China National Tobacco Company and Farmers

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Executive summary

China has the largest population in the world and boasts to have the fastest growing economy in the world. The country is also the major producer of tobacco and has the highest tobacco consumption in the world. Smoking in public is also socially accepted for both men and women. The Chinese government controls all production and marketing of tobacco products in the market in a form of monopoly. The state owns China National Tobacco Company, which is the biggest tobacco producing company in mainland China. This will be the supporting company for this task.

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The company however, lacks an intermediary with Chinese tobacco farmers, which is necessary to help cut on physical cost involved because of direct selling. This market plan is in an effort to fill this gap through introduction of an intermediary to buy raw tobacco from farmers, offer storage facilities, and add value through curing before transporting the raw material to tobacco manufacturers.

The Chinese government will finance the plan and it will involve supply of tobacco to other foreign companies with a base in China. Revenues generated will develop the tobacco sector to foster higher growth of the industry and the economy at large.

Situation analysis

Market summary

According to Breen (2001), tobacco industry constitutes those persons involved in its growth, processing, promotion, and supply of tobacco and other closely related products to the ultimate user.

Tobacco plant is easier to grow and can grow in all parts of the world except the Antarctica. Tobacco is a narcotic plant native to the continent of America and perceived to be one of the most important crops grown by American farmers over decades. The plant however, introduced by the Americans to other parts of the world because of migration and colonialism and was used as a tool for trade and for recreational purposes. Tobacco is cultivated for its leaves, which dried, processed for use in Cigarettes, snuff, cigar or pipe smoking. Other than smoking, tobacco used for medicinal purposes and perceived to be a painkiller for toothache and earache (Caldwell & Nordan, 1995).

Brandt (2009) stated that Industrialization of tobacco sector dates back to 1881 because of civil war in America, which led to a change in availability of labour and demand for tobacco products. An artisan by the name James Bonsac came up with a machine that chopped tobacco leaves dropping them on a long tube like paper, which sliced to individual Cigarettes. The machine functioned thirteen times faster the speed of humans, which was a huge boost to tobacco industry because of increased production.

Tobacco industry was until 1960 is a remarkably growing sector, when it proved to cause health problems, which led to a decline in its production trends. Tobacco proved to cause cancer and other circulatory and respiratory disorders. A tobacco agreement was formed which filed charges against tobacco companies and put limits on marketing and promotion of tobacco products (Brandt, 2009). He further states that, in 1970’s two scientists namely Williamson and brown had crossed tobacco strains to produce a strain that had twice higher the level of nicotine. This scenario was used by Food and Drug Administration body as a prove that some tobacco producers were manipulating nicotine content in their products. According to reports by the World Health Organisation, about 5.4 deaths occur as a result of tobacco in the world annually and 70% of this population is in developing countries (Brandt, 2009). Recent anti smoking campaigns on tobacco safety has however, seen a negative response towards smoking.

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Market demographics

Caldwell and Nordan (1995) noted that tobacco consumption is mainly through smoking. Smoking in public has however, been for long socially reserved for men and has been associated with promiscuity in the case of women. Caldwell and Nordan further states that smoking in men is five times higher than that of women but this trend has however, been seen to reverse in developing countries with women forming the higher percentage of smokers.

Market needs

Smoking is today, done by more than 1.22 billion people in the world. 1 billion of these smokers alleged to be in developing and middle economy countries (Brandt, 2009). Sensitivity on effects of smoking has led to a downward trend on the number of smokers in developed countries while the number of those smoking in developing countries alleged to increase at 3.5% annually as stated by Breen (2001).

Brandt (2009) states that, smoking observed to be common among criminals, mental challenged persons, the homeless, and drug and alcohol addicts. He notes that around 20% of youth aged between 12 and 15 years alleged to be tobacco users and projected as hooked to smoking for the next 15 to 20 years. By the year 2025, it is projected that the number of smokers in the world will hit an outstanding 1-9 billion people (Brandt, 2009).

Table 1. The Percentage number of males and females smokers against total population of various countries (Brandt, 2009, P. 98).

Country Percentage of Males Percentage of females
Ukraine 63.8 10.2
United states 26.3 3.15
United kingdom 36.7 1.15
Tonga 61.8 12.9
Samoa 58.3 12.8
Indonesia 65.9 8
Greece 63.6 7.55
China 59.5 11.8
Belarus 63.7 10.35
Bangladesh 47 8.9
Germany 37.4 2.55
Russia 70.1 11.o5

Market trends

According to Caldwell and Nordan (1995), China Tobacco limited company is the largest producer of tobacco products in the world. The two continue to note that five companies, which have grown through a series of acquisitions and mergers, dominate the international tobacco market. These are, Altria, British American Tobacco, Imperial Tobacco, Japan Tobacco, and Philip Morris Company.

Tobacco farming is practised in China in million of hectares of land. The Chinese government operates a monopolistic approach to tobacco production in China through China Tobacco Company, which has ensured economies of scale hence dominance in the market.

Table 2. Production trends of unprocessed tobacco in various countries (Caldwell & Nordan, 1995, p. 56).

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Country of origin Production in thousands of tonnes
China 2,298.8
India 595.4
Brazil 520.7
United states 408.2
European union 314.5
Zimbabwe 204.9
Turkey 193.9
Indonesia 166.6
Russia 116.8
Malawi 108.0

Market Growth

According to Food and Agricultural Organisation, production of tobacco was expected to hit 7.1 million tonnes (Brandt, 2009). China has the biggest share of tobacco market in the world largely because of higher import duty that is charged on foreign companies tobacco products entering the country. Although this duty has been reduced to 10%, most of its citizens prefer locally produced tobacco products as they retail at lower costs. This has seen a tremendous growth on China’s tobacco industry and the country produces 39.6% of total tobacco production in the world (Brandt, 2009).

Brandt (2009) adds that there are more than 20 million households that grow tobacco in China. Tobacco is the preferred crop of production by the Chinese; the government of china however, sets up the market price for tobacco, which is lower as compared to the natural price.

Strengths

Tobacco industry is projected to grow steadily as population and disposable income increases among people in developing and transitional economy countries. Total production of tobacco in the world was expected to reach 7.1 million tonnes by the year 2010 according to Food and Agricultural Organisation (Breen, 2001). The number of tobacco users has been growing at 1.5% and was expected to reach 1.3 billion people by the year 2010 with 71% of this total coming from developing countries and the rest 29% from developed countries (Breen, 2001).

Brandt (2009) argues that cigarette smoking is the ubiquitous form of tobacco use accounting to about 85% of total tobacco use. China is the largest tobacco consumer with an annual consumption of 37% of total world tobacco production.

Brandt (2009) acknowledged that:

Smoking is part of Chinese culture and giving cigarettes at any social interaction is a sign of respect and friendliness. Smoking is also connected to masculine identity as a social activity that is practiced among men to promote feelings of acceptance and goodwill, which explains why Chinese male doctors smoke than females.

Furthermore, physicians in particular may resort to tobacco as a coping mechanism to deal with the day-to-day stress that is associated with long work hours and difficult patient interaction. (p. 67).

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Weaknesses

In most countries, smoking is not socially accepted abd women who engage in it assumed to be licentious. Smoking has also been associated with prostitution, criminals, mentally disability, and other forms of hard drug use.

To reduce cigarettes consumption, many governments imposes high duty on tobacco products. According to Brandt (2009), “considerable scientific proof shows that elevated cigarette prices effect in lower overall cigarette consumption and a 10% increase in price will decrease on the whole cigarette use by 3% to 5%.”

Tobacco production is coupled with child labour, these children work for long hours and paid low amounts of money. Their supervisors also sexually abuse the children and this has called the attention of human right activists.

Tobacco is an agricultural crop and is highly dependent on weather conditions. Adverse weather conditions generally harm the crop. Use of pesticides and other chemicals in tobacco farming is also known to cause health effects to tobacco farmers.

China is famous as a hub for counterfeiters; such individuals take advantage of well-developed brands to introduce fake products in the market. Such products are sold at a low price and it is hard to distinguish them from real products.

Smoking of cigarettes has also posed danger through accidental fires especially by drunkards and mentally insane smokers. This has often led to loss of much property and even loss of lives.

Opportunities

According to Caldwell and Nordan (1995), “Tobacco Supply is expected to increase in countries where production costs are low, there are no production restrictions, and good transportation systems and access to international markets are available.” With this in mind, tobacco sector is expected to expand in the Far East countries especially China and in other developing countries.

With sensitization of people on health effects because of smoking tobacco opportunities lies in new products development. Tobacco companies should invest in producing products that have low amounts of nicotine. There is also a potential in electronic cigarettes, which is an alternative to cigarette smoking hence lesser health effects.

China has the fastest growing economies in the world. This has led to an increase in disposable income of the Chinese citizens. The country has also the highest population in the world. With this in mind Tobacco sector in China is in no doubt going places.

Threats

Although tobacco consumption is expected to rise steadily, consumption per head in developed countries was expected to fall with 10% by the year 2010 (Breen, 2001). This is largely as a result of anti- smoking campaigns, anti-smoking policies, higher taxation of tobacco products, ban on tobacco advertisements and sensitization of people against tobacco smoking.

Reallocation of resources to tobacco production from other agricultural practices may lead to collapse of the economy of developing countries. Tobacco manufacturers further, repatriates profits accrued from their operations back to their mother countries other than making investments in such countries.

Brandt (2009) acknowledged that:

Major tobacco companies have encouraged global tobacco production. Philip Morris, British American Tobacco and Japan Tobacco each own or lease tobacco manufacturing facilities in at least 50 countries and buy crude tobacco leaf from at least 12 more countries. This encouragement, along with government subsidies has led to a glut in the tobacco market. This surplus has resulted in lower prices, which are devastating to small-scale tobacco farmers. (P. 146).

Production policies subsequent tobacco are under steady force in developing countries and tobacco success at farm stage is likely to demur further which is a threat to sustainability of tobacco sector in developed countries.

Marketing strategy

Objective

According to Brandt (2009), “big tobacco manufacturers aren’t the only companies important to tobacco industry. Companies such as Universal Corporation, DIMON, and Standard Commercial act as middlemen, buying from farmers and/or tobacco auctions and then processing and shipping leaf tobacco to manufacturers.”

The main objective will be to establish a company in China to act as the intermediary for supply of Tobacco between Chinese tobacco farmers and the Tobacco manufactures in China.

Supporting Organization

China Tobacco Company is the biggest tobacco manufacturer in China and has grown through a series of acquisition. The company will be ou support in carrying out our endeavours in China.

The supporting company for this cause will therefore, be China Tobacco Company.

Marketing mix decisions

Place

Place refers to the channels of distribution or intermediaries used by a producer of goods and services to move his products and services from production point to the ultimate user (Wood, 2010). A product has three levels namely: actual product, core product and augmented product. Actual product is the physical merchandise of a company; core product is the intangible physical benefit that arises because of product use for example, car convenience while augment product is the non-physical part that adds value to a product for example, and car warranty (Wood, 2010).

Once a product is developed, it is introduced in the market and attracts more and more customers as time expires. The product is perceived to have attained maturity once the market become stable. Over time as development and superior products are introduced in the market by competitors, the product declines and eventually front its removal from the market. This constitute to what is referred to as The Product Life cycle. The cycle comprise of five phases namely: introduction, growth, maturity, decline and withdraw (Rainey, 2010). A company employs various strategies during these phases. During the introduction phase, a company promotes its products to attract customers and depending on the number of competitors various price strategies are employed, for example price skimming in the presence of few competitors. During the growth phase, more competitors arise offering similar products. There is formation of mergers and acquisition and the advertising campaign is high as each company aims at building its image and increasing its market share. Maturity phase is coupled with decreasing sales because of intense competition. Producers results to wider promotional campaigns and differentiate their products from those of their competitors. The market becomes saturated and some producers drop from the market due to poor profit margins. Decline phase marks the down point of most products. More innovated products introduced in the market and there is a change in the tastes and preferences of consumers. Price of products goes low and profits can only increase by cutting on production and marketing costs (Wood, 2010)

In addition, Wood states there are many intermediaries that a company can use to move its products or services to the end user. These include wholesalers, Agents, Retailers, Overseas distributors, Internet, or even direct marketing.

Brandt (2009) acknowledged that:

China, in the midst of some 25% of the world’s 1.2 billion smokers, is the big accolade. Government-owned China National Tobacco, the world’s leading tobacco manufacturer, chiefly serves China and the sketchy 1.5 trillion in yearly cigarette sales. There are presently about 130 tobacco processing companies in China and together, Gallaher Group and Imperial Tobacco enclosed agreements to manufacture and trade cigarettes in China. (p. 148).

China National Tobacco Company is owned by the state and plays a monopoly role in tobacco industry in China. The company produces markets and distributes all tobacco products in China. The company however, has established local factories that assist in distribution of the final product to the consumers.

With an intermediary between tobacco farmers and tobacco manufacturing companies absent, the main aim will be to establish an intermediary between tobacco farmers and the tobacco manufacturing companies in China in all tobacco producing regions in china. The intermediaries will buy raw tobacco from farmers, dry it, offer storage facilities, and add value through curing before transporting it to tobacco companies.

Product

Product represents the physical product or service that a company offers to its customers. A product has three levels namely: actual product, core product and augmented product (Kustin, 2004).

The company will take ownership of tobacco, offer storage facilities, and add value to the product before distribution to the manufacturers. By breaking down the physical cost involved because of direct selling between tobacco farmers and manufacturing companies, the finished product will have a lower price hence more demand in the market.

Breen (2001) suggested that, “curing and subsequent aging of tobacco allow for the slow oxidation and degradation of carotenoids in tobacco leaf. This produces definite compounds in the tobacco leaves, and gives a sweet hay, tea, rose oil, or fruity aromatic flavor that contributes to the silkiness of the smoke.”

The company will perform curing as a form of value addition to the raw tobacco. The company will employ air-curing method whereby tobacco will be hanged for a period of 4 to 8 weeks in properly ventilated rooms. Sun curing will also be employed since it is less expensive. This will ensure that the final product is of high quality because of this specialisation.

Price

According to Kerin (2008), Price refers to the amount of money that a customer pays for the provision of goods and services. When making Pricing decisions, a company pays to attention on profit margin and price offered by competitors. The main strategies employed by a company to price its products include;

Premium pricing

Those companies that produce exclusively unique products and services employ the strategy, which has substantive advantage in competing with other related products, or services. The products are mostly luxurious and hence a high price is charged for them

Penetration pricing

This strategy involves a company charging a low price for its products and services in order to gain a large market share for its products and raising the price once this is achieved. Companies for example, Sky TV and France Telecom, have employed this strategy.

Price Skimming

This strategy is employed by those companies that have substantial advantage for its products in the, market leading to the company offering a higher price for them, this however attracts new entrants to the industry leading to a fall in price due to increased supply. Digital watch manufacturing companies have employed this strategy once this occur a company results to another pricing strategy.

Economy pricing

This strategy results to low priced products and service as production and marketing costs are maintained low.

In international market, a number of factors influences price. These include: distribution, marketing and manufacturing cost, physical contact of the manufacturing firms, foreign currency fluctuation, consumer price, prices of other related companies and the environmental factors surrounding the international market for example, taxation, government laws and legislation (Wood, 2010).

Wood (2010) adds that, approaches to international pricing include export pricing, transfer pricing, non-cash payments, and standardization. In export pricing approach, marketing managers who are based in the mother country make pricing decision of a company’s products. Non-cash payment approach results when a company exchanges its products for other products, this approach is however, out of date. Transfer pricing is an approach where the price is set by marketing managers in the mother country, the international subsidiary companies however, attaches the best price possible on the product. Standardization approach entails a company adopting the most appropriate pricing decision it deems fit.

A number of factors influence Price. These include: distribution, marketing and manufacturing cost, physical contact of the manufacturing firms, foreign currency fluctuation, consumer price, prices of other related commodities and the environmental factors surrounding the international market for example, taxation, government laws and legislation (Wood, 2010).

Tobacco is an agricultural crop and its price is dependent on crop yield, which is influenced by the weather conditions, its price is also dependent on the type of species grown by farmers, available supply in the market and place of origin among other factors. The Chinese government in China also regulates Price of tobacco products. Pricing decisions will therefore be dependent on these factors. Geographical pricing strategy will also be employed depending on production costs incurred.

Promotion

Promotion refers to those activities involved in communicating and selling of a product to its potential customers (Rainey, 2010). Personal selling involves the use of sales people to promote a product on behalf of a company. The sales people are well trained but are expensive. Public relations aim at maintaining good understanding between the company and the public. Direct mail is based on a database and involves sending promotional mails to potential customers. Trade fair and exhibitions are appropriate when contacting new markets. Exhibitions for example Expo offers a chance of a company to meet with its potential customers. Advertising comprises of the paid for promotional campaign using the various advertising media for example television and newspapers. Sponsorship involves a company paying for its inclusion in particular events for example sports.

Promotional campaigns must be carried out with great care in the international market. A number of factors when making media choices for its products therefore guide a company. These are: competition of the company’s products with other related products in the international market, presence of that medium in the targeted market, technological and economic development of targeted market, availability of local personnel to aid in promotional campaign for example sales people, laws governing that particular international company and above all the company’s objective for carrying out the campaign (Wood, 2010)

Social cultural setting of the people of a given country is a major consideration when planning on the media to use for a company’s promotional campaign in the international market. Of importance is language, which is a major obstacle to marketing. China has six to twelve diverse cultures (Kerin, 2008).

China has a huge population and diverse culture. The country has also an extensive area. Advertisements through media will be the most appropriate to reach the diverse people. Advertisements will be run in all forms of media since the resource rich government will fund the campaign. Sales clerks will also be deployed to collect market information and feedback from farmers and tobacco manufacturers, which will assist in strategic plans for the industry.

Budget

The plan will be wholly financed by the Chinese government and revenue generated used to develop the industry. The plan will include construction of storage facilities, drying lacks, curing equipments and transportation vehicles. There will also be provisions for acquiring staff. Most of the labour force used will however, be casual.

Implementation and control

The market plan will however, be implemented on phases in various regions. The plan will first be introduced in large commercial producing provinces before introduction to other areas. The government will construct collection points where farmers will take their product. At the collection points, tobacco will be dried and cured before transportation to China National Tobacco Company and other potential tobacco companies. The market plan will be monitored regularly against revenue growth. This will ensure that best strategies are employed in a bid to propel tobacco industry in China to greater heights.

References

Brandt, A. (2009). The Cigarette Century: The Rise, fall, and Deadly Persistence of the Product That Defined America. New York, NY: Basic Books.

Breen, T. (2001). Tobacco Culture: The Mentality of the Great Tidewater Planters on the Eve of Revolution. New Jersey, NJ: Princeton University Press.

Caldwell, E. & Nordan, L. (1995). Tobacco Road. Georgia, US: University of Georgia Press.

Kerin, A. (2008). Marketing Mix Decisions: New Perspectives and Practices. New York, NY: American Marketing Association.

Kustin, A. (2004). Marketing mix standardization: a cross cultural study of four countries. Elsevier, SY: International Business Review.

Rainey, D. (2010). Sustainable Business Development: Inventing the Future through Strategy, Innovation, and Leadership. London, UK: Cambridge University Press.

Wood, M. (2010). Marketing Plan Handbook. London, UK: Prentice Hall.

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BusinessEssay. "China National Tobacco Company and Farmers." December 11, 2021. https://business-essay.com/china-national-tobacco-company-and-farmers/.