Reputed Big Brands to Dominate Cigarette Markets in China

Source from:  03/08/2004 03/08/2004

As a result of profound structural reforms of China’s tobacco industry and government policy changes following China’s entry into the World Trade Organization (WTO) in 2001, cigarette markets in China will likely be dominated by several reputed big brands in future. Since the beginning of 2004, the tobacco industry of China has been undergoing continued structural reforms in preparation for the wider opening up of cigarette markets to foreign tobacco products following the WTO entry. In honoring its commitments to the WTO accession, China has eased restriction on the retail of imported cigarettes by ceasing the use of the Special Tobacco Monopoly Retail License previously required for retailing imported cigarettes, and is taking steps to significantly lower tariff rates on cigarette imports. Because of this major policy change, the Special Tobacco Monopoly Retail License has no longer been in use in China since January 1, 2004, meaning that anyone holding a general Tobacco Monopoly Retail License are allowed to trade imported cigarettes on Chinese markets. Besides, China’s average tariff rate on cigarette imports will decline to 25 percent from 65 percent in 1999. These developments will only contribute to increasing the competitiveness of foreign cigarettes on markets in China. China signed on November 10, 2003 the Framework Convention on Tobacco Control of the World Health Organization, the first ever global public health treaty. As this convention is meant to restrict the tobacco industry, it will generate profound impacts on tobacco trade in China. Over recent years, in-depth problems on the part of tobacco industry of China have become increasingly obvious, including irrationality of the structures of the tobacco industry itself, its enterprises and products, and failure of the management and operating systems of the tobacco industry to meet the requirement of the market economy. Such problems have led to the decentralization of brands and the lack of reputed manufacturers and brands capable of well competing with transnational tobacco giants and famous foreign brands. So, the tobacco industry of China is facing an unprecedented serious change after China’s WTO accession. In efforts to meet the serious challenge, increase its overall competitiveness as quickly as possible and realize sustainable, stead, coordinated and sound development, the tobacco industry of China has taken a series of steps to reform its management system, separate its manufacturing sector from commercial sector, reform the structure of enterprises, accelerate the process of shutting down small, loss-making cigarette factories, encouraging enterprises to conduct reorganization, association or merger, strengthen the establishment of marketing networks, effectively fight the trade of counterfeit, smuggled, illegally produced and illegally supplied cigarettes, put an end to uncontrolled cigarette trade, and purify the market environment, contributing to greatly promoting the development of big enterprises, big brands and big markets. As a result, the organizational structure of the tobacco industry is turning rational, cigarette production is being concentrated in the hands of big manufacturers and the structure of cigarette brands is improving. So far, the number of cigarette factories in China has declined to 84 from the level of 185 previously while the number of cigarette brands in the country has been reduced to 582 from the level of 1,049 in 2001. Moreover, the reform steps have contributed to promoting fair trade on cigarette markets in China. At a time when cigarette markets in China are becoming saturated, domestic markets are becoming increasingly internationalized and Chinese cigarette consumers are paying greater attention to the technological content and reputation of cigarettes than flavor and prices, competition on cigarette markets in China is turning increasingly intense. In light of the status quo and development trend of the tobacco industry and the tobacco trade, cigarette markets in China will be of the following characteristics in a future period of time: Firstly, the production of reputed, high-quality and high- and medium-grade cigarettes will increase. From January to September 2003, Baisha, Honghe, Hongmei, Huangguoshu and Red Double Happiness were the five largest Chinese cigarette brands in terms of the output and sales volume. Of the 36 reputed cigarette brands designated by the tobacco industry of China, Yingkesong, Yunyan, Monkey King, Huangguoshu, Hongjinlong, Hibiscus King, Liqun, Yuxi, May 1, the General, etc registered rapid increases in the sales volume; Pride, Mount Huangshan, Seven Wolves, Honghe, the Red Flag Canal, etc registered relatively rapid increases in the sales volume; and Chunghwa, Baisha, Nanjing, Yipinmei, the Great Red Eagle, Jinsheng, etc registered mild increases in the sales volume in the nine-month period. Reputed big Chinese cigarette brands represented by advantaged brands from the southwestern province of Yunnan, eastern city of Shanghai and south central province of Hunan made great headway in sales increases in a favorable trend of development, with the sales volume going up steadily and prices rising amid stability. Secondly, non-famous, disadvantaged cigarette brands are in a trend of further reduction. At a time when reputed big cigarette brands register increases in terms of both production and sales, non-famous Grade One and Grade Two cigarette brands of China’s tobacco industry are in a process of being merged by reputed big brands while low-grade, disadvantaged cigarette brands are in a trend of sharp reduction. Meanwhile, the development of new brands will be subject to strict control. So far, the number of non-famous, disadvantaged cigarette brands of all the Chinese provinces has been reduced to different extents. In particular, the number of non-famous, disadvantaged cigarette brands in the eastern province of Anhui has declined by 49.09 percent, or 27, to 28; in the southern province of Guangdong by 39.39 percent, or 13, to 20; and in the eastern province of Shandong by 19.23 percent, or 10, to 43. Over the past few years, the number of cigarette brands of China’s tobacco industry has declined by an average annual rate of 15 percent. In 2004, the number of cigarette brands will be further reduced, leaving greater space for the development of reputed big brands. Thirdly, foreign cigarette brands are gaining greater market shares in China. As a result of the cessation of the use of the Special Tobacco Monopoly Retail License previously required for retailing imported cigarettes, the removal of other non-tariff trade barriers and further reduction of import duties, foreign cigarette brands will enjoy national treatment on Chinese markets, enabling them to compete with their Chinese rivals on an equal footing. Further reduction of import duties on tobacco products will give high- and medium-grade foreign cigarettes an edge for competing with Chinese-made cigarettes of the same grades in terms of prices and costs. Besides, along with gradual increases in the number of Chinese consumers choosing to smoke blend-type cigarettes instead of traditional flue-cured-type cigarettes, foreign cigarettes are expected to take greater market shares in China year by year. Fourthly, along with the reform of the structure of cigarette brands in China, there will occur several extra-large tobacco manufacturing enterprise groups in the country. According to the strategic plan for the development of the tobacco industry over the next few years formulated by the State Tobacco Monopoly Administration (STMA), all the small cigarette factories each with an annual production capacity of not more than 100,000 cases (5 billion cigarettes) will have been shut down by the end of 2004. Meanwhile, all the cigarette factories each with an annual production capacity of 100,000 cases to 300,000 cases (5 billion cigarettes to 15 billion cigarettes) will undergo corporate reorganization through merger or acquisition. Afterwards, several extra-large tobacco manufacturing enterprises each with an annul production capacity of some 1 million cases (50 billion cigarettes) will be formed on the basis of further structural reform. After the completion of the structural reform of the tobacco industry, cigarette markets in China will likely be dominated by several reputed big brands in future, with market shares mainly taken by several extra-large tobacco manufacturing enterprise groups including those based in Yunnan, Shanghai and Hunan. By then, there will have occurred in China a market of high- and medium-grade cigarettes with the 36 key Chinese cities as the center radiating to neighboring regions, a market of medium- and low-grade cigarettes mainly based in rural and township areas, and a market of high-grade and imported cigarettes mainly based in coastal areas. Accordingly, big brands with different prices and different grades intended to meet different demands of consumers will be playing a leading role in cigarette markets in China. Along with continued development and structural reform of cigarette brands in China, the structure of tobacco manufacturing enterprises, the structure of products and market resources of the tobacco industry of China will further improve in future. Computed by an annual retrogressive rate of 40 percent, the number of cigarette brands in China is expected to decline by some 100 over the next two to three years to a total of 400. Meanwhile, there will occur five or more big brands each with an annual output and sales volume of some 1 million cases (50 billion cigarettes), which will account for some 15 percent of the total cigarette output of China’s tobacco industry. In the 11th Five-Year Plan period (2006-2010), computed by an annual retrogressive rate of 20 percent, the number of cigarette brands in China is expected to further decline to some 200. Meanwhile, there will occur 10 or more cigarette brands each with an annual output and sales volume of over 1 million cases (50 billion cigarettes), and three to four each with an annual output and sales volume of 2 million cases (100 billion cigarettes). In the same period, the cigarette brands each with an annual output and sales volume of over 1 million cases (50 billion cigarettes) will account for 35 percent or more of the total cigarette output of China’s tobacco industry. The number of tobacco manufacturers in China each with an annual cigarette production capacity of 1 million cases (50 billion cigarettes) or higher will rise to 10 over the next two to three years from the present level of four, and to 15 in the 11th Five-Year Plan period (2006-2010), including six each with an annual cigarette production capacity of 1.5 million cases (75 billion cigarettes) or higher, and also including two or more each with an annual cigarette production capacity of 3 million cases (150 billion cigarettes) or higher. Enditem