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Chinese tobacco sector seeking massive restructuring

sector is planning a massive restructuring drive to maintain its viability, despite its relative immunity to Western-style antismoking campaigns.

But this will also involve moving out of its core business to cushion itself against any changes in fashion on the smoking front.

The mainland is the largest consumer and producer of cigarettes, but the government has been taking an increasingly hostile, although somewhat contradictory, policy stance toward its tobacco industry -- even though it is one of the country's most profitable sectors.

Mainland tobacco companies produced 1,700 billion cigarettes and paid 83 billion yuan (10 billion U.S. dollars) in taxes in 1996.

However, the industry has managed to blunt the implementation of a number of policy proposals, such as punitive provincial cigarette taxes aimed at funding health care.

For the moment, therefore, the government will concentrate on eliminating the smaller, less efficient manufacturers and upgrading the quality of the cigarettes produced to partly mitigate the health impact.

''We will try hard to alter the scattered cigarette production layout and create several large corporate groups,'' said Ni Yijin, director general of the State Tobacco Monopoly Administration (STMA).

Several conglomerates with annual production capacity exceeding 250 billion cigarettes will be formed by 2010, Ni said.

An array of large tobacco enterprises will form the core of the prospective conglomerates, which will integrate businesses as diverse as agriculture, industry, commerce and trade.

Mergers, acquisitions, sell-offs and stock rights transfers will be implemented to help cigarette producers realize economies of scale and carry out structural adjustments.

The STMA is encouraging the planting of fine tobacco leaf, technical upgrading, the use of advanced management expertise and talent training programs, and cutting of the tar content and improving the quality of cigarettes.

The government-owned China National Tobacco Corp. has formed partnerships with foreign cigarette makers, including Philip Morris Co. and BAT Industries Ltd., to improve its production and marketing abilities.

''The thorniest issue in the reform is how to handle the interests of local cigarette companies,'' Ni said.

Many of the nation's 180 cigarette producers opt for profits through the production of brands created illegally by themselves. Local protectionism is caused by the taxation system, which has made regional governments rely heavily on taxes on cigarette manufacturers.

''We are exploring the possibility of buying into the assets of these local companies without affecting the fiscal revenues of the local governments,'' Ni explained.

As a further significant step, nearly 20% of the industry's 500,000-strong workforce will be redeployed to noncigarette businesses by 2010.

The industry has begun to develop such sideline businesses as electronics, real estate and tourism, although revenues from these enterprises are unlikely to overtake those from its core business.

''We expect the profits and taxes from noncigarette operations to make up 10% of the industry's total by 2010,'' said Ni, while also stressing the formidable challenges facing the industry, which serves the world's largest group of smokers -- 300 million people.

The market for cigarettes has reached saturation point. Expansion of the higher end of the market will suffer from a slowdown, which is impossible to offset by producing cheaper products.

An influx of smuggled cigarettes and fake products has distorted the normal sales channels. Furthermore, the impact of the ''smoking and health'' movement has led to lower consumption of cigarettes to some extent.

Meanwhile, labeling requirements for cigarette tar levels were tightened from July 1, and overall content will be cut by 2000. Packaging will be required to specify tar content in milligrams per cigarette, replacing vague statements like ''medium'' or ''low'' tar, according to State Tobacco Monopoly Bureau official Yu Minfang.

The bureau planned to reduce average tar content in domestically made cigarettes from 18 milligrams to less than 15 milligrams by 2000, said Yu. Most developed countries require tar levels below 12 milligrams.

Chen Minzhang, former public health minister, said last January about 100 million mainlanders would die before the age of 70 from tobacco-related diseases unless they quit. ==More 191347 KW036 ECO ASA:China-Tobacco (News Focus) 2 BEIJING:
   Zhang Yifang, vice president of the China Association for Tobacco and Health, an official antismoking lobby, said, ''China has 320 million smokers. It's not realistic to ask them to quit smoking overnight.''

Nevertheless, 79 provinces and major cities on the mainland have so far drawn up regulations banning smoking in public places. They comprise Shanxi, Jilin, Shandong, Jiangxi and Fujian provinces, Beijing, Shanghai, Tianjin and Chongqing municipalities and 70 provincial capitals, including Guangzhou and Wuhan.

But Minister of Health Zhang Wenkang said, ''These 'smoking-control' cities only account for one-eighth of all the country's cities.''

''It will be a long-term and arduous task to promote the ban to all cities,'' he said.

The government is sending somewhat conflicting signals on its attitude toward smoking. For example, it seemed determined to make the habit a more costly pastime to some extent by raising the consumption tax on imported cigarettes to 50% from 40% as of July 1.

It also adjusted the tax on domestic cigarettes, creating three categories based on quality with rates of 50%, 40% and 25%. Previously, all domestic cigarettes were taxed at 40 %.

However, all this may do is to encourage smokers to switch to the cheaper, lower quality and more unhealthy brands. At the same time, the government is encouraging production by lowering the tax on tobacco growers to 20% from 31% at the start of next year.


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