At the turn of the century, American tobacco magnate James Duke was looking for ways to capitalize on a new invention, the cigarette-rolling machine. The story goes that he opened an atlas, scanning the population numbers of every country, until finally, he read the words “Pop. 430,000,000.”
“That is where we are going to sell cigarettes,” he proclaimed.
That place was, of course, China. Duke was the first chairman of British American Tobacco (BAT) and his company dominated the Chinese market in the early 1900s. Mao Zedong was said to be a fan of BAT’s premium brand, 555 State Express. Then BAT’s most famous customer closed China to the world.
Now that the world’s biggest tobacco market – the Chinese smoke a third of the world’s cigarettes – is open again, foreign firms are hoping for a return to Duke’s halcyon days.
“China is prized above all other markets,” said Kelley Lee, a tobacco control researcher at the London School of Hygiene and Tropical Medicine.
But selling cigarettes has become a complicated business. Foreign tobacco giants are locked in a tricky race: They have to beat the anti-tobacco movement without pushing Beijing too hard over market access.
It’s a difficult balancing act and they are already working from a low base. Limited by import caps, foreign firms have less than 5% of a market worth US$74.4 billion last year, according to research by Euromonitor International.
The market is regulated by the State Tobacco Monopoly Administration (STMA), which operates through the China National Tobacco Corporation (CNTC). Their aim is to keep foreign competition out while consolidating local brands to create national champions.
China now has about 31 tobacco companies, compared to 44 in 2005. The aim is to continue with consolidation until about 10 competitive firms remain.
Lee’s research underlines China’s central position in the global tobacco trade. In a number of research pieces, she says that BAT has been complicit in tobacco smuggling to enter the Chinese market. In a 2004 paper, Lee and her colleagues found that BAT had “circumvented [import] restrictions through illegal imports,” while a related paper co-authored by her argued that “smuggling has been strategically critical” to BAT’s China strategy.
BAT did not respond to a request for comment on Lee’s work.
There is still little discernible action by the government to relax the rules. One of the few examples came in 2004, when Beijing scrapped a license retailers needed to sell foreign tobacco products.
The following year, Philip Morris International (PMI), which makes Marlboro, struck a deal with CNTC. A joint venture was formed that would allow PMI to make Marlboro cigarettes in CNTC factories, and, more importantly, have its brand distributed in China through the CNTC network. In return, PMI would distribute Chinese brands abroad.
When contacted, PMI only said that China is a “strategic market” and that it had established a joint venture with the CNTC. Industry watchers, however, view the deal as a watershed for foreign firms.
“The [joint venture] is a major breakthrough,” said Farzana Mohsin, Euromonitor International’s head of research. “This represents a typical win-win situation that the Chinese government seeks.”
But even as global trade nudges open the door to China’s domestic market, a countervailing force is pushing it closed. Anti-smoking advocates have scored significant victories in recent years, with smoking bans now in force in a number of major cities. Even Beijing will become smoke-free, at least temporarily, during the 2008 Olympics.
In March, the Chinese People’s Political Consultative Conference debated a public smoking ban while the Ministry of Health is drawing up its own proposal to limit smoking areas.
“Tobacco control makes economic, as well as public health sense,” said Lee. “A healthier China will contribute to a wealthier China.”
The state tobacco monopoly could learn from the fate of its Asian neighbors. According to a series of investigative reports by the Washington Post in 1996, the tobacco markets in Japan, Korea and Taiwan were virtually closed to foreign firms in the late 1980s. But US threats of trade action opened the door and today foreign brands are strong in those countries.
For now, it seems foreign companies are playing it safe. They appear happy to cooperate rather than risk antagonizing the Chinese authorities. Japan Tobacco International, for example, which markets Mild Seven and Salem cigarettes here, is content to go where the regulator leads.
“Although we have not seen a rapid sales increase in the market so far … We think long-term commitment to the market is important,” said JTI’s media and investor relations division.
Money and power may run freely in China’s tobacco industry but perhaps the outcome will be decided by an increasingly educated and vocal Chinese middle-class. Tian Yuanyuan, for example, a 31-year-old accountant in Shanghai, doesn’t hesitate to take issue with smokers when they’re near her seven-year-old son.
“If I see someone smoking around children or pregnant women, I’ll tell them to stop it,” she said.
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