January 30th, 2008:

By Nicholas Zamiska and Juliet Ye in Hong Kong and Vanessa O’Connell in New York – The Wall Street Journal

China is hoping a partnership with Philip Morris can make it a global player in the tobacco business.

After more than three years of negotiations, the Chinese government has selected three domestic cigarette brands, of the hundreds sold, to market abroad in partnership with Philip Morris International, according to PMI and the Chinese companies involved.

China has more smokers, some 350 million, than the U.S. has people. China’s booming tobacco industry, which the government says generates about $30 billion of annual tax revenue, is an important part of the national economy. But all cigarettes in China are produced under stringent quotas restricting the industry’s domestic growth, and so far, the industry’s international efforts have been marginal at best.

Now, China National Tobacco Corp., the country’s state-owned cigarette monopoly, is hoping to change that. China and PMI have chosen markets for the three brands, although PMI says only that they are in Central Europe, Eastern Europe and Latin America.

The rollout is part of a December 2005 deal in which Philip Morris agreed to market Chinese brands internationally in exchange for the right to produce its own Marlboro brand at Chinese state-owned factories. The Chinese cigarettes will be made in factories owned by CNTC and PMI, according to PMI, which is expected to be split off soon from Altria Group Inc.

The joint venture will serve as another test of China’s ability to transplant homegrown brands, not just products, overseas. It has succeeded with such familiar names as Haier appliances and Lenovo computers, after years of watching foreign brands infiltrate the mainland and capture loyal followings. The question is whether it can pluck three cigarette brands — RGD, Harmony and Dubliss — from relative obscurity and elevate them to an international, or at least regional, presence.

This isn’t the first time China has entertained ambitions of going global with its cigarettes. Golden Deer cigarettes are sold in Russia through a joint venture with Japan Tobacco Inc.’s Gallaher Group and have entered the American, Taiwanese, Middle Eastern and African markets, according to a booklet handed out by CNTC officials at an international tobacco-industry conference in Paris in November.

Operating mostly on its own, CNTC has been forced to use a complex patchwork of arrangements to get its products into various regions. Through its joint venture with PMI, based in Lausanne, Switzerland, CNTC will have access to one of the industry’s most powerful distribution networks. With a 15% share of the international tobacco market, PMI does business in more than 160 countries. It can introduce a cigarette brand in dozens of countries at once.

CNTC, based in Beijing, declined to comment.

PMI Chief Executive André Calantzopoulos said the venture was delayed partly because of cultural differences. “By Chinese standards, urgency is in terms of decades, versus U.S. companies, where urgency is next quarter,” he said.

–Gordon Fairclough in Shanghai contributed to this article.

Altria/Philip Morris Break-Up Threatens to Worsen the Global Tobacco Pandemic

“The breakup of Philip Morris will unleash a Philip Morris International that will be even more predatory in pushing its toxic products worldwide,” says Robert Weissman, director of Essential Action, a corporate accountability group based in Washington, D.C. “An independent Philip Morris International, which is likely to be based in Switzerland, will no longer feel constrained by public opinion in its home country and most important market, the United States.”

Altria/Philip Morris is the world’s biggest multinational tobacco corporation. Eighty percent of its sales are outside of the United States.

The company announced last August its intention to pursue the spin-off. Today, Altria’s Board of Directors is expected to finalize the decision and announce the planned timing of the spin-off.

Essential Action has spearheaded an effort by more than 150 public health organizations in over 70 countries worldwide to respond to the Philip Morris break-up. The groups have urged governments (www.philipmorrisbreakup.org/calltogovs) to adopt comprehensive tobacco control measures to ensure that the spin-off of Philip Morris International does not worsen the tobacco epidemic. Among other measures, they are urging that governments ratify and strongly implement the Framework Convention on Tobacco Control, ban the tobacco industry from lobbying or working on legislation to implement the global treaty, and exclude tobacco products from bilateral and multilateral trade and investment agreements. Public health groups have also called on Philip Morris to commit to public health principles — a set of principles the company has rejected.

“An independent Philip Morris International based outside of the United States will be immune to even the possibility of domestic regulation in the United States or litigation in U.S. courts,” says Anna White of Essential Action, “This has been a real threat to Philip Morris International.”

The litigation risk to Philip Morris International was recently made apparent in the U.S. government case against the tobacco industry. In that case, U.S. Judge Gladys Kessler ruled that Philip Morris and other tobacco companies must stop using misleading terms like “light,” “mild” and “low” (as in “Marlboro Lights”). The tobacco industry has used these terms to deceive smokers into thinking they are using a reduced risk product, when they are not. Judge Kessler ruled that the prohibition on use of these misleading terms extends to Philip Morris International. If an independent PMI had no connection to the United States, the judge would not have been able to issue this order.

The Wall Street Journal reported on January 29 on Philip Morris International’s plans to inflict on the world an array of new products, packages and marketing efforts. According to the Journal, these are designed to undermine smokefree workplace rules, defeat tobacco taxes, segment markets with specially flavored products, offer sweetened cigarettes sure to appeal to youth, and overcome marketing restrictions.

“The World Health Organization projects that 10 million people will die annually from tobacco-related disease by 2030, 70 percent in developing countries,” says White. “We must work to lessen this toll, not allow an independent Philip Morris to make it worse.”

Weissman notes that there is also a danger of the independent Philip Morris International selling its new products into the United States — perhaps immune from the modest marketing restrictions now imposed on the major tobacco companies as a result of past litigation.

http://www.dj.com/ – January 30, 2008: 05:04 PM EST

NEW YORK -(Dow Jones)- Philip Morris International, Altria Group Inc.’s (MO) soon-to-be-independent international business, will begin manufacturing and selling its famous Marlboro brand in China later this year, a move that could eventually provide a big boost to the international tobacco company.

That move is part of a deal struck with the state-owned Chinese tobacco company a few years ago, and it’s taking off after lengthy discussions. China has an estimated 350 million smokers, and at the moment Marlboro isn’t manufactured in the country.

Altria Chief Executive Louis Camilleri said in a Wednesday conference call that Marlboro will be made and sold in China within the first six months of this year. The production of Marlboro in China, part of a deal that Altria cut in 2005 with the state-owned China National Tobacco Co., would not be subject to any quotas.

At present, Marlboro cigarettes are imported in limited quantities into China. As part of the deal with Chinese National Tobacco, Philip Morris International will also help sell some Chinese tobacco products internationally.

In China, Philip Morris International is going to have to grow from a small base against entrenched local brands, says Standard & Poor’s analyst Ken Shea.

“It’s going to be a good long-term move, but is unlikely to move the needle immediately,” he said.

Earlier Wednesday, Altria confirmed that it would spin off its Philip Morris International unit. While fast-growing emerging markets offer the Marlboro maker the potential for speedy growth, navigating these markets can be tricky due to local monopolies, regulations on foreign investment and the prevalence of alternative, regional tobacco products.

The spin-off would transform Altria into a domestic tobacco company from a global conglomerate. It would be left with Philip Morris USA and a 28.6% stake in brewer SABMiller PLC (SAB.JO).

-By Anjali Cordeiro; Dow Jones Newswires; 201-938-2408; anjali.cordeiro@ dowjones.com