ANALYSIS OF PAKISTAN

INDUSTRIES

TERM REPORT

TOBACCO INDUSTRY

TABLE OF CONTENTS
 PORTER’S DIOMAND MODEL

FIRM, STRATEGY, STRUCTURE, RIVALRY

DEMAND CONDITIONS FACTOR CONDITIONS

SUPPORTIVE INDUSTRIES
DEMAND CONDITIONS:

MARKET TRENDS
The demand for tobacco and its products have seen a steady growth
over the years. The reason for this growth largely has been the increase in
the population accompanied with easy availability of such products and
easing social norms(smoking not considered bad now it is a fashion symbol).
More choice is now available to smokers and the various brands in
themselves come in different varieties like the Soft Packs etc.

The problem is that this growth has been shared unequally between
the duty paid and evaded. Apart from the smuggling of tobacco and its
products, even the large multinationals don’t leave any opportunity to evade
taxes and duties.

According to an article in daily times(2006) about 0.2 million

cigarette packs out of the 1.3 million sold in Lahore are fake or smuggled,
causing cancer and heart diseases four times faster and resulting in a Rs 700
million to Rs 1 billion loss to the district government.

A Daily Times survey revealed that wholesale dealers supply fake and
smuggled cigarettes to about 20,000 retailers of Lahore, who sell them to
ignorant consumers who can either not tell the difference or sent their
children or servants to buy cigarettes
 According to the available statistics, out of about 71.80 billion
cigarettes sold in Pakistan in 2005, 15.40 billion were fake or smuggled.
Naveed Aftab, head of Pakistan Tobacco Board’s business department, said
smuggled and fake cigarettes were causing a loss of about Rs 6 billion to the
federal government, Rs 4 billion by tax evasion and Rs 2 billion by
smuggled or unauthorised brands 1

Seasonal Fluctuations in demand

During the winter season the demand for cigarettes and other tobacco
products like Hukka and Sheesha increases. Demographically the northern
cooler regions of Pakistan generally have a higher demand for these
products. Demand is also affected by promotional campaigns since a new
campaign triggers the need to try out the product or take advantage of the
scheme.
The month of Ramadan sees a fall in the demand for these products as
people only smoke after the fast is over. Even when not fasting people avoid
smoking since it is considered undesirable to do so in public during
Ramadan.

Local demand trend

The general perception is women do not engage in tobacco
consumption. But the fact of the matter is that around 34% men and 12.5%
women consume tobacco in some form. Besides the young men in the age
category of 15-24 years smoke cigarettes/ beddies largely in the rural areas.
But for men age 24-64 the prevalence of smoking cigarettes/ beddies is more
common in the urban centers. In the age group 25-64 years, 16% and 7% of
persons smoke chillium/huqqa in rural and urban area. Similarly 15% in
rural and 8% in urban areas chew tobacco/snuff.

The government of Pakistan identified smoking as among country’s

leading causes of morbidity and mortality in its December 1997 health
policy. This admission came against the backdrop of a rising incidence of
tobacco-related diseases. Despite numerous health and economic costs, the
1
Rs 1 billion up in fake and smuggled smoke By Rana Kashif http://www.dailytimes.com.pk/default.asp?
page=2006%5C03%5C15%5Cstory_15-3-2006_pg7_21
consumption of cigarettes continues to rise in Pakistan, making it a high
cigarette consumption country. Twenty-nine percent of men and 3.4% of
women smoke cigarettes regularly, concluded the National Health Survey,
while the Pakistan Society for Cancer Prevention says 37% of men and 4%
of women over 15 years of age are smokers.

• Smoking is most common and most likely to be heavy (20 or more

cigarettes per day) among men 25-44 years of age in Pakistan.
• Approximately 90% of lung cancer cases in men and 79% in women
are attributable to cigarette smoking.
• Twenty-four percent of illiterate rural young men smoke as compared
to 19% of illiterate urban young men.
• Among rural smokers (15-64 years of age), 26% smoke heavily
compared to 37% in urban areas.

FORMS OF TOBACCO INTAKE

Tobacco use in Pakistan is not limited to cigarette smoking. Chilum
huqqah, chewing tobacco in pan, snuff and niswar are some other common
ways of intake. Experts divide tobacco use into two broad categories -
smoking and smokeless tobacco. Both uses of tobacco are very common in
Pakistan as established by a survey conducted by the PMRC in 1984.
Smokeless tobacco include primarily moist dry snuff and chewing tobacco.

Smoking tobacco is used as cigarettes, huqqah and chilum, the latter

two being the oldest means of tobacco intake in this region. Presently,
cigarettes are most common, for they are ready to use and backed by
aggressive promotion by manufacturers. All forms of smokeless tobacco
contain nicotine and their use can lead to nicotine dependence and cigarette
use!
The reason for such high rates of tobacco consumption is the lack of
law enforcement. Ordinaces like ‘No Smoking in Public Places,’ ‘No Sale
Under 18’ and ‘No Sale in Educational Institutions’ exist but donot get
implemented. No mechanism was available on the ground by which an
ordinary citizen could register a complaint against violations taking place.

Besides the government took no concrete steps to apprise the citizens

of various provisions of the ordinance and thus people, including the
‘authorized persons’ under the ordinance are unaware of their rights and
duties under the law. Poverty and public indifference on issues are the
greatest hurdles in way of implementing laws. A campaign could be more
effective if the public is educated about the bad affects of smoking. The need
is for educating masses through electronic and print media.2

FOREIGN DEMAND
Most of the cigarettes produced in Pakistan are consumed locally.
Export markets of Pakistani national and international brands include the
Central Asian countries, Afghanistan and the Gulf countries. Exports of
Pakistani tobacco products have seen a growth over the years. Growth in
Pakistan tobacco exports indicates the growing popularity and acceptance of
Pakistan’s products for their quality, consistency and cost competitiveness.
The considerable high requirements, especially for flue-cured Virginia, are
indicative of increased cigarette sales in the domestic market, depleted
inventories with the manufacturers and a much robust showing on the export
front.

Pakistan’s tobacco and products have come a long way from the un-
impressive image they posessed about a decade and half back of poor quality
and standards. Besides becoming the fifth largest producer of finest flue
cured Virginia in the world with prospects of producing an optimum of upto
80,000 metric tons, investments in improved agronomic practices, use of
fertilizers and pesticides, introduction of international grading system and
state of the art green leaf threshing plants have led to yields of upto 2500 kgs
per hectare, one of the highest in the world. At the same time quality has
risen close to the best world leaf standards and prices have also been
favorable.

Besides the above, aggressive marketing, exploring of new markets,

improving product image, participation in international exhibitions and
conferences, becoming member of International Tobacco Growers’
Association, removal of tariff and non-tariff barriers on export of tobacco
have led to appreciable increase in tobacco exports

A Tobacco Delegation consisting of growers, manufacturers, dealers

and exporters is planned to visit Egypt to explore possibilities of larger
market access for Pakistani Tobacco. An Export Display Centre is also

2
http://www.telmedpak.com/ngos.asp?a=tobacco3
http://www.sdpi.org/SDPI_in_the_press/media_coverage_2005.htm
planned to be established at the Pakistan Tobacco Board’s Head Office in
Peshawar in close collaboration with the tobacco manufacturing companies.
Pakistan has a locational advantage due to its strategic proximity and
easy access to the region. There is great necessity that these valuable
opportunities may be developed and are put to use for the increase of value
added exports of the country. 3

FACTOR CONDITIONS:

RAW MATERIALS
The local oriental types of tobaccos are cultivated in the plains of
NWFP and, to some extent, in the provinces of Punjab, Sindh and
Baluchistan. Punjab is, however, famous for the production of dark air-cured
and hookah type tobaccos. The crop provides basic raw material to some 55-
plus licensed manufacturers of tobacco products, including 29-plus cottage
level operators.

Availability of raw material, which is being extensively available in

the locality is considered as the main strength of the Pakistani tobacco
industry. Tobacco mainly Virginia and Burley is procured mostly from local
farmers on contract basis. Pakistan is now the 5th largest producer of flue-
cured tobacco. 4

In order to reduce dependence on the import of good quality tobacco

leaf, the Pakistan Tobacco Board, in collaboration with the tobacco
companies, intensified research and development activities and explored the
soil and climatic conditions in the submontane areas of Mansehra, Buner,
Swat and Dir districts to meet the quality requirements of cigarettes for
domestic use. 5

Labour and Machinery:

3
Sources: Federal Bureau of Statistics, Government of Pakistan.
Pakistan expects $30 million by 2007 from tobacco export: PTB
http://www.dailytimes.com.pk/default.asp?page=story_21-1-2005_pg7_15
Some data taken from Ayesha’s report Batch 2008
4
http://www.jang.com.pk/thenews/investors/feb2001/if.htm
5
Pakistan Crop 2004, price, Marketing and Exports By RIAZ NOOR, CHAIRMAN,PTB
The level of skill required varies according to the position in the industry.
Training programs are conducted at all management levels and also in all the
tobacco sectors. Growers are taught how to best sow their seeds and what
fertilizers to use. Workers are shown how to best perform their duties.
Supervision of the production process is vital: inspection of the leaf,
blending, and quality assurance of the final product can never be left solely
to machines. Retailers are given tips on how to market the cigarettes. All the
machinery used in the production process is imported. With increasing
capacities, more machinery is now being imported. 6

FIRM’S STRATEGY, STRUCTURE AND

RIVALRY

STRATEGY:
Under-pricing and excessive sales promotion programs are said to be
some of the strategies of the industry. While the domestic industry indulges
in what is known as under-pricing by selling their brands cheaper than those
of their rivals in the same category, the manufacturers are said to be
involved in excessive advertisements and other promotion programs. The
industry is known to be the largest spender on publicity worldwide. 7

Also advertising under the laws of consumer protection and FCTC is

used. Also there is an increasing tendency to counterfeit cigarette brands,
which led to low cigarette prices, prevented regular price hikes, encouraged
down-trading and can lead to adverse excise structure changes.

STRUCTURE:
The Central Board of Revenue (CBR) has observed that the domestic
cigarettes industry has a monopoly like structure where two giants —
Pakistan Tobacco Company (PTC), a subsidiary of British American

6
CBR spells out procedure for cigarette industry record (News Item 8TH Jan 2007)
7
Deadly Tobacco promotion Intrudes SAARC activities
http://www.thenetwork.org.pk/pressrelease04-01-05.htm
Tobacco (BAT) and Lakson Tobacco Company (LTC) – jointly hold 98
percent market share.

The market share of three minor producers including Souvenir

Tobacco, Paramount Tobacco and Sarhad Cigarette Industries is negligible
at 0.8 percent, 0.5 percent and 0.5 percent, respectively. According to a list
of manufacturing units in NWFP International Tobacco and Khyber seem to
have a high installed capacity as well. 8

Some of the industries are attached with the multi-national companies

and are producing their brand of cigarettes. However, the overall production
quality of most industries is poor due to insufficient manufacturing facilities
in these industries. In fact, Pakistan has become the largest market after
China of substandard drugs and cigarettes and some 50 per cent of what is
sold here is second-rate. The establishment of tobacco industry equipped
with modern technology is highly justified to produce the quality of
cigarettes.9

RIVALRY:
Local Rivalry

Since the two major players in the Pakistani market are both foreign
subsidiaries, the cigarettes they produce are comparable in standard and
quality to those produced the world over. Following are profiles of major
two companies:

LAKSON TOBACCO COMPANY LIMITED

Lakson Tobacco Company was founded in 1971 and today is
Pakistan’s second largest tobacco company, with an estimated 47% cigarette
market share in fiscal year 2006. Lakson Tobacco’s shares are listed on the
Karachi and Lahore stock exchanges.

Lakson is engaged in the manufacture and marketing of cigarettes as

well as export of un-manufactured tobaccos. Lakson operates four cigarette
factories and one tobacco re-drying plant and constitutes the largest cigarette
8

9
Who benefits from the tobacco business?
http://www.telmedpak.com/ngos.asp?a=tobacco6
manufacturing company in Pakistan. LTC was the first Tobacco Company in
Pakistan to acquire ISO-9000 certification for two of its divisions.

Lakson's Head Office is located at Karachi, and its four cigarette

manufacturing units are situated in Dadu, Sahiwal, Rawalpindi and Swabi.
Lakson's Leaf Division is situated in Mardan, the capital of tobacco growing
areas in Pakistan's North West Frontier Province (NWFP).

Lakson provides direct employment to over 5000 people of which

approximately 1500 work at its Leaf Division during the leaf buying and
processing season.

Morven Gold and Diplomat are core brands in Lakson Tobacco’s

mainstream portfolio, while Red & White and Marlboro, manufactured
under licence from PMI, complement the portfolio.

Philip Morris International (PMI) recently announced that it has

entered into an agreement to acquire an additional 50.21% stake in Pakistan
cigarette manufacturer Lakson Tobacco Company Limited (Lakson
Tobacco) from a number of Lakson Tobacco’s principal shareholders for
PKR 666.89 (USD 10.96) per share. PMI currently holds a 40% stake in
Lakson Tobacco and this transaction will bring PMI’s stake in Lakson
Tobacco to approximately 90%.

Philip Morris International, based in Lausanne, Switzerland, held a 15%

share of the international cigarette market in 2005. Its brands, led by
Marlboro and L&M, are sold in over 160 countries around the world. Philip
Morris International is an operating company of Altria Group, Inc. 10

PAKISTAN TOBACCO COMPANY LIMITED

Pakistan Tobacco Company Limited was incorporated in 1947

immediately after partition, when it took over the business of the Imperial
Tobacco Company of India which had been operational in the subcontinent
since 1905. It is part of British American Tobacco, the world's most
international tobacco group, with brands sold in 180 markets around the
world.

10
http://www.altria.com/media/press_release/03_02_pr_2007_01_19_07_01.asp
http://www.corporateinformation.com/snapshot.asp?cusip=C586P1970&Sentby=Home
http://www.brecorder.com/index.php?id=520899&currPageNo=1&query=&search=&term=&supDate=
 PTC produces high quality tobacco products to meet the diverse
preferences of millions of consumers, and works in all areas of the business -
‘from seed to smoke’.
Operations in Pakistan began in 1947, making it one of Pakistan's first
foreign investments. Its two manufacturing sites are located at Jhelum,
Punjab and Akora Khattak, NWFP.

The Group's brands include Benson and Hedges, Gold Flake, John
Player Gold Leaf, Embassy, Capstan and Sundrop.

PTC - Recent figures (2006 vs. 2005) 11

Other Key Data12

2006 Sales: 17,867,912,000
Employees: 2,463
Market Capitalization: 38,795,614,830
Total Shares Outstanding: 61,580,341
Closely Held Shares: 44,379,674

11
PTC’s Directors’ Report For The Year Ended June 30, 2006
12
http://www.corporateinformation.com/snapshot.asp?SentBy=Home&cusip=C58625910
 13
Local Cigarette Manufacturers in Pakistan

 Excel Tobacco Company

 Hmag Impex
 Khyber Tobacco Company Ltd.
 Lakson Tobacco Company Ltd.
 Pakistan Tobacco Company Ltd.
 Paramount Tobacco Co. (Pvt) Ltd.
 Premier Tobacco Industries Ltd.
 Saleem Cigarette Industries Ltd.
 Sarhad Cigarette Industries Ltd.
 Souvenir Tobacco Co., Ltd.
 United Tobacco Industries

FOREIGN RIVALRY
About 100 countries produce tobacco. The major producers are China,
India, Brazil, United States, Turkey, Zimbabwe and Malawi, which together
produce over eighty per cent of the world's tobacco. China alone accounts
for over 35 per cent of world production.

When it comes to tobacco giants who have the world tobacco industry
in their hands there are a few names that everyone knows: In UK; British
American Tobacco UK Ltd, Gallaher Ltd and Imperial Tobacco Ltd are
popular names of large manufacturers. In US; the four large companies that
were quoted were Philip Morris, R.J. Reynolds and Brown and Williamson.

Tobacco thrives in poorer soils, providing farmers with a welcome

alternative crop. In many cases, it provides a higher income than any other
smallholder crop.
As a crop, it integrates well into environmentally friendly rotations, and its
inclusion benefits subsequent crops like maize.14

13
http://www.pakistanibusiness.com/pakistani-companies/cigarette-manufacturers-in-pakistan-1743.htm
14
http://ptc.com.pk/OneWeb/sites/PAK_62VKZB.nsf/vwPagesWebLive/2BEF61B7B0F44D1BC1256F070
03D572E?opendocument&SID=&DTC=
 Even though Pakistani cigarettes are of the one of the lowest costs in
the world, PTC and LTC comply with all international standards. Since the
two major players in the Pakistani market are both foreign subsidiaries, the
cigarettes they produce are comparable in both standard and quality to those
produced the world over.
 15
International Trends

The latest quarterly report (September 2005) of BAT shows that its major
growth areas are in Asia-Pacific, Africa and Latin America, all developing
regions of the world. Pakistan, Bangladesh, Brazil, Chile, South Africa and
Venezuela are the star performers for the last year.

‘In Pakistan, higher margins and excellent volume growth by Gold Flake
and John Player Gold Leaf resulted in higher profit and market share. In
Asia-Pacific, regional profit rose by £41 million to £418 million because of
good performances in Australasia and Pakistan.’

Pakistan also figured in Altria/Philip Morris annual report as Philip

Morris increased its stake to 40 per cent in Lakson Tobacco, a company that
has more than half of the Pakistani market share.

RELATED AND SUPPORTING INDUSTRIES

Chemicals Industry

A large number of pesticides are sprayed on tobacco. Tobacco is

traditionally one of the largest crops grown in the state, contributing
significantly to the state economy. Tobacco is also a chemical-intensive
crop, because it requires so many applications of insect-killers, weed-killers,
plant growth regulators as well as other types of pesticides.16

Paper Industry

The cigarette paper and the tipping paper includes paper and adhesive.
Hence paper industry also acts as a supporting industry.

Packaging Industry

15
Ayesha’s report Batch 2008
16
http://www.pested.org/informed/pdfs/Tobacco_chems.pdf
 Cigarette packaging requires extensive packaging. Hence it is also one
of the tobacco supporting industries.

GOVERNMENT’S ROLE IIN

TOBACCO INDUSTRY

Gold Leaf, a brand marketed by the Pakistan Tobacco Company, is sold

at a retail price of Rs.60 a pack of 20. The government gets Rs.24.20
while the company keeps Rs.7.80 only.

Addicted to tobacco revenues, the government patronizes the tobacco

business in a number of ways:

The Pakistan Tobacco Board (PTB) was established in 1968 with

headquarters in Peshawar after the government recognized 'tobacco
potential'. Attached to the Ministry of Commerce, the Board is to promote
tobacco cultivation on scientific lines for domestic use and export. It
regulates, controls, grades and exports tobacco products; undertakes research
and training for the tobacco industry: renders assistance for the development
of existing and growing areas and establishment of model farms.

The government ensures that the tobacco industry makes prompt

payments to tobacco farmers, which is not the case for other crops like
sugarcane, cotton and fruits.

Under the Deferred Payment Leaf Voucher Scheme, introduced in

1975 the government constituted a consortium of nationalized commercial
banks for providing additional loans to tobacco companies during the
marketing season of tobacco. The scheme is aimed at ensuring that tobacco
growers are promptly paid for purchases made by the industry. In 1994,
Rs.434.14 million were handed out to tobacco companies under this scheme.

The Pakistan Sports Board and all sports associations under its aegis
accept tobacco sponsorships. The monetary value of these sponsorships
runs into millions of rupees.

The government gives tobacco companies a freehand to advertise

their products on electronic and print media. While the total magnitude of
tobacco advertisement in the print media is unknown, the state-owned
Pakistan Television Corporation (PTV) earns almost 33% of its advertising
income from the tobacco industry. According to press reports, PTV
generated around Rs.280 million through tobacco advertisements during the
Cricket World Cup 1999. 17

A pilot programme for introduction of alternative crops like spring

maize and sunflower by PTB in collaboration with PTC.18

Tax Revenue:
Tax revenue is raised from the tobacco industry through two means:

• Indirect taxes levied on tobacco products, consisting of excise duty

and a general sales tax, which are both borne by the consumer.
• Direct taxes on incomes earned in the tobacco industry, which include
tobacco cess and income taxes paid by persons and businesses.

The provincial government had also imposed a provincial tobacco

development tax at the rate of Rs two per kilogram.19

Changes in the excise law to control

evasion
Through the active participation of the tobacco industry, the Central
Board of Revenue (CBR) made some changes in the Excise law to control
evasion in the cigarette industry. The changes are based on the proposal
submitted to the CBR by the Cigarette Manufacturers Association, of which
PTC is one of the members.

The industry suggested to CBR that they should fix the minimum
price for cigarettes in the market during the last budget; the proposal was
accepted and the required changes were made in the law. The main reason
for suggesting this proposal was that currently there are many companies
that are selling cigarettes packs for Rs. 5 and less whereas minimum duties
on a pack of cigarette are around Rs. 5.66. This will not only help control the
17
http://www.telmedpak.com/ngos.asp?a=tobacco7
18
News Item (8th January 2007, Dawn)
19
Tobacco Sector Profile Experts Advisory Cell 2004
tax evaded products in the market but also price these out of the reach of
most youth.20

Prohibition of Smoking at Public Places

and Protection of Non-Smokers Health
Ordinance of 2002
The Government of Pakistan has passed the Prohibition of Smoking at
Public Places and Protection of Non-Smokers Health Ordinance of 2002,
which is aimed at restricting promotional campaigns of the tobacco industry.
This law is the first statutory move to regularise promotional campaigns of
the tobacco industry. [See the appendix for full article]

The reasons behind the non-implementation of the anti-smoking law

have social, legal and moral dimensions. Violations of the anti-smoking law
reflected the disregard and disrespect for rules that prevailed in the country.
Implementation is the direct responsibility of law enforcement agencies. The
government cannot shift the responsibility from themselves by placing
warnings that read ‘smoking is injurious to health’ on each cigarette pack.
The health hazard posed by smoking should also be widely publicised.
Secondly, the procedures for implementing the anti-smoking law have not
been properly publicised.21

Framework convention on tobacco control

(fctc)
Pakistan has also ratified the Framework Convention on Tobacco
Control (FCTC). The FCTC is the world’s first global agreement devoted
entirely to tobacco control. Issues addressed in the FCTC include tobacco
advertising and promotion, smuggling, taxes, cessation and treatment,
passive smoking and tobacco product regulation.

20
http://ptc.com.pk/OneWeb/sites/PAK_62VKZB.nsf/vwPagesWebLive/B2CA5978B10BE753C1256F070
045334E?opendocument&SID=&DTC=
21
http://www.dailytimes.com.pk/default.asp?page=2006\03\08\story_8-3-2006_pg7_27
Obligations to the Cigarette Industry by
PTB:
The cigarette industry has conveyed to the CBR that if compliance
practices of cigarette manufacturers are not standardized, the industry will
face unnecessary problems at the time of departmental or external audit.
Keeping this in view, the board has specified the following uniform
documentation and other related obligations for the cigarette manufacturers:

Tax-Invoice (un-manufactured tobacco): At the time of clearance of un-

manufactured tobacco for the manufacture of cigarettes, an invoice would be
prepared by every manufacturer of cigarettes.

Register of receipts, issues and balances: A register shall be maintained by

the cigarette manufacturer at the place where un-manufactured tobacco is
stored. A separate entry shall be made in the register on each clearance of
un-manufactured tobacco.

Tax invoice/stock transport advice-cigarettes: At the time of clearance of

cigarettes from the manufacturing premises, an invoice as prescribed shall be
prepared. A separate entry for each brand shall be made in the said invoice
and a copy of the invoice shall accompany the vehicle up to the destination
mentioned in the invoice.

Register for production, transfers and balances on the production floor: A

register shall be maintained at the production floor and a separate entry shall
be made for each variety or brand of cigarettes in the register.

Register for receipts, issues and balances of major raw materials: A register
shall be maintained for major raw materials such as cigarette paper and filter
rods for cigarettes, other than un-manufactured tobacco used in the
manufacture of cigarettes.

Declaration of machinery: Each cigarette manufacturer shall declare to the

collector of Federal Excise, factory/floor-wise details of the machinery and
equipment installed and under use therein besides the machinery and
equipment lying idle/un-used in the factory or on the floor.

Addition or removal of machinery: All un-used and idle machinery or

equipment shall, immediately on receipt of the said declaration, be properly
sealed jointly by the Officer of the Federal Excise not below the rank of the
assistant collector and the authorized representative of the manufacturer. No
sealed machinery or equipment shall be desealed for any purpose and no
additional or new machinery/equipment shall be installed in the factory or on
the production floor and used without intimating the collector at least seven
days in advance.22

Ptb’s vigilance committees

The Pakistan Tobacco Board (PTB) constituted Vigilance Committees
to supervise tobacco marketing operations during 2005.23

In Pakistan, whenever taxes are increased on tobacco products, sales

of brands of legal companies decreases — and thereby the government
revenue — as prices have to be increased to pay taxes. However, sale of
counter band brands increase, as their prices remain same because their
manufacturers don’t have to pay any taxes.24

In a planning statement for the crop of 2005, the Board said according
to legal requirements, the tobacco manufacturing and/or exporting
companies are required to indicate their tobacco requirements by October 21
of each year in respect of the ensuing crop to the PTB.

After discussions between the Board and other stakeholders like

buyers, growers, dealers, etc and taking into account factors like crop size,
prices, domestic usage and exports, these figures are finalised.

The purpose of this exercise, carried out diligently each year, is to

enable a balance between the demand for tobacco by the companies and the
crop size.

The tobacco growers are, therefore, advised to plan production of tobacco

crop 2005 keeping in view the aforementioned purchase targets of tobacco
industry. They are further advised to execute agreements with the tobacco

22
http://www.dailytimes.com.pk/default.asp?page=story_6-9-2005_pg5_14
23
http://jang.com.pk/thenews/jul2005-daily/08-07-2005/business/b12.htm
24
http://www.dawn.com/2006/02/27/ebr15.htm
companies of their choice so that no problem is encountered in its proper
marketing at fair prices.

The tobacco companies will purchase tobacco according to their

indicated requirements from ‘contracted growers’ or ‘agreement-holders’
and not from growers who cultivate tobacco without any contract or
agreement with a company or the so-called "Azad Growers’.

The pre-planned projection efforts are aimed at securing a balance

between tobacco demand and supply. These efforts are offset, the tobacco is
produced without giving appropriate consideration to the execution of
agreements. This has always led to cultivation by growers of a crop size in
excess of the demand resulting in over-supply and consequent price
depression, not to mention difficulties in disposal of crop by small growers
with attendant serious financial distress.

Tobacco growers should not grow Virginia without agreements while

the tobacco companies should ensure compliance with the provision of law
which envisages execution of agreements for their targeted requirements by
the end of December, each year. 25

25
http://jang.com.pk/thenews/jan2005-daily/02-01-2005/business/b1.htm
 SWOT ANALYSIS

Strengths
• Extensive availability of raw material
• Availability of basic infrastructure facilities like roads,
railway, electricity, fuel and gas.
• Market for end products
• Gateway to Afghanistan and Central Asian states.
• Due to proximity to Afghanistan, businesses can be
strengthened by international business deal with Central Asian countries.
• Strong media backing aids in increasing revenues for the
industry. While TV channels treat the statistics of revenue earning from
advertisement as a well-guarded secret, one can understand the
magnitude of revenue from airing cigarettes advertisements.

Weaknesses
• Under-pricing and excessive sales promotion programmes
are said to be some of the major problems of the industry. While the
domestic industry indulges in what is known as under-pricing by selling
their brands cheaper than those of their rivals in the same category, the
manufacturers are said to be involved in excessive advertisements and
other promotion programmes. The industry is known to be the largest
spender on publicity worldwide.
• Unionism of labors may be invited due to concentration of
industries in the same place.
• Easily available smuggled goods - no level playing field for
companies in the organized sector.
• The foreign cigarettes have been here since the days of the
drug-lords when cigarettes were brought in from Dubai. The trade
reached its zenith during the Afghan Transit Trade. All the consumer
items that are offloaded in Bandar Abbas in Iran soon find their way to
Karachi through Quetta.
• Media pressure on youngsters towards smoking
Cigarette ads tend to glamourize smoking as something of a macho habit
luring the youngsters to get addicted to nicotine in the earlier years of
 their life. Cigarette ads being extremely alluring encourage smoking,
particularly among youngsters as one usually becomes a smoker before
the age of twenty-one, which is strongly being apposed by health to
concern organization.

Opportunities
• Pakistan has a locational advantage due to its strategic
proximity and easy access to the region. There is great necessity that
these valuable opportunities may be developed and are put to use for the
increase of value added exports of the country.
• The creation of the independent Central Asian States and
development in Afghanistan led to the opening of new opportunities for
investment and trade.
• Europe, Africa, and Australia are trying their level best to
acquire some unexplored niche of the area.
• PMI has acquired around 90 % stakes in Lakson Tobacco.
This acquisition combines PMI’s international expertise and global brand
portfolio with Lakson Tobacco’s local knowledge and strong brands,
including market leader Morven Gold. This mega deal is expected to
give a fillip to ancillary industry related to cigarette manufacturing such
as: tobacco processing units, packaging material, tipping paper etc. It
could also enhance export of raw tobacco.

Threats
• Legally imported foreign cigarettes have entered the market
and the local tobacco industry is worried about its very survival. The
locals claim that the high rates of taxes imposed by the government will
make it difficult for them to compete with the foreign varieties.
• Since good labor has already been engaged by the
competitors, therefore efforts will be to make available the experienced
staff on good salary, otherwise it may be problem for the Mills in the
initial stages.
• Price reduction by foreign competitors resulting in low
return to the locals.
• The ratification of the FCTC, if truly implemented, could
lead to even more stringent controls on the tobacco industry.
• Laws by the network of consumer protection and Tobacco
Free-Initiative (TFI) to pressure the government to introduce adequate
controls on tobacco sale and promotion will pose further resistance to the
tobacco industry.
• High rates of taxes imposed by the government is forcing
local firms to close.
• High interest rates due to tight monetary policy
• The ministry of health's warning, 'Smoking is injurious to
your health' as printed on packets of cigarettes of all brands and the same
accompanies the voice-over on cigarette advertisements on TV.
 ISSUES IN TOBBACCO INDUSTRY

GENERAL ISSUES
The Framework Convention Alliance (FCA) is an alliance of over 160
non-governmental organizations from around the world that are working
to support the development of a strong Framework Convention on
Tobacco Control, and related protocols. With the implementation of
FCTC recommendations the tobacco industry world over will suffer
severe losses. The 10 commitments that will have adverse affect over the
future demand of tobacco, globally as well as domestically, are:

1. Advertising. Ban on all forms of direct and indirect tobacco advertising,

promotion, and sponsorship. There will be restrictions on advertising as far
as possible within the tested limits of its constitution.

2. Smuggling. One in three internationally traded cigarettes enters the

black market, which will be stopped by the introduction of effective security
measures in the distribution system. Customs authorities must be able to
trace the movement of tobacco products retrospectively to identify where
diversion to the black market occurred. There are about 10,000 wholesale
traders in the world, and these could be built into a licensed system in which
they would record movements of tobacco products by scanning pack
markings. Technology is available to do this at less than US$0.02 per pack.

3. Pack markings. Produce a clear pack-marking regime - the language is

currently confusing. There are up to seven markings requirements to be
specified in G1.

• Rotated health warnings (not merely a bland general warning) - these

must cover at least 50% of the pack in line with world best practice.
• Use of pictures for at least some warnings to provide powerful visual
communication of risk.
• Information on ingredients and/or smoke emissions, but only if these
provide useful information about the product to consumers. There
should be no requirement for listing of tar, nicotine etc. yields on
packages.
• "For sale only in [market]" marking. This shortens the distribution
chain and will help to tackle diversion to the black market.
 • "Not for sale to under-18s" label. The FCA opposes this because it
makes tobacco seem more adult - and hence more attractive to kids.
• Security markings required for tracing - essential for a meaningful
counter-smuggling strategy.
• Plain packaging required for parts of package other than where
mandatory messages appear.

National authorities should specify culturally relevant messages and content

for warnings and consumer information, in local languages.

4. Health before trade. Change the guiding principles to give higher

priority to human life than to commercial interests. The FCTC should be the
prime treaty on tobacco and not be subject to challenge under the WTO
agreements. The guiding principles must be changed to reflect FCTC
supremacy in treaty conflicts relating to tobacco and to take a precautionary
approach to evaluating measures intended to protect life.

5. Prohibit misleading claims and descriptors. Ban clearly

misleading brand names using words like 'light', 'mild', and 'ultra low' or
similarly misleading expressions and symbols. These implied health claims
have no scientific basis, and mislead consumers and confuse regulators. The
FCTC should also ban any health claim on tobacco products unless
approved by the authorities in the country where they are placed on the
market.

6. Abandon the ISO methodology. The system of measuring tar and

nicotine 'yields' with a smoking machine does not give useful information
about the impact of smoking on health. These machine readings are not,
therefore, a useful basis for regulation or comparison of products. The ISO is
dominated by the tobacco industry, and should have no more than a strictly
subordinate role to the WHO, which must lead in the definition of standards
for public health.

7. Increase taxes. Tobacco taxes are effective in reducing demand and

raising revenue. It will be impossible and undesirable to develop a common
tax regime, but each party should commit to raise its tobacco taxes so that
tobacco does not become more affordable. This means increasing tobacco
taxes at least at the rate of growth of incomes - considerably ahead of
inflation. Some fraction of tobacco tax revenue should be dedicated to
funding tobacco control and cessation programs.
8. Close down duty free. Duty free is an unjustified tax break to
travellers, and opens a back door route to the black market by allowing retail
access to tobacco products on which the full duties have not been paid.

9. The right to smoke-free life. The FCTC should recognize the right
not to breathe second-hand smoke - a toxic and carcinogenic pollutant. The
aim of the FCTC must be to eliminate involuntary exposure to tobacco
smoke. There is no need to specify vulnerable groups in the text: everyone
deserves protection.

10. End all forms of subsidy to tobacco. There is no justification for

subsidizing any part of the production of tobacco. If there are social needs
for subsidizing communities based on tobacco farming, any support should
be for diversification, infrastructure development or activities that produce
public goods.
DOMESTIC ISSUES
Absence of Level Playing Field

The continued availability of the tax-evaded products restricts

legitimate price increases and is detrimental to what would be the ‘Level
Playing Field’. The absence of a Level Playing Field makes it extremely
difficult for the legitimate sector to market their brands against the tax-
evaded consignments. Evaders are therefore harvesting bumper returns by
commercially impairing the ethical manufacturers and fissuring
government’s revenue generating capabilities.

Tax Evasion

Due to the absence of a level playing field in the tobacco industry and
uneven business environment, tax evasion had risen to 21 per cent of the
total market share. The phenomenon has shown a rising trend every time
there was an increase in price/duty ratio.
The government is planning to introduce strict budgetary measures to
curb the persistent tax evasion by the tobacco industry, causing an annual
loss of around Rs6 billion to the national exchequer. Managing director of
the Pakistan Tobacco Company (PTC) Jeremy Pike has been urging the
government to check duty evasion and curb the incidence of smuggling. It is
vital to resolve problems being faced by the tobacco industry.

Smuggling

9/11 incident has led to an increased availability of the smuggled

brands in the country, which currently have two per cent of market share.
The officials blamed smuggling of foreign brands of cigarettes from
neighbouring countries as being the major factor for the loss in this regard.
Smuggling has been a major cause of revenue loss. Smuggled cigarettes are
readily available at various retail outlets even though only cigarette packs
with the Government of Pakistan mandated Health Warnings (in Urdu and
English) can be sold in the country.
Counterfeiting
Counterfeiting is also damaging the brand goodwill, annoying
customers and ultimately leading to the loss of sales volume. There is an
increasing tendency to counterfeit cigarette brands, which led to low
cigarette prices, prevented regular price hikes, encouraged down-trading and
can lead to adverse excise structure changes. Pakistan already has one of the
lowest cigarette prices in the world. Customer dissatisfaction has a knock-on
effect on Company market share and profitability. 26

According to the last financial year’s unofficial statistics, the

counterfeiting, smuggling and tax evasion on cigarettes alone rendered
billions of rupees loss to the national exchequer. The intensity of the tax
evasion can be gauged by the fact that the country’s two major companies on
their 17 legitimate brands paid Rs. 29.4 billion government taxes last year
while on the other hand, the rest total 118 brands share was only Rs. 200
million during this period.

Last year, over 74 billion cigarettes were released to the local market
including 60 billion cigarettes of legitimate brands while the rest 14 billion
cigarettes were smuggled, counterfeited and tax evaded by those who are
heavily involved in corrupt practices from smuggling, low quality tobacco
cropping to fake or substandard cigarette making level. 27

Apart from the detrimental effect on the industry and loss to the
government revenues, this also deters new foreign investment particularly in
view of continuous infringement of Intellectual Property Rights i.e.
International trademark infringements.

The adverse impact of counterfeit & smuggled goods affects not only the
tobacco industry, but pervades all sectors of consumer goods. The easy and
pervasive availability of counterfeit cheats consumers and robs brand owners
of the investment in building brand image.

26

27
http://paktribune.com/news/index.shtml?166062
Under-pricing and excessive sales
promotion
Under-pricing and excessive sales promotion programmes are said to
be some of the major problems of the industry. While the domestic industry
indulges in what is known as under-pricing by selling their brands cheaper
than those of their rivals in the same category, the manufacturers are said to
be involved in excessive advertisements and other promotion programmes.
The industry is known to be the largest spender on publicity worldwide.

A top excise official conveyed his observation to the representatives

of M/s Pakistan Tobacco Company, Islamabad, and Lakson Tobacco
Company, Karachi, that cigarette manufacturers are declaring prices in
fraction eg price of Gold Leaf (20 HL) has been printed on the pack as Rs
35.52 but it is not sold below Rs 37 by the retail traders, showing a built-in
evasion of duty and taxes. Since least transaction currency is one rupee,
price should be rounded off to avoid evasion of duty and taxes.

On the other hand, tax collectors opined that the reason of difference
in retail price printed on the pack and that charged by the retailer is due to
additional 3 per cent sales tax, which is being charged by the
distributor/dealer from un-registered retailer and the same is reflected in the
price charged by the retailer.

However, there is a margin of overpricing even if sales tax is

calculated at the rate of 18 percent. The tax collectors informed that some
cigarette manufacturers are declaring price of 10 cigarette pack to the extent
of Rs 2.10 and adding central excise duty and sales tax to their cost, which
comes to Rs 4.63.

The representative of a cigarette manufacturing giant pointed out that

some cigarette manufacturers are selling their brands on a price as low as Rs
4 despite the fact that price printed on their packets is Rs 5.56. The tax
element on 20-cigarette pack comes to Rs 4.80, and it is not possible that
any cigarette brand can be sold on such a reduced price.

The Collector, Sales Tax and Central Excise, Peshawar, submitted that
the Sales Tax Act has not been extended to Federally Administered Tribal
Areas (FATA) and Provincially Administered Tribal Areas (FATA), which
caused enforcement difficulties. The cigarette manufacturers should supply
list of both registered and un-registered dealers/distributors of settled as well
as FATA/PATA so that some enforcement measure may be taken.

Labor and Health Issues

Sources said growing tobacco was so labour intensive that farmers
typically employed their children. According to a report by the American
National Academy of Sciences, children who work on tobacco crops are
more vulnerable to health hazards than adults.
Pesticides used in tobacco farming were linked to cancer and caused
damage in the child’s nervous and immune system. Sources said children in
NWFP children start working on tobacco crops as early as six-years old.
Pesticides used in tobacco farming are more dangerous than other kinds of
pesticides, and kill wildlife as well.28
The tobacco industry is no friend of smokers — and ironically it's true
that “the tobacco industry kills its best customers”. Among consumers
tobacco use can cause serious oral health problems, including gum disease
and oral cancer, says the Academy of General Dentistry. 29

Grievances of Anjumane Kashtkaran

Tobacco (Grower’s Union)
Growers have been putting pressure on the Government to frame a strategy
for tobacco exports. According to them, they are not paid reasonable prices
by the cigarette manufacturers. The tobacco grower were of view that cost of
production was more than Rs. 62/kg whereas they got average Rs. 50/kg
from the companies. 30

Foreign Influx
The local tobacco industry is worried about its very survival, now that
legally imported foreign cigarettes have entered the market. The locals claim
that the high rates of taxes imposed by the government will make it difficult
for them to compete with the foreign varieties. It is argued that the country's
28
http://paktribune.com/news/index.shtml?166064
29
http://www.paktribune.com/news/index.shtml?174961
30
News Item 6th Feb, 2007, Dawn
balance of trade would be further aggravated with legitimate cigarette
imports which will soon shoot up sharply causing a drain on the country's
foreign reserves.

Cigarette Advertisements
Cigarette ads tend to glamourize smoking as something of a macho
habit luring the youngsters to get addicted to nicotine in the earlier years of
their life. Cigarette ads being extremely alluring encourage smoking,
particularly among youngsters as one usually becomes a smoker before the
age of twenty-one, which is strongly being apposed by health to concern
organization.

If the tobacco industry was serious about reducing youth smoking, it

would stop resisting and undermining tobacco control measures that work,
such as tobacco tax increases, comprehensive advertising bans, and
restrictions on smoking in public places.31

Laws by the network of consumer

protection
The Network for Consumer Protection which has been working to
protect and promote consumer rights has launched the Tobacco Free
Initiative Pakistan TFI-Pak with initial support from the WHO. The primary
goal of TFI-Pakistan is to mount resistance to the onslaught by the tobacco
industry to educate the people about the hazards of tobacco use and to
pressure the government to introduce adequate controls on tobacco sale and
promotion.

TFI-Pak, in collaboration with WHO, the international anti-tobacco

movement and domestic health groups, will mount a countrywide tobacco
campaign to reduce smoking prevalence and tobacco consumption, thereby
reducing the related burden of disease. 32

31
http://www.takingontobacco.org/itab/0203.html
32
http://www.telmedpak.com/ngos.asp?a=Tobacco_Free_Initiative
 RECOMMENDATIONS TO THE
TOBBACO INDUSTRY

Help growers cultivate the crop on scientific lines.

In order to save tobacco industry, it is imperative to help growers cultivate
the crop on scientific lines. Without doing enough for increasing the yield
per unit area, we would be dragging the country to import raw materials
worth Rs7 billion for tobacco industry that would be an additional burden on
the national exchequer.

Need to increase the yield

There is a need to increase the yield by promoting quality produce and
reducing the cost of production. An improved production technology is
required for nursery raising, field crop, curing and grading on qualitative
basis. Disease-resistant cultivars should be introduced in accordance with
the climatic conditions of a particular zone to boost the yield.

Timely control
Disease attack on crop is widely reported. Timely control of disease through
application of the recommended pesticide is important to avoid quantitative
and qualitative losses.

Modern technology for curing of tobacco leaves

Modern technology for curing of tobacco leaves should be disseminated
among the growers. Planting of modern tobacco - Bulk Curing Burns
imported from Greece at each tobacco research station is a good attempt to
facilitate curing on scientific basis. It would be a shift from manual curing to
mechanical curing.

Wholesalers licensed system

There are about 10,000 wholesale traders in the world, and these could be
built into a licensed system
Pack Markings
Improve efficiency by scanning pack markings
• Crop diversification for tobacco growers and alternative
business plans for retailers and workers in the tobacco industry
• Government should help in promoting products in foreign
markets by lobbying, freight charges reduction etc.

Other Recommendations:
• The price of per pack of 10 cigarettes should not cost less
than Rs. 4.15 plus sales tax. It is commercially not viable to sell
below this threshold keeping in view manufacturing cost Excise duty
and trade margins.

• As the country has surplus installed capacity therefore new

manufacturing licenses should be issued only after thorough
scrutiny.

• The GOP should introduce a provision in the manufacturing

license whereby each manufacturing unit should be allowed to
install cigarette making machines according to their clearance.

• Cigarette stock in transit should be subjected to surprise

checks.

• Customs Intelligence committees should check

counterfeiting activities and must seize their manufacturing
operations along with their licenses.

• A vigilant and watch should be kept in Azad Kashmir,

Chakwal, and Bahawalpur where these activities are on an
increasing trend.

• The patent laws in this regard are weak and should be made
more stringent with stricter punishments. There should be proper
implementation of IPRs. (Intellectual Property Rights)
 • Regular raids on the retailers to check the smuggled items.
This will reduce the availability and thus increase the price of the
cigarettes.

• In the long run the borders should be sealed for any kind of
illegitimate trade.

RECENT DEVELOPMENTS AND FUTURE

OUTLOOK

Philip Morris International completes

acquisition in Lakson Tobacco Company
World's number one cigarette producer Phillip Morris International Inc.
(PMI) on 9th March, 2007 announced completion of its acquisition of an
additional 50.21% stake in Pakistan's 2nd largest cigarette company Lakson
Tobacco at a cost of $338.9 million. The Lakhani family sold the total
shareholding at Rs 667 per share to the US giant, which already owns 40
percent stake in the company.

According to market experts family-owned tobacco companies are becoming

extinct world-wide because of the high investment in technology. The world
business is divided with state monopolies in countries such as: Japan, China
and Korea with western majors dominating such as: Phillip Morris, BAT
industries (owners of Pakistan Tobacco) and RJR.

Phillip Morris is expected to invest over $400 million for acquisition of the
full company and is expected to retain the name as well. This mega deal is
expected to give a fillip to ancillary industry related to cigarette
manufacturing such as: tobacco processing units, packaging material, tipping
paper etc. It could also enhance export of raw tobacco.

At present, both Phillip Morris and BAT industries feed the Central Asian
countries from Europe. Shifting of this business to Pakistan is now a
possibility. Over $400 million investment by a US conglomerate reflects a
confidence in the country's economy and should attract further US
investment.33

“PMI looks forward to a bright future for Lakson Tobacco in Pakistan,” said
Matteo Pellegrini, President of PMI’s Western Asia region. “This
acquisition combines PMI’s international expertise and global brand
portfolio with Lakson Tobacco’s local knowledge and strong brands,
including market leader Morven Gold. We look forward to continuing to
work with the management and employees of Lakson Tobacco to further
solidify its market position and ensure the continued success of the company
in Pakistan.”

Looking to the future, Salman Hameed, the newly appointed chairman and
chief executive of Lakson Tobacco said: “Our focus will be to bring together
the complementary strengths of Lakson Tobacco and PMI,” adding that:
“Lakson’s business performance over the years provides a strong platform
for growth.” 34

Other Developments
There was an increase in plant capacity in 2006, where the Frontier
province has 25 factories with installed annual capacity of more than 35
billion sticks. The nine factories in Sindh and four in Punjab have annual
capacities of nearly 22 billion sticks and nearly 30 billion sticks respectively.

The tobacco export of Pakistan has increased since 2001 and if the
growth continues, the country would reach a total export target of almost
$30 million by end of 2007. The exports during 2003-04 were 111.68
percent higher than those for the corresponding period of previous year. This
growth in Pakistan tobacco exports indicates the growing popularity and
acceptance of Pakistan’s products for their quality, consistency and cost
competitiveness.35

33
http://www.brecorder.com/index.php?id=520899&currPageNo=1&query=&search=&term=&supDate=
34
http://www.dailytimes.com.pk/default.asp?page=2007\03\10\story_10-3-2007_pg5_5
35
http://www.dailytimes.com.pk/default.asp?page=story_21-1-2005_pg7_15