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Mark O'Neill

A private firm will challenge the mainland's 54-year tobacco monopoly by producing cigarettes for the export market.

The Lifan Group, China's biggest private manufacturer of motorcycles with sales last year of 4.02 billion yuan (HK$3.73 billion), said yesterday it had signed a contract with the Qianjiang Cigarette Factory to produce the Lifan brand.

The plant is able to manufacture the brand for the export market without contravening China's strict laws on cigarette production because it is registered in Britain and considered legally 'foreign'.

However, as with global giants Philip Morris and British American Tobacco (BAT), many believe Lifan is aiming to sell the brand to China and not the export market.

China is being forced to open its market to foreign cigarettes under commitments it made to the World Trade Organisation.

From January, the duty on imported cigarettes will fall to 25 per cent, while retailers will be allowed to sell them without a special permit.

The mainland cigarette market is the biggest in the world, with more than 300 million smokers puffing their way through 1.9 trillion cigarettes a year, about a third of the global total.

'Profit margins from motor cycles are falling and we need to find another engine of growth and profit,' said a spokesman for the group.

'Our plan avoids the legal restrictions in China.

'We see enormous potential for our cigarettes.

'Production cost in Chongqing is one yuan a packet which will sell in the Middle East for more than 10 yuan. After subtracting taxes, that leaves a profit margin of at least four yuan a packet.'

The firm signed letters of intent with buyers from 20 countries - including Syria, Nigeria and the United Arab Emirates - at the Autumn Trade Fair in Guangzhou last month, the spokesman said.

A spokesman for the Qianjiang plant said: 'To produce Lifan is legal. Since all the production is going for export and it is a foreign brand, we are breaking no regulations. After preparing all the necessary documents, we decided to accept the contract.'

The Qianjiang plant belongs to the State Tobacco Monopoly (STM), which controls production, distribution and sale of cigarettes in China.

In the first half of this year, the STM earned profits and taxes of 86.67 billion yuan, an increase of 13.57 per cent from last year, ensuring it will again be the biggest contributor of any industry to the national treasury, as it has been for the past 15 years.

An STM spokesman said: 'We do not know how to talk about Lifan.'

Entrepreneur Yi Mingshan set up the Lifan Group in 1992.

It now employs more than 5,000 people, producing motorcycles and engines, and is also involved in finance, property development and the Chongqing football team, which it acquired in 2000 for 55.8 million yuan.

Its revenue last year included US$110.6 million from exports to Southeast and west Asia, Europe and Africa, and it plans to export its cigarettes to countries where it has some brand recognition.



Motorcycle firm to make Lifan-brand cigarettes for export