Tobacco scheme approval denied
By Zhang Lu (China Daily)
Updated: 2004-07-21 08:40

China's State Tobacco Monopoly Administration yesterday denied a report that it had approved British American Tobacco Plc's establishment of a cigarette joint venture in China.

The London-based cigarette maker said in a statement last Friday that its major strategic investment in the country had been approved by the Chinese Government.

According to the statement, British American Tobacco (BAT), teaming up with China Eastern Investments Co Ltd, was to set up an 800 million pounds (US$1.5 billion) joint venture to domestically produce and sell its cigarettes.

"We did not approve the project, and we are surprised to hear the report," Wei Xinhua, deputy director of the General Office of the State Tobacco Monopoly Administration (STMA), said yesterday.

In accordance with China's Law on Tobacco Monopoly, the establishment of a new cigarette factory must be approved by the STMA, the country's tobacco industry watchdog.

"I am wondering why BAT said the Chinese Government had approved the project," he said, adding that his office will make an announcement on this issue in two days.

But, in response to questions yesterday, British American Eastern, BAT's subsidiary in China, said "the approval comes from the central government."

BAT's announcement aroused great concerns in the global tobacco industry, because the joint venture, if approved, will be the first foreign tobacco firm to get the green light to manufacture cigarettes in China, and will probably be the biggest cigarette factory in the country.

The world's second-largest tobacco firm said that the new joint venture will have a manufacturing capacity of 100 billion cigarettes per year, dwarfing its existing 180 factories.

Output is expected to give BAT's leading brands a 5 per cent share of China's tobacco sales, the company said.

It plans to make State Express 555 - the most popular foreign cigarette in China - together with its other brands in the factory, and sell and distribute its products nationally.

The tobacco giant regards the new investment as a potential source of profits.

"It represents a major growth opportunity for us," said BAT Chief Executive Paul Adams.

"We look forward, with our partners, to finalize the detailed work in close co-operation with the Chinese Government," he said.

The company said further details of the joint venture project, including its final location and arrangements will be announced in due course.

The world's second-largest tobacco maker produced 792 billion cigarettes last year and has a 15 per cent of the world's tobacco market.

The company, through its partner China Eastern Investment, imported over 1 billion cigarettes into China last year.

All foreign firms are eager to establish a base for domestic production in China, as the country is the world's largest cigarette market with annual sales of around 1.8 trillion cigarettes, while the European and American markets are shrinking.

They have been selling cigarettes in China for many years, but export tariffs are as high as 65 per cent.

But Hu Xinhua from the STMA said that the country will not currently approve the establishment of any new cigarette factories, as manufacturing capacity exceeds demand.

The country plans to close or merge all its small cigarette factories with an annual production capacity of fewer than 100,000 cartons (5 billion cigarettes) by the end of this year.

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