China is the world's largest producer and consumer of tobacco, with a smoking rate above 38%. According to statistics, the number of smokers worldwide is declining, but in China, the number of smokers is expanding: there are currently 350 million smokers in China, more than the total population of the United States. China has become a veritable "largest smoking country."

Image from the internet

1 Some cigarettes sell for a few yuan, others for hundreds Despite the "strictest ever" smoking ban introduced last year, the number of Chinese smokers continues to grow. This is closely related to China's long-standing "cigarette culture." In China's specific social environment, cigarettes are not only a "delight" to refresh and relieve boredom, but also a "messenger" for entertaining guests and visiting friends. Chinese people value face and ostentation; smoking is not just a pastime but also a symbol of status. When seeking a favor or negotiating a business deal, it is absolutely necessary to give several cartons of high-end cigarettes.

We know that cigarette prices on the market range from a few yuan to over a hundred yuan. Why is there such a big difference between cheap cigarettes and expensive ones? Take the 65-yuan pack of soft Zhonghua, for example. This price is not cheap for ordinary white-collar workers. Why can such a small amount of tobacco sell for such a high price?

2 How high is the profit in the tobacco industry? First, let's look at the cost of manufacturing cigarettes. In fact, whether high-end or low-end, the raw materials are similar. Although the grades of tobacco leaves differ, the price difference is not significant. From the purchasing agent to the grower, the cost is about 20 to 30 yuan per kilogram, and some are even cheaper. The only difference may be in the production process. From re-drying, screening, cutting, and shaping, to final packaging, high-end cigarettes typically select the middle part of the tobacco leaf, add more flavoring, use the best filters, and employ high-permeability filter rods, along with premium packaging. Even so, the cost of a 65-yuan pack of Zhonghua does not exceed 3 yuan, and the cost of a hundred-yuan pack does not exceed 8 yuan. The profit in the tobacco industry is thus evident.

According to the "2013-2017 China Tobacco Products Industry Production and Sales Demand and Investment Forecast Analysis Report" released by the Prospective Industry Research Institute, from 2001 to 2012, the gross margin of China's tobacco products industry remained at a high level above 57%, showing an upward trend year by year, reaching 74.06% in 2012.

Gross margin of China's tobacco products industry from 2001 to 2012 (unit: %)

What does a 74% gross margin mean? Let's compare it with listed companies with strong profitability. In the same year, 2012, the average gross margin of listed companies in the first quarter was 18.18%. That is, the gross margin of the tobacco industry is about four times the average gross margin of A-share listed companies! With the same investment, if an A-share listed company earns 1 yuan, the tobacco industry can earn 4 yuan!

With such low costs and high profits, why do cigarettes become so expensive for consumers? The reason is not hard to guess: the key lies in tobacco taxes.

3 Who "protects" the tobacco industry's huge profits? The "huge profits" of the tobacco industry are staggering, but compared with the "heavy taxes" in this industry, they are nothing. As is well known, tobacco taxes account for a large part of national tax revenue; the tobacco industry is a major taxpayer. Because there are so many smokers in China, the state has always imposed heavy taxes on the tobacco industry, which is a considerable source of income for the country. In fact, the cost of a pack of cigarettes includes a 54.5% tobacco consumption tax levied on behalf of the cigarette factory. These taxes include value-added tax, income tax, stamp duty, etc. In addition, there are production costs and profits of the cigarette factory. Then the cigarettes are sold to the tobacco monopoly bureau, which in turn sells them wholesale to retailers. Therefore, the high price of cigarettes is due to taxes and fees.

According to reports from CNR (China National Radio), in 2016, the tobacco industry achieved total industrial and commercial taxes and profits of 1,079.5 billion yuan. During the entire "12th Five-Year Plan" period, the cumulative total was 4,768 billion yuan, of which about 87% was turned over to the national treasury, totaling 4,132.3 billion yuan!

What does 4 trillion yuan mean?

After the 2008 financial crisis, the Chinese government launched an economic stimulus package, the aftermath of which is still widely criticized, and that round of massive monetary injection was only 4 trillion yuan.

According to the Ministry of Finance's 2015 fiscal revenue and expenditure data, the national general public budget revenue that year was 15,221.7 billion yuan, and the amount turned over by the tobacco industry alone accounted for more than 7% of fiscal revenue. —— The close relationship between tobacco and the government's "money bag" is very clear.

No wonder there have been loud calls to break the monopoly in recent years, and even the salt industry, which has been solid for thousands of years, has begun to loosen, but the tobacco monopoly remains unchanged.

The current average comprehensive tax rate for tobacco is around 68%, which is taken by the state. The remaining 32% includes the retailer's profit, which is generally required to be around 10%. That leaves 22%. This 22% gross profit sounds good, but it includes logistics costs, warehouse costs, etc., so the final actual profit margin of tobacco companies is not high.

4 Behind the huge profits of the tobacco industry, counterfeit cigarettes are rampant If they only sell genuine cigarettes, it would be difficult to survive, so some tobacco and alcohol shops mix in counterfeit cigarettes. Yunxiao County, located in the Golden Triangle of southern Fujian, became famous quickly for making counterfeit cigarettes. According to locals, the production and sale of counterfeit cigarettes, as a national industry for Yunxiao people to get rich, has brought astonishing economic benefits. Some villages even saw a grand scene of the whole village wrapping cigarettes and getting rich.

Yunxiao counterfeit cigarettes are divided into four types to meet the needs of different customers or distributors.

The first type is low-quality imitation cigarettes. These cigarettes use materials that are black in color and are chemically treated with sulfur to turn yellow. Sulfur entering the respiratory system is 100% harmful.

The second type is grafted cigarettes. Grafted cigarettes are more conscientious than low-quality imitations; at least they do not use toxic tobacco shreds, but rather pass off inferior goods as superior ones. For example, they graft Mudan cigarette sticks onto Zhonghua filters and sell them as Zhonghua. This trick uses genuine cigarettes that cost less than 5 yuan per pack, and because there is no tax interception, huge profits can be achieved.

The third type is packaging improvement. They take bought cigarettes, open them, put them in self-made iron boxes, and sell them as brand gift boxes at a high price of 3,000 yuan.

The fourth type is self-creation. Counterfeiters develop products that regular tobacco companies do not produce. It is estimated that 90% of the strange cigarettes we see on the market and online are original creations from Yunxiao.

Similar to the WeChat business distribution model of Putian counterfeit shoes, there are many "WeChat businesses" distributing counterfeit and smuggled cigarettes on social platforms such as WeChat, Weibo, and QQ. Driven by ultra-high price differences, they become customers of Yunxiao counterfeit cigarettes as distributors.

More importantly, counterfeit cigarettes also play a subtle rebalancing role in the tobacco industry chain. The tobacco monopoly bureau has some "reservations" about cracking down on counterfeit cigarettes:

"If law enforcement is too strict, retailers won't make money and will close their shops, then genuine cigarettes won't sell either, and the tobacco commercial companies will fail to complete their sales tasks..."

In terms of production scale, although Yunxiao is a county, its counterfeit cigarette production capacity is huge and its output is astonishing. There is a saying in the industry that whether a cigarette has been counterfeited by "Yunxiao Zhongyan" is a measure of its popularity. In 1997, at the peak of counterfeiting, Yunxiao county produced more than 2.5 million cartons of counterfeit cigarettes annually, of which 80% were counterfeit Yunnan cigarettes, and a huge amount of counterfeit cigarettes flowed into the market. This situation prompted Yunxiao's counterfeit cigarettes to abandon small workshop-style counterfeiting early on and adopt a model similar to modern tobacco industry, achieving consumer insight and new product development.

"It can be said that this is a '20th tobacco company' operating outside the 19 China Tobacco companies," industry insiders jokingly call the cigarette counterfeiting group in Yunxiao County, Zhangzhou City, Fujian Province.

Calling Yunxiao's counterfeit cigarette production organization "Yunxiao Zhongyan" is a joke, but it also shows the industry's evaluation of the high degree of specialization in Yunxiao's counterfeit cigarette production. You only know that Fujian people make counterfeit shoes, but you don't know how hard they work on counterfeit cigarettes.

However, categorizing the "Yunxiao Zhongyan" model with Putian counterfeit shoes is both ridiculous and sad. Brother Bang hopes that the cigarette industry will be the last industry where Fujian people continue to counterfeit.

Source: Entrepreneur Bang (ID: ichuangyebang)

-END-