand awareness and expanding in China,” Falvey said.
　　Even British American Tobacco, which slipped in its premature factory announcement, has been able to extend the Kent Mintek range, which was developed in Japan, to Hong Kong and the Chinese mainland, surpassing expectations in the growing menthol lights category, according to company officials.
　　China is “enormously important,” said British American Tobacco spokeswoman Teresa La Thangue. But “doing things in China takes a long time,” she said. Even now, the multinationals’ share of the Chinese cigarette market is negligible, according to a Euromonitor International report. The import segment, Falvey said, accounts for less than 0.1 percent of the total Chinese market, which is about 1.8 trillion cigarette sticks.
　　“Our business in China today is…not that it is going to move the needle relative to the Gallaher group in terms of volume or profitability,” said Falvey, who estimated his company has a six to seven percent share of the import segment, behind Phillip Morris’ 23 to 25 percent share and British American Tobacco’s 50 percent share. “It’s all about making sure that Gallaher’s brands are in a [good] position should the China tobacco industry open up in the future.”
　　
　　Advancing one drag at a time
　　
　　While setting up distribution channels in China has been a large initial administrative hurdle for cigarette multinationals, legal marketing is a second big one.
　　The FCTC, which China ratified, “requires parties, in accordance with their respective constitution and constitutional principles, to undertake a comprehensive ban on all tobacco advertising, promotion and sponsorship within five years of the WHO FCTC’s entry.” It also requires prominent health warnings on cigarette packs and bans tobacco sales to minors.
　　During the February FCTC convention, Sha said his government--beyond cracking down on new cigarette factories-also plans to host a tobacco-free Olympic Games in Beijing in 2008, although that already is common Olympic practice, Xinhua reported.
　　Nonetheless, Gallaher’s Falvey said that while China does not allow consumer advertising of cigarettes, Gallaher uses other promotional means, including packaging gifts (such as a cap, T-shirt or lighter) with cigarette purchases, he said. People who use these stylish branded items often have no idea they are inadvertently advertising.
　　Indeed, stylishness is what often attracts overseas customers to international brands, Falvey said.
　　“When you go to developing countries, people aspire to own or buy these international designer type products,” just like Louis Vuitton or Nike, Falvey said. “[They] like to be seen with an aspirational brand on a coffee table on a Friday evening as opposed to smoking a domestic brand. You see this the world over.”
　　But would an urban cell-phone toting Asian aspire to be a rough Marlboro Man?
　　“We believe that the universal appeal of the Marlboro Man and Marlboro Country transcends all flavor types,” a Phillip Morris official said, according to a 2000 journal article in Tobacco Control. The article also found that in an import brand awareness study conducted for the company, 85 percent of 1,000 households contacted and questioned named Marlboro first.
　　
　　In addition, while industry observers say the male smoking market is mature in China (about 63 percent smoke), there still is plenty of room to hook women and teenagers. In 1984, 7 percent of females 15 and older smoked, while in 2002 only 2.6 percent did, Mackay said.
　　“No tobacco farmer in China is going to be out of work in my lifetime,” she said.
　　
　　New market
　　
　　While some might see the Marlboro deal as a coup for Phillip Morris, others see China doing what they have done for millennia: absorbing even victorious invaders into its culture.
　　“It’s a way of learning new technologies and new capabilities,” said Dayton Matlick, Editor in Chief of Tobacco Reporter. “You learn the most by the people that perhaps have an edge on you.”
　　Indeed, according to the December deal, Marlboro would not only be produced by the CNTC’s factories, it would be handed out by its “official distributors” nationwide. It appears that the old communist credo of controlling the means of production is beginning to make good business sense, at least in terms of learning about the competition.
　　“The cooperation between Chinese and foreign tobacco companies on brands is a win-win strategy,” Xing told Tobacco Reporter. “[The] STMA has always encouraged cooperation on brands and technology between foreign and Chinese tobacco companies.”
　　In the meantime, the Chinese are careful about maintaining a firm grip on their own highly successful market. One of every three smokers worldwide, after all, is widely reported to be Chinese.
　　Falvey acknowledged just how difficult it is to inch into China as an outside producer.
　　“If you want to import tobacco products in China, you have to create the demand in the province you want to go into,” Falvey said. “Then you have to sit down and negotiate every year, every quarter, with the [Chinese authorities] to effectively get a de facto quota. Generally with a new brand, you will start off with a small volume.”
　　And while the CNTC certainly doesn’t have an edge on the world market yet, it’s cultivating one, not only by optimizing its own cigarette production and distribution, but also by employing the industry at-large to help out.
　　That’s exactly what the other half of the Phillip Morris deal, involving the Switzerland-based joint venture between Morris and a CNTC subsidiary to market Chinese-brand cigarettes globally, would do.
　　So some industry observers wonder who’s getting a bigger butt in the door: multinational tobacco companies into China, or China into the world cigarette marketplace.
　　
　　Matlick’s money is on China.
　　
　　Multinationals “will probably never have a significant percentage of the Chinese market,” said Matlick, whose publication also has a China edition published in cooperation with the STMA. “I think their volume won’t expand all that much. There may be some shifts between brands, [but] I don’t think you will see a flood of additional cigarettes in China.”
　　Some scientific evidence suggests otherwise.
　　In the 1980s and 1990s, markets for U.S. cigarettes opened in Japan, Taiwan, South Korea and Thailand. Research shows that in those countries and regions, per-capita cigarette consumption in 1991 was almost 10 percent higher than it would have been had those markets remained closed to U.S. cigarettes, according to the National Bureau of Economic Research.
　　While the Chinese market certainly is unique, the research shows the power a foreign brand can wield in an Asian market.
　　Especially, some say, when that brand’s name is Marlboro.

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