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Chinese Cigarettes to Go Global

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.

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