British American Tobacco (BAT) is to become the first foreign company to manufacture cigarettes in China, the home of one in three of the world's smokers.
The London-based firm said on Friday it has signed a deal with a local partner, China Eastern Investments, to build its biggest plant -- a US$1.5 billion factory capable of producing 100 billion cigarettes a year.
The agreement -- reached after lengthy negotiations with the government -- is a coup for BAT, which has a head start over international rivals seeking to exploit the biggest and fastest growing tobacco market on earth.
It is also the closest any foreign firm has come to breaking the monopoly of China's state-run tobacco companies.
No details have been revealed about the location of the new plant, but construction is expected to take at least two years. When running at full capacity, it will dwarf BAT's existing 180 factories. Its output is expected to give the company's leading brands -- Dunhill, Lucky Strike, Kent and State Express 555 -- a 5 percent share of China's tobacco sales.
At a time when health concerns are shrinking markets in developed countries, BAT welcomed its new investment as potential source of profits.
"We are committed to China for the long term," BAT's chief executive, Paul Adams, said. "For us it represents a major growth opportunity while contributing to the Chinese government's excellent efforts to continue developing the performance of the country's tobacco industry."
Like its rivals, BAT has been selling cigarettes in China for many years, but with export tariffs as high as 65 percent, it has been eager to set up a base for domestic production.
As well as being the most populous nation on earth, China is seen as a gold mine by tobacco firms because its poses less risk of lawsuits and imposes fewer advertising restrictions.
Cigarette packets do carry health warnings but they are vaguely worded and printed in relatively small characters on the sides rather than the front. Many municipal ordinances ban sale of cigarettes to minors, but there is no national law on juvenile smoking.
More than a quarter of China's 1.3 billion population are smokers.
Among adult men, the rate is about 65 percent. According to the state-run local media, tobacco firms sold 1.8 trillion cigarettes last year.
Even with prices as low as US$0.14 a packet, the companies were able to rack up profits of US$30 billion last year.
Future business prospects are mixed. The World Health Organization has warned that one-third of all Chinese men alive today will die from lung cancer and tobacco-related illness.
Such concerns prompted Beijing to sign up to the UN Framework Convention on Tobacco Control, which obliges it to tighten restrictions on cigarette marketing and consumption.
But the government is addicted to tobacco income, which accounts for a tenth of its tax revenues. Demand is also on the rise. As well as an economic boom that is pushing up wages and prices, the traditional reluctance of Chinese women to puff is fading.
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