Behind 30 Years of No Smoking Day: Huge Tobacco Taxes and 9 Vape Financings

May 31 each year is World No Tobacco Day, but 30 years of anti-smoking campaigns have not shaken the foundations of the tobacco industry. It remains a massive industry with continued growth and considerable profits, and it is still searching for new forms of tobacco consumption.
 
Five consecutive years of taxes and profits exceeding one trillion

At the 2019 National Tobacco Work Conference, Zhang Jianmin, Party Secretary and Director of the State Tobacco Monopoly Administration and General Manager of China National Tobacco Corporation, released a set of figures: in 2018, the tobacco industry achieved total industrial and commercial taxes and profits of 1.1556 trillion yuan, up 3.69% year-on-year; total payments to the national treasury reached 1.00008 trillion yuan, up 3.37%; and industrial added value reached 787.7 billion yuan, up 4.88%.

In financial statistics, the total taxes and profits of the tobacco industry consist of total tax revenue and total profits. Total tax revenue includes consumption tax, value-added tax, tobacco leaf tax, urban construction and maintenance tax, education surcharges, and so on, but does not include income tax; total profits refer to pre-tax profits. Since surpassing the one-trillion-yuan mark in 2014, China Tobacco has maintained taxes and profits at the trillion-yuan level for five consecutive years.

In fact, this industry has long remained in a state of concealed high growth. In 2002, total industrial and commercial taxes and profits in China’s tobacco industry were 145 billion yuan. For the next five years, growth remained above 20% annually. By 2007, it had risen to 380 billion yuan; in 2009, it exceeded 500 billion yuan for the first time; in 2010, it surpassed 800 billion yuan; and by 2018, it had peaked at 1.1556 trillion yuan. By comparison, the nation’s personal income tax revenue that year was only 1.3872 trillion yuan.

Looking at cigarette sales trends over the past five years, sales maintained steady growth in 2013 and 2014, reaching a peak of 50.99 million cases in 2014, before declining for two consecutive years in 2015 and 2016. The reasons were twofold: on the one hand, in 2015 the Ministry of Finance raised the ad valorem tax rate at the wholesale stage for cigarettes from 5% to 11%, while also imposing an additional specific tax of 0.005 yuan per stick; on the other hand, tobacco control measures were strengthened. In 2015, Beijing implemented what was called the "strictest smoking ban in history," comprehensively prohibiting smoking in indoor public places with roofs and enclosed spaces. By the end of 2016, around 20 cities nationwide had enacted smoke-free public place regulations in line with the requirements of the Framework Convention on Tobacco Control.

However, the effect did not last. In 2017, cigarette sales resumed growth, with total national sales reaching 47.38 million cases, an increase of 390,000 cases year-on-year. At the same time, sales revenue fluctuated accordingly. Looking at the past five years, sales revenue stabilized and rebounded in 2017 after declining in 2016. After two consecutive years of slowing growth and a negative growth rate in 2016, revenue growth stopped falling and rebounded in 2017, up 8.3% from 2016, with nationwide cigarette sales revenue reaching 1.435 trillion yuan.

At the "Media Advocacy Conference on Tobacco Tax and Tobacco Economics" held on December 1, 2017, Jiang Yuan, Director of the Tobacco Control Office of the Chinese Center for Disease Control and Prevention, stated publicly that although the Framework Convention on Tobacco Control took effect in China on January 9, 2006, the results of 11 years of tobacco control were still not optimistic. China remained the world’s largest tobacco consumer, with tobacco consumption ranking first globally—equal to the combined sales of the countries ranked second through twenty-ninth.

E-cigarettes rise rapidly

While tobacco control organizations have been trying to reduce people’s daily exposure to tobacco, the tobacco industry has also been trying to make tobacco consumption appear more discreet and less harmful. Although cigarette sales returned to growth, the era of rapid growth is gone. In 2016, Xu Weihua, Director of the Economic Operations Department of the State Tobacco Monopoly Administration, wrote in China Tobacco that 2000 to 2013 was the golden era of development for the tobacco industry, while from 2013 onward it entered a period of deep adjustment marked by a "high platform, low growth."

The clearest sign is that it has become increasingly difficult to improve the per-case product mix value of cigarettes. Although this metric has continued to rise over the past five years, its growth rate plunged to 2.1% in 2016. It rebounded somewhat in 2017, but still lagged behind the previous average annual growth rate of 7%, meaning further structural improvement remains difficult. In 2017, the nationwide per-case product mix value for cigarettes reached 30,288 yuan, an increase of 1,122 yuan year-on-year.

Traditional cigarettes contain high tar and many harmful substances. Low-tar cigarettes can address some smokers’ health concerns, but reducing tar too aggressively sacrifices flavor. Meanwhile, a new type of e-cigarette—one that does not contain actual tobacco but gives users a cigarette-like experience by inhaling atomized nicotine—began appearing on the market.
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In fact, the e-cigarette industry is not new. It has existed in the Chinese market for more than a decade, though previously it mainly operated as an OEM export business. At present, 90% of the world’s e-cigarettes come from China, with Shenzhen serving as the main manufacturing hub. But in 2019, the e-cigarette market suddenly became red-hot. Public data show that in the first five months of the year alone, there were at least 9 financing events involving e-cigarette startups. Well-known figures such as Smartisan founder Luo Yonghao and Tongdao Shushu chairman Zhang Jinyuan also began endorsing e-cigarettes and participating in the industry personally.

China Tobacco has also taken note of new tobacco products. On May 24 this year, CTIHK Limited, a subsidiary of China National Tobacco Corporation, passed its Hong Kong Stock Exchange listing hearing. Through this capital markets debut, CTIHK planned to use the funds raised to acquire overseas tobacco product operating entities, well-known cigarette brands, or new tobacco product brands, as well as sales channels. At the end of 2018, U.S. e-cigarette startup Juul Labs was acquired by tobacco giant Altria, the maker of Marlboro cigarettes, in a deal valued at US$12.8 billion, giving the company a valuation of US$38 billion.

However, the road for e-cigarettes has not been smooth. In February this year, Hong Kong’s Food and Health Bureau proposed a bill recommending a ban on the import, manufacture, sale, distribution, and promotion of e-cigarettes and other alternative smoking products. On March 15, China Central Television’s annual 3.15 consumer rights program reported that e-cigarettes also release harmful substances, endangering both users and bystanders, and that long-term use can likewise lead to nicotine dependence. Shenzhen, Hangzhou, Nanning, and other cities have also stipulated that e-cigarettes may not be used in public places.