China: Hongta Eyes Expansion Into Russian Market Through Donskoy Tie-Up

Source from:  Global Times (cn) 06/26/2012

China's Tobacco producer Hongta Tobacco Group is considering to expand into the Russian market, sources close to the matter confirmed Monday, a move analysts said contains big risks. The Yunnan-based Hongta may use production capacity of the Russian tobacco company Donskoy Tabak in an initial tie-up with the ultimate goal of acquiring the South Russia-based company, Russian business daily Kommersant reported, quoting Donskoy Tabak's President Savvidi Lvan Lgnatievich. The report said Donskoy Tabak would produce about 2 billion Hongta-branded cigarettes annually for the local market at the initial stage, and then raise the output to 10 billion cigarettes by using Donskoy's spare capacity. The Chinese State-owned tobacco company could take a 0.5 percent share of the Russian tobacco market following the agreement, which is expected to be completed by early July. A management staff at Hongta, who asked not to be named, confirmed the report when reached by the Global Times Monday, but refused to comment or provide further information. Lgnatievich visited Hongta and discussed future cooperation projects in Russia with Hongta President Liu Wandong last month, according to Hongta. "However, compared to other international tobacco brands, Hongta's overseas recognition is low, and it is not certain if the company can run a successful business in Russia," Wang Nengyuan, an industry analyst and partner at the Beijing-based Adfaith Management Consulting, told the Global Times Monday, expressing concern over the overseas expansion ambitions of the Chinese company. Wang said Chinese companies going global face many challenges such as adapting to the overseas market and managing sales networks. Huang Xiaoyun, an industry analyst with market consultancy askci.com, echoed Wang's opinion, saying that Chinese companies are usually not familiar with the overseas markets and regulations, which could present risks for the companies' future development. China suffered a net loss of $26.8 billion in overseas investments in 2011, according to the China International Council for the Promotion of Multinational Corporations over the weekend. "Risks aside, considering the uncertain external environment, foreign partners are likely to lower acquisition requirements to ease their financial pressures," Huang noted. As early as in November last year, Russian State news agency Ria Novosti reported that Donskoy Tabak would be up for sale because the company was under pressure of high taxes and new anti-smoking law in the country. Enditem