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Friday, August 14, 2015, 10:14

China’s smokers spoiled for choice

By CORNELIA ZOU in Hong Kong
China’s smokers spoiled for choice
People smoke in a bar in Beijing in May. China has more than 300 million smokers, and around 3,000 people die from smoking-related illnesses every day. The government has introduced measures to cut tobacco consumption. (Photo / AFP)
Despite smoking bans and growing health concerns, China’s tobacco industry is puffing from strength to strength and playing a large part in filling up the government’s coffers.

Unlike other places in the world, the emerging consumer class is not giving up cigarettes but rather upgrading to more expensive products. China is likely to remain the largest tobacco market in the world for years to come.

There are, by some estimates, around 300 million smokers in China, which is more smokers than Indonesia has people, for example.

China is also home to the largest State-owned tobacco products manufacturer in the world by revenue — the China National Tobacco Corporation (CNTC).

The country accounts for around 30 percent of total tobacco consumption globally and the market is almost completely self-supplied, with foreign tobacco companies holding less than 2 percent market share.

“China National Tobacco Corporation dominates the market,” says Matthieu David-Experton, CEO of Daxue Consulting, a market research company in China.

“It has 98 percent market share, and its next biggest competitor, British American Tobacco, comes in at 0.6 percent, while Philip Morris’ Marlboro had a 0.3 percent market share in 2012.”

Smoking is big business in China. Around 9 percent of the government’s income comes from tobacco sales.

Founded in 1982, CNTC contracts out orders to smaller local factories, mostly in the southwest Yunnan province and around Shanghai.

In turn, factories, wholesalers, distributors and consumers pay taxes, and all revenues ultimately filter back to the monopoly operator. The State Tobacco Monopoly Administration enforces the government’s hold over the industry.

“Despite a decelerating growth in volume, the market is expected to reach nearly 2.5 trillion yuan ($390 billion) in value by the end of this year, up more than 1 trillion yuan since 2013,” says David-Experton.

“CNTC owns more than 900 different tobacco brands, but the market is extremely fragmented in terms of favorites.”

Tobacco is a huge revenue generator for China, which was made even bigger this past May when the government more than doubled the tobacco tax to 11 percent, up from the 5 percent set in 2009.

Despite the tax increases, sales of tobacco products have not really budged, partly because deterrents for smoking are quite weak.

“Fines between 50 and 200 yuan are moderately serious but enforcement has been lackluster, faced with the sheer number of smokers,” says David-Experton.

Global tobacco industries are shrinking, but in China the growth continues, although at a much more moderate pace than before.

“The industry is growing slowly,” says a spokesman at a Chinese tobacco market intelligence provider, who asks to remain anonymous.

“Sales of cigarettes in different parts of China are mainly affected by the size of the smoking population there.”

Tobacco manufacturers and wholesalers need production and wholesale certificates from the government to operate, which can be difficult to obtain.

Retailers must have a sales license from the authorities also, but these are easier to acquire, at least for domestic operators.

“It’s not to say that a retailer can get the certificate faster,” says the spokesman. “It depends on the tobacco market plan of the specific city.”

Foreign companies can only manufacture tobacco products in the country if they work with a local partner. The market is constantly changing, however, as consumers increasingly want different products.

In 2014, some 81 new tobacco products were registered, and all 16 provincial level tobacco manufacturers filed new product registrations.

Most of these new brands are derivatives from established brands such as Hong Shuangxi, Yun Yan and Zhongnanhai, brands that have figured out China’s complex cost requirements.

“Foreign companies, even if they produce in China, have a hard time getting costs low enough to appeal to the mass Chinese market,” says David-Experton.

“As incomes rise, more expensive foreign cigarettes may become more appealing, but the State monopoly and long history of domestic brands — associated with national icons like Deng Xiaoping and Mao Zedong — make it a very challenging prospect for foreign competitors.”

Some people are giving up smoking, however, with health campaigns having an effect. For the industry as a whole though, the losses are offset by gains from higher levels of spending from a more affluent consumer class.

As incomes rise, many smokers upgrade to higher-value cigarettes, often seen as status symbols or traditionally given out as gifts.

Expensive cigarettes like Zhonghua and Xiong Mao (or Panda) are now more common among smokers. Low-tar cigarettes have also become popular, which has led to a shift among manufacturers focusing on making weaker products.

Despite the upside that the tobacco industry represents for State coffers, cigarettes can be a mixed blessing for the government.

The health impacts of smoking, including a higher incidence of cardiovascular and respiratory diseases, can translate into an economic burden for society, the healthcare system and individual smokers themselves.

A study by the faculty of medicine of the Chinese University of Hong Kong (CUHK) found that Hong Kong’s pack-a-day smokers spend more than HK$1 million ($129,000) on tobacco products in their lifetime, but smoking costs the Hong Kong government around HK$11 billion a year in healthcare bills.

In the Chinese mainland, smoking remains endemic and the bills can be astronomically high. Cities like Beijing, Shanghai and Shenzhen have banned smoking in many public places but these bans have not had a substantial impact on the consumption of tobacco products.

According to information provider Euromonitor International, the China Tobacco Control Program 2012-2015 launched in December 2012 by the Ministry of Industry and Information Technology is lacking enforcement.

The program aims to reduce the number of smokers from 28 percent of the total population (according to 2010 figures) to 25 percent by the end of 2015.

“Our most updated official data of 2010 shows that every hundred packs of cigarettes cost 2 percent of China’s total per capita GDP in 2009 (around 500 yuan),” says Song Chunyue, spokeswoman of the Chinese Association on Tobacco Control (CATC).

“And the price of cigarettes has just been raised, with a tax increase this May.”

A group of researchers from the department of health economics, Huaxi School of Public Health at the University of Sichuan, found that the total economic cost of smoking in China amounted to $28.9 billion in 2008.

Direct smoking-attributable healthcare costs in 2008 (the latest available figures) were $6.2 billion and indirect economic costs were $22.7 billion.

According to the CATC, the Chinese government’s new advertisement law will come into effect in September to ban the promotion of tobacco in public places.

However, this new regulation is unlikely to reduce the exposure of tobacco to the public, since there’s a debate on whether cigarette retail stores are counted as public places.

“We have 5.4 million cigarette retailers in China that also sell food; if they’re not considered as public places then the law really has no impact on limiting the promotion of tobacco,” says Song of the CATC.

David-Experton of Daxue Consulting says that less than a quarter of adults in the entire country understand the specific health hazards of smoking.

“Rough calculations based on the average number of cigarettes per day and the average price of packs, suggest the average smoker could spend between 2,700 and 4,100 yuan per year on cigarettes,” he says.

But the number can only be bigger since much more smoking occurs in the lesser-developed cities where data can be more difficult to collect.

Cigarettes priced at 10 yuan per pack are the most popular, taking up about 60 percent of the market.

“In terms of the types of cigarettes, flue-cured tobacco cigarettes remain the most popular,” says the tobacco industry spokesman. “Flavored ones are still rare.”

For the foreseeable future, and despite their strength, China’s tobacco makers are unlikely to go global.

“The biggest market is China itself, so why join the battle outside?” he adds.

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