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SCMP Reporter

Two Philip Morris partners have begun producing the renowned cigarettes in anticipation of official quotas

Two mainland tobacco firms have begun making  Marlboro cigarettes under licence from Philip Morris International before  a key approval meeting scheduled by the State Tobacco Monopoly Administration  for next month.

The  tobacco body is expected to announce the first orders for mainland-made Marlboros after a semi-annual planning meeting  scheduled for May 16.

'Both factories have already started manufacturing but they haven't put the cigarettes on the market yet,' said an executive close to Philip Morris' partners - Longyan Cigarette Factory in Fujian province and Baisha Group in Hunan.

'They are waiting on a production quota.  You can't sell cigarettes unless you have orders for them,' he said.

'The order-placing meetings are held only twice a year.'

According to the executive, Longyan is expected to receive a first-year production quota of 24,000 cases, or 1.2 billion cigarettes, with slightly less for Baisha. Official approval would enable them to start selling Marlboros on the domestic market as early as July.

A Beijing-based tobacco official  confirmed that orders determining production volumes for Marlboro cigarettes would not be issued before next month's meeting.

'They cannot go on to the market unless they have [approved] orders,' the official said.

Formal approval would constitute a milestone for arguably the world's most famous cigarette brand as it seeks to secure a foothold in the world's largest market. Any last-minute obstacles,  however, could jeopardise years of planning and at least eight months of on-the-ground preparation.

Philip Morris began moving forward with plans to license  annual production of  about two billion Marlboro cigarettes at Longyan and Baisha last summer.

Since news of the agreement was first reported in September last year, Philip Morris technicians have made frequent trips to both factories to install and adjust machinery on the production lines.

An official contacted at Longyan's production department confirmed production had started but declined further comment.

'I don't have any comment on speculation about what we may or may not be doing [in China],' a spokeswoman at Philip Morris' headquarters in Lausanne, Switzerland said.

In July last year, British American Tobacco   said  it had received approval 'from the highest levels of government' for a US$1.5 billion joint-venture cigarette factory near Shanghai only to be shot down later by  tobacco authorities who apparently were not consulted.

The company announced last month that it would write off a US$96 million investment in the project.

In recent months,  the tobacco body has repeatedly stressed it will not permit fully fledged production joint ventures with foreign tobacco companies.

However, several smaller foreign companies, such as the Britain-based Gallaher Group, have been allowed to license production of foreign-brand cigarettes to Chinese state-owned manufacturers.

While the mainland's tobacco industry has undergone a vast consolidation in recent years and competition in the sector remains fierce, Beijing  restricts the size and scale of foreign involvement in domestic tobacco production.

In 1986, RJ Reynolds  invested US$31 million in a joint venture to manufacture Camel cigarettes.

That stake was taken over by Japan Tobacco International  in 1999 when it bought  RJ Reynolds' international business. But the licence for the venture expired in September and the Chinese side, after almost  two decades of absorbing advanced foreign technology and know-how, bought out Japan Tobacco for just US$18 million.

As a state monopoly, the tobacco industry is a key  employer and revenue generator for the government.

In 2003, it paid US$20.6 billion in taxes, accounting for 7.7 per cent of the central government's income.

Up to 350 million mainland smokers puffed their way through almost  1.8 trillion cigarettes last year.

Foreign brands account for less than 5 per cent of the market, with many of those smuggled into the country to evade high import tariffs.



Marlboro makers jump state go-ahead