Tobacco Industry Lights Up at Mention of China Market : Cigarettes: Nation has more smokers than U.S. has residents. But state keeps much of the trade for itself.

Viewed from the embattled perspective of the American tobacco industry, the People’s Republic of China is a pipe dream come true.

The world’s most populous country is already hooked on cigarettes. More people--300 million--smoke in China than live in the United States.

More than 60% of teen-age and adult males smoke. Although the percentage of female smokers is only one-ninth as great, smoking among women in high schools and universities is on the rise, indicating that a traditional cultural aversion is giving way.

“A lot of young women are smoking to show that they are not the same old traditional ‘gal,’ ” said Tinne Loh, a Singapore native who recently graduated from the Central Academy of Fine Arts in Beijing.

Domestic cigarette manufacturers command the vast bulk of China’s huge market--and probably will continue to, given import restrictions and lower prices for Chinese-made smokes.

But in terms of public image, Western brands--and especially American ones--are making dramatic inroads in China today. The Marlboro man rides high: His rugged form is featured on a billboard in Shanghai’s famous Bund central business district. In Wuhan, industrial capital of Hubei province, he rides herd atop the central post office.

To try to snuff out the pervasive advertising campaigns by overseas brands, the National People’s Congress passed a law late last month banning all forms of tobacco advertising--domestic and foreign--effective Feb. 1. But similar attempts to limit tobacco promotion have met with failure.

Industry analysts point out that the Beijing central government is too dependent on sales by the state-owned tobacco monopoly and taxes on cigarettes to mount an effective anti-smoking campaign.

Taxes on popular domestic brands such as Double Happiness and Gaoli (High Happiness) are the government’s biggest single source of revenue, generating about $5.26 billion in 1993. Cigarettes are also the largest-selling retail product in China, accounting for more than $24 billion in sales last year.

Although imports of American and other foreign cigarettes are extremely limited, totaling less than 2% of the market, the well-financed, sophisticated American ad campaigns have helped increase the market for China’s own brands.

China’s tobacco industry, in this respect, is indebted to overseas marketing experts for its steady annual growth. The glossy pages of a recent issue of a magazine published by the China National Tobacco Corp., the state monopoly, featured more than a dozen full-page ads by American and foreign companies.

Adding to their smoky allure here, American cigarettes carry a social and political message that speaks of luxury, freedom and modernity.

During the massive 1989 student demonstrations in Beijing’s Tian An Men Square, for example, the unofficial cigarette of protest was Marlboro, manufactured by America’s Philip Morris Co.

For today’s more business-minded students, American cigarettes are a sign of having arrived.

“For young people, even younger than me, smoking American cigarettes is a kind of a glory,” said Lu Haiqing, 25, a municipal government cultural officer in Shanghai. “It’s a way of showing off your wealth.”

Perhaps for that reason, foreign business people find American cigarettes a perfect bribe when seeking small favors.

“When I first came here 10 years ago, I could get almost anything I wanted for a pack of American cigarettes,” said an American garment exporter, a nonsmoker himself. “Now the ante has moved up to a carton.”

Many young artists and musicians recently have switched to Camels as the cigarette of choice, reports Loh, a heavy smoker.

Until the recent legislation by the National People’s Congress, Chinese government anti-tobacco efforts were practically nonexistent. Anti-smoking laws that do exist are loosely enforced.

Robert Fletcher, manager of general affairs in Hong Kong for the British firm Rothmans International, said each province decides how to apply Beijing’s limits on tobacco advertising. Revenue-hungry local television and radio stations, he said, can be persuaded to overlook restrictions.

“The policy is written in Beijing and loosely interpreted at the provincial level,” Fletcher said. “There are a few inconsistencies.”

Local interpretations of the rules sometimes are colored, he noted, by the fact that many state governments own advertising agencies that would profit by placing ads.

“The cigarette companies are just riding rings around the regulations,” said Judith Mackay, a British physician in Hong Kong who advises Asian governments on anti-smoking legislation.

Staff members at the Chinese Assn. on Smoking and Health, the government-sponsored anti-smoking organization in Beijing, complain that it is difficult to find volunteers for their campaigns.

The immensity of China’s market, plus the hostility of shrinking markets back home, have caused the American and European tobacco industries to sink millions of dollars into advertising and other product promotions on the mainland.

According to the Hong Kong-based Survey Research Group, the main foreign brands--Marlboro, Parliament, Kent, 555 State Express (a British brand) and Mild Seven (a Japanese brand)--spent $2.5 million on TV advertising in 1993. Marlboro is among the nation’s most advertised foreign products.

Salem sponsors the annual Beijing tennis tournament. The British-American Tobacco Co.’s 555 brand sponsors the popular Hong Kong-Beijing Rally car race.

The most aggressive of the international marketers, 555 sprinkles product placements in popular national TV shows, including last year’s hit series “A Beijinger in New York.” For location scenes in that series, the company shipped ashtrays and other product-labeled decorations to New York to be used in backdrops. The 555 brand is not marketed in America.

No age group is out of bounds. To promote the Hong Kong-Beijing Rally, free tickets to a rally associated with the event--each ticket emblazoned with the 555 logo--were distributed in Beijing elementary schoolyards.

Here in Shanghai--China’s prosperous industrial center--billboards advertising Kent, Salem and Marlboro cigarettes adorn the city skyline. Marlboro and Kent each sponsor popular music programs.

“The Chinese cigarette market offers immense opportunities,” Philip Morris said in its latest annual report.

Still, for a variety of reasons, including the strength and vitality of the indigenous tobacco industry, the Chinese market may not be the gold mine the tobacco industry seeks.

Easily self-sufficient in tobacco production, China severely restricts imports, set this year at 1% of overall sales.

And Beijing imposes prohibitive duties on those cigarettes that are imported. In January, the Chinese government raised the tax on imported cigarettes from 175% to 430%, all but halting imports. Shipments are expected to resume by year’s end under a memorandum of understanding between the Chinese and U.S. governments.

On the streets of most major Chinese cities, American and European cigarettes--a significant number of them smuggled into the country--sell for the equivalent of $1.25 a pack. That is cheap by American standards. But incomes in China are low. And good-quality Chinese cigarettes sell for 25 cents.

The result is that, although foreign cigarettes have a high-profile posture in the major cities and ports, they account for a minute share of the overall market. Given the price differential and differences in taste, most Chinese prefer to smoke homemade brands.

In an exhaustive recent study of the mainland Chinese consumer market, DRI/McGraw-Hill projected that the domestic-brand market will top $48 billion by the year 2003, based on the current 18% annual growth in cigarette sales.

Indeed, there is no compelling reason for China to cede a significant portion of the market to foreign products. According to the China National Tobacco Corp., 10 million Chinese households are involved in tobacco production.

To get a toehold in the huge market, several foreign companies have entered into joint-production agreements with Chinese partners. Rothmans operates a joint venture in China’s Shandong province that uses 60% Chinese tobacco in its cigarettes. In August, 1993, Philip Morris signed a cooperative agreement with the China National Tobacco Corp. to produce Marlboros in Shanghai and Ningbo.

“It’s a two-way street,” explained Philip Morris corporate affairs director Donald Harris. “We’re using their production facilities, and they are working with us on learning technical things.”

The DRI/McGraw-Hill researchers suggested that such joint-venture agreements could pay off for foreign manufacturers. In general, though, the prospects for foreign tobacco products in China are not bright, according to the report.

“While China’s cigarette market is enormous and expected to continue to grow, we believe it represents a limited opportunity for foreign manufacturers,” the report says.

Times special correspondent Maggie Farley in Hong Kong and Wang Jilu and Victor Zatsepin of The Times’ Beijing Bureau contributed to this report.