TA: This year marks the 30th anniversary of the promulgation and implementation of the “Law of the People’s Republic of China on Tobacco Monopoly”. What are its key regulations?
AL: Well, that law acts as the principal legal framework governing China’s tobacco industry. Its key regulations are:
The State shall, in accordance with the law, exercise monopoly administration over the production, sale, import, and export of tobacco monopoly commodities, and implement the tobacco monopoly licensing system;
The State shall oversee cultivation; purchase and allocation of tobacco leaves; the manufacture of tobacco products; sales and transportation of tobacco products; and sales and transportation of cigarette paper and filter tips.
TA: How has that law benefitted China’s tobacco industry at large, from the farming sector up to final manufacturing?
AL: The whole supply chain from tobacco planting to cigarette production is subject to rational planning, which effectively reigns in unfettered growth in cigarette consumption. Secondly, there is a quota system as far as the manufacturing side is concerned, preventing tobacco factories from producing too many cigarettes. On the agricultural side, each tobacco farmer only can grow a certain amount in line with the contracts they sign with CNTC. In other words, the production of tobacco leaf is pre-planned to match expected demand. On the marketing side, retailers are obliged to obtain certificates or licenses if they want to sell any tobacco products. Meanwhile, advertising campaigns of any kind are prohibited. All of these mechanisms combined ensure a strict, efficient, and stable process that maintains the quality of cigarette products. Last but not least, the tight measures effectively help crack down on fake and illicit tobacco products in the country.
TA: Foreign cigarette brands are readily available in China, but some critics claim that the monopoly law puts foreign brand owners at a disadvantage. Do you concur?
AL: No, I don’t. The monopoly law itself welcomes foreign cigarette brands. As you mentioned, foreign brands are easily available in China. But, it’s a [matter of] taste. Chinese smokers just got used to the blends and taste of Chinese cigarettes. Also, China’s tobacco market is fiercely contested by local players. That doesn’t make it easy for foreign cigarette brands to gain market share. Furthermore, the manufacturers under CNTC are enormously creative and innovative, often launching new styles, new flavors, and new packaging, which are very attractive to consumers. On the other hand, foreign brands – despite their good quality – tend to stagnate in terms of innovation, failing to cater to the needs of Chinese consumers.
TA: And that explains why foreign brands have such a hard time in China?
AL: Quintessentially, yes. New product launches each month are homing in on what Chinese smokers really want, especially younger people, who embrace change. Foreign brands are just not as dynamic and don’t compete as hard [as local companies]. But then there is the other side of the coin, namely the fact that Chinese cigarette brands in turn are not popular in overseas markets, as we simply are not familiar with their culture, taste preferences, regulations. Also, foreign markets are heavily dominated by multinational players such as PMI, BAT, JTI, and Imperial Brands. They leave very little space Chinese cigarettes.
TA: How large is China’s domestic cigarette market in terms of billion sticks consumed annually?
AL: I cannot give you a figure. But, you may be surprised to hear that the domestic market remains remarkably stable. It’s not growing every year. That is because STMA frequently implements tax increases in order to keep production volumes in check. Even if the total quantity of sticks is up, the total volume of tobacco leaf consumed actually goes down, because slim formats, which now are all the rage, require a lot less raw material.
TA: China also has made inroads in developing its cigar sector. Which brands are the most popular ones and how would you position them?
AL: There are now four popular cigar brands: Great Wall, Yellow Crane Tower, Crown, and Mountain Tai. Less than half of the output is hand-rolled. Cigars from Cuba, as well as the Caribbean and Mesoamerica, are still renowned worldwide. But, the Chinese cigar industry is catching up fast, developing the quality in great strides. The biggest problem Chinese cigar companies face is that they do not have sufficient cigar-quality leaf. There is a particular shortfall in binder and wrapper leaves and they have to import from the Dominican Republic, Brazil, and Indonesia. But, they are also investing a lot in r&d to develop their own tobacco sources, and significant progress has been made.
TA: To what extent did the Covid-19 pandemic impede or affect China’s tobacco industry?
AL: It was quite positive for the industry. We have very few overseas markets. Most of our cigarettes are for domestic consumption. Due to Covid-19 most people have to stay at home, having more time to light up. Despite generally slow overall economic growth in 2020, China’s tobacco industry actually saw positive growth.
TA: There is occasional criticism China is a major source of illicit tobacco products. How is the Chinese government combatting this?
AL: These claims are totally false. Even if there is indeed some illicit or fake tobacco product exporting going on, this is the doing of individual criminals or groups and certainly not condoned by the government. Besides, being generally very expensive, Chinese cigarettes are just not competitive enough in the global market, even at black market prices. Additionally, to fight illegal tobacco, China maintains a very stringent anti-counterfeiting and anti-smuggling system in which multiple parties are involved. In my opinion, China tops the world in combatting illicit tobacco. This is also one of the advantages of the monopoly law.
TA: What are the opportunities for foreign investors for engaging in China’s tobacco industry?
AL: China’s doors are open to foreign investors. However, they will have to step up their efforts in getting to know China better, such as the country’s market dynamics, consumer behavior, the regulations, and so on.
TA: Is there anything else that you would like to share with our readers?
AL: Tobacco Asia covers a rather controversial industry, which is subject to a lot of sometimes-abusive criticism and scrutiny from the public, the media, and governments alike, perhaps more so than any other industry around. However, the tobacco industry solely exists due to consumer demand. Yet the industry has always made it a point to be transparent, educating smokers, and encouraging them to quit their habit. Most people smoke to comfort themselves, or ease pressure, stress, or anxiety. Critics will just have to come to terms that the industry is not forcing consumers to smoke. Rather, it’s all about individual freedom of choice.