<strong>Made-to-Order: A New Trend in Leaf Tobacco Production in China</strong>

Source from:  Tobacco Asia  11/29/2013

The tobacco industry of China, in line with its ambitious endeavor to significantly improve the quality of its cigarette products, has vigorously adopted the "Made-to-Order" approach in securing the supply of high-quality leaf tobacco needed for cigarette production over recent years.

The tobacco industry has been endeavoring to significantly improve the quality of its cigarette products to satisfy growing customer requirements over the past few years which has in turn resulted in active reform of the structure of leaf tobacco products. In this regard, made-to-order has emerged as a leading focus in leaf tobacco production in China.

Over recent years, key cigarette brands of the tobacco industry have undergone rapid development leading to increasing demand for the supply of high-grade leaf tobacco. At a time of year-on-year growth in leaf tobacco inventories, there has been an unexpected shortfall in the supply of high-grade leaf tobacco while medium-grade leaf tobacco inventories basically met demand, and low-grade leaf tobacco exceeded demand.

Therefore, a structural contradiction in leaf tobacco supply became critical and high-quality leaf tobacco has become a "scarce resource" for the development of key cigarette brands.

In face of the pressure from coexistence of total quantity control and the structural contradiction, the State Tobacco Monopoly Administration (STMA) – the regulator of China's tobacco industry – adopted a decision in 2012 to actively promote reform of the system of leaf tobacco distribution and introduce the system of organizing leaf tobacco production and sales to meet the demands of tobacco manufacturing enterprises for the development of competitive cigarette brands and the requirement of the tobacco industry using the  made-to-order approach.

Made-to-order here means adopting the system of leaf tobacco production upon the particular demand of tobacco manufacturing enterprises under the leadership of the tobacco industry in which leaf tobacco producing regions play a principal role. The adoption of such a system will not only meet the demand for high-quality leaf tobacco but will also ensure stable income for tobacco growers and arouse enthusiasm to produce high-quality leaf tobacco.

2012: initial success

In 2012, by arrangement with STMA, eight tobacco manufacturing enterprises – Shanghai Tobacco Group, China Tobacco Hunan Industrial Co., Ltd., China Tobacco Zhejiang Industrial Co., Ltd., China Tobacco Jiangsu Industrial Co., Ltd., China Tobacco Guangdong Industrial Co., Ltd., China Tobacco Fujian Industrial Co., Ltd., China Tobacco Hubei Industrial Co., Ltd. and Hongta Group – entered into cooperative agreements with a total of six provincial commercial enterprises of the tobacco industry, respectively in Yunnan, Guizhou, Sichuan, Hunan, Shandong and Hubei provinces, to launch pilot leaf tobacco production projects according to orders placed by customers in 21 units of exclusive bases for the production and supply of high-quality leaf tobacco designated by the tobacco industry.

In the execution of the pilot projects, the tobacco-producing regions concerned, in accordance with the specific requirements of customers for the grades, parts and quantity of leaf tobacco raw materials for producing cigarettes of their competitive brands, have managed to strengthen research of support technologies and the relevant systems of quality standards, scientifically formulate production technology schemes, improve the relevant operation processes and operation standards, strengthen whole-process traceability management, focus energy on solving problems of redundant production or supply, and strive to reduce the proportion of low-grade leaf tobacco to a minimum. As a result, the orders for the supply of high-quality leaf tobacco placed by tobacco manufacturers have been met by 95%.

Through the concerted efforts of all sides, initial success has been achieved executing the made-to-order pilot projects.

Take Shanghai Tobacco Group for example. The tobacco group has sponsored pilot projects in exclusive bases for producing and supplying high-quality leaf tobacco in Dali prefecture of Yunnan province in southwest China, Zunyi City of Guizhou province in southwest China, Weifang City of Shandong province in east China, Chenzhou City of Hunan province in south central China and Liangshan prefecture of Sichuan province in southwest China.

In 2012, Shanghai Tobacco Group purchased from the units in the five bases 286,900 dan (14,345 tons) of high-quality leaf tobacco in total, including 223,500 dan leaf tobacco of the grades ordered. In comparison with previous years, the output of leaf tobacco of the grades required by orders rose by an average 11.3%. In particular, the output of high-quality leaf tobacco of Grade 4C (an abbreviation of the first four of all the 41 grades of leaf tobacco) went up by 8% year-on-year.

Also for example, Hubei Provincial Tobacco Corporation (which doubles as Hubei Provincial Tobacco Monopoly Administration) have entered in agreements on cooperation with China Tobacco Hubei Industrial Co., Ltd. and China Tobacco Zhejiang Industrial Co., Ltd. in sponsoring pilot projects in two exclusive bases in Hubei province. Consequently, the proportion of medium- and high-grade leaf tobacco produced there in 2012 reached a high of 94.7%, exceeding the average national level by 0.2%. In 2012, the tobacco industry designated the 21 exclusive bases to produce leaf tobacco by orders to the tune of 883,000 dan. But in reality, the 21 units produced 1.287 million dan of leaf tobacco in the year, with 1.015 million dan purchased by China Tobacco Hubei Industrial Co., Ltd. and China Tobacco Zhejiang Industrial Co., Ltd.. According to the structure of leaf tobacco of all grades supplied to tobacco manufacturing enterprises, unusable fresh leaf tobacco totaling 2.175 million dan, equivalent to 272,000 dan of dry leaf tobacco, was destroyed and disposed of in the fields. In compensation, the two tobacco manufacturing enterprises extended RMB210 million (US$33.87 million) in subsidies to the tobacco growers concerned in accordance with the standards agreed upon for the execution of the pilot projects.

Judged by the situation in 2012, the quality of leaf tobacco produced to order was generally good. What is important is that the rate of usability of leaf tobacco rose significantly, indicating that staged success was made in the pilot project execution.

"In 2012, a new step was taken in the production and supply of leaf tobacco by orders," an STMA leader said, commenting on the favorable situation. "The manufacturing enterprises are relatively satisfied, and the commercial enterprises are relatively approving."

2013：further promotion

In 2013, continuing made to order pilot projects has been defined as a priority in leaf tobacco production in China. At the 2013 annual leaf tobacco work conference held in Beijing on January 17, STMA unveiled a package of targets for leaf tobacco production and supply for the year – "to take improvement of the structure of leaf tobacco as the core of leaf tobacco production in the year, in striving to enhance the capacity of guaranteeing the supply of high-quality leaf tobacco raw materials for cigarette production; to fully exert the role of tobacco manufacturing enterprises in orienting demand, to ensure that leaf tobacco produced will be suitable for cigarette production; to promote full-scale launch of structural improvement and to meticulously organize execution of pilot projects of operating leaf tobacco production according to orders placed by customers, with sufficient consideration given to effective use of resources, to practically meet the demand for the supply of high-quality leaf tobacco for cigarette production, and to strive to promote structural improvement to higher levels."

On the basis of the achievement of the staged success of made-to-order pilot projects in 2012, the manufacturing and commercial enterprises concerned have taken advantage of the current favorable situation by further extending the execution of made-to-order pilot projects.

For example, China Tobacco Chuanyu Industrial Co., Ltd. in southwest China is making preparations to launch a made-to-order pilot project at an exclusive base unit in Luoping County of Yunnan province which is intended to improve the structure of leaf tobacco. In accordance with the relevant planning of China Tobacco Chuanyu Industrial Co., Ltd., the company will order the production of around 50,000 dan of leaf tobacco at the exclusive base unit, with planned destruction and disposition of five to six unusable fresh tobacco leaves from each individual plant, thus raising the proportion of high-quality leaf tobacco and improving the overall quality of leaf tobacco. Besides, in early 2013, Chongqing City Tobacco Monopoly Administration (which doubles as Chongqing City Tobacco Corporation) in southwest China's Chongqing City announced that it would vigorously support development of leaf tobacco production by customer orders, and would offer a total of RMB5 million in subsidies to all exclusive base units designated to execute made-to-order pilot projects at a rate of RMB1 per kg.

A leader of Chongqing City Tobacco Monopoly Administration said that the tobacco industry of Chongqing, in accordance with the requirement of development of a made-to-order agriculture, was taking steps to implement the policy for the manufacturing and commercial sectors to jointly choose varieties, formulate production technology schemes meeting the styles and characteristics of the relevant competitive cigarette brands and set standards for purchasing leaf tobacco grown in the execution of pilot projects in efforts to gradually establish a relationship of increasingly close cooperation between the manufacturing and commercial sectors of the tobacco industry.

Judged by the present situation and data provided by manufacturing enterprises, a total of 13 provincial-level tobacco-producing regions and 17 tobacco manufacturing enterprises nationwide have submitted their plans for executing made-to-order pilot projects involving the cultivation of 5.18 million dan of leaf tobacco on 1.781 million mu of farmland in 84 exclusive bases units. After improvement of the structure of leaf tobacco, the manufacturing enterprises concerned will purchase 3.81 million dan of leaf tobacco from the exclusive bases units in 2013, which will be an increase of several times over the corresponding level in 2012, demonstrating successful development.

Moreover, in the process of executing made-to-order pilot projects in 2013, the manufacturing and commercial enterprises concerned will also strengthen efforts to further improve the structure of leaf tobacco in order to increase the usability of leaf tobacco. In doing so, all exclusive bases units will take steps to innovate methods of operation and pay close attention to the various specific processes of operation at all times. For example, in efforts to reduce labor and simplify the operational procedures in fields, they do not have to pick unusable leaves, which can be disposed of together with tobacco stems under supervision after technical acceptance is conducted in the fields. Therefore, execution of made-to-order pilot projects in 2013 is expected to lead to further improvement of the quality and usability of leaf tobacco, as well as enlarging the scale of production. Enditem