Breaking and re-entering: British American Tobacco in China 1979-2000.
ABSTRACT To analyse the strategy used by British American Tobacco (BAT) to re-enter the Chinese market from 1979 to 2000 after historically dominating the market before the 1950s.
Analysis of tobacco industry document files to date available only on-site at the Guildford Depository operated by BAT. An additional search of recent documents related to BAT, placed in the Minnesota Depository, was also carried out.
BAT has been committed to regaining its historically dominant position in China since the country reopened to foreign companies in 1979. Initially, BAT remained cautious relative to competitors in seeking joint ventures, finding market access hindered by bureaucratic complexity, restrictions on foreign investment and imports quotas, and later an advertising ban. Instead, the documents suggest BAT strongly relied on illegal imports to expand market presence of State Express 555 and other key brands. It was only when risks to contraband sales increased that the company made greater efforts to establish a legal presence in the country. Attempts to stress the long history of BAT in China and a proclaimed commitment to corporate social responsibility have been used to facilitate later negotiations.
China has remained relatively closed to transnational tobacco companies (TTCs) during its transition to a market economy, maintaining a firm grip over foreign investment and imports. Nonetheless, BAT has circumvented such restrictions through illegal imports and exploitation of inconsistencies in the local enforcement of advertising bans. Governments need to understand and address the full range of market entry tactics by TTCs in order to ensure effective tobacco control.
[show abstract] [hide abstract]
ABSTRACT: Internal tobacco industry documents relevant to China as published on www.tobaccoarchives.com located between 31 May and 1 August 1999 were searched. Documents describing the ambitions and conduct of transnational tobacco companies (TTCs) in China between 1976 and 1997 were located and reviewed in three sections: part A-early identification of market potential and attempts to enter the market, and improve trade and technology; part B-marketing and promotion efforts; part C-efforts to pre-empt legislation, control the smoking and health debate, and undermine the anti-tobacco lobby.Tobacco Control 10/2000; 9(3):292-302. · 3.01 Impact Factor
Article: Tobacco industry efforts subverting International Agency for Research on Cancer's second-hand smoke study.[show abstract] [hide abstract]
ABSTRACT: Scientific reports on second-hand smoke have stimulated legislation on clean indoor air in the USA, but less so in Europe. Recently, the largest European study, by the International Agency for Research on Cancer (IARC), demonstrated a 16% increase in the point estimate of risk in lung cancer for nonsmokers, a result consistent with earlier studies. However, the study was described by newspapers and the tobacco industry as demonstrating no increase in risk. To understand the tobacco industry's strategy on the IARC study we analysed industry documents released in US litigation and interviewed IARC investigators. The Philip Morris tobacco company feared that the study (and a possible IARC monograph on second-hand smoke) would lead to increased restrictions in Europe so they spearheaded an inter-industry, three-prong strategy to subvert IARC's work. The scientific strategy attempted to undercut IARC's research and to develop industry-directed research to counter the anticipated findings. The communications strategy planned to shape opinion by manipulating the media and the public. The government strategy sought to prevent increased smoking restrictions. The IARC study cost $2 million over ten years; Philip Morris planned to spend $2 million in one year alone and up to $4 million on research. The documents and interviews suggest that the tobacco industry continues to conduct a sophisticated campaign against conclusions that second-hand smoke causes lung cancer and other diseases, subverting normal scientific processes.The Lancet 05/2000; 355(9211):1253-9. · 38.28 Impact Factor
BMJ (Clinical research ed.). 08/2004; 329(7457):104-6.
Breaking and re-entering: British American Tobacco in
K Lee, A B Gilmore, J Collin
See end of article for
Dr Kelley Lee, Centre on
Global Change and
Health, London School of
Hygiene & Tropical
Medicine, Keppel Street,
London UK WC1E 7HT;
Tobacco Control 2004;13(Suppl II):ii88–ii95. doi: 10.1136/tc.2004.009258
Objectives: To analyse the strategy used by British American Tobacco (BAT) to re-enter the Chinese market
from 1979 to 2000 after historically dominating the market before the 1950s.
Design: Analysis of tobacco industry document files to date available only on-site at the Guildford
Depository operated by BAT. An additional search of recent documents related to BAT, placed in the
Minnesota Depository, was also carried out.
Results: BAT has been committed to regaining its historically dominant position in China since the country
reopened to foreign companies in 1979. Initially, BAT remained cautious relative to competitors in seeking
joint ventures, finding market access hindered by bureaucratic complexity, restrictions on foreign
investment and imports quotas, and later an advertising ban. Instead, the documents suggest BAT strongly
relied on illegal imports to expand market presence of State Express 555 and other key brands. It was only
when risks to contraband sales increased that the company made greater efforts to establish a legal
presence in the country. Attempts to stress the long history of BAT in China and a proclaimed commitment
to corporate social responsibility have been used to facilitate later negotiations.
Conclusion: China has remained relatively closed to transnational tobacco companies (TTCs) during its
transition to a market economy, maintaining a firm grip over foreign investment and imports. Nonetheless,
BAT has circumvented such restrictions through illegal imports and exploitation of inconsistencies in the
local enforcement of advertising bans. Governments need to understand and address the full range of
market entry tactics by TTCs in order to ensure effective tobacco control.
chairman of British American Tobacco (BAT), famously
asked that a globe be brought to him and pointed to China
as the key market where he wanted to sell.1With a
population today of 1.2 billion, with over 350 million
smokers, China is much the world’s largest cigarette market,2
accounting for one in three cigarettes smoked in the world
(1.7 trillion sticks in 2000).3Critically for the expansion of
transnational tobacco companies (TTCs), China remains a
growing market. From the early 1970s to early 1990s, per
capita consumption of cigarettes rose by 260%,4with further
rapid growth during 2001–2002 when sales volume rose by
5.5%, and commercial profits and taxes by 19.6%.5
During the first half of the 20th century, BAT dominated
the lucrative Chinese market, becoming the company’s key
overseas operation. Exporting its first cigarette to China in
1890, the market grew meteorically from 1.25 billion sticks in
1902 to 55 billion sticks in 1937.6By as early as 1924 BAT had
established an 82% market share.7Throughout the 1920s,
BAT exports to China from its US base exceeded those for all
other countries combined.8Political and economic instability
meant that the country never provided a straightforward
business climate, but the market’s closure in the early 1950s,
after the establishment of the People’s Republic of China, lost
BAT its largest source of foreign earnings9and BAT has long
sought to re-establish its presence.
The announcement of China’s ‘‘open door policy’’ in the
late 1970s signalled that the country was ready to do business
again, and offered TTCs a timely opportunity as traditional
markets began to decline. Although the Chinese tobacco
industry remained strictly controlled by a state owned
monopoly, TTCs saw China as the ultimate prize. As one
hina has been the ultimate prize for tobacco companies
since the industry set its sights on international
markets over a century ago. James B Duke, first
Rothman’s official stated, ‘‘Thinking about Chinese smoking
statistics is like trying to think about the limits of space.’’10
This paper uses corporate documents from BAT to describe
its strategy to re-enter China from 1979 to 2000, comple-
menting an earlier analysis of on-line industry documents.11
While this previous work primarily describes market entry
tactics by Philip Morris and other companies, this paper
reveals the initial strategies deployed by BAT. It examines the
company’s relations with the Chinese government, and
highlights how BAT countered restrictions in market access
through strategic exploitation and oversight of contraband
markets. While seeking to apply strategies used in other
emerging markets, notably the ‘‘staged approach’’ to market
entry,12 13the company found itself needing to adapt to the
‘‘difficult market’’ it encountered. An understanding of the
strategies used will contribute to strengthening regulation of
the industry’s expansion in the developing world.
Abbreviations: BAT, British American Tobacco; BATUKE, British
American Tobacco United Kingdom Export; BCF, Beijing Cigarette
Factory; BLI, Beijing Light Industry No. 1 Bureau; CORA, Consumer and
Regulatory Affairs; CSR, corporate social responsibility; CITIC, China
International Trust and Investment Service Corporation; MACHIMPEX,
China National Machinery and Equipment Import and Export
Corporation; CNNPC, China National Native Produce and Animal By-
Products Import and Export Corporation; CNTC, China National
Tobacco Corporation; CT, Chia Tai Investment Company; CTIEC, China
Tobacco Import and Export Corporation; FCTC, Framework Convention
on Tobacco Control; FSU, former Soviet Union; GATT, General
Agreement on Trade and Tariffs; GT, general trade; JV, joint venture;
NBD, New Business Development; PM, Philip Morris; PRC, People’s
Republic of China; SEFK, State Express Filter King; SE555, State Express
555; SRBT, Sino-Russian Border Trade; STMA, State Tobacco Monopoly
Administration; SUTL, Singapura United Trading Limited; TTC,
transnational tobacco company; WTO, World Trade Organization
The paper reviews documents only available, at the time of
writing, on-site from the BAT Depository in Guildford, UK.
Conditions of access to this collection are highly problematic,
and precluded systematic searching of the entire collection.14–
16The crude file level index available was iteratively searched
in October 2003 using the keywords ‘‘China’’, ‘‘Chinese’’,
‘‘PRC’’ (People’s Republic of China), ‘‘Sino*’’, ‘‘Peking/
Beijing’’, ‘‘Shanghai’’, ‘‘Guangdong/Canton’’, ‘‘Hong Kong’’,
and ‘‘CNTC’’. This resulted in the retrieval of 226 files. In
addition, China related regional documents found in files on
the Asia-Pacific region of BAT were indexed. A total of 1538
documents were indexed in detail in a specially designed
database to enable the construction of an historical narrative.
Given the crude index at the Depository, documents on China
located under file titles not containing the above keywords
are necessarily excluded. Documents placed in the Minnesota
Depository related to BAT (around one million pages) were
manually searched page by page, given the lack of searchable
index, in July and August 2003. Industry trade publications,
newspaper articles, and academic journals were reviewed for
information relevant to TTCs in China.
An open door to a ‘‘difficult market’’
For the first 30 years of Communist rule (1950s to 1979), the
Chinese market remained firmly closed. The ‘‘open door
policy’’ announced by Deng Xiaoping in 1979 marked a
radical policy shift, signalling a desire to integrate market
economics with Chinese socialism. TTCs were among the first
foreign businesses to explore this opportunity, acutely aware
of the need to establish an early competitive advantage.
However, initial enthusiasm soon gave way to the realisation
that China remained a ‘‘difficult market’’9posing numerous
First, the complex bureaucracy proved an immediate
barrier. Trade remained tightly controlled by a Ministry of
Foreign Trade that owned a number of corporations solely
responsible for trade in specific commodities.17Until the early
1980s, trade in tobacco leaf and cigarettes was the
responsibility of the China National Native Produce and
(CNNPC). This structure was replicated at provincial level,
where foreign companies needed to establish formal relation-
ships with provincial CNNPC offices. Longstanding tensions
between central and provincial government often made this
awkward, as the provinces jealously guarded their authority
over the local tobacco industry as a lucrative source of tax
revenue. BAT’s Group Advisor on Chinese Affairs JPHD
Payne described the CNNPC as ‘‘a mammoth corporation…
locked in a power struggle with several of its Provincial
Second, central planning created volatility in leaf produc-
tion and market instability. In 1980, a poor crop resulted in a
severe domestic shortage, but the government’s subsequent
raising of the procurement price produced a substantial glut
as domestic supply grew by 107%.18Low grade cigarettes then
flooded the market which, along with the limited availability
of foreign exchange, prompted the government in 1982 both
to reduce foreign imports by 36% annually and to press TTCs
to lower their export prices.9This led to efforts by TTCs to
jointly resist the new policy:
and Export Corporation
BAT HK, in company with other Western manufacturers,
feels that a further increase in the retail price in China is
called for… BAT HK met with PMI [Philip Morris
International] and RJR [RJ Reynolds] to discuss the former’s
proposal for the industry to halt further exports to the PRC,
until such times as sensible pricing can be achieved.9
Third, the Chinese government was not offering foreign
ownership and continued to restrict imports, keen only to
secure technology and advice to improve manufacturing
capacity and leaf growing. For BAT, such opportunities were
Let us be under no illusion that the only reason for CNTC’s
overtures to BATCo (and other foreign manufacturers) is to
persuade or coerce us into subsidising a) their leaf
development schemes, b) their factory modernisation
programmes, so they can rapidly upgrade their quality
and compete with us in the export markets of the world…19
In this context, BAT cautiously focused on low risk
activities that would bring direct benefits to the company.
In 1979 BAT began conducting leaf trials in Yunnan province
aiming to establish ‘‘either a possible alternative source for
the world market or as an import substitute for the benefit of
the Chinese’’.9BAT subsidiaries also made ‘‘regular limited
purchases’’ of Chinese grown tobacco leaf as gestures of
Second, BAT offered to sell new and reconditioned
machinery to the Beijing Light Industry No. 1 Bureau
(BLI), using the opportunity of a 1979 agreement to establish
an exclusive relationship and prevent competitors gaining a
During the Trial Period and any extension of cooperation
between the parties, BLI and BAT shall not negotiate or
conclude any similar agreement with any other tobacco
manufacturer or any other Light Industry Bureau in the
People’s Republic of China respectively.21
From September 1981, BAT publicised its expertise more
widely as machinery suppliers, particularly when the Chinese
government needed to convert its bumper crop to cigarettes.
Brochures were sent to 28 factories in 13 provinces, and
machinery was ultimately supplied to
factories.22While it was unlikely to be financially lucrative,
BAT saw such supplies ‘‘mainly as a means to gaining an
entree to factories in the provinces, to strengthen our
A third activity was licensed manufacturing of BAT brands.
Under the 1979 agreement between BAT and BLI, manu-
facture was initially limited to local brands, though BAT
envisaged expansion to premium brands (most notably State
Express 555) if international production standards were
attained.23Relationships during this period were charac-
terised by keenness from the Chinese and by BAT’s concern
to ensure that cooperation was not financially compromising.
This was helped by BAT’s exemption from customs on raw
materials and other inputs and the payment of a 2% royalty
on retail sales of SE555.24
BAT’s competitors were actively pursuing joint ventures
(JVs) during this period. By 1979 it was reported that PM had
signed agreements for 10 JVs with Chinese authorities.11In
1981 RJ Reynolds became the first TTC to manufacture in
China with an agreement with the Xiamen Cigarette Factory
to produce Camel Filters to sell through foreign currency
outlets, followed in 1986 with the jointly established brand
(Jinqiao) for the domestic and export markets.25 26Similarly,
in 1985 Gallaher International identified a ‘‘successful local
manufacturing operation’’ as one of the ‘‘prime components
of our business’’ in China.27
at least three
BAT in China 1979–2000ii89
In contrast, BAT remained cautious regarding such
relationships. A 1983 report by Payne on preliminary
discussions regarding JVs in China identified existing guide-
lines as making it ‘‘difficult to identify positive profit-
sources’’. Establishing a fully owned subsidiary in China
was also rejected as untried, with Payne advising not ‘‘to
blaze this trail nor to regard that route as a viable alternative
without further research’’.9It was concluded that if the
Chinese could not ‘‘in advance, demonstrate that their
scheme would prove economically beneficial to BAT, no
involvement is likely to ensue’’.19Joint ventures by other
companies, which the Chinese government hoped would earn
much needed foreign currency, were dismissed as unsuccess-
ful and mutually unsatisfactory:
The CNTC are dissatisfied because the ‘exporting rules’
are circumvented by brand owners selling to Hong Kong
(who then re-sell back into the PRC) and the foreign
manufacturer is frustrated because he does not have totally
free access to the PRC domestic market.28
BAT was especially cautious about the prospects of local
manufacture of its international brands, particularly SE555,27
and expressed ongoing protectiveness of its ‘‘crown jewels’’.29
The value accorded to SE555 demonstrates the continuing
relevance of BAT’s pre-revolutionary dominance in China:
BAT has received many requests from PRC organisations
wishing to manufacture SE 555 under licence, as this is still
the most prestigious and best remembered International
brand. None of the proposals indicate any real return to
BAT. Until the joint venture rules become more attractive to
the foreign partner, and the necessary brand ownership
safeguards are incorporated, licensing of SE 555 for local
manufacture will not be contemplated.27
In 1986 BAT did sign a memorandum of understanding
with the Hong Kong based Chia Tai Investment Company
(CT) to explore a possible joint venture focusing initially on
leaf processing with the later prospect of cigarette manu-
facture and sales.30Yet its prospective partner apparently
viewed BAT’s position as overcautious, seeming to feel that
‘‘BAT should not be seeking cast-iron guarantees [of
sufficient financial returns] either from PRC or from C-T’’.31
Overall, the Chinese market was assessed by BAT as
‘‘highly unfavourable to western manufacturers’’. BAT felt its
competitors had ‘‘launched into premature manufacture’’ of
lower quality products, while BAT restricted itself to
economically viable leaf growing and machinery.19It took
care to receive payment in hard currency, and satisfied itself
with widening its ‘‘network of contacts’’. BAT’s strategy was
‘‘to keep a profitable foot in the Chinese door without
extensive or irrevocable commitment, so that, if and when
conditions become favourable, BAT will have a profitable
base from which to expand’’.27
Use of ‘‘alternative export routes/customers’’ to
‘‘improve direct penetration’’
While BAT remained wary about expanding its legal presence
in China, documents suggest that illegal imports rapidly
increased from the early 1980s to dramatically exceed legal
imports. Tighter quotas introduced under the newly formed
China National Tobacco Corporation (CNTC) kept all legal
imports restricted to 1400 million sticks in 1982. Yet BAT
describes rapidly growing sales to China during this period.
In 1987 sales to the Far East region reached four times the
1986 volume, attributed in large part to ‘‘expanded distribu-
tion and demand’’ in China.32In November 1990, total
monthly sales to China by BAT alone reached a record high of
2343.7 million sticks (28 128 million per year).33By compar-
ison, official figures for legal imports by all TTCs in 1990 was
only 10 551 million.34
One key supply route for contraband during this period
was from Hong Kong to the Xiamen Special Economic Zone
Trade Company Limited, located in the southeast province of
Fujian. From Xiamen, stock was transported onwards to
other regions of the country. This included what BAT called
‘‘Sino-Russian Border Trade’’ (SRBT) where sales figures
cited for specific brands reveal the scale of illicit operations.
In November 1986, total shipments were 56 million sticks per
month.35By January 1989, monthly sales of SEFK (State
Express Filter King) alone reached 40 million sticks (480
million annually), while sales of Kent were expected to reach
180 million sticks per month (2160 million per year).36The
projected sale of SE555 for 1989 in China, which BAT deemed
to offer no ‘‘real return’’ if manufactured locally under
licence,27was projected at 233 million sticks per month (2800
million per year).37So successful was this trade that the
potential impact of local production may have restricted
enthusiasm for a more substantial legitimate presence. For
example, it was noted that, in discussions on developing a
joint venture, ‘‘C-T appreciate that BAT may be apprehensive
re effect on BAT HK’s exports to PRC’’.30
The documents suggest an occasional lack of organisa-
tional cohesion and an inability to exert sufficient control
over some distributors. For example, shipments from Hong
Kong to Xiamen intended for the SRBT were found diverted
to Bangladesh, Taiwan and elsewhere.38In 1983 Payne
expressed concern ‘‘at the leakage of cigarettes from the
People’s Republic of China (PRC) to other Far Eastern
territories’’.9This ‘‘leakage’’ was addressed in meetings in
August and September 1986, with concerns including the
impact on the highly profitable operations of BAT distributor
Singapura United Trading Limited (SUTL) (see Collin et al in
this supplement).39In meeting notes dated 22 September
1986, Ronayn Coburn (BAT Singapore) wrote:
[I]t was yet again made clear to BATHK that the continued
disruption to BATUKE [British American Tobacco United
Kingdom Export]/SUTL interests in the key Bangladesh
market resultant from massive leakage from Hong Kong
was totally unacceptable. This situation, it was reiterated,
was not only putting the BATUKE/SUTL operation and
relationship at increasingly serious risk but also, in Group
terms, placing in grave jeopardy a source of major
Under no circumstances will any further shipments of SEFK
be made to Xiamen SEZ since BATUKE (RJMC) [Coburn] at
least remains convinced that this customer, beyond all
reasonable doubt, has been a principal, if not the sole,
source of leakage in recent months.40
Despite ‘‘leakage’’, there was only a brief halt to supplies
and smuggling remained remarkably lucrative. From 1989–
1993 BAT exports to China quadrupled, with only a small
proportion (5.4% in 1993) reportedly passing through legal
channels.41The ‘‘strength of the cross-border trade from
Hong Kong into the semi-autonomous Southern provinces’’42
ensured BAT brands reached key urban markets and beyond.
By the early 1990s, however, BAT’s reliance on contraband
led to a growing sense of vulnerability, particularly as
competitors pursued a legal presence in China. In 1991
Rothmans formed a joint venture in Shandong to produce
three brands,21 43and in 1993 PM concluded a joint venture to
manufacture Marlboro in Shanghai. The fear that this greater
manufacturing presence by TTCs in China would lead to a
ii90Lee, Gilmore, Collin
crackdown on smuggling was identified as among the key
threats to BAT’s business plans:
Authorities’ efforts to curb illegal imports will increase,
although they will remain sporadic and inconsistent.
However, access of exports from PAC RIM [Pacific Rim]
countries will still be possible.44
Similarly, in a 1993 memorandum marked ‘‘SECRET’’ from
Susan Osborne (Brand Manager SE555, BATCo) to Jimmi
Rembiszeski (Marketing Director, BATCo), the PM joint
venture was described as a threat to import dependent
brands ‘‘555, Kent and Hilton’’ which ‘‘may suffer from [a]
tightened policy’’. Osborne warned:
You will see from the attached that PM has confirmed an
JV agreement to manufacture Marlboro in Shanghai
(capacity unknown). Clearly this is consistent with their
strategy to build legitamite [sic] domestic sales.
I believe that this action may have serious implications for
our GT [general trade, a euphemism for cigarette
smuggling39] business in China in the medium to longer
I address this to you in the context of 555
1. The Beijing government is capable of controlling
2. Given the profile the Chinese government is seeking as
a world leader (for example, 2000 Olympics) it is unlikely
that they will want to be perceived as the contraband
capital of the globe
3. Once Marlboro is manufactured locally manufactured
555, Kent and Hilton, dependent on import may suffer
from tightened policy
4. I am not aware of current BAT JV status in China via
BAT China or the NBD in Windsor House
5. Certainly we would locally manufacture 555 as
opposed to sacrifice the consumer franchise if exports
become restricted (555 original heritage was locally made
prior to 1948).45
Concerns about risks to contraband sales were supported
by growing efforts by Hong Kong and Chinese authorities to
investigate smuggling. In May 1991 it was reported by BAT
HK that customs officials in Wenzhou ‘‘made a surprise move
by burning up 400 cases of contraband foreign cigarettes’’.46
In 1994 the government confiscated 510 000 cases of
smuggled cigarettes, estimated to be a small fraction of the
US$1 billion in lost revenue annually. The CNTC estimated
that 99% of foreign cigarettes sold in China in 1996 were
contraband.47In 1998 Premier Zhu Rongji and President
Jiang Zemin began a long running anti-smuggling campaign,
including investigating the suspected involvement of the
People’s Liberation Army in the illegal trade.12 48 49In Hong
Kong, investigations under the Independent Commission
Against Corruption led to the murder of a key witness, and a
BAT Hong Kong executive was convicted of taking bribes in
connection with cigarette smuggling. Reports indicate that
BAT sales to a Hong Kong based network smuggling into
China and Taiwan, and backed by the Triad (organised
criminal group), totalled approximately US$1.2 billion
between 1987 and 1993.39
BAT’s response to this riskier environment was ‘‘[t]o
improve overall availability, particularly direct supply in
North and Central regions’’ to ensure that its brands would
maintain a strong market presence in the face of growing
competition. The company also stated that it would
‘‘investigate alternative export routes/customers that will
improve direct penetration of UK brands in northern and
central provinces’’50given legal sale of imports were focused
primarily in Beijing, Guangdong and Shanghai.
‘‘To gradually increase sales through CNTC so as to
improve positive sales ratio over other channels’’51
A second strategy by BAT was to seek a firmer legal footing in
China. Expectations of China’s potential economic stature
were beginning to be realised. The economy grew by 8.2% per
annum between 1978–95,52outperforming the recession hit
countries of North America and Western Europe. In 1986 the
Chinese government submitted its membership application to
the General Agreement on Tariffs and Trade (GATT), later the
World Trade Organization (WTO), signalling its commitment
to further expand foreign trade and investment. BAT
expected membership to reduce barriers to market entry by
BAT drew on its experience in other emerging markets. In
1991 it had formed the New Business Development unit
(NBD) to develop new investment opportunities,13 53particu-
larly in the former monopoly markets of Eastern Europe and
the Far East.54In January 1993, BAT undertook a major
company restructuring entitled ‘‘Project Rubicon’’, driven by
concerns that NBD could not adequately deal with all the
opportunities available at the time.55 56It was felt that BAT’s
decentralised structure was inefficient,57 58and there was an
urgency ‘‘to exploit the growing opportunities for its brands
in world markets’’.59
In 1993 BAT formed a specific NBD Team for China ‘‘[t]o
assist BAT Industries in the development of new investment
opportunities’’.60Strategies to be used, namely acquiring
‘‘best production capacity’’ and achieving ‘‘limited exclusive
brand opportunities’’, had already been tried and tested in
what BAT described as ‘‘it’s first stage of NBD acquisitions’’
in Eastern Europe and the former Soviet Union.12 61In China,
an immediate scaling up of company presence was planned,
including opening four more area offices in 1993 ‘‘to
maximise our focus on the China market’’.62
By the mid 1990s, BAT was actively pursuing closer
cooperation with Chinese counterparts which it had pre-
viously been reluctant to engage. The company’s aim was ‘‘To
gradually increase sales through CNTC so as to improve
positive sales ratio over other [illegal] channels.’’51Despite a
slower start, BAT aimed to overtake the competition via a
‘‘‘first strike’ mindset’’ to establish market leadership.63This
proactive strategy included a desire for agreements on
licensing, contract manufacturing, profit sharing, marketing
only joint ventures, strategic alliances and, most sought after
of all, equity JV.59
On 22 February 1995 a letter of intent was signed with a
number of provincial tobacco companies for leaf and
manufacturing projects. The letter of intent was seen as a
N Develop and maintain first class relationship with STMA/
N Enhance the corporate image of BAT as a credible and
N Build up BAT’s capability to influence in the industry64
For these purposes, BAT sought local partners that were
politically influential, strategically important to the STMA/
CNTC, and willing to cooperate on a long term basis towards
an equity JV. The establishment of ‘‘contract manufactur-
ing’’, plus a marketing and sales joint venture, was intended
to achieve several objectives including the establishment of a
legal entity, side stepping CNTC’s over-capacity problem and:
BAT in China 1979–2000ii91
N To increase sales volume through normal channel
N To normalise and increase BAT’s control on marketing
After prolonged negotiations, BAT signed an agreement in
1996 with the Guizhou Huang Guo Shu Group, the second
largest provincial tobacco producer,65to jointly develop a new
lights brand. The agreement was heralded as a major
competitive breakthrough, although the brand was not
launched until May 2000.66The agreement also fell short of
the equity JV that was now BAT’s ‘‘ultimate goal’’.67BAT was
pursuing an equity JV for key brands SE555 and Kent, in the
form of localised manufacturing, and a permanent manu-
facturing and business base.62Additionally, BAT wanted an
agreement with the CNTC ‘‘which would allow control over
marketing and distribution of our brands within the PRC’’.68
NBD China was charged with the task of establishing a full
JV that would enable quality control, and competitive
advantagevia sales representatives
Through such an operation, BAT sought ‘‘[t]o obtain a 15%
share of the Greater China market by 2015’’, representing 250
billion sticks of which 168 billion would be BAT brands and
82 billion jointly developed brands.66
As negotiations progressed for China’s accession to the
WTO, including reduced tariffs on imported cigarettes,
competition among TTCs to gain market entry intensified.
Yet, according to industry reports, progress by all companies
remained slow. Despite concerted efforts to woo Chinese
authorities, and various agreements were reached after
prolonged negotiations, an equity JV remained elusive. For
example, in 2001, BAT chairman Martin Broughton’s
announcement that the Chinese government had granted
approval for the signing of a joint venture was met with the
comment by an STMA official that ‘‘the Chinese tobacco
industry is not open to foreign investment’’.69When the
company again announced in July 2004 that it would become
the first foreign company to manufacture cigarettes in
China,70STMA officials again quickly denied approval had
been given.71With massive oversupply of tobacco domes-
tically under central planning, the government was not keen
to encourage increased imports.72
on the ground.62
Increasing advertising ‘‘where restrictions are not
As well as the active pursuit of a joint venture, BAT
commissioned detailed market research about the diverse
Chinese market. Initial research confirmed BAT as the clear
market leader among foreign imports led by SE555, although
official imports comprised under 1% of the total Chinese
market in the early 1990s.33The identified strategy was ‘‘to
further grow SE555’s dominant share from 13.6% in the
imported segment in the duty paid and duty free markets’’
based on the brand’s ‘‘intrinsic exclusivity and prestige’’.
Premium local brands such as Panda, Zhonghua, Ashima,
Red Pagoda, and Yun Yan were acknowledged, but the longer
term threats were identified as Marlboro and Rothman’s
SE555 has no available imported equivalent in terms of
heritage, status, or prestige. However, Marlboro has
historically attempted (and so far failed) to embark upon a
pricing strategy of achieving retail pricing parity with
SEFK which could threaten the premium pricing, and
consequently status values of SEFK.
With the strong imagery of Marlboro, as well as the strong
status and gift giving qualities [supporting] more wide-
spread consumer penetration, Marlboro represents the
greatest immediate threat to SE555.73
At the lower end of the market, Hilton was identified as
BAT’s ‘‘value for money’’ brand intended to be ‘‘the ‘starter’
or ‘staging’ brand’’ for the all important Chinese mass market
where most consumers were then placed. It was hoped that,
as the country became more prosperous, consumers would
‘‘trade up from local to import brands, often to higher priced
imports’’.74Hence, Hilton would serve as a lower price
alternative to SE555.75
The documents reflect an urgency to increase spending on
marketing to match competitors despite the introduction of
the Control of Tobacco Products law in 1992 which, inter alia,
banned advertising in the print and broadcast media.76PM
was reportedly spending ‘‘twice as much as BAT on
communications’’, with ‘‘90% of total expenditure’’ on
marketing on the European Community and Far East, the
spending gap having grown particularly pronounced in
support of international brands.77
increased communication spending in China by 43%.78
While advertising restrictions were not fully enforced in
some provinces, BAT anticipated that these would ‘‘succumb
to Central Government’s pressure to enforce the advertising
ban’’.74The BAT China company plan therefore proposed
substantial marketing activities to exploit this window of
From 1993–94 BAT
N To maximise the opportunity to increase communication
spend behind major media, especially TV, in strategic
regions to build brand awareness of international brands.
N To actively secure quality outdoor signages in major cities
for long term in anticipation of clamp down on major
media for cigarette advertising.
N To work with other tobacco companies to lobby the
Central Government in relaxing restriction.79
A key objective was to establish and then increase
advertising in key markets, notably Beijing, Shanghai, and
Guangzhou. In 1992, BAT’s overall marketing strategy
targeted advertising agencies ‘‘that are well established in
China, that provide a national service, are of international
reputation, and are acceptable to IBM [International Brand
Management] unit’’.80The UK based advertising firm BSB
was identified to lead BAT’s scaling up efforts, with a strong
emphasis on developing local contacts.
The best way of identifying media opportunities, achieving
planned media buys and conducting initial negotiations is
through local persons who are well connected to decision-
making authorities in their own locales. The idea of doing
business with one’s own kind is very important to the
In this respect, it is recommended that a network of local
contacts or representatives be set up by BSB within China,
to the extent of at least having one contact in each priority
BAT sought to circumvent the 1992 national advertising
restrictions by exploiting regionality (with local attitudes to
advertising being seen as a function of distance from Beijing
and relative economic autonomy), the increasing need for
foreign currency, and local subjectivity in interpreting ‘‘what
extraordinary circumstances provide sufficient reason to be
flexible and to relax prohibitions’’:
In this environment where the only constant is incon-
sistency, it is obviously that media planning for cigarette
products in China must be flexible, media strategies must
be clearly defined by region, and tactics for negotiations
ii92 Lee, Gilmore, Collin
must be creative and cognizant of the sensitivities to the
Corporate social responsibility in practice: preserving
marketing freedom, undermining health
BAT has long sought public relations opportunities to invest
in communities in ways that advance commercial and
political objectives. In 1992, for example, HK$300 000 was
given to repair the Haizhou bridge in Guangzhou, an
investment viewed as ‘‘the sort of gesture to which
officialdom will be obligated, and (that) can benefit 555
and BAT more ways than advertising alone’’.83
opportunities have recently been more systematically pur-
sued as BAT’s broader strategy has increasingly emphasised
its high profile ‘‘corporate social responsibility’’ (CSR)
initiatives.84The CORA (Consumer and Regulatory Affairs)
section of the Asia Pacific North Company Plan 2000–2002
set the broad objective across Hong Kong and China of
becoming ‘‘known as a responsible company in a business
seen to be controversial’’.85
Activities such as endowing a Chair of Marketing at a
Shanghai business school, sponsoring the Beijing Orchestra,
and financing a ‘‘youth smoking prevention’’ programme
have been depicted by BAT executives as evidence of the
company’s contribution to sustainable development in
China.86 87In contrast, internally the regional plan highlights
the role of such exercises in promoting ‘‘a positive reputation
in order to improve our ability to shape the future business
environment’’.80Such apparent philanthropy is rather part of
a broader strategy to prevent tighter marketing restrictions.88
CORA proposed a number of actions to ‘‘promote advertising
and sponsorships as vital business activities’’ in China
including: ‘‘Continue to lobby for marketing freedom’’,
‘‘Influence the drafting of the supplemental tobacco adver-
tising laws’’, and ‘‘Lobby the Ministry of Public Health to re-
prioritise health issues. Hepatitis is the number 1 killer
disease in China.’’ The key performance measure for success
in securing such a reorientation would be that ‘‘(t)he liver
disease prevention program is endorsed by and goodwill is
generated among the Ministry of Public Health and senior
The disregard for public health characteristic of such
‘‘corporate responsibility’’ is further illustrated by regional
plans to ‘‘(p)ut ETS [environmental tobacco smoke] into its
proper perspective’’,80namely to create controversy around
the scientific evidence linking second hand smoke and ill
health. The plan emphasised promotion of ‘‘the concept of
accommodation [such as smoking and non-smoking areas]
to lobby for the delay of further restrictions on public
smoking’’. Proposed activities in China included lobbying for
the establishment of indoor air quality standards, the launch
of a public education programme via the STMA website, and
the continuation of a ‘‘PRC ETS research project’’.83Such
plans correspond with industry efforts elsewhere to under-
mine public debate on ETS.89
Critically, the plan also outlines proposals aimed at
countering the WHO’s Tobacco Free Initiative in China, with
a strong emphasis on undermining negotiations for the
Framework Convention on Tobacco Control (FCTC). BAT was
the most vociferously critical among TTCs in its criticisms of
the proposed convention,90 91and the Asian region assumed a
critical role in its strategy to counter what BAT China’s Ooi
Wei-Ming (managing director) identified as ‘‘the spectre of
global tobacco control’’.82The strategies proposed to address
the FCTC within China were:
(b) Form alliance with STMA in lobbying to defend the
legitimacy and marketing freedom of the tobacco industry
(c) Proactively publicise WHO’s agenda and the progress
(d) Lobby the participation by officials of other ministries
(including officials having financial, trade, taxation,
environment, and agricultural portfolios in the FCTC
Working Group and an inter-governmental negotiating
body) to influence the drafting and be opposed in most
part to the FCTC.83
The STMA is clearly identified as the key to achieving
broader political influence over the FCTC, being repeatedly
highlighted as the subject of proposed lobbying activities,
with the intended outcome being that ‘‘STMA forms an
alliance with BAT and adopts BAT company positions in its
discussions and work with other ministries’’.83An indication
of the initial success of this strategy is provided by Brenda
Chow’s (director of public affairs, BAT China) reported
claims that BAT ‘‘persuaded the monopoly to look at it from a
national economic perspective’’, and secured the inclusion of
STMA officials among China’s negotiating team.92
BAT continues to portray its operations as born in, and
‘‘intrinsically linked to the social development’’81of, countries
like China in which it established an early presence. This self
serving portrayal may be disingenuous, but it highlights the
distinctively global character of the company by comparison
with other TTCs.93BAT’s performance and prospects in China
remain shaped by this history. The company’s competitive
advantage is seen as residing in its long term presence,94a
major contributing factor to the current strength of SE555.95
In 2001 Martin Broughton cited this history as enabling the
agreement to build a factory in Sichuan Province.96In the
announcement of a similar agreement in July 2004, with
China Eastern Investments, to build an £800 million factory
to produce 100 billion cigarettes annually, the Financial Times
stated that ‘‘BAT is believed to have used its historic
connections with China to facilitate the deal’’.97
difficulties following these agreements, and China’s signing
of the FCTC,98indicate that BAT’s recent progress has by no
means gone unchecked. Nevertheless, despite initial reluc-
tance, the company is today more ambitious in its China
strategy than its competitors.99
This paper argues that BAT’s initial strategy to re-enter
China from the late 1970s was characterised by caution, in
contrast with the active efforts by PM, RJR, and others.11
Frustrated by bureaucratic complexity, import quotas, and
the terms for foreign investment set by the Chinese
government, BAT limited itself to leaf development and
equipment sales. Behind the scenes, however, it relied heavily
on contraband to protect its lead position in the import
market, and to penetrate new regions of the country. It was
only when BAT began to feel vulnerable by its dependence on
illegal imports that a firmer legal presence was sought. From
the early 1990s, the company began to actively pursue a joint
venture and increase marketing efforts.
These findings are pertinent for two reasons. First, the
tactics used in China are remarkably similar to those used in
the former Soviet Union (FSU) where a cautious stepwise
approach, focusing initially on imports and later local
manufacturing, was employed.12 13Here, the company was
also more cautious than its major competitors in establishing
legal imports and manufacturing, perhaps inappropriately so,
and possibly missing major opportunities. Instead, permitting
salesto buildvia smuggling
Interestingly, one of the key attractions of the FSU was its
border with China, with BAT specifying that it would review
its strategy for SE555 when more was known about the
smuggling routes to China. Later, when seeking to reduce
BAT in China 1979–2000ii93
dependence on contraband sales, the company effectively
exploited weak local enforcement of advertising restrictions.
Second, these similarities with the Chinese context, in
turn, can be used to inform the development of appropriate
tobacco control measures. It is noteworthy that in China,
where the transition to a market economy has been
comparatively successful and the national government has
so far effectively resisted local expansion of TTCs, BAT has
still been able to build market presence. Admittedly, foreign
brands remain a small albeit growing proportion of the total
market. Yet it is clear that far better policing of imports (for
example, through a tax marker system with appropriate
monitoring and penalties) is needed. Restrictions on legal
imports are meaningless where smuggling is so rife.
Similarly, stricter local enforcement of advertising restric-
tions is needed in such emerging markets to prevent an
undermining of national and international policy. More
recently, BAT has sought to circumvent regulation through
its sponsorship of the Chinese Grand Prix in September
2004100 101and its CSR initiatives. Comprehensive restrictions
on marketing and advertising, in line with the FCTC, and
effective enforcement by all levels of government, and by all
governments, is the only effective way forward.
This research is supported by funding from the National Cancer
Institute, US National Institutes of Health, Grant Number 1 RO1
Documents cited in this paper not currently available on existing
websites will be posted on the Tobacco Control Research page on the
London School of Hygiene and Tropical Medicine website http://
K Lee, J Collin, Centre on Global Change and Health, London School of
Hygiene & Tropical Medicine, London, UK; email@example.com
A B Gilmore, European Centre on Health of Societies in Transition,
London School of Hygiene & Tropical Medicine
Conflicts of interest: No competing interests
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What this paper adds
China is the key new market for TTCs but little is known so far
about specific market entry strategies used over the past two
decades. Previous analysis of China based on industry
documents has drawn on documents available on-line which
largely excludes documents related to BAT. This paper is the
first detailed analysis of previously unseen documents only
available on-site from BAT’s Guildford Depository, focusing
on the tactics used by the company to re-enter the Chinese
The paper demonstrates that BAT’s actual strategy in China
differs somewhat from its public stance. While the company
has consistently sought to present itself as a preferred foreign
investor to the Chinese government, including corporate
social responsibility initiatives, in practice, it has engaged in
dubious tactics to circumvent persistent barriers to market
entry. BAT’s efforts to use its historical dominance as
leverage over other TTCs in China is also shown.
ii94Lee, Gilmore, Collin
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