Global: China tobacco dragon set to overtake TTCs

10 February 2017:

The world’s largest tobacco manufacturer, China National Tobacco Corporation (CNTC), is set to expand its overseas operations and overtake the transnational tobacco companies according to the latest study by Fang, Lee and Sejpal.

How is the Chinese tobacco industry expanding in the ASEAN region? As early as the 1990s the Lao Liaozhong Hongta Fortune Tobacco and Viniton Group established production and distribution bases in Lao PDR and Cambodia respectively. In 2012, Viniton Tobacco underwent relocation and technological transformation and by January 2014 the new factory had a single-shift annual production capacity reaching 7.5 billion sticks. Indonesia is the latest target by the Chinese tobacco industry.

Modified table on foreign tobacco operations of China

Examples of Chinese tobacco industry associated brands found in the region are Dok Mai Daeng sold in Lao PDR, and Angkor, Luxury and Crown, in Cambodia. The Angkor brand is seen by locals as the national cigarette of Cambodia. In Myanmar, Peacock brand is manufactured by the Kokang Cigarette Factory located at Muse.

Shanghai Tobacco Group (STC) is opening a distribution centre in Singapore, with initial duty-paid target markets of Indonesia, Malaysia, Philippines and Singapore, and select duty-free markets within the region. STC is a large intensive and modern state-run enterprise. In 2014, STC sold 146.58 billion cigarettes (up 5.29%) and generated US$17.2 billion in manufacturing and commercial taxes and profits (10.13%).

Since 2013, STC has actively developed new markets overseas, with its Chunghwa, Zhongnanhai, Red Double Happiness, and Golden Deer brands entering 13 markets in Singapore, Myanmar and Turkey among others.

According to the study, to prepare itself to “go global”, the CNTC first went through substantial consolidation inside the country to transform a highly fragmented and inefficient industry into fewer, larger and more competitive firms. Between 1998 and 2009, the number of companies operating in China reduced from 185 to 31, leaving just bigger companies, big brands and large markets. The resultant structure potentially dwarfs existing transnational tobacco companies and serves as a springboard for globalisation. The authors note change in ownership is not part of the business strategy and that the CNTC industry is likely to remain state-owned and controlled for the foreseeable future.

The study states another indicator of globalisation is product development to promote a small number of Chinese ‘heritage’ brands overseas, as well as premium brands. These are likely to appeal to overseas Chinese, rather than serve as global brands, given their close affinity with Chinese cultural tastes and practices. The development of new brands, to appeal to a wider global market beyond Chinese diasporas, is likely to increase via joint ventures with existing TTCs.

The study notes trends in exports suggest an increasingly outward looking Chinese industry. Chinese cigarette exports have grown rapidly by volume (Figure below) following the establishment of five export manufacturing facilities in 2013. A target of 8 million cases (400 billion sticks) by 2020 was declared in 2014 with the aim of catching the sales volumes of leading TTCs. Asia will remain a priority region for exports.

CNTC annual production and export in billions of sticks (19802013)

The sheer size of the Chinese tobacco industry compared to existing TTCs, and thus its potential to generate significant foreign earnings, has prompted the government to support promote the industry’s expansion overseas.

The study authors noted while China ratified the FCTC and started its implementation since 2005, however due to weak political will and enforcement, major gaps still exist compared with FCTC requirements. 

Our response: The FCTC Article 5.3 clearly states state enterprise must be treated like any other tobacco industry. For us in the region we must remember that while the Chinese government is the owner of its tobacco industry, however, the industry should be treated the same way we treat the other tobacco companies. This means no incentives to expand its business in our countries, our governments should not sign MOUs and partnership, and no new investments with the Chinese tobacco industry.

Reference: Jennifer Fang, Kelley Lee & Nidhi Sejpal (2017) The China National Tobacco Corporation: From domestic to global dragon? Global Public Health, 12:3, 315-334, DOI:

10.1080/17441692.2016.1241293  See: http://dx.doi.org/10.1080/17441692.2016.1241293

For cigarette market share in ASEAN region: http://tobaccowatch.seatca.org/index.php/2016/09/26/ti-market-share-2/

 

–00–