Study On The Performance Of China’s Tobacco Industry Under Regulation

To one degree or another, tobacco products are generally regulated in countries all over the world because of its unique characteristic of easy to get addicted and are harmful to the public health. The government usually adopted the high-priced high-tax policy about tobacco products to make it prohibitive, as well as to make it as an important source of tax. The regulations in western countries about tobacco industry focus on social regulation measures to protect public health and the social environment.In China, there are 2 reasons of the establishment of the current tobacco monopoly system in the early 1980s, not only to regulate the industry to keep it develop in order, but also to accumulate funds for economic development, with distinct revenue functions.The tobacco industry developed rapidly for nearly 30 years and two major contradictions about it gradually emerges:First, by taking advantage of the tobacco industry monopoly system, the tobacco contributed a huge amount of revenue to the country, but itself is having a "big but not strong" characteristics, as well as its competitive force lags far behind the international tobacco giant. Second, the regulation of the tobacco industry in China adopted many economic regulation measures, such as permit system, taxation and price regulation and so on to maintain its high-yield, high-profit and high tax contributions. Social regulation focus on public health has never been substantively developed nationwide. The author worked in the tobacco industry for a decade and felt deeply about the conflicts of different dimensions of the tobacco industry’ performance and its restriction of the long-term development of China’s tobacco industry, so decided to use the convenience of the job to make a discussion and analysis of this issue. This paper tried to facilitate the use of work on the study and analysis of this issue, tried to make full use of standard research methods, research tools, and detailed industry data and information, and used research methods such as qualitative analysis and quantitative analysis and SCP Paradigm to definitude the conflicts of performance of the tobacco industry between different dimensions,as wenll as the causes and solution paths. It is to original intention of writing this article.Tobacco industry is a typical regulated industry, so the standard control theory, the theoretical basis of the government control over the tobacco industry and the performance measurement and related research findings constitute a theoretical basis for this study.Further, for the tobacco industry, the division of economic regulation and social regulation as well as the asymmetry of the effect in actual operation became the most concerned item of tobacoo which is a "bad" items in nature.From the perspective of social regulation, combined with the characteristics of tobacco products and their effects, tobacco consumption has great internal cost (purchase expenditure, health hazards, etc.) and external costs (second-hand smoking, reduction of working hours, etc.), and the low price elasticity of demand, few alternative, stable customer crowd and other market structure makes economic regulation measures, such as purely raising tax rate of tobacco products and so on, of limited effectiveness. Regulation measures focusing on building positive social atmosphere and promoting tobacco control and the "Tobacco Framework on Tobacco Control" which aims at the international tobacco reduction had a significant impact on performance of tobacco companies. Social regulation in China was carried out in this context, but its effectiveness is weak because of the impact of cultural and price factors on smoking rates and weak tobacco regulation activities carried out. Further, limited by this situation in the practical level, the academic study of social control about tobacoo industry is also more concentrated in medicine and the health sector through a series of observational, experimental research and large-scale survey of smoking on the body health hazards, such as respiratory diseases, cancer, etc.; and economics studies about the measurement of the dangers of smoking, such as unemployment costs, medical costs, death losses caused by labor costs are limited.From the perspective of economic regulation, the traditional analysis of regulated industries is generally based on SCP Paradigm (market structure, market conduct and market performance.) As China’s tobacco industry is monopolized by the state’s highly regulated measures, for a long period of time in the past (The current monopoly system of tobacoo industry began from 1982), the market structure and distribution of companies was fairly stable and several large adjustments (such as the ban on new cigarette factory as well as Business and Factory Separation, etc.) were also deployed by the national Bureau under an orderly manner, with significant administrative color. In this market structure, local tobacco industry and tobacco companies under the State Bureau’s unified guidance, their operations and business activities were in a higher degree of homogeneity, and the differenc of market behavior of them were more specific in the extent and detail. However, with this high degree of unity in the control model and management mechanism, the companies’performance all over the tobacco industry was of greater difference, mainly because the this kind of control model and management mechanism in the early time gradually formed a strong local protectionism, so that the tobacco companies’performance were deeply dependend on the economic development level and the local residents’tobacco consumption capacity. After 2003, the State Bureau adopted the reformation such as Business and Factory Separation and then merger of tabacoo factories to restructurie the industry structure, which significantly weakened the local protectionism through internal adjustment of the original system and promoted the tobacco industry enterprises and formed limited competition in the country, and the change of the performance and the emerge of leading manufacturers showed the differentiation became clear. This paper madea comprehensive analysis of the performance and used data analysis, empirical models to measuire market structure, market performance and made comparison with the background of China’s tobacco industry, market structure, market conduct and market, and found that:(1) The market concentrate rate of China’s tobacco industry remarkably rised after the separation of manufacture and sale of tobacco industry, but the analysis result based on MES and PCM model showed that the change of market structure has no significant impact on the performance, so it requires cross-province and large-scale merge to raise the market concentrate rate further.(2) China’s tobacco industry’s market behavior is mainly characterized by a weak brand development and low brand competitiveness. In China, tobacco products’ price is strictly regulated and the price level increases rapidly. Also, the advertising input is huge but the advertisement is at low level, repeated seriously and the effect is intangible.(3) Despite the tobacco industry’s operating performance and financial performance are very high; the distribution of income between different members in the tobacco industry chain is unequal. The state got 50-60% of the total income in the form of tax, the tobacco industry itself got 30-40%, and the farmers and retailers got little and their share was declining during the past years. In addition, the analysis using financial ratios from the industry as a whole level and from the corporate level of the performance of the tobacco industry showed that a clearer pattern of intra-industry competition has emerged and leading companies have formed. Meanwhile, the polarization is obvious and there are still a large number of uncompetitive firms.Based on analysis of the tobacco industry itself (mostly vertical comparison), this paper made horizontal comparison between tobacoo industry and a number of other industries over the whole society to illustrate the performance level of tobacco industry. It is found that only the profitability of the former is particularly high but the other indicators are of the same as other industries. So the tobacco industry gained its high performance through monopoly and exclusive regulation. Further, this chapter used DEA method to make input-output estimates of overall resource allocation efficiency of the tobacco industry in China and found that through the resource allocation efficiency of tobacco industry raised obviously but the capital costs, personnel and other inputs are still serious surplus. In addtion, this chapter used factor analysis to analyses the impact factor of performance of the tobacco industry and found that the tobacco manufacture enterprises in China now mainly depends on adding more capital and intermediate inputs to expand the output. So it is the extensive development model. Nevertheless, commercial enterprises in tobacco industry focused improvement in operating efficiency to enlarge output.At last, this chapter summarized the contradiction between performances of different dimensions and analyses the reason from the origin of the regulation, the evaluation basis (performance evaluation standards) and regulatory instruments as well as gave forward proposals for reform.Overall, this paper measured the comprehensive performance of the tobacco industry in multi-dimensions and in detail, especially a longer period DEA analysis to measure efficiency of resource allocation, which filled the gaps in this field. But the analzsis, especiaay the quantitative analysis about social regulation was slightly less than other parts, and there was no factor about price of input and output in the tobacco industry during different periods of DEA analysis. Further, a deeper discussion of the details of internal management about tobacoo industry was not provided. These are the limitation of this paper and can be the direction for further research.