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June 27th, 2011:

Might isn’t right, Labor tells big tobacco

PRIME Minister Julia Gillard believes the federal government is capable of winning a legal stoush with big tobacco over plain packaging of cigarettes because it’s on the right side of the argument.

Philip Morris has launched an action suggesting the commonwealth is effectively planning to steal the company’s brand in contravention of a bilateral investment treaty Australia signed with Hong Kong 20 years ago.

But Ms Gillard says Labor isn’t about to be intimidated.

“We’re going to deliver cigarette packages in that drab green with no logos,” she told ABC Radio on Monday.

“We’re very confident of our position.”

Philip Morris spokeswoman Anne Edwards is equally convinced the cigarette maker has “an extremely strong case”.

She says if plain packaging is introduced companies should be compensated.

“By attempting to take our company property (brand) … it’s a very, very clear violation of the investment treaty that Australia has with Hong Kong,” Ms Edwards told Fairfax Radio.

But legal experts say things aren’t that clear cut.

A lawyer who’s had more experience than most fighting cigarette companies in court, Peter Gordon, believes Philip Morris is actually on shaky ground.

“The suggestion that the commonwealth is trying to take away the property rights of tobacco companies is of course a farcical proposition,” he told AAP.

“No one’s suggesting they’re not allowed to own these trademarks, they’re just suggesting they’re not allowed to use them in a way which improperly promote cigarette use among kids.”

Mr Gordon, formerly of Slater and Gordon, worked on the marathon Rolah McCabe cancer case against British American Tobacco until he was sued by the company himself.

He says while big tobacco is normally successful against smaller claimants it doesn’t have such a good track record against larger litigants it can’t outspend.

Manufacturers have had to cough up billions of dollars when they’ve gone up against the US federal government, combined US states and even Australian retailers backed by a wealthy litigation funder.

“Every time that a sovereign nation or a sufficiently funded private litigant has taken them on over a good case they’ve won,” he said.

It’s a point Health Minister Nicola Roxon rammed home on Monday too.

“It may be that big tobacco are famous for taking on victims – we’ve seen that over the past decades,” she told reporters in Canberra.

“(But) this is a course of action which is in the public interest.

“We won’t be frightened off by threats of legal action.”

International law expert Don Anton thinks the commonwealth is right to argue plain packaging is about protecting peoples’ health – not stealing intellectual property.

“(It’s arguable that) public regulation for a public purpose is not direct or indirect expropriation and therefore is not prohibited by the investment treaty,” the Australian National University academic told ABC TV.

Fellow ANU expert Donald Rothwell says until Labor introduces its draft laws into parliament, which could occur as early as next week, it’s not even clear Philip Morris has a cause of action.

The company is yet to suffer any damage, Prof Rothwell told AAP.

“So I see this more as an attempt to fire a shot across the bows.”

China’s anti-smoking activists try a new argument: that it’s bad for the economy

By William Wan, Monday, June 27, 9:42 AM

YUXI, China — When China issued its first national ban on public smoking last month, health advocates cheered but didn’t hold their breath. Like many anti-smoking regulations in China, this one seemed hollow, and for good reason.

A month later, the ban has had little, if any, effect. Smoking remains rampant in spaces where it has been prohibited, such as restaurants, schools and hospitals.

The main reason so few take China’s campaign against cigarettes seriously: The very government promising to crack down on tobacco use is the owner and chief beneficiary of the $93 billion industry.

For decades, that simple fact has blessed the state-run monopoly with custom-designed loopholes and stalled anti-smoking legislation.

As a result, China is tobacco’s biggest stronghold, the world’s largest producer and consumer. According to World Health Organization estimates, more than half of the men in China smoke, compared with roughly 20 percent in the United States. And cigarettes contribute to four of the top five causes of death in China, with 1.2 million tobacco-related fatalities a year.

In many ways, China’s struggle over smoking embodies a key dilemma facing its government: balancing the state’s obsession with economic growth with the appearance of looking out for the public interest.

So far, the public interest has been on the losing end. While tobacco users are dying in increasing numbers, tobacco farmers say they are sometimes forced to grow the low-earning crop by local officials eager to protect their key source of tax revenue.

Now, after years of working in vain, anti-smoking activists say they must move their fight away from simplistic arguments over health and morality and into the arena that matters most in modern China: economics.

A company town

Perhaps nowhere does the economic argument against smoking face a greater challenge than in the small city of Yuxi in Yunnan province, home of the Hongta Group, one of China’s biggest cigarette companies.

Residents work at the sprawling Hongta cigarette factory. Visitors stay at the Hongta Hotel. The rich play at Hongta golf courses. The poor toil in tobacco fields in surrounding villages.

For decades, Yuxi and the regional government of Yunnan have depended on the economic engine of tobacco. Yunnan, a relatively undeveloped region with many poor counties, receives almost half its tax revenue from tobacco.

As a result, the very idea of an anti-smoking movement remains foreign — an effort funded almost completely by international grants and often considered unwelcome.

“They call us crazy sometimes,” said Li Xiaoliang, who heads one of the few anti-smoking nonprofit groups in Yunnan. “People tell us, ‘The rice you eat, the clothes you wear come from the tobacco fields. Opposing tobacco is like opposing our right to a life.’ ”

Tobacco executives and local government officials declined requests for interviews, but workers for Hongta confirmed privately that their company and others in Yunnan have worked with local officials for decades to counter anti-smoking efforts.

When Li and other health advocates got cigarette billboards banned from some cities in Yunnan, tobacco companies responded by sponsoring events that allowed them to plaster their logos around town to promote auto races, charities and even marathons.

When activists appealed to local media, the companies poured money into newspapers for pro-tobacco fluff pieces and sidestepped TV advertising laws by sponsoring soap operas.

But the most frustrating setbacks for health advocates, Li said, have been in their work with schools. It took her years, she said, to persuade a small number of schools to declare themselves tobacco-free. At the same time, however, the companies expanded their presence in other schools through teacher awards and student scholarships.

In the poorest regions, schools built by tobacco companies include the cigarette brand in their names and adorn their halls with corporate slogans.

“Despite all our work, I don’t know if the tobacco companies even take us seriously,” Li said. “We are just a small gnat in comparison.”

Powerful partners

The power of the tobacco lobby is only magnified at the national level, where the government and the industry are deeply entwined.

Working together, they have jealously protected their monopoly and have largely fended off powerful foreign companies salivating over the Chinese market.

The same top administrators work overlapping positions at the National Tobacco Corp. — which produces China’s cigarettes — and the State Tobacco Monopoly Administration, which is supposed to regulate the industry.

And the Tobacco Control Office, created to reduce smoking nationwide, reports not to the Ministry of Health but to the Ministry of Industry and Information Technology, which runs the tobacco industry.

As head of the Tobacco Control Office, Yang Gonghuan works in a dimly lighted Beijing building with a staff of two dozen.

An epidemiologist who studied at Harvard, Yang in the 1990s helped organize the government’s first attempt to gather mortality statistics. When she realized most of China’s top causes of death could be tied to smoking, she began pushing officials to tackle the problem.

Her influence these days stems from a World Health Organization treaty China signed a few years ago that specifies actions and deadlines aimed at reducing smoking.

Chinese leaders, however, have largely been able to skirt those requirements. In 2008, when tobacco companies were ordered to add warning labels covering 30 percent of cigarette packs, they created a mostly blank box with a vague warning in minuscule print. They filled leftover space with English text, incomprehensible to most in the country.

In 2009, when the treaty required an increase in the cigarette tax, the government and the industry worked together to switch many brands to lower tax categories, thereby negating the effect.

“In some cases, the cigarettes actually got cheaper instead,” Yang said.

For the past decade, Yang’s opponents within the government have trumped her efforts with a single, powerful argument: Tobacco is indispensable to China’s economy, and the economy is key to social stability — the one thing China’s leadership worries about most.

While the government has dismantled other state-owned enterprises, it has clung to its lucrative tobacco trade. Last year, China’s tobacco industry generated $93 billion in total revenue and contributed $77 billion in taxes, almost 7 percent of China’s total tax revenue. And the number of cigarettes it produces continues to grow, rising 40 percent during the past decade.

In response, health advocates in China are trying to craft economic arguments.

This year, Yang’s office teamed with some of China’s most prominent economists as well as international experts to produce an attention-grabbing study on the social cost of tobacco. Factoring in the cost of health-care and lost productivity from dying smokers, the report argued that the long-term expenses of tobacco outweigh its short-term gains.

“As long as they continue to believe there is profit there, we will never get the government to change,” Yang said.

Meanwhile, health advocates in Yunnan have begun making a similar pitch to local leaders and say they have seen glimmers of hope. This year, Zhao Yaqiao, an economics professor at Yunnan Agricultural University, launched a pilot project to find alternative industries, including vegetable farming and tourism.

“You can’t just tell people not to smoke, just like you can’t tell farmers to stop planting,” he said. “You need to show them a different way.”

One of Zhao’s first moves was to reach out to the tobacco companies, a crucial step, he said, because of their vast political and economic influence. Many in the anti-smoking movement questioned his motives, and tobacco executives avoided him for six months.

A surprising response

When he finally landed a meeting, what they said surprised him.

“In their hearts, they also believe that someday tobacco will die and that there is a need for transition,” he said. “They said they’ve seen what happened in the U.S., Japan, Singapore.”

One manager at Hongta, declining to speak on the record for fear of losing his job, said that his company and others have recently begun exploring alternatives, investing in hydroelectric projects, real estate and hotels. “But we were stopped by the government and told to keep our focus on tobacco,” he said.

Tobacco executives, however, see the writing on the wall, the Hongta manager said.

“The industry may not collapse within the next 10 or 20 years, but for the next generation here, it’s hard to say what their prospects are,” he said. “It doesn’t look promising.”

Researcher Wang Juan contributed to this report.

© The Washington Post Company

Printing, ink and packaging suppliers discuss ways to make packs more appealing

Brandy Brinson

Everyone in the industry is looking for the next latest and greatest innovations as the bar is raised higher and higher for cigarette packs. All the focus on advertising and marketing is now turned to the pack, as restrictions abound and the pack remains the one avenue of communication with the consumer. Today’s packs are certainly turning heads with glitz and glamour—flashy foils, fancy paperboard featuring unique curves, and etching and embossing that you just have to touch. And all the while, these eye-catching designs serve another purpose—thwarting counterfeiters.

Tobacco Reporter caught up with a few leading suppliers to discuss packaging trends.


“Packaging has evolved greatly over the past 40 years, moving from simple printed cartons to lacquered finished boxes to plastic shrink sleeves with foil imprints. In the 1960s, the trend was multicolor printing with lacquering and/or lamination,” says Jacquie Wells, spokesperson for foil supplier Kurz.

Hot stamping dates back to the late 1800s with the use of authentic gold foil “leaf,” and it wasn’t until the past 40 years or so that the commercial use of foil as a decorative enhancement became widespread. “Hot stamping didn’t get its legs until the mid 1980s. At that time, an advance in application equipment allowed for higher speeds, making hot foils more flexible. Hot foil also gave products more appeal and allowed designs to become very diverse.”

Hot foils are transferred using a combination of heat and pressure, providing a very unique advantage—gloss level. “Structural and relief stamping are not only eye-catching, they also possess tactile characteristics offering even further potential for product positioning,” says Wells.

One of the most noticeable changes in packaging today is the use of hot and cold foil to give products more “pop” and shelf appeal, she says. “Many brands not only use hot or cold foil on the exterior package, but also on the product itself to make the brand and product more memorable. Foil increases the product’s overall appeal and brand imagery, and it can create more purchase interest.” Growth of foil use is due in part to the effectiveness of true product differentiation, luxury presentation and brand security features through foil stamping and embossing techniques, she adds.

Cold foils are gaining popularity in the market because they are cost effective and can be applied more quickly than hot foils, as today’s machinery allows faster application speeds. These foils are applied with adhesive, are highly versatile and have excellent design qualities.

“Today, cold foil is coming of age, bringing packaging houses a quick, efficient, cost-effective means of decorating with foil. Over the coming year, it is anticipated that cold foil will gain more ground in the marketplace and we will continue to see a trend towards more ‘green’ packaging.”

As for product security, Kurz offers a proprietary technology called Trustseal, which combines a variety of security features for brand owners and consumers. Wells says, “Tamper-evident seals and beautifully designed, custom-tailored solutions minimize brand erosion and maximize product visibility.”

Embossing cylinders

Engraved embossing cylinders are used to decorate cigarette packaging by running in line with printing presses in a single pass. Thus, no additional processes or raw materials such as special inks or foils are required to enhance the package, explains Peter Spector, vice president of sales for Eastern Engraving.

“This is especially advantageous for point-of-purchase selling where no other form of advertising is permissible. Embossing cylinders can be housed in existing press rotary die stations or in stand-alone units. Embossing can be registered to print with tight tolerance, overall patterns and textures, or blind (non-registered). Ribs that produce the round corner effect to create elliptical-shaped packages can also be engraved on the embossing cylinders either alone or in conjunction with registered embossing.”

Embossing cylinders can be engraved by chemical etching (photo engraving) or CNC milling. Overall patterns or textures may be engraved by machine engraving using die and mill tooling. Eastern Engraving uses a wax jet digital imaging system as a means of more accurately “printing” the cylinder prior to etching. The cylinders themselves can be solid steel, segmented inserts or copper-covered bases.

Etched embossing cylinders.

Gerrit van der Veen, division manager for tobacco and member of the board of ATG-Systems, discussed embossing and mock-up service in the tobacco industry at a presentation at TABEXPO Interactive. ATG manufactures engraved and etched embossing cylinders.

He discussed a new service from ATG regarding the initial design of new packs. “The usual way of starting a redesign, a limited edition or a new brand is using the design agency. The mock-ups they create are made in offset. Sometimes even with flatbed embossing. After approval from the brand manager, the printers, together with the cylinder manufacturers and the ink companies, try to reproduce this mock-up. Often they find out that the first mock-up cannot be reproduced, because of various reasons. A lot of time is lost and the brand manager doesn‘t understand why it all starts over again,” says Van der Veen.

ATG is offering a new kind of service—producing a “realistic” mock-up, which can be reproduced later on the gravure printing machine. ATG can make “barrel proofing“ cylinders. “With this, we can make on the original material and with the original inks, a realistic sample. Because this has been made with gravure cylinders, this can be reproduced later for the production cylinders in the same way. We start with several options, and the brand manager chooses the best option,” says Van der Veen.

If the brand manager has approved one of the versions, ATG can do the embossing on the same samples. After the printing and the embossing, ATG makes the mock-up and the brand manager has a “realistic“ pack in his hands. This is a sample that can be reproduced later in production.

“We can also use this service to find out how an old design looks with new (“all-over”) embossings,” says Van der Veen. “In this way, we save a lot of time—and money—because marketing will get a sample made with the right tools—in gravure and with rotary embossing, instead of an offset proof with flatbed embossing.”

Gravure printing

Gravure printing has come a long way in recent years. “Looking back in time, only pure engraved or conventional etched cylinders were in place. About 20 years ago, with the invention of laser technique to harden the light-sensitive cover, a much better definition of the text element became possible. The latest steps in direct laser engraving widen the technical possibilities as well. But also the classical engraving became better by innovations like the extreme gravure,” says Ruediger Brinkmann of Gundlach Verpackung GmbH, a supplier of printing solutions for the tobacco industry.

“Nowadays we make use of all applicable cylinder manufacturing techniques—depending on the special nature of the print jobs, it can be a combination of different techniques. This offers the tobacco industry a wide range of high-quality text elements, four-color pictures and, especially in gravure, very good effects with metal inks and varnishes.”

Precision has increased over the years due to sophisticated data workflow. This is vital to meeting the tight print and converting tolerances of customers, says Brinkmann.

“Last but not least the price for gravure cylinders became more competitive—a very important development for gravure versus flexo.”

In the future, he says, “We expect a further technical development with direct laser cylinders in view of cost and quality in order to keep the gap to alternative printing methods.”

New Packaging

Oscar Bos, sales director for Gestel Printing Co. says today’s trends in packaging and printing are to “create and use more space for communication with the consumer to compensate for the loss of advertising possibilities for tobacco products; and to introduce limited-edition packs (LEPs), often using nonconventional materials to draw the consumer’s attention and to make the product more attractive.”

In line with these goals, Gestel Printing Company B.V. recently introduced a brand-new packaging concept—the Zmart Box. The company launched the pack at TABEXPO.

Interestingly, the pack finds its origin in the roots of the company. In the late 19th century, Gestel started as a supplier for the cigar industry, which was located mainly in the area around Eindhoven in the south of the Netherlands. The products that Gestel supplied started from cigar bands and cigar box labels but were later followed by the well-known shoulderboxes—the main type of cigar packaging nowadays. Over the years, Gestel broadened its market by adding some of the world’s largest cigarette manufacturers to its customer list, besides various other “luxury” markets such as the chocolate, liquor and cosmetics industries.

“Having produced shoulderboxes for such a long time already, we wanted to find a type of packaging that had the manufacturing features of a modern cigarette hinged lid but the looks of the more luxurious shoulderbox,” says Bos.

Although the shoulderbox looks great, it is more expensive than a hinged lid due to several reasons. For one, it is made up of four separate parts (bottom, lid, label and shoulder) instead of one; also, after printing it has to be assembled into a shoulderbox; and furthermore, it has higher freight costs due to the transport of boxes instead of flat-packs.

The Zmart Box is unique because it is a one-piece flat-pack, based on the same wrap-around concept as a hinged lid. However, once made up, it looks like a shoulderbox. This offers a unique opportunity to cigarette manufacturers as they can now produce high volumes of shoulderbox-like packs at ta speed and cost almost comparable to that of normal hinge-lid packs.

Compared with a conventional shoulderbox, the manufacturing costs are about 40 percent lower, and the assembling/filling speed is up to five times quicker. “For Gestel, this means we can expand our market for this type of packaging to not only cigar but also cigarette manufacturers, which obviously means larger volumes. This is not entirely unwelcome considering these volumes have been decreasing substantially over the last years due to more rigid government legislations,” says Bos.

To be able to offer a complete solution, Gestel has established a partnership with a machine manufacturer to develop a brand-new machine. Some of the features of the machine include an assembling/filling speed up to 300 boxes per minute and the possibility to vary shapes and sizes using Flex Units. Depending on the customer’s requirements, the machine can be installed in a production plant within seven or eight months.

Bos says, “Adding everything up, we are convinced that we have developed a unique concept for tobacco manufacturers and look forward to making it a success together with our valued customers.”


Bloomberg – Philip Morris Claims Australia’s Plain Cigarette Package Plan is Illegal

Philip Morris International Inc. (PM), the world’s largest publicly traded tobacco company, said it has started legal action against
the Australian government over plans to allow the sale of cigarettes only in plain packages. The company filed a notice of claim
against the government saying the proposals violate terms of Australia’s Bilateral Investment Treaty with Hong Kong, Philip
Morris’ Asian unit said in an e-mailed statement today. A copy of the court document wasn’t immediately available. Australia,
which has already banned the public display of tobacco products in retail outlets, plans to outlaw logos on cigarette packs and
force them to be sold in plain dark olive packaging, carrying health warnings instead of company logos. Cigarette brand names
will appear on the packages in the same size and style of printing. The legislation, if passed by parliament, will come into force
on Jan. 1, 2012. “The forced removal of trademarks and other valuable intellectual property is a clear violation of the terms of
the bilateral investment treaty between Australia and Hong Kong,” Anne Edwards, a spokeswoman for Philip Morris Asia, said in
the statement. “We believe we have a very strong legal case and will be seeking significant financial compensation for the
damage to our business.” The government raised tobacco taxes by 25 percent last year as it seeks to curb smoking, which is the
nation’s largest single preventable cause of death, according to Health Minister Nicola Roxon. “We don’t believe that taking
that action is in breach of any of our international obligations,” Roxon told Sky News today. “We believe that we are able, and
the Australian people I think would expect their government, to take action in the interests of public health.” To contact the
reporter on this story: Robert Fenner in Melbourne at To contact the editor responsible for this
story: Neil Denslow at

Philip Morris International Inc. (PM), the world’s largest publicly traded tobacco company, said it has started legal action againstthe Australian government over plans to allow the sale of cigarettes only in plain packages. The company filed a notice of claimagainst the government saying the proposals violate terms of Australia’s Bilateral Investment Treaty with Hong Kong, PhilipMorris’ Asian unit said in an e-mailed statement today. A copy of the court document wasn’t immediately available. Australia,which has already banned the public display of tobacco products in retail outlets, plans to outlaw logos on cigarette packs andforce them to be sold in plain dark olive packaging, carrying health warnings instead of company logos. Cigarette brand nameswill appear on the packages in the same size and style of printing. The legislation, if passed by parliament, will come into forceon Jan. 1, 2012. “The forced removal of trademarks and other valuable intellectual property is a clear violation of the terms ofthe bilateral investment treaty between Australia and Hong Kong,” Anne Edwards, a spokeswoman for Philip Morris Asia, said inthe statement. “We believe we have a very strong legal case and will be seeking significant financial compensation for thedamage to our business.” The government raised tobacco taxes by 25 percent last year as it seeks to curb smoking, which is thenation’s largest single preventable cause of death, according to Health Minister Nicola Roxon. “We don’t believe that takingthat action is in breach of any of our international obligations,” Roxon told Sky News today. “We believe that we are able, andthe Australian people I think would expect their government, to take action in the interests of public health.”

Download PDF : Combined(1)

Plain Packaging

Download PDF : Plain-Packs-Sydney-Institute

Time to Quit Big Tobacco Dividends

Riding the U.S. tobacco gravy train has been one of the most reliable ways for an investor to get rich over the past century. Wharton’s Jeremy Siegel reports that Altria (NYSE: MO ) , formerly Philip Morris, was the best performing stock in the S&P 500 from 1957 to 2003. I believe him: They’ve been some of my best buys on CAPS.

But all good things — or bad depending on your perspective — must eventually draw to a close. Such is the case with U.S. tobacco stocks today. I think we are at a crossroads and it’s finally time to call ’em quits.

Quit your tobacco dividend addiction
U.S. tobacco stocks have historically appealed to investors because of their dividend yields of 5% or more coupled with reliable dividend increases. But now there is reason to think those dividends are — or soon will be — under pressure, and simply aren’t worth the risk anymore.

For the first time in the last decade, Altria’s free cash flow could not cover its dividend payments last year. America’s largest domestic tobacco company paid out $2.96 billion in dividends while only generating $2.6 billion in free cash flow. The gap was made up by the issuance of equity and debt.

Now, I’m sure an observant reader will point out that 2010’s result was an aberration due to a one-time $945 million Internal Revenue Service payment and that Altria’s continuing profitability cannot be judged by it.

I totally get that (and good for you for knowing that), but even if we add back the IRS payment, the free cash flow yield is a paltry 6.3%. That provides a dangerously thin margin to be supporting a 5.7% dividend yieldReynolds American (NYSE:RAI ) is in a similar pickle, supporting its own dividend yield of 5.7% with a free cash flow yield of 3.6%. Lorillard(NYSE: LO ) has more headroom.

There are better alternatives
Besides, a 5.7% yield (what Altria and Reynolds both offer, and Lorillard 4.7%) simply doesn’t cut it anymore. I can get that from safer telcos like Verizon Communications (NYSE: VZ ) or AT&T (NYSE: T ) , which sell their own form of addictive product. And unlike big tobacco, those two companies have ample free cash flow yields (a whopping 16.6% for Verizon and 8.1% for AT&T) to cover their dividend yields of 5.4% and 5.7%, respectively, while funding future growth.

Another alternative is junk bonds. Don’t laugh. Altria, Reynolds, and Lorillard are practically junk bonds themselves, since they have a risky future, pay out most of their expected return, and have, dare I say, a finite lifetime. Junk bond ETFs like the SDPR Barclays Capital High Yield (NYSE: JNK ) offer yields of around 8%. And they’re more diversified to boot.

Last but not least, what about Coca-Cola (NYSE: KO ) or PepsiCo (NYSE: PEP ) ? They’re trading at nearly identical free cash flow ratios as the tobacco companies (4.9% and 4.8%, respectively), which I’ve argued matters more than dividend yields. Why would I buy a moribund Altria or Reynolds when I can buy a Coke or Pepsi at a similar valuation? Plus you still get a roughly equal payout when you factor in share buybacks.

A picture is worth a thousand words
But there is another reason to stay away from U.S. tobacco dividends. Starting in fall 2012, tobacco companies will have to start putting horrific pictures on every cigarette carton. While I personally doubt this will have an effect on pre-existing smokers, I do think this will discourage a great many kids from taking it up. And without new customers, big tobacco and their big dividends eventually bite the dust.

The Campaign for Tobacco-Free Kids — an interest group that lobbies against tobacco companies — has put together an informative factsheet detailing the effectiveness of pictorial labeling requirements in the 35 countries that already have them.

More than 90% of Canadian youths report that pictorial labels make smoking seem less attractive. When a second set of pictorial labels was introduced in Thailand in 2006, 53% of smokers said it made them think “a lot” about the health risks, and 44% of smokers said they were “a lot” more likely to quit over the next month. When Brazil introduced new picture warnings, 67% of smokers said it made them want to quit. When pictorial labels were introduced in Australia, the number of smokers who called the quit line doubled.

Just Say NO
Like their products, big tobacco’s stocks are just too expensive and just too dangerous. These companies pay out most everything in a dividend, retaining almost nothing for growth, and 4.7% to 5.7% just isn’t a high enough return given the risk. There are better alternatives for your money

Factoids and legal bollocks in war against plain packaging

by Simon Chapman

With the passage of the government’s bill on plain packaging now assured by the support of the opposition, the Greens and all but one of the independents, an ever-desperate tobacco industry is now  concentrating on the legal apocalypse that they say will descend on Australia through the courts.

These arguments are all a paper-thin house of cards, starting with the central problem that plain packaging will not extinguish brand identities. All brands will still carry brand names allowing smokers to clearly exercise their freedom of choice to select between the much-vaunted but mostly non-existent differences in brands. This is critical, because in the highly unlikely event of a ruling by the High Court in favour of the industry, all calculations of compensation will need to take account that branding differences have only been diminished, not extinguished.

Given that some 30-40 nations now have appropriated massive sections of packs with graphic warnings and that not a cent has been claimed or awarded in brand damage  anywhere in the world for this egregious assault on brand identity, the prospects of any claim for huge compensation even in the unlikely event of a favourable ruling are vanishingly small. The companies would need to demonstrate with precision that sales losses arose from losing colours, logos and different pack shapes, not brand names.

Given that consumption is falling every year, this task would be like unraveling gossamer while wearing boxing gloves.

Few of those megaphoning this legal Armageddon appear to have even read the draft Bill itself. Section 11  makes it clear that plain packaging won’t apply if it were to be determined (by a court) that its operation would result in an acquisition of property otherwise than on just terms. So in the unlikely event that the High Court says there is an acquisition of property (more on this below), the legislation would revert to a fallback position in the regulations under which “the trade mark may be used on the packaging of tobacco products, or on a tobacco product, in accordance with any requirements prescribed in the regulations”.

In other words, the bill has been drafted with a get-out-of-jail-free card under which plain packaging will not proceed if the court said it was an unjust acquisition. So massive damages or compensation will simply not arise.

Moreover, Monash University’s Prof Mark Davison has explained “As for the Constitutional argument that the legislation acquires property on other than just terms, Professor Craven, a noted Constitutional expert, has since observed on Radio National’s Background Briefing that the tobacco industry’s prospects of success are about the same as a three-legged horse has of winning the Melbourne Cup. The reason for his view is simply explained. The extinction of rights or the reduction of rights is not relevant. The government or a third party must acquire property as a consequence of the legislation.

“The government does not wish to use the tobacco trade marks. Nor does it want third parties to do so. It does not desire to or intend to acquire any property. The proposition that prohibitions on the use of property do not constitute an acquisition of property was confirmed by the High Court as recently as 2009. In that case, the High Court held that the government was entitled to extinguish property rights in licences of farmers to take bore water.”

But the industry and its errand boys, such as those at the Institute of Public Affairs, nonetheless know that the threat of a massive legal penalty will get them headlines. A big number is required and the number that has been selected is $3 billion … per year. So where did this satisfyingly large number come from? It started circulating in May 2010 and has been repeated countless times since by frothing shock-jocks and some who should have known better.

Step forward Tim Wilson, the director of intellectual property and the Free Trade Unit and the IPA. Wilson sent asubmission to Senator Steve Fielding’s inquiry into plain packaging where we can examine his prowess with the numbers.

At page four in his executive summary he says plain packs would lead to a court order to award the tobacco industry  between $378 million and $3027 million per year. Table 2 (page 13) in his submission shows two lines of numbers for the total value of tobacco sales in Australia in 2006: one for the value including excise tax (which goes to the government) and one for the sales value ex-tax (in other words the returns to manufacturers and retailers combined). By taking the trouble to differentiate the two, Wilson must know that no court would order the return of the tobacco tax component to the companies: it’s the ex-tax value that fuels such a pipe-dream.

Wilson then calculates the ex-tax value on two assumptions: a 10% and a 30% fall in sales  each year that might follow the introduction of plain packs. He calculates these two figures at $378 million and $1.135 billion. So where does the $3 billion factoid come from? Are you ready for this? The tax-included sales value of a 30% fall is $3.027 billion.

So how reasonable are Wilson’s assumptions that plain packs will cause a fall of a minimum 10% through to 30% a year? Between 1999 and 2003 the average annual fall in total dutied cigarettes was just 2.6%. The most sales haveever fallen in one year was just shy of 10% in 1999 after the combined impact of a change in the way  cigarettes were taxed (from weight to per stick) and a big boost to the national quit campaign by health minister Michael Wooldridge.

Most analysts of the likely impact of plain packaging believe that its main impact will be on children over the next generations. Just as no Australian aged under 19 today has ever seen a local tobacco ad or tobacco sponsored sporting event, no child growing up after 2010 will ever see carcinogenic  tobacco products packaged in carefully market researched attractive boxes. Smoking rates by kids today are the lowest ever recorded. Plain packs are expected to continue that downward momentum, starving the industry of new generations of new smokers as older smokers quit and die early. Plain packs will probably not influence long-term, older smokers much.

Wilson’s $3 billion number is thus based on a projected decline, which is so far off the planet of declines ever recorded, that it is dreamland stuff. Worse, it appears to be a willful selection of the tax-included biggest number he could sight in his own table. To the delight of the industry, it has now become a virulent factoid with Google showing more than 7000 hits for “plain packs cigarettes” and “$3 billion”.  Tim, you are a true contributor to informed public debate.

*Simon Chapman is professor of public health at the University of Sydney.

Moves by Big Tobacco to use Australia / HKG bilateral investment agreement in its favour against incoming Plain Packaging legislation – Huff and Puff threats

Tobacco giant ready to launch legal action against Govt

Alexandra Kirk reported this story on Monday, June 27, 2011 08:04:00

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TONY EASTLEY: The Federal Health Minister, Nicola Roxon says the Government is on “very strong legal ground” and can withstand a legal challenge to its plain packaging legislation from tobacco giant, Philip Morris.

Philip Morris says it will begin the process today – serving a “notice of claim” on the Government, which triggers a three-month negotiating period.

The cigarette manufacturer says if there’s no resolution, the matter will then go to international arbitration, arguing the Government is breaching a bilateral investment treaty between Australia and Hong Kong, where Philip Morris’s parent company is based.

It says if it wins the compensation bill it may run into billions.

The Federal Health Minister, Nicola Roxon spoke to Alexandra Kirk in Canberra.

NICOLA ROXON: We believe that we are on very strong legal ground. We are breaking new ground around the world. This is the first time any country has taken this step and of course our Government would take proper advice to ensure that we can do that.

ALEXANDRA KIRK: Did you take advice on this bilateral investment treaty that Australia has with Hong Kong which Philip Morris maintains your plain packaging legislation would breach?

NICOLA ROXON: Well, I’m not going to go through the details of all of our legal advice in the media. Suffice to say we are very confident that we are on strong ground and I do need to point out to the public that I think they would expect that their own government, Australians expect the Australian Government to be able to take action which are in the community’s interests and in the interest of public health.

The World Health Organization recommends that states consider taking this action. We believe that it will be an effective part of our fight against tobacco and our determination to reduce the harm caused from smoking. But obviously big tobacco is going to fight this tooth and nail and we said from day one that we expected they would.

ALEXANDRA KIRK: And how much are you willing to spend defending your position? Presumably big tobacco has very deep pockets.

NICOLA ROXON: Well, they do because they make very large profits out of a lot of misery and death caused to thousands of Australians every year. So we already spend billions of dollars dealing with the harms caused from tobacco. Of course, we can’t stop tobacco companies taking legal action. We’ll defend our determination to protect public health and try to reduce the harms of smoking and ultimately I am confident that we are on very strong ground.

ALEXANDRA KIRK: Do health reasons though, which you cite, override a company’s ability to use a brand to differentiate itself from its competitors?

NICOLA ROXON: Well, I believe that it is in the public interest for us to be able to take this step. Tobacco is unlike any other product, any other legal product in the world. We know so much about the harm it causes. We know that there is not a single safe cigarette or amount of smoking that can be done in a way which may not lead to very severe health outcomes.

So in those unusual circumstances, taking steps as we have already done in Australia to severely restrict advertising, has not been able to be challenged and similarly we think this next sensible, logical step will not be successfully challenged either.

ALEXANDRA KIRK: The notice of claim that Philip Morris is lodging today triggers a period of three months for negotiation. Will you negotiate with Philip Morris?

NICOLA ROXON: Well, I’m not going to make comments on a claim that has not even been provided to me. It is in the media and I’m happy to make general comments in the media and when these materials are served on us, we will deal with them appropriately.

TONY EASTLEY: The Federal Health Minister, Nicola Roxon speaking there with Alexandra Kirk in Canberra.

Customs cracks down on an illicit cigarette syndicate

Hong Kong (HKSAR) – Customs has mounted a large-scale anti-illicit cigarette operation, code-named “Sky-Eye” since last month. During the operation, Customs officers raided 41 peddlers, cracked 41 warehouses, including 30 residential storages, six mini-storage warehouses and five warehouses in factory buildings, detained 10 light goods vehicles, and arrested 63 persons, including 48 men and 15 women, aged between 21 and 78. The officers also seized about 10 million sticks of duty-not-paid cigarettes, 760 kg of duty-not-paid tobacco, worth about $23 million, with the duty potential of about $17 million. Customs believed that this operation has smashed an active illicit cigarette smuggling syndicate in the territory and its distribution network.

Customs has been closely monitoring the illicit cigarette activities.

Since the upsurge of tobacco duty rate in February, Customs has strengthened its manpower through internal deployment to take vigorous actions against illicit cigarette activities.

Under vigorous Customs actions, the large-scale smuggling activities became inactive. Customs later found the syndicate had changed the modus operandi and adopted the ‘swift distribution’ method to reduce the risk of being detected. Once a small amount of illicit cigarettes was smuggled into Hong Kong by cross boundary vehicles, then they would be dispatched to the peddlers in various districts without delay.

About a month ago, Customs targeted at a territory-wide illicit cigarette smuggling syndicate. After in-depth investigation, Customs found the syndicate smuggled the illicit cigarettes into Hong Kong by making false declaration. Once the illicit cigarettes were smuggled into the territory, they would be transported to peddlers in different districts by light goods vehicles without delay. The majority of the peddlers would sell the illicit cigarettes through telephone order and they would immediately dispatch to the buyers once an order was received.

Customs took follow-up action yesterday afternoon (June 24) and arrested the mastermind while he was receiving the seized 72 cartons of illicit cigarettes (about 870,000 sticks). Later, another 70,000 sticks of illicit cigarettes, 610kg of illicit tobacco and some packing material were seized from the syndicate’s packing and storage centre. It was believed that the syndicate not only smuggled the illicit cigarettes for the local market, but also smuggled some of the illicit cigarettes and tobacco to the overseas markets, including the United Kingdom by express couriers after repacking.

Customs believed that the result of the operation reflected the effectiveness of the enforcement strategy. Customs will continuously make stringent effort to monitor the illicit cigarette situation and combat any illicit cigarette activities.

Under the Dutiable Commodities Ordinance, anyone involved in dealing with, possession, selling and buying illicit cigarettes commits an offence. The maximum penalty on conviction is imprisonment for two years and a fine of $1 million.

Members of the public are urged to report any suspected illicit cigarettes activities to the Customs’ 24-hour hotline 2545 6182.

Source: HKSAR Government