TOBACCO INDUSTRY [pic] PORTER’S DIOMAND MODEL FIRM, STRATEGY, STRUCTURE, RIVALRY DEMAND CONDITIONSFACTOR CONDITIONS SUPPORTIVE INDUSTRIES DEMAND CONDITIONS: MARKET TRENDS The demand for tobacco and its products have seen a steady growth over the years. The reason for this growth largely has been the increase in the population accompanied with easy availability of such products and easing social norms(smoking not considered bad now it is a fashion symbol). More choice is now available to smokers and the various brands in themselves come in different varieties like the Soft Packs etc.
The problem is that this growth has been shared unequally between the duty paid and evaded. Apart from the smuggling of tobacco and its products, even the large multinationals don’t leave any opportunity to evade taxes and duties. According to an article in daily times(2006) about 0. 2 million cigarette packs out of the 1. 3 million sold in Lahore are fake or smuggled, causing cancer and heart diseases four times faster and resulting in a Rs 700 million to Rs 1 billion loss to the district government.
A Daily Times survey revealed that wholesale dealers supply fake and smuggled cigarettes to about 20,000 retailers of Lahore, who sell them to ignorant consumers who can either not tell the difference or sent their children or servants to buy cigarettes According to the available statistics, out of about 71. 80 billion cigarettes sold in Pakistan in 2005, 15. 40 billion were fake or smuggled. Naveed Aftab, head of Pakistan Tobacco Board’s business department, said smuggled and fake cigarettes were causing a loss of about Rs 6 billion to the federal government, Rs 4 billion by tax evasion and Rs 2 billion by smuggled or unauthorised brands [1]
Seasonal Fluctuations in demand During the winter season the demand for cigarettes and other tobacco products like Hukka and Sheesha increases. Demographically the northern cooler regions of Pakistan generally have a higher demand for these products. Demand is also affected by promotional campaigns since a new campaign triggers the need to try out the product or take advantage of the scheme. The month of Ramadan sees a fall in the demand for these products as people only smoke after the fast is over.
Even when not fasting people avoid smoking since it is considered undesirable to do so in public during Ramadan. Local demand trend The general perception is women do not engage in tobacco consumption. But the fact of the matter is that around 34% men and 12. 5% women consume tobacco in some form. Besides the young men in the age category of 15-24 years smoke cigarettes/ beddies largely in the rural areas. But for men age 24-64 the prevalence of smoking cigarettes/ beddies is more common in the urban centers.
In the age group 25-64 years, 16% and 7% of persons smoke chillium/huqqa in rural and urban area. Similarly 15% in rural and 8% in urban areas chew tobacco/snuff. The government of Pakistan identified smoking as among country’s leading causes of morbidity and mortality in its December 1997 health policy. This admission came against the backdrop of a rising incidence of tobacco-related diseases. Despite numerous health and economic costs, the consumption of cigarettes continues to rise in Pakistan, making it a high cigarette consumption country. Twenty-nine percent of men and 3. % of women smoke cigarettes regularly, concluded the National Health Survey, while the Pakistan Society for Cancer Prevention says 37% of men and 4% of women over 15 years of age are smokers. • Smoking is most common and most likely to be heavy (20 or more cigarettes per day) among men 25-44 years of age in Pakistan. • Approximately 90% of lung cancer cases in men and 79% in women are attributable to cigarette smoking. • Twenty-four percent of illiterate rural young men smoke as compared to 19% of illiterate urban young men. • Among rural smokers (15-64 years of age), 26% smoke heavily compared to 37% in urban areas.
FORMS OF TOBACCO INTAKE Tobacco use in Pakistan is not limited to cigarette smoking. Chilum huqqah, chewing tobacco in pan, snuff and niswar are some other common ways of intake. Experts divide tobacco use into two broad categories – smoking and smokeless tobacco. Both uses of tobacco are very common in Pakistan as established by a survey conducted by the PMRC in 1984. Smokeless tobacco include primarily moist dry snuff and chewing tobacco. Smoking tobacco is used as cigarettes, huqqah and chilum, the latter two being the oldest means of tobacco intake in this region.
Presently, cigarettes are most common, for they are ready to use and backed by aggressive promotion by manufacturers. All forms of smokeless tobacco contain nicotine and their use can lead to nicotine dependence and cigarette use! The reason for such high rates of tobacco consumption is the lack of law enforcement. Ordinaces like ‘No Smoking in Public Places,’ ‘No Sale Under 18’ and ‘No Sale in Educational Institutions’ exist but donot get implemented. No mechanism was available on the ground by which an ordinary citizen could register a complaint against violations taking place.
Besides the government took no concrete steps to apprise the citizens of various provisions of the ordinance and thus people, including the ‘authorized persons’ under the ordinance are unaware of their rights and duties under the law. Poverty and public indifference on issues are the greatest hurdles in way of implementing laws. A campaign could be more effective if the public is educated about the bad affects of smoking. The need is for educating masses through electronic and print media. [2] FOREIGN DEMAND Most of the cigarettes produced in Pakistan are consumed locally.
Export markets of Pakistani national and international brands include the Central Asian countries, Afghanistan and the Gulf countries. Exports of Pakistani tobacco products have seen a growth over the years. Growth in Pakistan tobacco exports indicates the growing popularity and acceptance of Pakistan’s products for their quality, consistency and cost competitiveness. The considerable high requirements, especially for flue-cured Virginia, are indicative of increased cigarette sales in the domestic market, depleted inventories with the manufacturers and a much robust showing on the export front.
Pakistan’s tobacco and products have come a long way from the un-impressive image they posessed about a decade and half back of poor quality and standards. Besides becoming the fifth largest producer of finest flue cured Virginia in the world with prospects of producing an optimum of upto 80,000 metric tons, investments in improved agronomic practices, use of fertilizers and pesticides, introduction of international grading system and state of the art green leaf threshing plants have led to yields of upto 2500 kgs per hectare, one of the highest in the world.
At the same time quality has risen close to the best world leaf standards and prices have also been favorable. Besides the above, aggressive marketing, exploring of new markets, improving product image, participation in international exhibitions and conferences, becoming member of International Tobacco Growers’ Association, removal of tariff and non-tariff barriers on export of tobacco have led to appreciable increase in tobacco exports A Tobacco Delegation consisting of growers, manufacturers, dealers and exporters is planned to visit Egypt to explore possibilities of larger market access for Pakistani Tobacco.
An Export Display Centre is also planned to be established at the Pakistan Tobacco Board’s Head Office in Peshawar in close collaboration with the tobacco manufacturing companies. Pakistan has a locational advantage due to its strategic proximity and easy access to the region. There is great necessity that these valuable opportunities may be developed and are put to use for the increase of value added exports of the country. [3] FACTOR CONDITIONS: RAW MATERIALS The local oriental types of tobaccos are cultivated in the plains of NWFP and, to some extent, in the provinces of Punjab, Sindh and Baluchistan.
Punjab is, however, famous for the production of dark air-cured and hookah type tobaccos. The crop provides basic raw material to some 55-plus licensed manufacturers of tobacco products, including 29-plus cottage level operators. Availability of raw material, which is being extensively available in the locality is considered as the main strength of the Pakistani tobacco industry. Tobacco mainly Virginia and Burley is procured mostly from local farmers on contract basis. Pakistan is now the 5th largest producer of flue-cured tobacco. [4]
In order to reduce dependence on the import of good quality tobacco leaf, the Pakistan Tobacco Board, in collaboration with the tobacco companies, intensified research and development activities and explored the soil and climatic conditions in the submontane areas of Mansehra, Buner, Swat and Dir districts to meet the quality requirements of cigarettes for domestic use. [5] Labour and Machinery: The level of skill required varies according to the position in the industry. Training programs are conducted at all management levels and also in all the tobacco sectors.
Growers are taught how to best sow their seeds and what fertilizers to use. Workers are shown how to best perform their duties. Supervision of the production process is vital: inspection of the leaf, blending, and quality assurance of the final product can never be left solely to machines. Retailers are given tips on how to market the cigarettes. All the machinery used in the production process is imported. With increasing capacities, more machinery is now being imported. [6] FIRM’S STRATEGY, STRUCTURE AND RIVALRY
STRATEGY: Under-pricing and excessive sales promotion programs are said to be some of the strategies of the industry. While the domestic industry indulges in what is known as under-pricing by selling their brands cheaper than those of their rivals in the same category, the manufacturers are said to be involved in excessive advertisements and other promotion programs. The industry is known to be the largest spender on publicity worldwide. [7] Also advertising under the laws of consumer protection and FCTC is used.
Also there is an increasing tendency to counterfeit cigarette brands, which led to low cigarette prices, prevented regular price hikes, encouraged down-trading and can lead to adverse excise structure changes. STRUCTURE: The Central Board of Revenue (CBR) has observed that the domestic cigarettes industry has a monopoly like structure where two giants — Pakistan Tobacco Company (PTC), a subsidiary of British American Tobacco (BAT) and Lakson Tobacco Company (LTC) – jointly hold 98 percent market share. The market share of three minor producers including Souvenir Tobacco, Paramount Tobacco and Sarhad Cigarette Industries is negligible at 0. percent, 0. 5 percent and 0. 5 percent, respectively. According to a list of manufacturing units in NWFP International Tobacco and Khyber seem to have a high installed capacity as well. [8] Some of the industries are attached with the multi-national companies and are producing their brand of cigarettes. However, the overall production quality of most industries is poor due to insufficient manufacturing facilities in these industries. In fact, Pakistan has become the largest market after China of substandard drugs and cigarettes and some 50 per cent of what is sold here is second-rate.
The establishment of tobacco industry equipped with modern technology is highly justified to produce the quality of cigarettes. [9] RIVALRY: Local Rivalry Since the two major players in the Pakistani market are both foreign subsidiaries, the cigarettes they produce are comparable in standard and quality to those produced the world over. Following are profiles of major two companies: Lakson Tobacco Company Limited Lakson Tobacco Company was founded in 1971 and today is Pakistan’s second largest tobacco company, with an estimated 47% cigarette market share in fiscal year 2006.
Lakson Tobacco’s shares are listed on the Karachi and Lahore stock exchanges. Lakson is engaged in the manufacture and marketing of cigarettes as well as export of un-manufactured tobaccos. Lakson operates four cigarette factories and one tobacco re-drying plant and constitutes the largest cigarette manufacturing company in Pakistan. LTC was the first Tobacco Company in Pakistan to acquire ISO-9000 certification for two of its divisions. Lakson’s Head Office is located at Karachi, and its four cigarette manufacturing units are situated in Dadu, Sahiwal, Rawalpindi and Swabi.
Lakson’s Leaf Division is situated in Mardan, the capital of tobacco growing areas in Pakistan’s North West Frontier Province (NWFP). Lakson provides direct employment to over 5000 people of which approximately 1500 work at its Leaf Division during the leaf buying and processing season. Morven Gold and Diplomat are core brands in Lakson Tobacco’s mainstream portfolio, while Red & White and Marlboro, manufactured under licence from PMI, complement the portfolio. Philip Morris International (PMI) recently announced that it has entered into an agreement to acquire an additional 50. 1% stake in Pakistan cigarette manufacturer Lakson Tobacco Company Limited (Lakson Tobacco) from a number of Lakson Tobacco’s principal shareholders for PKR 666. 89 (USD 10. 96) per share. PMI currently holds a 40% stake in Lakson Tobacco and this transaction will bring PMI’s stake in Lakson Tobacco to approximately 90%. Philip Morris International, based in Lausanne, Switzerland, held a 15% share of the international cigarette market in 2005. Its brands, led by Marlboro and L, are sold in over 160 countries around the world. Philip Morris International is an operating company of Altria Group, Inc. 10] Pakistan Tobacco Company Limited Pakistan Tobacco Company Limited was incorporated in 1947 immediately after partition, when it took over the business of the Imperial Tobacco Company of India which had been operational in the subcontinent since 1905. It is part of British American Tobacco, the world’s most international tobacco group, with brands sold in 180 markets around the world. PTC produces high quality tobacco products to meet the diverse preferences of millions of consumers, and works in all areas of the business – ‘from seed to smoke’.
Operations in Pakistan began in 1947, making it one of Pakistan’s first foreign investments. Its two manufacturing sites are located at Jhelum, Punjab and Akora Khattak, NWFP. The Group’s brands include Benson and Hedges, Gold Flake, John Player Gold Leaf, Embassy, Capstan and Sundrop. PTC – Recent figures (2006 vs. 2005) [11] [pic] Other Key Data[12] 2006 Sales: 17,867,912,000 Employees: 2,463 Market Capitalization: 38,795,614,830 Total Shares Outstanding: 61,580,341 Closely Held Shares: 44,379,674 Local Cigarette Manufacturers in Pakistan [13] ? Excel Tobacco Company Hmag Impex ? Khyber Tobacco Company Ltd. ? Lakson Tobacco Company Ltd. ? Pakistan Tobacco Company Ltd. ? Paramount Tobacco Co. (Pvt) Ltd. ? Premier Tobacco Industries Ltd. ? Saleem Cigarette Industries Ltd. ? Sarhad Cigarette Industries Ltd. ? Souvenir Tobacco Co. , Ltd. ? United Tobacco Industries FOREIGN RIVALRY About 100 countries produce tobacco. The major producers are China, India, Brazil, United States, Turkey, Zimbabwe and Malawi, which together produce over eighty per cent of the world’s tobacco. China alone accounts for over 35 per cent of world production.
When it comes to tobacco giants who have the world tobacco industry in their hands there are a few names that everyone knows: In UK; British American Tobacco UK Ltd, Gallaher Ltd and Imperial Tobacco Ltd are popular names of large manufacturers. In US; the four large companies that were quoted were Philip Morris, R. J. Reynolds and Brown and Williamson. Tobacco thrives in poorer soils, providing farmers with a welcome alternative crop. In many cases, it provides a higher income than any other smallholder crop. As a crop, it integrates well into environmentally friendly rotations, and its inclusion benefits subsequent crops like maize. 14] Even though Pakistani cigarettes are of the one of the lowest costs in the world, PTC and LTC comply with all international standards. Since the two major players in the Pakistani market are both foreign subsidiaries, the cigarettes they produce are comparable in both standard and quality to those produced the world over. International Trends [15] The latest quarterly report (September 2005) of BAT shows that its major growth areas are in Asia-Pacific, Africa and Latin America, all developing regions of the world.
Pakistan, Bangladesh, Brazil, Chile, South Africa and Venezuela are the star performers for the last year. ‘In Pakistan, higher margins and excellent volume growth by Gold Flake and John Player Gold Leaf resulted in higher profit and market share. In Asia-Pacific, regional profit rose by ? 41 million to ? 418 million because of good performances in Australasia and Pakistan. ’ Pakistan also figured in Altria/Philip Morris annual report as Philip Morris increased its stake to 40 per cent in Lakson Tobacco, a company that has more than half of the Pakistani market share.
Related and supporting industries Chemicals Industry A large number of pesticides are sprayed on tobacco. Tobacco is traditionally one of the largest crops grown in the state, contributing significantly to the state economy. Tobacco is also a chemical-intensive crop, because it requires so many applications of insect-killers, weed-killers, plant growth regulators as well as other types of pesticides. [16] Paper Industry The cigarette paper and the tipping paper includes paper and adhesive. Hence paper industry also acts as a supporting industry. Packaging Industry
Cigarette packaging requires extensive packaging. Hence it is also one of the tobacco supporting industries. GOVERNMENT’S ROLE IIN TOBACCO INDUSTRY Gold Leaf, a brand marketed by the Pakistan Tobacco Company, is sold at a retail price of Rs. 60 a pack of 20. The government gets Rs. 24. 20 while the company keeps Rs. 7. 80 only. Addicted to tobacco revenues, the government patronizes the tobacco business in a number of ways: The Pakistan Tobacco Board (PTB) was established in 1968 with headquarters in Peshawar after the government recognized ‘tobacco potential’.
Attached to the Ministry of Commerce, the Board is to promote tobacco cultivation on scientific lines for domestic use and export. It regulates, controls, grades and exports tobacco products; undertakes research and training for the tobacco industry: renders assistance for the development of existing and growing areas and establishment of model farms. The government ensures that the tobacco industry makes prompt payments to tobacco farmers, which is not the case for other crops like sugarcane, cotton and fruits.
Under the Deferred Payment Leaf Voucher Scheme, introduced in 1975 the government constituted a consortium of nationalized commercial banks for providing additional loans to tobacco companies during the marketing season of tobacco. The scheme is aimed at ensuring that tobacco growers are promptly paid for purchases made by the industry. In 1994, Rs. 434. 14 million were handed out to tobacco companies under this scheme. The Pakistan Sports Board and all sports associations under its aegis accept tobacco sponsorships. The monetary value of these sponsorships runs into millions of rupees.
The government gives tobacco companies a freehand to advertise their products on electronic and print media. While the total magnitude of tobacco advertisement in the print media is unknown, the state-owned Pakistan Television Corporation (PTV) earns almost 33% of its advertising income from the tobacco industry. According to press reports, PTV generated around Rs. 280 million through tobacco advertisements during the Cricket World Cup 1999. [17] A pilot programme for introduction of alternative crops like spring maize and sunflower by PTB in collaboration with PTC. [18] Tax Revenue:
Tax revenue is raised from the tobacco industry through two means: • Indirect taxes levied on tobacco products, consisting of excise duty and a general sales tax, which are both borne by the consumer. • Direct taxes on incomes earned in the tobacco industry, which include tobacco cess and income taxes paid by persons and businesses. The provincial government had also imposed a provincial tobacco development tax at the rate of Rs two per kilogram. [19] Changes in the excise law to control evasion Through the active participation of the tobacco industry, the Central Board of Revenue (CBR) made some changes in the Excise law to control vasion in the cigarette industry. The changes are based on the proposal submitted to the CBR by the Cigarette Manufacturers Association, of which PTC is one of the members. The industry suggested to CBR that they should fix the minimum price for cigarettes in the market during the last budget; the proposal was accepted and the required changes were made in the law. The main reason for suggesting this proposal was that currently there are many companies that are selling cigarettes packs for Rs. 5 and less whereas minimum duties on a pack of cigarette are around Rs. 5. 6. This will not only help control the tax evaded products in the market but also price these out of the reach of most youth. [20] Prohibition of Smoking at Public Places and Protection of Non-Smokers Health Ordinance of 2002 The Government of Pakistan has passed the Prohibition of Smoking at Public Places and Protection of Non-Smokers Health Ordinance of 2002, which is aimed at restricting promotional campaigns of the tobacco industry. This law is the first statutory move to regularise promotional campaigns of the tobacco industry. [See the appendix for full article]
The reasons behind the non-implementation of the anti-smoking law have social, legal and moral dimensions. Violations of the anti-smoking law reflected the disregard and disrespect for rules that prevailed in the country. Implementation is the direct responsibility of law enforcement agencies. The government cannot shift the responsibility from themselves by placing warnings that read ‘smoking is injurious to health’ on each cigarette pack. The health hazard posed by smoking should also be widely publicised. Secondly, the procedures for implementing the anti-smoking law have not been properly publicised. [21]
Framework convention on tobacco control (fctc) Pakistan has also ratified the Framework Convention on Tobacco Control (FCTC). The FCTC is the world’s first global agreement devoted entirely to tobacco control. Issues addressed in the FCTC include tobacco advertising and promotion, smuggling, taxes, cessation and treatment, passive smoking and tobacco product regulation. Obligations to the Cigarette Industry by PTB: The cigarette industry has conveyed to the CBR that if compliance practices of cigarette manufacturers are not standardized, the industry will face unnecessary problems at the time of departmental or external audit.
Keeping this in view, the board has specified the following uniform documentation and other related obligations for the cigarette manufacturers: Tax-Invoice (un-manufactured tobacco): At the time of clearance of un-manufactured tobacco for the manufacture of cigarettes, an invoice would be prepared by every manufacturer of cigarettes. Register of receipts, issues and balances: A register shall be maintained by the cigarette manufacturer at the place where un-manufactured tobacco is stored. A separate entry shall be made in the register on each clearance of un-manufactured tobacco.
Tax invoice/stock transport advice-cigarettes: At the time of clearance of cigarettes from the manufacturing premises, an invoice as prescribed shall be prepared. A separate entry for each brand shall be made in the said invoice and a copy of the invoice shall accompany the vehicle up to the destination mentioned in the invoice. Register for production, transfers and balances on the production floor: A register shall be maintained at the production floor and a separate entry shall be made for each variety or brand of cigarettes in the register.
Register for receipts, issues and balances of major raw materials: A register shall be maintained for major raw materials such as cigarette paper and filter rods for cigarettes, other than un-manufactured tobacco used in the manufacture of cigarettes. Declaration of machinery: Each cigarette manufacturer shall declare to the collector of Federal Excise, factory/floor-wise details of the machinery and equipment installed and under use therein besides the machinery and equipment lying idle/un-used in the factory or on the floor.
Addition or removal of machinery: All un-used and idle machinery or equipment shall, immediately on receipt of the said declaration, be properly sealed jointly by the Officer of the Federal Excise not below the rank of the assistant collector and the authorized representative of the manufacturer. No sealed machinery or equipment shall be desealed for any purpose and no additional or new machinery/equipment shall be installed in the factory or on the production floor and used without intimating the collector at least seven days in advance. 22] Ptb’s vigilance committees The Pakistan Tobacco Board (PTB) constituted Vigilance Committees to supervise tobacco marketing operations during 2005. [23] In Pakistan, whenever taxes are increased on tobacco products, sales of brands of legal companies decreases — and thereby the government revenue — as prices have to be increased to pay taxes. However, sale of counter band brands increase, as their prices remain same because their manufacturers don’t have to pay any taxes. [24]
In a planning statement for the crop of 2005, the Board said according to legal requirements, the tobacco manufacturing and/or exporting companies are required to indicate their tobacco requirements by October 21 of each year in respect of the ensuing crop to the PTB. After discussions between the Board and other stakeholders like buyers, growers, dealers, etc and taking into account factors like crop size, prices, domestic usage and exports, these figures are finalised. The purpose of this exercise, carried out diligently each year, is to enable a balance between the demand for tobacco by the companies and the crop size.
The tobacco growers are, therefore, advised to plan production of tobacco crop 2005 keeping in view the aforementioned purchase targets of tobacco industry. They are further advised to execute agreements with the tobacco companies of their choice so that no problem is encountered in its proper marketing at fair prices. The tobacco companies will purchase tobacco according to their indicated requirements from ‘contracted growers’ or ‘agreement-holders’ and not from growers who cultivate tobacco without any contract or agreement with a company or the so-called “Azad Growers’.
The pre-planned projection efforts are aimed at securing a balance between tobacco demand and supply. These efforts are offset, the tobacco is produced without giving appropriate consideration to the execution of agreements. This has always led to cultivation by growers of a crop size in excess of the demand resulting in over-supply and consequent price depression, not to mention difficulties in disposal of crop by small growers with attendant serious financial distress.
Tobacco growers should not grow Virginia without agreements while the tobacco companies should ensure compliance with the provision of law which envisages execution of agreements for their targeted requirements by the end of December, each year. [25] SWOT ANALYSIS Strengths • Extensive availability of raw material • Availability of basic infrastructure facilities like roads, railway, electricity, fuel and gas. • Market for end products • Gateway to Afghanistan and Central Asian states. • Due to proximity to Afghanistan, businesses can be strengthened by international business deal with Central Asian countries. Strong media backing aids in increasing revenues for the industry. While TV channels treat the statistics of revenue earning from advertisement as a well-guarded secret, one can understand the magnitude of revenue from airing cigarettes advertisements. Weaknesses • Under-pricing and excessive sales promotion programmes are said to be some of the major problems of the industry. While the domestic industry indulges in what is known as under-pricing by selling their brands cheaper than those of their rivals in the same category, the manufacturers are said to be involved in excessive advertisements and other promotion programmes.
The industry is known to be the largest spender on publicity worldwide. • Unionism of labors may be invited due to concentration of industries in the same place. • Easily available smuggled goods – no level playing field for companies in the organized sector. • The foreign cigarettes have been here since the days of the drug-lords when cigarettes were brought in from Dubai. The trade reached its zenith during the Afghan Transit Trade. All the consumer items that are offloaded in Bandar Abbas in Iran soon find their way to Karachi through Quetta. • Media pressure on youngsters towards smoking
Cigarette ads tend to glamourize smoking as something of a macho habit luring the youngsters to get addicted to nicotine in the earlier years of their life. Cigarette ads being extremely alluring encourage smoking, particularly among youngsters as one usually becomes a smoker before the age of twenty-one, which is strongly being apposed by health to concern organization. Opportunities • Pakistan has a locational advantage due to its strategic proximity and easy access to the region. There is great necessity that these valuable opportunities may be developed and are put to use for the increase of value dded exports of the country. • The creation of the independent Central Asian States and development in Afghanistan led to the opening of new opportunities for investment and trade. • Europe, Africa, and Australia are trying their level best to acquire some unexplored niche of the area. • PMI has acquired around 90 % stakes in Lakson Tobacco. This acquisition combines PMI’s international expertise and global brand portfolio with Lakson Tobacco’s local knowledge and strong brands, including market leader Morven Gold.
This mega deal is expected to give a fillip to ancillary industry related to cigarette manufacturing such as: tobacco processing units, packaging material, tipping paper etc. It could also enhance export of raw tobacco. Threats • Legally imported foreign cigarettes have entered the market and the local tobacco industry is worried about its very survival. The locals claim that the high rates of taxes imposed by the government will make it difficult for them to compete with the foreign varieties. Since good labor has already been engaged by the competitors, therefore efforts will be to make available the experienced staff on good salary, otherwise it may be problem for the Mills in the initial stages. • Price reduction by foreign competitors resulting in low return to the locals. • The ratification of the FCTC, if truly implemented, could lead to even more stringent controls on the tobacco industry. • Laws by the network of consumer protection and Tobacco Free-Initiative (TFI) to pressure the government to introduce adequate controls on tobacco sale and promotion will pose further resistance to the tobacco industry. High rates of taxes imposed by the government is forcing local firms to close. • High interest rates due to tight monetary policy • The ministry of health’s warning, ‘Smoking is injurious to your health’ as printed on packets of cigarettes of all brands and the same accompanies the voice-over on cigarette advertisements on TV. ISSUES IN TOBBACCO INDUSTRY GENERAL Issues The Framework Convention Alliance (FCA) is an alliance of over 160 non-governmental organizations from around the world that are working to support the development of a strong Framework Convention on Tobacco Control, and related protocols.
With the implementation of FCTC recommendations the tobacco industry world over will suffer severe losses. The 10 commitments that will have adverse affect over the future demand of tobacco, globally as well as domestically, are: 1. Advertising. Ban on all forms of direct and indirect tobacco advertising, promotion, and sponsorship. There will be restrictions on advertising as far as possible within the tested limits of its constitution. 2. Smuggling. One in three internationally traded cigarettes enters the black market, which will be stopped by the introduction of effective security measures in the distribution system.
Customs authorities must be able to trace the movement of tobacco products retrospectively to identify where diversion to the black market occurred. There are about 10,000 wholesale traders in the world, and these could be built into a licensed system in which they would record movements of tobacco products by scanning pack markings. Technology is available to do this at less than US$0. 02 per pack. 3. Pack markings. Produce a clear pack-marking regime – the language is currently confusing. There are up to seven markings requirements to be specified in G1. Rotated health warnings (not merely a bland general warning) – these must cover at least 50% of the pack in line with world best practice. • Use of pictures for at least some warnings to provide powerful visual communication of risk. • Information on ingredients and/or smoke emissions, but only if these provide useful information about the product to consumers. There should be no requirement for listing of tar, nicotine etc. yields on packages. • “For sale only in [market]” marking. This shortens the distribution chain and will help to tackle diversion to the black market. “Not for sale to under-18s” label. The FCA opposes this because it makes tobacco seem more adult – and hence more attractive to kids. • Security markings required for tracing – essential for a meaningful counter-smuggling strategy. • Plain packaging required for parts of package other than where mandatory messages appear. National authorities should specify culturally relevant messages and content for warnings and consumer information, in local languages. 4. Health before trade. Change the guiding principles to give higher priority to human life than to commercial interests.
The FCTC should be the prime treaty on tobacco and not be subject to challenge under the WTO agreements. The guiding principles must be changed to reflect FCTC supremacy in treaty conflicts relating to tobacco and to take a precautionary approach to evaluating measures intended to protect life. 5. Prohibit misleading claims and descriptors. Ban clearly misleading brand names using words like ‘light’, ‘mild’, and ‘ultra low’ or similarly misleading expressions and symbols. These implied health claims have no scientific basis, and mislead consumers and confuse regulators.
The FCTC should also ban any health claim on tobacco products unless approved by the authorities in the country where they are placed on the market. 6. Abandon the ISO methodology. The system of measuring tar and nicotine ‘yields’ with a smoking machine does not give useful information about the impact of smoking on health. These machine readings are not, therefore, a useful basis for regulation or comparison of products. The ISO is dominated by the tobacco industry, and should have no more than a strictly subordinate role to the WHO, which must lead in the definition of standards for public health. . Increase taxes. Tobacco taxes are effective in reducing demand and raising revenue. It will be impossible and undesirable to develop a common tax regime, but each party should commit to raise its tobacco taxes so that tobacco does not become more affordable. This means increasing tobacco taxes at least at the rate of growth of incomes – considerably ahead of inflation. Some fraction of tobacco tax revenue should be dedicated to funding tobacco control and cessation programs. 8. Close down duty free.
Duty free is an unjustified tax break to travellers, and opens a back door route to the black market by allowing retail access to tobacco products on which the full duties have not been paid. 9. The right to smoke-free life. The FCTC should recognize the right not to breathe second-hand smoke – a toxic and carcinogenic pollutant. The aim of the FCTC must be to eliminate involuntary exposure to tobacco smoke. There is no need to specify vulnerable groups in the text: everyone deserves protection. 10. End all forms of subsidy to tobacco. There is no justification for subsidizing any part of the production of tobacco.
If there are social needs for subsidizing communities based on tobacco farming, any support should be for diversification, infrastructure development or activities that produce public goods. Domestic Issues Absence of Level Playing Field The continued availability of the tax-evaded products restricts legitimate price increases and is detrimental to what would be the ‘Level Playing Field’. The absence of a Level Playing Field makes it extremely difficult for the legitimate sector to market their brands against the tax-evaded consignments.
Evaders are therefore harvesting bumper returns by commercially impairing the ethical manufacturers and fissuring government’s revenue generating capabilities. Tax Evasion Due to the absence of a level playing field in the tobacco industry and uneven business environment, tax evasion had risen to 21 per cent of the total market share. The phenomenon has shown a rising trend every time there was an increase in price/duty ratio. The government is planning to introduce strict budgetary measures to curb the persistent tax evasion by the tobacco industry, causing an annual loss of around Rs6 billion to the national exchequer.
Managing director of the Pakistan Tobacco Company (PTC) Jeremy Pike has been urging the government to check duty evasion and curb the incidence of smuggling. It is vital to resolve problems being faced by the tobacco industry. Smuggling 9/11 incident has led to an increased availability of the smuggled brands in the country, which currently have two per cent of market share. The officials blamed smuggling of foreign brands of cigarettes from neighbouring countries as being the major factor for the loss in this regard. Smuggling has been a major cause of revenue loss. Smuggled cigarettes are readily vailable at various retail outlets even though only cigarette packs with the Government of Pakistan mandated Health Warnings (in Urdu and English) can be sold in the country. Counterfeiting Counterfeiting is also damaging the brand goodwill, annoying customers and ultimately leading to the loss of sales volume. There is an increasing tendency to counterfeit cigarette brands, which led to low cigarette prices, prevented regular price hikes, encouraged down-trading and can lead to adverse excise structure changes. Pakistan already has one of the lowest cigarette prices in the world.
Customer dissatisfaction has a knock-on effect on Company market share and profitability. [26] According to the last financial year’s unofficial statistics, the counterfeiting, smuggling and tax evasion on cigarettes alone rendered billions of rupees loss to the national exchequer. The intensity of the tax evasion can be gauged by the fact that the country’s two major companies on their 17 legitimate brands paid Rs. 29. 4 billion government taxes last year while on the other hand, the rest total 118 brands share was only Rs. 200 million during this period.
Last year, over 74 billion cigarettes were released to the local market including 60 billion cigarettes of legitimate brands while the rest 14 billion cigarettes were smuggled, counterfeited and tax evaded by those who are heavily involved in corrupt practices from smuggling, low quality tobacco cropping to fake or substandard cigarette making level. [27] Apart from the detrimental effect on the industry and loss to the government revenues, this also deters new foreign investment particularly in view of continuous infringement of Intellectual Property Rights i. . International trademark infringements. The adverse impact of counterfeit & smuggled goods affects not only the tobacco industry, but pervades all sectors of consumer goods. The easy and pervasive availability of counterfeit cheats consumers and robs brand owners of the investment in building brand image. Under-pricing and excessive sales promotion Under-pricing and excessive sales promotion programmes are said to be some of the major problems of the industry.
While the domestic industry indulges in what is known as under-pricing by selling their brands cheaper than those of their rivals in the same category, the manufacturers are said to be involved in excessive advertisements and other promotion programmes. The industry is known to be the largest spender on publicity worldwide. A top excise official conveyed his observation to the representatives of M/s Pakistan Tobacco Company, Islamabad, and Lakson Tobacco Company, Karachi, that cigarette manufacturers are declaring prices in fraction eg price of Gold Leaf (20 HL) has been printed on the pack as Rs 35. 2 but it is not sold below Rs 37 by the retail traders, showing a built-in evasion of duty and taxes. Since least transaction currency is one rupee, price should be rounded off to avoid evasion of duty and taxes. On the other hand, tax collectors opined that the reason of difference in retail price printed on the pack and that charged by the retailer is due to additional 3 per cent sales tax, which is being charged by the distributor/dealer from un-registered retailer and the same is reflected in the price charged by the retailer.
However, there is a margin of overpricing even if sales tax is calculated at the rate of 18 percent. The tax collectors informed that some cigarette manufacturers are declaring price of 10 cigarette pack to the extent of Rs 2. 10 and adding central excise duty and sales tax to their cost, which comes to Rs 4. 63. The representative of a cigarette manufacturing giant pointed out that some cigarette manufacturers are selling their brands on a price as low as Rs 4 despite the fact that price printed on their packets is Rs 5. 56. The tax element on 20-cigarette pack comes to Rs 4. 0, and it is not possible that any cigarette brand can be sold on such a reduced price. The Collector, Sales Tax and Central Excise, Peshawar, submitted that the Sales Tax Act has not been extended to Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (FATA), which caused enforcement difficulties. The cigarette manufacturers should supply list of both registered and un-registered dealers/distributors of settled as well as FATA/PATA so that some enforcement measure may be taken. Labor and Health Issues
Sources said growing tobacco was so labour intensive that farmers typically employed their children. According to a report by the American National Academy of Sciences, children who work on tobacco crops are more vulnerable to health hazards than adults. Pesticides used in tobacco farming were linked to cancer and caused damage in the child’s nervous and immune system. Sources said children in NWFP children start working on tobacco crops as early as six-years old. Pesticides used in tobacco farming are more dangerous than other kinds of pesticides, and kill wildlife as well. 28] The tobacco industry is no friend of smokers — and ironically it’s true that “the tobacco industry kills its best customers”. Among consumers tobacco use can cause serious oral health problems, including gum disease and oral cancer, says the Academy of General Dentistry. [29] Grievances of Anjumane Kashtkaran Tobacco (Grower’s Union) Growers have been putting pressure on the Government to frame a strategy for tobacco exports. According to them, they are not paid reasonable prices by the cigarette manufacturers. The tobacco grower were of view that cost of production was more than Rs. 2/kg whereas they got average Rs. 50/kg from the companies. [30] Foreign Influx The local tobacco industry is worried about its very survival, now that legally imported foreign cigarettes have entered the market. The locals claim that the high rates of taxes imposed by the government will make it difficult for them to compete with the foreign varieties. It is argued that the country’s balance of trade would be further aggravated with legitimate cigarette imports which will soon shoot up sharply causing a drain on the country’s foreign reserves. Cigarette Advertisements
Cigarette ads tend to glamourize smoking as something of a macho habit luring the youngsters to get addicted to nicotine in the earlier years of their life. Cigarette ads being extremely alluring encourage smoking, particularly among youngsters as one usually becomes a smoker before the age of twenty-one, which is strongly being apposed by health to concern organization. If the tobacco industry was serious about reducing youth smoking, it would stop resisting and undermining tobacco control measures that work, such as tobacco tax increases, comprehensive advertising bans, and restrictions on smoking in public places. 31] Laws by the network of consumer protection The Network for Consumer Protection which has been working to protect and promote consumer rights has launched the Tobacco Free Initiative Pakistan TFI-Pak with initial support from the WHO. The primary goal of TFI-Pakistan is to mount resistance to the onslaught by the tobacco industry to educate the people about the hazards of tobacco use and to pressure the government to introduce adequate controls on tobacco sale and promotion.
TFI-Pak, in collaboration with WHO, the international anti-tobacco movement and domestic health groups, will mount a countrywide tobacco campaign to reduce smoking prevalence and tobacco consumption, thereby reducing the related burden of disease. [32] RECOMMENDATIONS TO THE TOBBACO INDUSTRY Help growers cultivate the crop on scientific lines. In order to save tobacco industry, it is imperative to help growers cultivate the crop on scientific lines.
Without doing enough for increasing the yield per unit area, we would be dragging the country to import raw materials worth Rs7 billion for tobacco industry that would be an additional burden on the national exchequer. Need to increase the yield There is a need to increase the yield by promoting quality produce and reducing the cost of production. An improved production technology is required for nursery raising, field crop, curing and grading on qualitative basis. Disease-resistant cultivars should be introduced in accordance with the climatic conditions of a particular zone to boost the yield.
Timely control Disease attack on crop is widely reported. Timely control of disease through application of the recommended pesticide is important to avoid quantitative and qualitative losses. Modern technology for curing of tobacco leaves Modern technology for curing of tobacco leaves should be disseminated among the growers. Planting of modern tobacco – Bulk Curing Burns imported from Greece at each tobacco research station is a good attempt to facilitate curing on scientific basis. It would be a shift from manual curing to mechanical curing. Wholesalers licensed system
There are about 10,000 wholesale traders in the world, and these could be built into a licensed system Pack Markings Improve efficiency by scanning pack markings • Crop diversification for tobacco growers and alternative business plans for retailers and workers in the tobacco industry • Government should help in promoting products in foreign markets by lobbying, freight charges reduction etc. Other Recommendations: • The price of per pack of 10 cigarettes should not cost less than Rs. 4. 15 plus sales tax. It is commercially not viable to sell below this threshold keeping in view manufacturing cost Excise duty and trade margins. As the country has surplus installed capacity therefore new manufacturing licenses should be issued only after thorough scrutiny. • The GOP should introduce a provision in the manufacturing license whereby each manufacturing unit should be allowed to install cigarette making machines according to their clearance. • Cigarette stock in transit should be subjected to surprise checks. • Customs Intelligence committees should check counterfeiting activities and must seize their manufacturing operations along with their licenses. A vigilant and watch should be kept in Azad Kashmir, Chakwal, and Bahawalpur where these activities are on an increasing trend. • The patent laws in this regard are weak and should be made more stringent with stricter punishments. There should be proper implementation of IPRs. (Intellectual Property Rights) • Regular raids on the retailers to check the smuggled items. This will reduce the availability and thus increase the price of the cigarettes. • In the long run the borders should be sealed for any kind of illegitimate trade. RECENT developments AND FUTURE OUTLOOK
Philip Morris International completes acquisition in Lakson Tobacco Company World’s number one cigarette producer Phillip Morris International Inc. (PMI) on 9th March, 2007 announced completion of its acquisition of an additional 50. 21% stake in Pakistan’s 2nd largest cigarette company Lakson Tobacco at a cost of $338. 9 million. The Lakhani family sold the total shareholding at Rs 667 per share to the US giant, which already owns 40 percent stake in the company. According to market experts family-owned tobacco companies are becoming extinct world-wide because of the high investment in technology.
The world business is divided with state monopolies in countries such as: Japan, China and Korea with western majors dominating such as: Phillip Morris, BAT industries (owners of Pakistan Tobacco) and RJR. Phillip Morris is expected to invest over $400 million for acquisition of the full company and is expected to retain the name as well. This mega deal is expected to give a fillip to ancillary industry related to cigarette manufacturing such as: tobacco processing units, packaging material, tipping paper etc. It could also enhance export of raw tobacco.
At present, both Phillip Morris and BAT industries feed the Central Asian countries from Europe. Shifting of this business to Pakistan is now a possibility. Over $400 million investment by a US conglomerate reflects a confidence in the country’s economy and should attract further US investment. [33] “PMI looks forward to a bright future for Lakson Tobacco in Pakistan,” said Matteo Pellegrini, President of PMI’s Western Asia region. “This acquisition combines PMI’s international expertise and global brand portfolio with Lakson Tobacco’s local knowledge and strong brands, including market leader Morven Gold.
We look forward to continuing to work with the management and employees of Lakson Tobacco to further solidify its market position and ensure the continued success of the company in Pakistan. ” Looking to the future, Salman Hameed, the newly appointed chairman and chief executive of Lakson Tobacco said: “Our focus will be to bring together the complementary strengths of Lakson Tobacco and PMI,” adding that: “Lakson’s business performance over the years provides a strong platform for growth. ” [34] Other Developments
There was an increase in plant capacity in 2006, where the Frontier province has 25 factories with installed annual capacity of more than 35 billion sticks. The nine factories in Sindh and four in Punjab have annual capacities of nearly 22 billion sticks and nearly 30 billion sticks respectively. The tobacco export of Pakistan has increased since 2001 and if the growth continues, the country would reach a total export target of almost $30 million by end of 2007. The exports during 2003-04 were 111. 68 percent higher than those for the corresponding period of previous year.
This growth in Pakistan tobacco exports indicates the growing popularity and acceptance of Pakistan’s products for their quality, consistency and cost competitiveness. [35] ———————– [1] Rs 1 billion up in fake and smuggled smoke By Rana Kashif http://www. dailytimes. com. pk/default. asp? page=2006%5C03%5C15%5Cstory_15-3-2006_pg7_21 [2] http://www. telmedpak. com/ngos. asp? a=tobacco3 http://www. sdpi. org/SDPI_in_the_press/media_coverage_2005. htm [3] Sources: Federal Bureau of Statistics, Government of Pakistan.
Pakistan expects $30 million by 2007 from tobacco export: PTB http://www. dailytimes. com. pk/default. asp? page=story_21-1-2005_pg7_15 Some data taken from Ayesha’s report Batch 2008 [4] http://www. jang. com. pk/thenews/investors/feb2001/if. htm [5] Pakistan Crop 2004, price, Marketing and Exports By RIAZ NOOR, CHAIRMAN,PTB [6] CBR spells out procedure for cigarette industry record (News Item 8TH Jan 2007) [7] Deadly Tobacco promotion Intrudes SAARC activities http://www. thenetwork. org. pk/pressrelease04-01-05. htm [8] Who benefits from the tobacco business? ttp://www. telmedpak. com/ngos. asp? a=tobacco6 [9] http://www. altria. com/media/press_release/03_02_pr_2007_01_19_07_01. asp http://www. corporateinformation. com/snapshot. asp? cusip=C586P1970&Sentby=H ome http://www. brecorder. com/index. php? id=520899&currPageNo=1&query=&search=&term=&supDate= [10] PTC’s Directors’ Report For The Year Ended June 30, 2006 [11] http://www. corporateinformation. com/snapshot. asp? SentBy=Home&cusip=C58625910 [12] http://www. pakistanibusiness. com/pakistani-companies/cigarette-manufacturers-in-pakistan-1743. tm [13] http://ptc. com. pk/OneWeb/sites/PAK_62VKZB. nsf/vwPagesWebLive/2BEF61B7B0F44D1BC1256F07003D572E? opendocument&SID=&DTC= [14] Ayesha’s report Batch 2008 [15] http://www. pested. org/informed/pdfs/Tobacco_chems. pdf [16] http://www. telmedpak. com/ngos. asp? a=tobacco7 [17] News Item (8th January 2007, Dawn) [18] Tobacco Sector Profile Experts Advisory Cell 2004 [19] http://ptc. com. pk/OneWeb/sites/PAK_62VKZB. nsf/vwPagesWebLive/B2CA5978B10BE753C1256F070045334E? opendocument&SID=&DTC= [20] http://www. dailytimes. com. k/default. asp? page=2006 3 8story_8-3-2006_pg7_27 [21] http://www. dailytimes. com. pk/default. asp? page=story_6-9-2005_pg5_14 [22] http://jang. com. pk/thenews/jul2005-daily/08-07-2005/business/b12. htm [23] http://www. dawn. com/2006/02/27/ebr15. htm [24] http://jang. com. pk/thenews/jan2005-daily/02-01-2005/business/b1. htm [25] [26] http://paktribune. com/news/index. shtml? 166062 [27] http://paktribune. com/news/index. shtml? 166064 [28] http://www. paktribune. com/news/index. shtml? 174961 [29] News Item 6th Feb, 2007, Dawn
