Treaty May Stub Out Cigarette Ads in China

GEOFFREY A. FOWLER / Wall Street Journal 2dec03

HONG KONG -- Cigarette advertising in all print and electronic media has been banned in China since 1995, but you would never know it. The names of cigarette brands are pervasive on Chinese television and billboards and in subway cars.

It is a matter of loopholes -- and perception. For example, the Ningbo Cigarette Factory has advertised its Dahongying brand by trumpeting the Dahongying Economic & Trading Co. -- the company's small but similarly named businesses in trading and education. Ningbo has even built libraries named Dahongying in China's rural schools. The famous Zhonghua brand advertises with the slogan "Love Our Zhonghua" -- which conveniently translates as the technically legal "Love Our China."

But if China turns into law a tough new United Nations antismoking treaty it signed last month, marketing strategies like these might go up in smoke. The treaty, if fully adopted, would require tough restrictions on tobacco advertising and sports sponsorship, stricter health warnings that would cover half the surface of a pack of cigarettes, and limits on product descriptions such as "light." It would also encourage companies to raise tobacco prices and taxes. China could ratify the treaty and make it law by the spring of next year.

A cigarette vendor in Shanghai. Brands sold in China include Dancing Butterfly and Viagra.

At present, tobacco is clearly big business in China, whose 350 million smokers consume one out of every three of the world's cigarettes. The tobacco industry contributed $16 billion in profits and tax revenue to governmental bodies over the first nine months of this year.

But Chinese tobacco companies -- and the multinational tobacco giants struggling to join the world's largest cigarette market -- are already bracing for change. "It is possible that even the name Dahongying could no longer show up in public," says Lu Sheng, deputy manager of corporate planning for Ningbo Cigarette Factory.

Meantime, marketers continue to take advantage of legal loopholes that allow corporate branding by making small expansions into other industries, such as Ningbo Cigarette Factory's education business, and then advertising the parent company's -- and the cigarette brand's -- name. Or they rely on willfully lax enforcement by local governments, who are often eager to support their local state-run tobacco companies.

Other techniques include in-store displays and dispatching women in skimpy tobacco-label-emblazoned outfits to hand out free cigarettes in bars. Altria Group Inc.'s Philip Morris International gets a boost for its Marlboro brand through stores that sell Marlboro-label cowboy-theme menswear. The Marlboro Classics clothes are licensed by Philip Morris to Italian clothier Marzotto SpA. (Philip Morris declines to describe its marketing techniques in China, saying it operates "strictly by the rules of the national legislation.")

Philip Morris set up its first China office in Beijing this year to sell Marlboro cigarettes imported from the U.S. But without agreements to manufacture cigarettes in China, Philip Morris and multinationals such as British American Tobacco PLC and Japan Tobacco Inc., remain a small fraction of the Chinese market, relying on promotions that make their labels status symbols in the wealthier coastal cities.

Antismoking groups see the U.N. treaty as a way for Beijing, which is increasingly concerned about smoking's impact on public health, to get tougher on tobacco companies. "This becomes a very difficult and murky area for even the most sophisticated countries to deal with, never mind developing countries," says Judith MacKay, director of the nonprofit Asian Consultancy on Tobacco Control.

The industry isn't sure how sweeping the changes will be as a result of the treaty. "Its impact will depend greatly on how the [World Health Organization] and the convention committee implement it," says Zheng Fugang, deputy secretary-general of the China Tobacco Society, an industry group.

Mr. Zheng argues that manufacturers of legal products should be "given rights to communicate with consumers." But in practical terms, tobacco companies relying on corporate branding, sponsorship and other loopholes "probably can't do it any more in the future," he says.

James Duan, business director of WPP Group's OgilvyOne Worldwide in Guangzhou, closely follows tobacco-marketing issues and concludes that the problem facing tobacco companies in China is that they spend a lot of money doing promotions without breaking the law, but "the effectiveness of their ads suffers as they are forced to get more abstract."

Ratification of the treaty is sure to change sports sponsorship, already a contentious issue in China. Like many other Chinese tobacco companies, Yunnan Hongta Group funds its local "Hongta Soccer Club" and also sponsored Chinese favorite David Beckham's Real Madrid soccer team on its visit to Kunming in August.

Shanghai, China's biggest city, is counting on tobacco advertising to generate revenue for its new Formula 1 racing track, now under construction. Health advocates say there is a direct link between boys' smoking and Formula 1 tobacco sponsorship, already banned almost everywhere else in the world. Almost 600 groups and individuals have signed a petition to Wu Yi, China's Vice Premier of Public Health and Commerce, to ban tobacco sponsorship of the track.

Bob Miller, spokesman for British American Tobacco's China unit, declined to comment on plans for sponsorship of the Shanghai track "due to reasons of competitive commercial confidentiality" but says the company will be pulling out of all Formula 1 sponsorship globally by the end of 2006.

Tobacco marketers will likely increasingly turn to below-the-line techniques such as direct marketing, database building or loyalty programs.

"As with many other tobacco companies in China, both local and international, point-of-sale materials and in-store consumer promotions as communication tools have become more important," says BAT China's Mr. Miller.

In the past two years, local and international brands have begun turning to advertising agencies, including the multinationals, for help.

"The Chinese tobacco companies are beginning to behave more now like the Western companies in every way," says antismoking activist Ms. MacKay.