Review of Low-Grade Cigarette Production in China

Source from:  China Tobacco magazine 01/10/2005

The production of popular low-grade cigarettes in China, largely affected by government policy changes and market demand, has experienced continued falls over the past four years as Chinese tobacco manufacturers maneuvered to shift production onto more profitable high-grade cigarettes. The prime culprit behind continued falls in the output of low-grade cigarettes was a controversial government consumption tax policy change that has made the production of low-grade cigarettes largely unprofitable. [img border=0 hspace="4" vspace="4" align="left" src=http://www.tobaccochina.com/english/picture/Pakistan.jpg] In 2001, the Chinese government reformed the consumption tax system on cigarettes, benefiting high-grade cigarette producers while greatly increasing the burden of consumption tax on low-grade cigarette producers. Under the government's new tax policy effective since June 1, 2001, the consumption tax rates on cigarettes are now set by both the price and quantity instead of only by the price previously, significantly increasing taxes on low-grade cigarettes, particularly Grade Four and Grade Five cigarettes. As a result, low-grade cigarette producers in China rushed to shift onto the production of higher grade cigarettes while market demand for low-grade cigarettes kept increasing. Such a situation prompted the leadership of China's tobacco industry to pay heightened attention to possible contradiction between the supply and demand of low-grade cigarettes on markets. Almost at the same time as the consumption tax policy change, the State Tobacco Monopoly Administration (STMA) made a proposal for maintaining balance between the supply and demand of low-grade cigarettes. Over the past four years since the consumption tax policy change, market demand for low-grade cigarettes in China has kept growing, which has become a hot topic for debate within the tobacco industry of China. [b]2001: SHORTAGE OF SUPPLY OF LOW-GRADE CIGARETTES ALREADY PREDICTABLE[/b] According to official statistics on cigarette sales in China in the first quarter of 2001, the output and sales volume of Grade Four cigarettes in China in the three-month period were basically balanced while the sales volume of Grade Five cigarettes slightly outdid the output. At the end of 2001, the proportion of Grade Four and Grade Five cigarettes in the total cigarette sales volume declined by two percentage points, or 159,900 cases (7.995 billion cigarettes), year-from-year. In particular, the sales volume of Grade Five cigarettes went down 15.47 percent, or 135,400 cases (6.77 billion cigarettes), year-from-year. Obviously, the shortage of supply of low-grade cigarettes in China was already predictable in 2001. [b]2002: IRRATIONAL STRUCTURE OF CIGARETTE PRODUCTS[/b] In 2002, the tobacco industry of China produced 564.55 billion Grade Four cigarettes (11.291 million cases) and 292.55 billion Grade Five cigarettes (5.851 million cases), with the output of Grade Four cigarettes outdoing the sales volume, and with the output of Grade Five cigarettes slightly beneath the sales volume. In the first half of 2002, some provincial-level Chinese regions blindly upgraded the structure of cigarette products or unrealistically raised their prices, further exacerbating the contradiction between the supply and demand of low-grade cigarettes in China. This prompted the STMA to urge tobacco manufacturing enterprises to reform the structure of their products, well plan production, simplify product packaging, lower the cost of production, and strive not to make losses in producing low-grade cigarettes, and also urge commercial enterprises to well organize the marketing of low-grade cigarettes to ensure the stability of supply though the trading of low-grade cigarettes could bring meager profits. But according to official statistics, the operation of China's tobacco industry was still fairly overheated in the January-September 2002 period because of these two reasons: Firstly, Chinese tobacco manufacturers were generally in a big rush to increase their cigarette output and were all trying to make big progress in production. Secondly, most of the provincial-level Chinese regions acted to upgrade the structure of cigarette products too rapidly by slashing the output of Grade Five cigarettes or sharply raising the prices of Grade Five cigarettes, making the supply of Grade Five cigarettes seriously fall short of demand in some regions. [b]2003: STRENGTHENING OF MACROCONTROL AND DESIGNATION OF MANUFACTURERS TO PRODUCE LOW-GRADE CIGARETTES[/b] According to official statistics, both the output and sales of Grades One, Two, Three and Four cigarettes in the first quarter of 2003 went up year-on-year while the output, sales volume and inventories of Grade Five cigarettes respectively went down 35.61 percent, 27.59 percent and 37.44 percent year-from-year. As both the output and sales volume of Grade Five cigarettes continued to fall sharply, the shortage of supply of Grade Five cigarettes on the market became increasingly serious. In a report on the operation of China's tobacco industry, the STMA emphasized that the structure of cigarette products in the first quarter of 2003 was not rational enough; that both the output and sales of Grade Five cigarettes fell too sharply in the three-month period; that both the production and marketing of low-grade cigarettes were in an increasingly harsh situation; and that the potential danger caused by irrationality of the structure of cigarette products was growing, which would significantly impact the development of the tobacco industry. In April 2003, the output of Grade Five cigarettes in China fell 25.66 percent, or 6.86 billion cigarettes (137,200 cases), from the same month of 2002. Although the fall was in a trend of slowing down, the contradiction between the supply and demand of low-grade cigarettes in China remained relatively conspicuous. In the month, only three provincial-level Chinese regions – roughly one-tenth of the total – registered increases in the output of Grade Five cigarettes year-on-year, and all the other provincial-level regions saw it decline. On April 24, 2003, the STMA issued the Proposal for Stabilizing the Production of Low-Grade Cigarettes to Ensure Market Supply, requiring all the provincial tobacco monopoly administrations in China to earnestly analyze the situation of and major problems in the production of low-grade cigarettes in their regions, and well organize the production of Grade Five cigarettes by designated manufacturers, in order to redress the downward trend in the production of low-grade cigarettes in China. On June 7, 2003, in an effort to stabilize the production of low-grade cigarettes and meet the growing market demand for low-grade cigarettes, the STMA designated 18 Chinese tobacco manufacturers, including Zhangjiakou Cigarette Factory in north China's Hebei Province, Xiangfan Cigarette Factory in central China's Hubei Province and Fuyang Cigarette Factory in east China's Anhui Province, as key producers of low-grade cigarettes, and defined their obligations to produce low-grade cigarettes. Meanwhile, the STMA also made clear the ways of subsidization by the State of low-grade cigarette production and the ways of assessment of low-grade cigarette production on the part of the designated manufacturers. In 2003, some Chinese provinces and cities saw the sales volume of all grades of cigarettes in them declining continuously, which was attributed mainly to insufficient supply, particularly the shortage of supply of low-grade cigarettes. In 2003, the tobacco industry of China produced 600.61 billion Grade Four cigarettes (12.0122 million cases), up 36.05 billion cigarettes (721,000 cases) year-on-year, and 208.4 billion Grade Five cigarettes (4.168 million cases), down 84.155 billion cigarettes (1.6831 million cases) year-from-year. [b]2004: BIG DECISIONS TO SUPPORT PRODUCTION OF LOW-GRADE CIGARETTES TO SETTLE SEVERE SHORTAGE OF SUPPLY[/b] Over the past four years, the amount of taxes and profits generated by the tobacco industry of China has kept growing. But from 2001 to 2003, the output of low-grade cigarettes in China kept falling at an annual rate of 3 percentage points. In its monthly reports on the operation of China's tobacco industry, the STMA has begun to particularly list statistics on the production of Grade Four and Grade Five cigarettes, which are worrying the management of the national tobacco industry: From January to March 2004, the tobacco industry of China produced 150.985 billion Grade Four cigarettes (3.0197 million cases) and 38.715 billion Grade Five cigarettes (774,300 cases), with the output of both declining 6.3 percent from the same period of 2003. As the output of low-grade cigarettes continued to fall in China in 2004, the shortage of supply of low-grade cigarettes on the market became increasingly serious. For the management of China's tobacco industry, there are reasons to worry them: Further shortage of supply of low-grade cigarettes on the market will negatively impact stable growth of sales, will make efforts to fight the production and trading of counterfeit cigarettes more difficult, etc. In its reports on the operation of the tobacco industry of China, the STMA seriously points out that top priority should be given to promoting stable growth of sales, that the reform of the structure of products should strictly follow market demand, that any move to unilaterally seek high gross profits and blindly upgrade the structure of products should be resolutely redressed, and that efforts should be made to well organize the production and sales of marketable cigarettes, particularly low-grade cigarettes, to practically meet the growing market demand. In the first half of 2004, the tobacco industry of China produced 225 billion low-grade cigarettes (4.5 million cases), down 24.91 percent, or 74.46 billion cigarettes (1.4928 million cases), year-from-year. Besides the decline in the output of low-grade cigarettes on the part of the whole tobacco industry of China, the 18 designated low-grade cigarette producers also cut down the production of low-grade cigarettes to avert losses: In the six-month period, they produced 102.77 billion low-grade cigarettes (2.0554 million cases), down 22.22 percent, or 29.36 billion cigarettes (587,200 cases), from the same period of 2003. The low-grade cigarette output of the 18 designated manufacturers accounted for 44.23 percent of their total cigarette output in the six-month period, and 45.68 percent of the total low-grade cigarette output of the national tobacco industry. In the first six months of 2004, only five of the 18 designated low-grade cigarette manufacturers – Hanzhong Cigarette Factory and Yan'an Cigarette Factory in northwest China's Shaanxi Province, Xiangfan Cigarette Factory in central China's Hubei Province, Xichang Cigarette Factory in southwest China's Sichuan Province and Fuyang Cigarette Factory in east China's Anhui Province – registered year-on-year increases in the production of low-grade cigarettes. All the other designated manufacturers registered declines in the output of low-grade cigarettes in the six-month period, making the shortage of supply of low-grade cigarettes in China all the more serious. In an effort to solve this difficult problem, the STMA issued another two official documents in the second half of 2004 intended to increase the production of low-grade cigarettes – the Proposal for Further Supporting the Production of Low-Grade Cigarettes by China's Tobacco Industry and the Proposal for Arrangements for the Production and Marketing of Low-Grade Cigarettes in 2005. In both official documents, the STMA urges all levels of the national tobacco industry to have reflections on continued falls in the production of low-grade cigarettes, seriously consider the situation of supply of low-grade cigarettes on the market, attach great importance to solving the contradiction between the supply and demand of low-grade cigarettes on the market, and manage to increase the production and marketing of low-grade cigarettes. However, according to latest official statistics, the tobacco industry of China, in the first 10 months of 2004, produced 484.78 billion Grade Four cigarettes (9.6957 million cases), down 5.19 percent year-from-year, and 115.7 billion Grade Five cigarettes (2.314 million cases), down 36.11 percent. Therefore, to effectively solve the shortage of supply of low-grade cigarettes in China remains an arduous task for the national tobacco industry. Enditem