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September, 2006

China’s Tobacco Packaging Industry Faces Anti-Counterfeiting and Cost Challenges

By Allan Liao

Along with escalating competition in domestic cigarette markets, Chinese tobacco manufacturers, in an attempt to gain greater market shares, are doing all they can to constantly renew their cigarette packaging, contributing to unprecedented prosperity in the tobacco packaging segment. The packaging of some cigarette products far exceeds that of famous-brand, high-quality foreign brands. So far, such fine packaging technologies as gold or silver stamping and frosted finish, bronzing printing and holographic anti-counterfeiting have all appeared on hard packaging of domestic cigarette products.

Behind the dazzling packaging, two major challenges are faced by the tobacco packaging industry — anti-counterfeiting on cigarette packaging and control of cost. Over recent years, various newly created anti-counterfeiting technologies have been increasingly applied on the packaging of medium- and high-grade cigarette products. As a result, tobacco manufacturers vie with one another in applying new technologies, and the cost of packaging has kept increasing. Also, some newly applied anti-counterfeiting technologies do not work well. Therefore, unification of technical standards governing anti-counterfeiting and innovation of packaging will become the trend in cigarette packaging. Besides, overpackaging has resulted in such problems as reduced profits and consubstantiality of packaging of different products. Along with continuation of the structural reform of the tobacco industry, rationalization of the cost of packaging will become a major issue.

Technical difficulties
Official statistics indicate that in 2005, Chinese administrative law-enforcement authorities cracked 347,000 cases of making or selling cigarettes with fake trademarks and seized 7.3 billion cigarettes (730,000 cases) bearing fake trademarks. The making and marketing of counterfeit cigarettes has become a serious problem that cannot be ignored. Therefore, the application of anti-counterfeiting technologies in packaging has become a hot topic.

In February 1996, Yuxi Cigarette Factory as the core of Hongta Group in Yunnan Province — the largest Chinese tobacco manufacturer — took the lead by applying an oil-resistant label on its Mount Hongtashan cigarette products, an easily identifiable sign containing special fibers on the packaging of all cartons. Since then, tobacco manufacturers in all regions have followed suit by applying various high or new technologies to make special labels in efforts to prevent counterfeiting and protect the legitimate rights and interests of the companies and consumers.

Faced with the harsh reality that cigarette counterfeiting has become increasingly rampant despite government crackdowns, Chinese tobacco manufacturers have vied with one another to improve packaging, applying high-tech solutions to safeguard their own legitimate rights and interests and those of consumers at the source. As far as existing cigarette packaging is concerned, it is made with constantly emerging new materials, new technologies and new techniques, including DNA technology, three-dimensional laser solid autokinetic effect technology and holographic positioned bronzing.

Despite the application of so many anti-counterfeiting technologies or techniques, counterfeit cigarette products have kept mushrooming, indicating that the effect of anti-counterfeiting efforts has not been ideal, and that anti-counterfeiting methods used on cigarette packaging is still problematic. Anti-counterfeiting technologies applied are not unified, resulting in difficulty in the exchange of information on identification of anti-counterfeiting signs. Consumers are not well aware of the anti-counterfeiting technologies applied, and thus these applications do not work well. There are excessive, overlapping or inferior technologies, resulting in blind competition among tobacco manufacturers in their application, making it easy for counterfeiters to make fake cigarettes, and leading to increases in the cost of production.

In light of such a harsh situation, some industry experts have proposed that solutions be found through the following approaches:

First, the state should design unified forms of anti-counterfeiting signs on the packaging of tobacco products, in the style of stamp tax designs applied in many countries. Doing so will contribute to totally freeing manufacturers from the hard job of developing anti-counterfeiting technologies, significantly lowering the cost of production in making anti-counterfeiting signs on cigarette packaging, and making it easier for consumers to identify them.

Second, efforts should be made to conduct in-depth research into the creation and development of packaging structures, in order to make it more difficult to imitate and easier to identify. In this respect, we can proceed from the uniqueness and novelty of packaging designs, and designing unconventional forms of product packaging. This is because unconventional packaging does not conform to the requirement of economic designing, and makes the production of die equipment very difficult. Moreover, the production of unconventional packaging has very high processing technology requirements and involves very complicated packaging structures, which will lead to significant increases in the cost of production while making imitation more difficult. Consequently, counterfeiters can hardly profit and will encounter higher risk. Therefore, the development and production of unconventional forms of packaging can effectively contribute to stopping acts of counterfeiting. Although tobacco manufacturers may sustain increases in the cost of production in this respect, they will see their ultimate economic efficiency go up significantly along with a decline in the cost of anti-counterfeiting technologies.

Thirdly, importance should be attached to increasing the identifiability of anti-counterfeiting packaging. In the development of new technologies, we should not only attach importance to making it more difficult to imitate them, but should also pay sufficient attention to the effect of any new anti-counterfeiting technologies after they are applied. If a new form of anti-counterfeiting packaging is unidentifiable by consumers, the technology for making it can only be regarded as ineffective.

Along with the change of styles of cigarette packaging design, and with the strengthening by the state of efforts to control luxurious packaging, anti-counterfeiting on future cigarette packaging will inevitably be subject to many factors including government policy change, simplification of packaging styles, cost control and market demand. No matter how cigarette packaging changes, anti-counterfeiting technologies for making cigarette packaging at lower costs that will be easily identifiable and possesses strong characteristics will be well received by tobacco manufacturers.

Control over packaging costs
Presently, cigarette packaging in China is becoming increasingly luxurious and superior. The new forms of packaging used by manufacturers include soft and hard board packets, plastic packets and metal packets with frosted finish or bronzing printing, among many others. The technologies and techniques for printing cigarette packaging in China are inferior only to those for printing banknotes and valuable securities. In today’s markets there are many dazzling cigarette packaging designs and materials in use. Presently, packaging materials account for too big a proportion of the cost of cigarette production. Annually, the tobacco industry of China spends RMB35 billion (US$4.3 billion) on cigarette materials, including RMB15 billion, or 45% of the total, on cigarette materials alone, which exceeds the average cost of cigarette production by 10% or even higher. For some cigarette brands, including low-grade cigarette brands, the printing of their trademarks alone accounts for 40% or higher of the cost of production. For example, the retail price of a particular cigarette brand is RMB15 per carton, but the cost of its packaging materials stands at RMB1.88 per carton. Likewise, for another brand whose retail price is RMB10 per carton, the cost of its packaging materials is as high as RMB1.8.

Along with China’s lifting of quotas on cigarette imports and import duties on low-tar-level blend-type cigarettes, and with tax increases on domestic cigarettes, the tobacco industry will face very serious challenges controlling the cost of cigarette production. Therefore, while seeking luxuriousness in cigarette packaging, Chinese tobacco manufacturers will have to take the related costs into account.

Presently, Chinese tobacco manufacturers mostly apply laser technology to produce high-grade hard packaging of cigarettes, at a relevant high cost accounting for 25% to 35% of the total cost of production. For some brands, the cost of making hard packaging runs as high as 40% as a result of applying frosted finish technology. Because of this, Chinese cigarette brands will see their competitiveness seriously weakened in terms of production costs compared to big foreign brands, which mostly use relatively low cost white paperboard costing roughly one-fourth of the cost of hard packaging using laser technology. Besides the high cost of packaging for high-grade cigarettes, rather luxurious packaging is also used in the production of cigarettes of a considerable number of low-grade brands at a persistently high cost.

Overpackaging at such a high cost has brought about serious negative impacts on Chinese tobacco manufacturers. First, persistent increase of the cost of packaging has resulted in consubstantiality of packaging of cigarette products of totally different grades. In some cases, the packaging of low-grade cigarettes is almost comparable to the packaging of high-grade cigarettes, not only misleading consumers, but also negatively impacting the promotion and marketing of high-grade cigarettes.

Persistent increases in the cost of packaging has contributed to raising the total cost of production of cigarette products, which in turn results in declining in profits. Presently, a majority of low-grade cigarette brands in China have very low profit making capacity. In reality, losses are made in the production of over 50% of low-grade cigarette brands. Chinese tobacco manufacturers, including Hongta Group (the largest Chinese tobacco manufacturing enterprise group) and Shanghai Tobacco Group (China’s most profitable tobacco manufacturing enterprise) have all expressed acknowledgement of this status quo. For example, such low-grade brands as the white-packaging Hongmei (The Red Plum Blossom) and the soft-packaging Baoshi (Gem) of Hongta Group are making virtually no profit. Therefore, control over the cost of packaging has become a thorny issue for many tobacco manufacturers. State Tobacco Monopoly Administration (STMA) – the watchdog of China’s tobacco industry – has noticed the problem of overpackaging that has driven up the total cost of cigarette production in China. On July 4, 2005, the State Council – the highest governing body in China – issued the Notice on Key Points of the Work for Building an Economic Society for a Recent Period of Time, which explicitly provides that the state will study the adoption of policies and measures for banning overpackaging, and enact regulatory legal documents on prohibition of overpackaging, against which there are strong public complaints.

Moreover, STMA has issued the Guiding Opinions on Control Over the Cost of Production of Low-Grade Cigarettes, which requires Chinese tobacco manufacturers to use simple packaging in producing low-grade cigarettes, and manage to lower the cost of packaging for all products.

As consumers of low-grade cigarettes pay greater attention to the inherent quality of products, they normally do not have too high a demand for packaging. To lower the total cost of low-grade cigarette production through reduction of the cost of packaging will be one of the major approaches to significantly lower the cost of low-grade cigarette production in China. If Chinese tobacco manufacturers all use transparent packaging free of cartons and packets or soft packaging of cartons, they will succeed in lowering the cost of packaging by RMB50 per case. And nationally, the cost of packaging can drop by RMB500 million per year. If so, a majority of the cigarette brands concerned will be able to make profits instead of making losses. Some manufacturers have started the process of improving the packaging of their low-grade products. Many of them are managing to lower the cost of packaging by directly using thin film as cigarette packaging instead of conventional packaging such as cartons and packets. For example, the Hefei subsidiary of Mount Huangshan General Cigarette Factory in Anhui Province now uses PVDC coating film to wrap up packets of low-grade cigarettes as transparent packaging for both cartons and boxes. Computed by its annual output of 100,000 cases (5 billion cigarettes), it should be able to save up to RMB6.115 million in the cost of packaging each year. This could offer a great contribution in the drive to control costs and lower the consumption of materials in cigarette production.

Meanwhile, there is also room for lowering the cost of packaging for high-grade cigarettes. Official statistics indicate that the cost of production of high-grade cigarettes will drop by at least 10% if cheaper aluminum-sprayed paperboard is used instead of costly aluminum foil composite paperboard. Over recent years, many Chinese cigarette brands using aluminum-sprayed paperboard as packaging have shown very good packaging effects. They include such big brands as Liqun, Shanghai and The Red Double Happiness of Shanghai. Besides, Yuxi Cigarette Factory in Yunnan province, Ningbo Cigarette Factory in Zhejiang province, Xuzhou Cigarette Factory in Jiangsu province and Wuhan Tobacco Group in Hubei province have also used aluminum-sprayed paperboard as the packaging of their cigarette products instead of aluminum foil composite paperboard.

Along with acceleration of the pace of structural reform of China’s tobacco industry, characterized by corporate mergers, acquisitions and associations, the number of tobacco manufacturers in China has been declining over the past few years. Accordingly, the tobacco industry is strengthening efforts to reform the structure of existing cigarette brands, resulting in concentration of cigarette products in a number of big, competitive brands. Thus, rational planning of cigarette packaging improvement will be placed firmly on the industry’s agenda. To develop different forms of packaging for different cigarette products in accordance with their grading is a general course of development for Chinese cigarette packaging.

The General Group in Shandong province is one manufacturer that is developing different forms of packaging for different cigarette products in accordance with their grading. The General Group continues to use expensive materials and costly printing to produce packaging for famous-brand, high-quality cigarettes, to seek luxuriousness of their packaging and maintain the image of high-grade cigarette brands. Meanwhile, the group uses some 230 grams of white paperboard as the hard packaging of packets for its medium-grade cigarette products. For cheap products, it uses some 80 grams of double-glued white paperboard as the soft packaging of packets. As a result, the General Group has succeeded in rationalizing the structure of cost on the premise of maintaining the quality of products.

Over recent years, both taxes on and retail prices of cigarette products in China have seen a trend of continued growth. Accordingly, to lower the cost of production of cigarettes will be a challenge that Chinese tobacco manufacturers will have to face on a long-term basis, a fact they are well aware of. In an address to a national tobacco work conference in Beijing on January 14, 2006, STMA director-general Jiang Chengkang, when commenting on key points of the work that the tobacco industry of China must fulfill, said: “The whole tobacco industry of China must put the saving of resources and reduction of costs on its important agenda, and must manage to realize thrifty development and sustainable development by raising the efficiency of utilization of resources.”

Tobacco International - September, 2006

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