By Allen Liao
The production of low-tar cigarettes in China, after experiencing stable development over the past few years, has entered a period of rapid development recently, with both the annual sales volume and sales income going up sharply year-on-year.
In 2007, the annual sales volume of low-tar cigarettes with a tar level of 8mg per cigarette or lower marked on the packet reached 342,300 cases (17.115 billion cigarettes). In 2009, it soared to a high of 571,500 cases, with an average annual growth of 27% or even higher.
In 2010, the annual sales volume of low-tar cigarettes with a tar level of 8mg per cigarette or lower further rose to a new high of 888,000 cases (44.4 billion cigarettes).
Since 2007, the annual low-tar cigarette sales income has been growing rapidly, with an average annual growth rate of 30% or higher. In 2007, the annual low-tar cigarette sales income in China was merely RMB6.159 billion (YS$948 million). In comparison, it soared to a high of RMB12.034 billion in 2009, almost doubling the amount of 2007. It further rose to a new high of over RMB15 billion in 2010.
In 2011, the production of low-tar cigarettes in China was in even more rapid development. Official data released by the State Tobacco Monopoly Administration (STMA) indicates that in the first half of 2011, both the production and marketing of low-tar cigarettes in China kept developing relatively rapidly, with the output of low-tar cigarettes with a tar level of 8mg per cigarette or lower reached 1.443 million cases, sharply up 174.4% year-on-year, while the annual sales volume reached 1.395 million cases, sharply up 163.1% year-on-year.
Key brands are the leading force
For the key competitive cigarette brands designated by STMA as leading players in the development of cigarette brands in China, they have naturally emerged as the leading force of growth in low-tar cigarette production, thanks to their well-developed technology, marketing and brand resources. Therefore, the key brands have given a powerful impetus to the development of low-tar cigarettes in China. By the end of 2010, 17 key brands designated by STMA had 48 specifications of low-tar cigarettes, accounting for almost half of the 91 specifications of low-tar cigarettes in production and sales in China.
Different brands may have different tar levels. Typically, having a tar level of 5mg per cigarette, Septwolves (Pure Classic) is one of the new flue-cured type cigarette brands with the lowest tar level in China. With a tar level of 8mg per cigarette or lower, Mount Changbaishan is another typical low-tar cigarette brand. In 2010, the sales volume of low-tar Mount Changbaishan reached 216,900 cases, up 22.61% year-on-year. Today, major markets in all Chinese provinces, provincial-level municipalities and autonomous regions sell Mount Changbaishan brand cigarettes. There are other low-tar cigarette brands, including Mount Taishan, Pride, Jinsheng, the Yellow Crane Tower, Diamond and Double Happiness, that have enjoyed relatively rapid growth over recent years. Southwest China’s tobacco-producing Yunnan province has two emerging low-tar cigarette brands – Yunyan and Mount Hongtashan. By means of their strong rallying power and marketing capacity, both Yunyan and Mount Hongtashan achieved good sales immediately after entering the market.
In the first half of 2011, key cigarette brands designated by STMA were still leading players of both production and marketing of low-tar cigarettes in China. Specifically, the output of low-tar cigarettes of key cigarette brands amounted to 64.15 billion cigarettes, accounting for 88.95% of the total low-tar cigarette output of China’s tobacco industry, while the sales volume of low-tar-level cigarettes of key cigarette brands reached 61.6 billion cigarettes, accounting for 88.33% of the total sales volume of low-tar cigarettes of China’s tobacco industry.
In the first half of 2011, both the production and marketing of low-tar cigarettes in China experienced continuous development while the development of low-tar cigarettes brands was further accelerated as competition intensified. Of the low-tar cigarette brands, Mount Changbaishan, Red Golden Dragon and Yellow Crane Tower, were the top three in terms of growth of the output, respectively up 9.62 billion cigarettes, 7.67 billion cigarettes and 7 billion cigarettes year-on-year. Meanwhile, Mount Changbaishan, Yellow Crane Tower and Red Golden Dragon were the top three in terms of growth of the sales volume, up 10.02 billion, 8.58 billion and 7.43 billion cigarettes respectively year-on-year. From January to May, all Chinese tobacco manufacturers further strengthened their efforts to produce low-tar cigarettes. Nationwide, there were 25 tobacco manufacturing enterprises producing low-tar cigarettes, four more than in the previous period last year.
It is foreseeable that as more and more tobacco manufacturers have chosen to produce low-tar cigarettes, future low-tar cigarette markets in China may be dominated by many key competitive cigarette brands, rather than a small number of brands that virtually monopolize the production and marketing.
Unbalanced Development
Presently, the distribution of production and marketing of low-tar cigarettes is unbalanced throughout China. In particular, there are imbalances among different regions, different tobacco manufacturers and different brands in terms of the production and marketing of low-tar cigarettes. Causes include regional differences, the different scopes of enterprises and the different structures of brands.
Regionally, the production and marketing of low-tar cigarettes has developed more rapidly in north than in south China. In 2010, the low-tar cigarette output of the three provinces and one city in northeast China accounted for roughly one-fourth of the total output of this segment in China. When the output of Beijing City, etc., is taken into account, the low-tar cigarettes produced in the north will amount to more than half of the total output of low-tar cigarettes in China, far exceeding its total cigarette market shares in the country. As far as south China is concerned, southeast China’s Fujian province is the largest low-tar cigarette producer. In 2010, Fujian’s low-tar cigarette output reached 110,000 cases. In the first half of the year, the sales volume of low-tar cigarettes in the five provincial-level markets of Hubei, Hunan, Gansu, Qinghai and Ningxia rose 500% year-on-year. Meanwhile, the three provincial-level markets of Hubei, Jilin and Heilongjiang took the first three places in terms of the sales volume of low-tar cigarettes, with a sales volume of 12.25 billion, 6.37 billion and 4.88 billion cigarettes respectively.
Nationwide, there are 25 tobacco manufacturing enterprises that produce low-tar cigarettes. However, three of them – Jilin Tobacco Industry Co., Ltd. in northeast China, Shanghai Tobacco Group in east China and Hubei Provincial China Tobacco Industry Corporation in central China – annually produce 32.32 billion low-tar cigarettes, accounting for nearly half of China’s total low-tar cigarette output of 1.1413 million cases.
Structurally, the brands of medium-grade low-tar cigarettes always show good performance while the performance of brands of high-grade ones clearly improved in the first half of 2011. In 2010, the best low-tar cigarette brands were mainly medium- and low-grade ones, such as Zhongnanhai (The South Central Lake) and Derby. But in the first half of 2011, there was an obvious trend of medium- and low-grade low-tar cigarette brands giving way to high-grade ones, with the output of grade-one low-tar cigarettes rising sharply. Accordingly, some brands of high-grade cigarette products responded rapidly by joining the camp of low-tar cigarettes without hesitation. For example, the output of Yellow Crane Tower brand low-tar cigarettes abruptly rose to 159,200 cases in the first half of 2011, from fewer than 10,000 cases (500 million cigarettes) in the whole of 2010.
Although such imbalances will make the development of production and marketing of low-tar cigarettes by China’s tobacco industry highly uncertain, they will contribute to providing broad room for overall development of the tobacco industry.
Three proposals for development
On July 28, the 2011 annual symposium of the chiefs of the tobacco monopoly administrations and general managers of tobacco companies in China was held in Beijing. In an address to the meeting, STMA director-general Jiang Chengkang, discussing relevant problems pending solution, said that it was imperative to strengthen the work of development and marketing of low-tar cigarettes and strive to make new progress in the drive to reduce the content of tar and other harmful substances in cigarette products. Jiang noted that in the development and marketing of low-tar cigarettes, efforts must be made to firstly realize a substantial breakthrough in technological development in order to embody high quality and high level of low-tar cigarette production in China and secondly, to adhere to the policy of developing high-grade low-tar cigarette products, to satisfy the demand of the group of high consumption, and, thirdly, to strengthen market development and orientation of low-tar cigarettes in order to create a more favorable market environment for the development of low-tar, reduced-harm cigarette brands.
To get low-tar cigarettes recognized by more and more consumers, it is necessary first of all to maintain or even improve the original aroma and flavor of tobacco while striving to reduce the content of tar in low-tar cigarette production, in order that consumers will accept low-tar cigarettes. In 2010, STMA, in promulgating a set of opinions on “promoting cigarette production to a higher level” and on “promoting technological innovation to a higher level”, once again emphasized the imperative of “mastering the core technology for compensating aroma in the production of low-tar cigarettes” and “establishing a system of core technologies for reducing the content of tar and other harmful substances while increasing aroma and maintaining moisture in the development and production of Chinese-style cigarettes.”
By the end of 2010, China had seen the introduction of new low-tar cigarette products with a tar level of 5mg, 3mg or even 1mg. However, there were more new technologies that were still being laboratory tested. The development of new products is required for realizing commercial application of new technologies. It is foreseeable that, driven by new planning and adoption of new measures by STMA, the quality of low-tar cigarettes will be increasingly assured and low-tar cigarettes will be increasingly recognized by the market and favored by consumers.
As both the research and development of technologies for producing low-tar cigarettes and market development of low-tar cigarettes require heavy investment, the policy of shifting to the production of high-grade low-tar cigarettes will be in the best interests of sustainable development. Besides, as low-tar cigarette consumers are mostly high-income earners, they are more concerned about their physical health and are more inclined to consume reduced-harm tobacco products.
Today, more and more relatively competitive cigarette brands such as Yunyan, Baisha, Mount Hongtashan, Liqun, Yellow Crane Tower and Double Happiness are joining the rush to produce low-tar cigarettes. As consumers of such high-grade cigarette brands are highly faithful, low-tar products of such brands will be more likely to win recognition from consumers.
As markets of low-tar cigarettes in China are still in a period of formation, it is still necessary to strengthen the market development of low-tar cigarettes. Presently, the focus of development is to create a favorable environment for consumption and to make low-tar cigarettes more attractive to consumers rather than merely seek growth of the sales volume. In correctly guiding consumers to accept low-tar cigarette products, tobacco manufacturers need to analyze and study changes in consumer demand in a timely manner, to keep enhancing their market control capacity, to further tap the functional value of retailers in terms of image display, brands exhibition, advertising and product promotion, to enhance their capacity of using and managing retail terminals, and to help retailers enhance their capacity to guide consumption.
Future prospects
In early 2011, STMA announced that the tobacco industry of China will produce 80 billion low-tar cigarettes in 2011 and that the annual sales volume of low-tar cigarettes and reduced-harm cigarettes in China will reach 400 billion cigarettes five years later.
According to the situation in 2010, although the annual sales volume of low-tar cigarettes with a tar level of 8mg per cigarette or lower stood at merely 880,000 cases, the annual output and sales volume of cigarettes with a tar level of 8-10mg per cigarette remain above the level of 2.8 million cases. In 2011, through reduction of the tar level, many of the cigarette products with a tar level of 8-10mg per cigarette have seen their tar level drop below the 8mg mark. As the sales volume of low-tar cigarettes in China has already reached 1.1413 million cases (57.065 billion cigarettes) in the first half of 2011, it will not be difficult to meet the target of selling 80 billion low-tar cigarettes (1.6 million cases) in the whole of 2011.
Although the production and marketing of low-tar cigarettes in China is already growing rapidly, whether Chinese tobacco manufacturers will be capable of solving hard technological problems in an in-depth way and developing new technologies for lowering the tar level for producing Chinese-style cigarettes in the long run will be decisive to the future development and production of low-tar cigarette products in China.
