By Allen Liao
After the latest round of sweeping structural reforms designed to significantly enhance their production capacities, Chinese tobacco manufacturers appear to be concentrating on penetrating international markets by either increasing cigarette exports or establishing overseas joint-venture cigarette-making enterprises.
In April 2011, China Tobacco International Europe Company (CTIEC) – in which China Tobacco Anhui Industrial Corporation (CTAIC) in east China’s Anhui province takes a 58% stake – sold 40 million cigarettes (4,000 boxes), which was actually equal to its entire cigarette sales volume in the whole of 2010. In 2011, CTIEC’s annual cigarette sales by volume is expected to reach nearly 500 million cigarettes, 10 times the amount of 2010. China National Tobacco Corporation (CNTC) will additionally invest US$10 million in the development of CTIEC, which will certainly contribute to CTIEC’s efforts to develop markets in Eastern Europe. In the first quarter of 2011, Shanghai Tobacco Group (STG) developed three duty-free markets for its time-honored competitive Chunghwa brand – the duty-free markets operated by Hong Kong Airlines, Hong Kong Express Airways and All Nippon Airways, further extending the coverage and influence of the Chunghwa brand family.
On September 10, 2011, a joint-venture enterprise co-funded by STG and Nanyang Brothers Tobacco Co., Ltd. of Hong Kong officially went into operation in Hong Kong, a new chapter in STG’s development of international markets.
All such events or developments demonstrate that Chinese tobacco manufacturers are taking greater steps into international markets.
Steady development
On May 12-13, 2011, the State Tobacco Monopoly Administration (STMA) – the regulator of China’s tobacco industry – held a working conference in Beijing on the development of international markets by the tobacco industry, in which four competitive cigarette brands – Chunghwa, The Red Double Happiness, Zhongnanhai and Golden Deer – were defined as priority export-oriented cigarette brands given greater support by the tobacco industry in developing international markets. In particular, Zhongnanhai and Golden Deer will be promoted as priority international brands while The Red Double Happiness will be promoted as a key regional brand.
Deputy general manager Zhu Wei of China Tobacco Shanghai Import & Export Co., Ltd. said that cigarette products manufactured by STG have entered 30 taxable markets and 44 duty-free markets in 57 countries and regions around the world with competitive cigarette brands such as Chunghwa, The Red Double Happiness, Zhongnanhai, Panda and Golden Deer. In foreign licensing cooperation, STG has also made much headway over recent years. It has been eight years since STG and Japan Tobacco Inc. (JTI) licensed each other to produce and market the Golden Deer brand of the former and the Memphis brand of the latter. (Prior to its acquisition by JTI in 2007, the cooperation was with Gallaher Group).
China Tobacco Yunnan Industrial Corporation (CTYIC) in southwest China’s tobacco-producing Yunnan province has always taken the lead among Chinese tobacco manufacturers developing international markets. Grouping the two domestic tobacco giants of Hongta Group and HongyunHonghe Tobacco Group, CTYIC has acquired shares in four overseas tobacco manufacturing enterprises – Hong Kong Hongta, Laos Hongta, CTIEC and Myanmar Kokang. In 2010, CTYIC produced 5.6 billion cigarettes in its overseas operations, accounting for 26% of the total cigarette output of China’s tobacco industry that year, with its competitive cigarette brands extending to six major market areas including Southeast Asia, the Middle East, Central and South America, Africa and Eastern Europe as well as duty-free markets around the world. Its cigarette products are exported to more than 30 countries and regions globally.
Hongta Group c.e.o. Li Suiming said that over recent years, Hongta Group realized rapid growth in overseas cigarette sales.
“In 2010, Hongta Group exported 9.56 billion cigarettes, up 120.69% over 2008,” according to Li.
At the May working conference on the development of international markets, the Red Gold Dragon (RGD) of China Tobacco Hubei Industrial Corporation (CTHIC) in central China’s Hubei province was listed as a priority cigarette brand given greater support in developing international markets. Since February 2008, RGD brand cigarettes have been exported to markets in the Czech Republic, Slovakia and Poland. In reality, RGD is the first Chinese cigarette brand oriented toward international markets jointly developed by China’s tobacco industry and Philip Morris. By April 2011, the sales volume of RGD in markets in Eastern Europe had reached nearly 3 billion cigarettes, accounting for 80% of the total sales volume of the three Chinese cigarette brands present in that markets. RGD has become the most successful one of the three Chinese cigarette brands jointly developed by China’s tobacco industry and Philip Morris. In particular, RGD has taken large market shares in the Czech Republic and Slovakia.
China Tobacco Shaanxi Industrial Corporation (CTSIC) in northwest China’s Shaanxi province is one of the first Chinese tobacco manufacturers that started the development of international markets. Presently, it is holding a controlling stake in Mongolia Tobacco Co., Ltd.(MTCL), Besides, it has taken a 10% stake in CTIEC. Talking about the development of international markets, general manager Chen Hui of CTSIC said that through development over the past decade, MTCL has seen its annual cigarette production capacity steadily enlarged to 1.5 billion cigarettes accounting for 45% of the total cigarette sales volume in Mongolia.
“Through exclusive and joint venture projects, CTSIC has succeeded in establishing an extensive cigarette marketing network under its control,” According to Chen. “Presently, the corporation is striving to turn itself into a major cigarette production and marketing base operated by China’s tobacco industry in Northeast Asia.”
The largest Chinese provincial-level operator of overseas cigarette production and sales is Jilin Provincial Tobacco Industry Co., Ltd. (JPTIC) in northeast China’s Jilin province. In the 2006-2010 five-year period, JPTIC established three wholly-owned or joint-venture cigarette making enterprises in North Korea. Piao Guangshi, director of the International Operations Department of JPTIC said that by the end of 2010, the three wholly-owned or joint-venture cigarette making enterprises established by JPTIC in North Korea had accounted for 32% of the annual cigarette output and sales of the company. JPTIC has become the largest overseas cigarette production and marketing base of China’s tobacco industry.
In August 2010, Chinese and North Korean tobacco administration authorities signed a Framework Agreement on Strategic Cooperation, signifying that the cooperation between the tobacco industries of China and North Korea had entered a new phase of all-round development, and that the tobacco industry of Jilin province had reached a higher level in carrying out its strategy of penetrating international markets.
Besides, JPTIC has also built the Rajin-Sonbong Emerging Tobacco Corporation in North Korea into an export-oriented cigarette processing base, exporting Mount Changbaishan brand cigarettes to South Korea, the Middle East and Southeast Asia as well as other neighboring countries and regions, thereby significantly promoting the influence of the brand.
Achievements in 2006-2010
In the 2006-2010 five-year period, leading competitive Chinese cigarette brands all made great achievements in the development of international markets in terms of the annual sales volume, market expansion, overseas production, etc.
In the five-year period, the overseas sales volume of leading competitive Chinese cigarette brands amounted to a total of 161.3 billion cigarettes, with the average annual increment reaching 12.75%. At the end of the 2006-2010 period, the number of Chinese cigarette brands in overseas sales was 95, down 40 from the 2001-2005 five-year period. In 2010, there were 16 Chinese cigarette brands each registering an overseas sales volume of 1 billion cigarettes or more. In the year, the 16 brands registered a total overseas sales volume of 29.4 billion cigarettes, accounting for 68% of the aggregate cigarette sales volume of all the export-oriented Chinese cigarette brands that year, up 3.7% year-on-year. In particular, Zhongnanhai registered an overseas sales volume of 1.351 billion cigarettes in 2010, maintaining the trend of its continued annual growth. Also in 2010, Chunghwa registered an overseas sales volume of 1.92 billion cigarettes.
In the development of key markets around the world in 2010, the tobacco industry of China registered a 17.7% year-on-year increase in cigarette sales volume in markets in Southeast Asia, 45.6% in Middle East and 9.7% in East Asia.
In the 2006-2010 five-year period, overseas cigarette-making enterprises exclusively operated by China’s tobacco industry saw both their annual cigarette output and sales volume grow steadily year-on-year, with the average annual increment reaching 17.81%, in a generally favorable trend of development. In 2010, the overseas cigarette-making enterprises exclusively operated by China’s tobacco industry produced 18.62 billion cigarettes (1.862 million boxes), up 8.7% year-on-year, and sold 18.65 billion cigarettes (1.865 million boxes), up 13.2% year-on-year.
In 2010, the overseas joint ventures funded by China’s tobacco industry produced 3.018 billion cigarettes, up 39% year-on-year, and sold 4.23 billion cigarettes, up 28%. In particular, the RGD cigarette brand alone registered an overseas sales volume of 1.13 billion cigarettes in the year.
Future development
Although Chinese tobacco manufacturers now face serious challenges from competition by transnational tobacco giants, difficulty in the establishment of marketing channels, and a shortage of qualified international marketing human resources in the development of international markets, they are still fully confident in their future growth and are all planning for the expansion of overseas operations.
In 2011, CTYIC is planning to export 5.5 billion and operate overseas processing of 7 billion cigarettes. So far, Hongta Group has completed the process of planning for brand development and has prepared cigarette reserves of three brands destined for Iran. Moreover, it has started preliminary preparation for incorporating a joint venture with its Iranian cooperation partners.
HongyunHonghe Tobacco Group has given priority to developing markets in Myanmar. The annual cigarette production capacity of HongyunHonghe’s Myanmar operation is expected to reach 3 billion cigarettes at the end of the 2011-2015 five-year period. The operation is also expected to radiate into markets in neighboring countries including India and Bangladesh.
In the 2011-2015 five-year period, CTYIC will give priority to developing markets in six major market areas including Southeast Asia, the Middle East, Central and South America and Africa as well as duty-free markets around the world, and will strive to promote the development of Mount Hongtashan and Yunyan as two leading competitive international cigarette brands, seven other brands including Honghe (The Red River) and Ashima as leading competitive regional brands, and it will strive to increase its annual overseas cigarette sales volume to a total of 25 billion cigarettes, in order that HongyunHonghe will become the leading Chinese tobacco manufacturers in terms of the annual overseas cigarette output and sales volume, and also in terms of the annual single-brand cigarette sales volume in international markets.
Using the taxable markets in Panama and Peru as a hub, STG will gradually extend its cigarette sales to taxable markets in neighboring countries including Mexico and Guatemala and will make continued efforts to make its Red Double Happiness cigarette brand better known and more influential at markets in Central and South America.
According to Zhu Wei, to realize local production of cigarettes using STG brands is one of the major approaches adopted by the tobacco group to penetrate international markets.
“We will strive to turn Red Double Happiness into a cigarette brand with certain market shares and with certain coverage, and will actively promote local production and local marketing of cigarettes using STG brands,” Zhu said. “We will create new ways of market development, paving the way forward for our international market business development.”
On the future development of its cigarette export business, Deng Jiayun, chief of the import-export arm of CTHIC, said that the corporation will make further efforts to promote implementation of its strategy of focusing on key market areas, and will set a new strategy for entering international markets, under which RGD will be designated as a priority brand for developing international markets, and the Yellow Crane Tower will be designated as a high-end brand for developing international duty-free markets.
“The strategy of focusing on key market areas defines Central and South America, Southeast Asia, the Middle East and East Europe as key market areas, and is intended for realizing great success in developing key brands and key markets,” according to Deng.
On the future development of international markets in the foreseeable future, Zhao Hui, deputy general manager of CTAIC in east China’s Anhui province, appears to be fully confident. He said that the corporation will take its well-known Derby cigarette brand as a key player in developing international markets. (Derby may also be known as Dubliss, Dubao or D&B in different markets.)
“With enlargement of the marketing scope as a target, and with CTIEC as a platform, the corporation will do all it can to develop markets in Europe. Meanwhile, it will manage to maintain its marketing scope in Taiwan. Besides, the corporation will strive to develop overseas markets for its competitive Mount Huangshan cigarette brand, and make it better known and more influential,” according to Zhao.
“We will strive to increase the sales volume of Derby in overseas markets to an annual total of 2 billion cigarettes by the year 2015 – 1.45 billion cigarettes sold in European countries including the European Union states, Russia and Ukraine, and 550 million cigarettes sold in Taiwan and Mongolia,” Zhao said.
