The deal between China's largest cigarette producer and Imperial Tobacco (IT) could be a dry run for the world's big three manufacturers as the World Trade Organisation forces China to open up its giant tobacco market.
Last month, the Hongta (Red Pagoda) Group signed a 10-year agreement with IT to produce and sell its West brand of cigarettes, with the first batch going on sale in Shanghai and Kunming next month.
It is the second deal between a foreign major and a Chinese producer, following a contract between the Gallaher Group and Shanghai Tobacco Corp earlier last month. The Shanghai firm will make and sell the Memphis brand in China, while Gallaher will make and sell Shanghai's Golden Deer brand in Russia.
IT is the world's fourth-biggest producer, after Altria, the former Philip Morris, British American Tobacco and Japan Tobacco.
West is already a popular brand in China, imported legally or smuggled. By producing it internally, IT and Hongta will keep the revenue from the sales, a model which Altria and BAT may wish to copy through joint production of brands like Marlboro and 555 in Chinese factories.
'Of the sales of West, we will collect 60 per cent and IT 40 per cent,' said a Hongta spokesman. 'IT has agreed to invest US$8.4 million a year in the production. This is just the start. In future, we could jointly develop new brands and new markets.'
He said that IT had developed West into a brand that had become popular in Hong Kong and other coastal areas of China.