China's Tobacco Industry: Five Years of Reform Promotes Sustainable Development

Source from:  China Tobacco magazine 04/09/2008

The tobacco industry of China, while sticking to and improving the system of State tobacco monopoly, has made great efforts to conduct market-oriented structural reform in an in-depth way over the past five years, powerfully promoting its sustainable and sound development in an all-round way, with breakthrough particularly made in separating the management of its manufacturing sector from that of its commercial sector that started in 2002. REFORM STEP OF SEPARATING MANAGEMENT OF MANUFACUTRING SECTOR OF PROVINCIAL-LEVEL TOBACCO INDUSTRIES FROM THAT OF THEIR COMMERCIAL SECTOR IN INTENSIFYING EFFORTS TO FIGHT REGIONAL BLOCKAGE OF TOBACCO MARKETS For decades, regional trade blockade was a hard problem plaguing the development of the tobacco industry. Therefore, how to practically break regional trade blockade and genuinely develop a national single tobacco market became a priority in the structural reform of the tobacco industry. In late 2002, the State Tobacco Monopoly Administration (STMA) – the regulator of China's tobacco industry – adopted a decision to promote structural reform of the tobacco industry in an active and stable way, with separation of the management of the manufacturing sector from that of the commercial sector as a point of breakthrough. The major approach for separating the management of the manufacturing sector from that of the commercial sector was to establish provincial-level China Tobacco Industry Corporations in provinces or provincial-level regions meeting the relevant requirements (mainly capable of producing 50 billion cigarettes per year), which are in charge of control over the production and marketing of cigarettes, trade of tobacco supply and tobacco machinery parts and business diversification concerned. Provincial-level China Tobacco Industry Corporations are delinked from the provincial-level Tobacco Monopoly Administrations in their respective regions. They each have separate functional departments, different functions, different personnel establishments and different funding. PROMOTION OF STRATEGIC REFORM OF STRUCTURE OF TOBACCO MANUFACTURING ENTERPRISES AND CIGARETTE BRANDS TO FOCUS ENERGY ON DEVELOPING MORE THAN 10 KEY MANUFACTURING ENTERPRISES AND MORE THAN 10 KEY HIGH-QUALITY CIGRETTE BRANDS Through efforts over the past more than five years, historic breakthrough has been achieved in the reform of both the structure of tobacco manufacturing enterprises and the structure of cigarette brands nationwide, successively shutting down 52 small cigarette factories, realizing merger or reorganization of 50 small- or medium-sized cigarette factories and five key tobacco manufacturing enterprises, and greatly reducing the number of existing cigarette brands. At the end of 2007, there were in China 31 tobacco manufacturing enterprises, down 92 from 2002, and the number of cigarette brands in China was 173, down 585 from 2002. While promoting the structural reform of tobacco manufacturing enterprises, the tobacco industry has taken steps to shut down all leaf tobacco stringing and redrying enterprises, and has actively promoted the structural reform and systemic conversion of leaf tobacco threshing and redrying enterprises. So far, more than 60 leaf tobacco threshing and redyring enterprises have been basically converted into joint-stock limited liability companies. REDEFINITION OF FUNCTIONS OF TOBACCO COMPANIES AT ALL LEVELS TO ESTABLISH AND IMPROVE NEW SYSTEM OF UNIFIED DISTRIBUTION ENTITIES FOR CHINA'S TOBACCO INDUSTRY Over recent years, the tobacco industry, while strengthening the role of tobacco monopoly administrations at all levels in tobacco monopoly and supervision over tobacco markets, has actively promoted the change of functions of tobacco companies at all levels and kept promoting reform of the tobacco trade system in an in-depth, in accordance with the tasks and requirements for establishing a national single tobacco market, advanced cigarette marketing networks, and a marketing environment of fair competition. Major approaches adopted by the tobacco industry in this regard are to strip county-level tobacco companies of their legal person status and convert them into branch companies affiliated to prefecture-level or city-level tobacco companies, which will no longer operate cigarette trade; to turn prefecture- and city-level tobacco companies into sole marketing entities for the commercial sector of the tobacco industry, which will take orders, purchase supplies and distribute and deliver cigarettes on a unified basis; and to prompt provincial-level tobacco companies to withdraw from the field of tobacco trade, in order that they can focus their energy on management, supervision and assets operation, instead of directly operating leaf tobacco and cigarette trade and activities of business diversification. By the end of 2007, the tobacco industry of China had managed to strip 1,680 county-level tobacco companies of their legal person status nationwide, had basically established the status of more than 400 prefecture- and city-level tobacco companies as sole marketing entities in their respective regions, and had had a majority of provincial-level tobacco companies withdraw from the field of tobacco trade. Meanwhile, the respective functions of the STMA and China National Tobacco Corporation had been further redefined. Namely, after structural reform, they would mainly take charge of well conducting macrocontrol, strategic management, policy research, assets operation and human resources development, while strengthening administrative control over tobacco monopoly and market supervision, rather than directly intervene in activities of production and marketing on the part of enterprises of the tobacco industry. REFORM OF CIGARETTE TRADE SYSTEM TO INTRODUCE SYSTEM OF ORGANIZING SUPPLIES AND PRODUCTION BY ORDERS In exploring new ways and forms of increasing general adoption of the market principle in tobacco trade, the tobacco industry launched in 2005 pilot projects of introducing the system of organizing supplies and production in accordance with orders placed by customers, firstly in Shenzhen City in south China, Dalian City in northeast China and Hanghzou City in east China's Zhejiang Province, which is designed to transform the traditional cigarette trade pattern based on the distribution of annual cigarette production and marketing quotas from the top to the grassroots levels into a new cigarette trade pattern intended to lead consumption from the top to the grassroots levels. In 2006, application of the system of organizing supplies and production by customer orders was extended to the whole of Zhejiang Province, Shandong Province in east China and Shanxi Province in north China. In 2007, it was further extended to a total of 36 key cities designated by the STMA. In 2008, application of the system organizing supplies and production by customer orders will be generalized to the whole of China. Enditem