Rivals smoked out by beijing lobbying

The biggest loser in the new tobacco order in China is British American Tobacco (BAT), Philip Morris' biggest rival and the market leader on the mainland before the Japanese invasion in 1937.

Peak sales in the 1930s exceeded 55 billion cigarettes, a 67 per cent share of the mainland market and almost 40 per cent of its global volume at that time. In 2001 and 2004, BAT said it would set up large joint venture plants in China but the State Tobacco Monopoly Bureau torpedoed the projects.

CNTC's deal with Philip Morris closes the door on BAT. Sha Zukang, China's ambassador to UN agencies in Geneva, said on February 8 that China would not allow new factories, including joint ventures with foreign partners, as part of efforts to reduce smoking. This policy, which no foreign government can challenge, serves the policy goals of Jiang Chengkang and his colleagues at CNTC. While his counterparts at other state firms in most sectors face rising foreign competition, he has the world's biggest market to himself.

Few people outside Philip Morris and CNTC know why the former got the nod ahead of BAT. Neither details nor the talks that led up to the deal have been given.

The tobacco industry has become so socially sensitive and legally dangerous in the west that company executives rarely talk about policy, especially towards developing countries, fearful that they will be accused of exporting a 'deadly' product to poor people.

Even worse for BAT, the single joint venture contract it has in China, Hua Ying (China-Britain) Tobacco Company in Shandong province, will expire in September this year. BAT entered the venture in 1999 when it acquired Rothmans, the original foreign partner. Liu Jingru, head of the legal and policy department of the State Tobacco Monopoly Bureau, said the existing foreign-invested joint ventures in China would, like Hua Ying, lapse when the contract term expired.