Posted on 28th Jun 2011 @ 11:07 PM
Vietnam has many of the characteristics that the tobacco industry considers attractive in Asia—many people (84 million), a growing economy and a relatively tolerant attitude toward smoking. The Vietnam Tobacco Association believes total industry volume is 74 billion units, but estimates vary. However, economic realities and trade restrictions have so far prevented international cigarette makers from fully tapping into that market. Multinationals know that investment here is a long-term commitment.
Despite ongoing market reforms, Vietnam remains a communist country in which the government manages many aspects of the economy, including the tobacco industry. The Vietnam National Tobacco Corp. (Vinataba) has a market share of approximately 60 percent and provincial, non-Vinataba factories control about 30 percent.
Like its counterpart in China, the Vietnamese tobacco industry is consolidating. Three years ago, there were 28 factories; today there are 18. The number of tobacco holding companies has been reduced from 20 to eight. To increase efficiency, the government is in the process of closing factories that produce fewer than 1 billion sticks. The plan is to convert all state-owned tobacco factories into limited companies and, eventually, privatize them. The time frame, however, remains uncertain.
FOREIGN BRANDS. Vietnamese law currently prohibits cigarette imports and the local manufacture of cigarettes by foreign companies. Multinationals that want to sell their brands in Vietnam must contract with Vinataba or one of the provincial factories and manufacture their brands under license. British American Tobacco, Philip Morris and Japan Tobacco hold fixed-period branch-license status in Vietnam, which entitles them to trade the brands specified in each license.
BAT’s says it’s market share is 22.4 percent, while Philip Morris believes it has 1 percent of the market. Accurate statistics are hard to come by because of the size and nature of the market. Ho Chi Minh City alone reportedly has more than 70,000 cigarette outlets, many of which are street vendors with small sales carts.
Vinataba manufactures foreign brands such as Marlboro, State Express 555, Dunhill and Mild Seven, among others. In 2000, however, Vietnam announced a moratorium on new international brand launches, arguing that the current volumes are sufficient. As part of its public health agenda, the government wants to curb the supply of tobacco products.
While foreign cigarette makers support the public health objectives, some believe the import ban is discriminatory. “Domestically made cigarettes are not safer than foreign-made ones,” says Ashok Rammohan, Philip Morris’ general manager of Indochina. “We think that Vietnam should one, lift the import ban, and two, determine the appropriate import duty rate for cigarettes.” Rammohan fears the ban on imports could also hurt Vietnam’s ability to export its tobacco products to other Association of Southeast Asian Nations (ASEAN)—a government objective—because those countries might reciprocate.
Vietnam’s tax structure, too, favors locally made brands. For example, cigarettes with less than 51 percent local tobacco are subject to a 65 percent special consumption tax (SCT), while cigarettes with more than 51 percent local leaf attract a 45 percent SCT. Rammohan believes that this should be changed. “There is no public health rationale for subsidizing cheaper brands or local leaf,” he says. “We also think a specific, nondiscriminatory tax system would maximize government revenues.”
AFFORDABILITY. Domestic and foreign players alike must contend with local economic realities: Vietnam is a poor country. With a per-capita annual GDP of merely $2,700 (compared with $29,600 in the United Kingdom), the majority of sales are in the value segment. More than 50 percent of volume sells for only 3,000 dong per pack—less than us$0.20—and in rural areas, per-stick sales are still common. In the cities, low-priced cigarettes account for a smaller share of sales (about 33 percent).
“Because incomes are low, we must keep the price of cigarettes low also,” says Nguyen Nam Hai, general director of Vinataba. “This means there isn’t much profit to reinvest in cigarette risk reduction and other projects.”
The shortage of capital hampers Vinataba’s modernization efforts. Because of financial constraints, the company buys much of its equipment from China. “It doesn’t make sense to buy a German-built Protos cigarette maker to manufacture 5,000-dong cigarettes,” says Nguyen.
Vietnamese smokers’ low disposable incomes also constrain multinationals, whose brands tend to sell in the premium segment. Philip Morris’ Marlboro, for example, sells for vnd22,000—400 percent above the most popular price segment. Nevertheless, the company is confident that its investment in Vietnam will ultimately pay off. “Our strategy is always to invest for the long term; we hope to see industry liberalization in the coming years that would allow us to compete fairly and effectively with other tobacco companies,” says Rammohan.
Indeed, as a member of ASEAN, Vietnam has committed to reducing trade barriers under that organization’s Asian Free Trade Agreement. Vietnam has also applied for membership in the World Trade Organization, which requires members to lower tariffs and remove nontariff barriers. Negotiations, however, are proceeding slowly, and it is unlikely that Vietnam will join in 2005, as earlier press reports suggested. Nguyen believes that the ban on cigarette imports will eventually be lifted but not in the near future. “The government wants time for the transition to free trade,” he says.
Vietnam has signed and ratified another significant international treaty—the World Health Organization’s Framework Convention on Tobacco Control (FCTC). Local tobacco executives don’t expect radical changes, however, because many of the framework’s requirements are already in place in Vietnam. For example, Vietnamese law prohibits tobacco advertising and sponsorships of cultural and sporting events. There are restrictions on smoking and selling cigarettes in public places.
Tobacco executives expect merchandising to be further restricted. There is also talk of tax increases and further restrictions on smoking. Vietnam has a long, porous border and the illicit cigarette trade thrives. Nguyen estimates that smuggled stock accounts for some 10 percent of all Vietnamese cigarette sales. Some Vietnamese smokers believe that imported international brands are better than international brands made in Vietnam, and they are willing to pay more for foreign-made cigarettes. Unlike smokers in other countries, they are attracted to smuggled stock because of perception, not price.
The multinationals insist their brand quality is similar worldwide. In Vietnam, “Marlboro is produced at the Saigon Cigarette Factory by its highly skilled team with close guidance from Vinataba management in Ho Chi Minh City,” says Rammohan. “All our brand variants use imported raw material, and [the] SCF primarily handles the making of packing of the cigarettes for the domestic market. Like all our products around the world, the Marlboro product manufactured at the SCF goes through a rigorous quality assurance process in order to ensure high quality and taste.”
In the past two years, the government has become more actively engaged in anti-contraband activities, increasing border control among other measures. The industry applauds this greater involvement. Still, Nguyen believes, the anti-smuggling efforts need to be carried out more consistently then they currently are. “Now, there is the occasional campaign that abates after a few months,” he says. “Only with continuous action can we effectively tackle the issue.”
To save money and create jobs, the Vietnamese government wants to reduce the tobacco industry’s dependence on foreign materials. In November 2004, Vinataba and BAT opened a joint cut-rag factory in Dong Nai province (see sidebar). By substituting imported tobacco with Vietnamese tobacco, the industry hopes to save $500 million in foreign exchange over 50 years. One of the most modern leaf processing facilities in Asia, the plant can produce 17,000 tons of cut rag per year—enough for 20 billion cigarettes.
After Vietnam joins the WTO, the factory might even contribute to Vietnam’s ambition of exporting leaf tobacco. Nguyen concedes this a long-term objective, however. “We must be strong internally before expanding,” he says.
Written by tobaccoreporter.com on October 2005