Industrial and competitive analysis

Assignment 1

National University of Sciences and Technology

NUST Institute of Management Sciences
Spring 2006

Submitted to:
Ms. Zainab Dar
Submitted by:
Ayesha Zulfiqar
Faez Fayaz siddiqui
Maria Riaz
Saira Yousaf
Sumayyah Rafiq
Zuneera
Khurshid

BBA 2K5
A

Due Date:
th
4 April, 2007
Tobacco Industry:

The tobacco industry is a source of revenues, employment and foreign

exchange for the country. The industry has to pay very high excise and sales
tax while complying with various strict rules and regulations of the
government. During 2004-2005, it contributed above Rs.28 billion as Central
Excise Duty and Sales Tax. Despite its contribution to the economy, the
industry is highly criticized for its negative impacts on the society.

Structure of Industry:

In Pakistan the industry consists of farmers who grow tobacco, firms that
convert the raw materials into finished goods (Cigarettes), exporters and
importers of tobacco and its products. Smuggling of tobacco products to and
from neighboring countries is also quite common.

Size and number of sellers:

In Pakistan, tobacco cultivation occupies a relatively small area of 0.27% of the

total irrigated land. The country has been divided into various zones depending
on the type of tobacco being grown in that region. The details and amount of
production is mentioned in appendix1.

The major firms involved in the manufacture of finished goods and exports
include Pakistan Tobacco Company, Lakson Tobacco Company, Souvenir
Tobacco Company, Saleem Cigarette Industry, Universal Tobacco Company,
Imperial Cigarette Industry, Khyber Tobacco Company, International Cigarette
Industry, Walton Tobacco Company and Sarhad Cigarette Industry. Of these
firms Pakistan Tobacco Company is the market leader with lakson Tobacco
Company in second place.
Number of buyers:

The firms that manufacture finished goods act as purchasers themselves,

buying it from the farmers. They serve as intermediaries that purchase,
process and resell.

In the local market, Twenty-nine percent of men and 3.4% of women smoke
cigarettes regularly, concluded the National Health Survey, while the Pakistan
Society of Cancer Prevention says 37% of men and 4% of women over 15
years of age are smokers. According to Pakistan Pediatric Association, 1,000 to
1,200 children between the ages of 6 and 16 years take up smoking every day.

Cigarette consumption in Pakistan is five times higher than in India with 620
cigarettes per adult per annum against 119 for India¹. This shows that the
market for tobacco industry is very immense locally. Chewing tobacco is in
demand in the villages.

Along side this; various countries are also acting as buyers for the tobacco
industry. The export details are available in the appendix2

Product differentiation:

The major product differentiation exists between chewing tobacco and

cigarettes and cigars. The main differentiation exists between the
manufactured goods in the form of branded cigarettes. The firms target
different segments of the society with different price levels. Differentiation also
exists between imported and local cigarettes and cigars. Consumers are willing
to pay a premium price for the imported product especially cigars.
1. www.thenetwork.org.pk/pressrelease04-01-08.htm

Entry conditions and government regulations:

There are no entry conditions as such but when a company enters the industry,
it has to abide by all the rules and regulations of government. This is very
costly especially in terms of advertising. The firms have to inform the
consumers about the potential health hazards related to tobacco products. This
implies that in order to enter as a manufacturer, heavy investment is required.

The government is providing incentives to the tobacco growers in order to

promote the industry. This is being done through the Pakistan tobacco board.
The board tries to find out their problems and to educate them about the
cultural operations, plant protection measures, picking and curing operations.
Other responsibilities of the board are to regulate, control and promote the
export of tobacco and tobacco products, and to fix grading standards. The
board is also helping in the research and development to improve the quality.
It looks after the interests of the industry.

Demand and supply:

The tobacco board also manages the demand and supply in the industry.
According to legal requirements, the tobacco manufacturing and exporting
companies are required to inform their tobacco requirements by the 21st of
October to the Pakistan Tobacco Board. 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 finalized.
In this way the growers get a rough estimate of how much they should grow.
This creates a balance between demand and supply. The Pakistan Tobacco
Board, in collaboration with tobacco companies, holds meetings in the tobacco
growing areas to inform the growers about the requirements of tobacco
companies.

Image:

The industry has a negative image among its consumers and the general
public. This is due to the various health hazards associated with tobacco
consumption. People are also blaming the government for its support for the
industry. Smoking is the cause of lung cancer in 90% of the cases. Its users
get addicted to it.

Although the companies can not change the nature of their product, they are
trying to build a socially responsible image in the eyes of the consumers. PTC
is currently engaged in various programs such as afforestation, Mobile doctors
program, Youth smoking prevention, learning resource centers. The laskson
group has set up Lakson medical center (Sahiwal hospital) and a Medical
complex in Sawabi NWFP.

Price:
The government fixes the lowest price that firms can pay to growers. There is
a restriction that price for the current year can not be lower than that paid in
the preceding year. The tobacco board has specified the criteria for fixing
prices.

Smuggling is resulting in revenue leakage for the government. Some groups

say that high taxation on the tobacco industry is encouraging smuggling.
Future plans:

To further improve the quality of tobacco in Pakistan the PTB imported two
numbers of modern Tobacco Bulk Curing Barns from Greece. PTB, in
collaboration with the growers and manufacturers is examining facilities of
fabrication of cheaper versions of such barns locally which can be operated on
C.N.G. or other alternate and cost-effective energy sources.

A Tobacco Delegation consisting of growers, manufacturers, dealers and

exporters is planned to visit Egypt to explore larger and new markets for
Pakistani Tobacco. Efforts are also being made to set up an export display
center.
References
www.pakistaneconomist.com/database1/cover/c96-61.
www.yespakistan.com/people/tobacco
www.thenetwork.org.pk/pressrelease04-01-08.htm
www.ptb.com.pk
Appendix1

AREA UNDER DIFFERENT TYPES OF TOBACCO IN PAKISTAN (HECTARES)

Year Flue-cured Dark air- White Burley Others Total
Virginia cured Patta
1999- 27376 902 8069 237 19853 56437
2000
2000- 21301 571 4990 257 19853 46972
2001
2001- 24570 751 4749 432 19873 50575
2002
2002- 20748 489 5469 933 18961 46600
2003
2003- 20660 355 5472 878 18276 45641
2004
2004- 26312 367 4929 943 *18276 50827
2005

PRODUCTION OF DIFFERENT TYPES OF TOBACCO IN PAKISTAN (MILLION KGS)

Flue-cured Dark air-

White Patta Burley Others Total
Year Virginia cured

1999-2000
64.96 2.44 15.10 0.29 24.86 107.65
2000-2001
50.96 1.17 9.65 0.58 23.38 85.74
2001-2002
59.61 1.94 9.38 0.95 20.70 92.58
2002-2003
51.31 1.42 10.83 2.15 22.55 88.26
2003-2004
50.29 0.69 10.98 1.60 22.63 86.19
2004-2005 65.78 0.86 9.91 1.64 *22.63 100.82

YIELD OF DIFFERENT TYPES OF TOBACCO IN PAKISTAN (KG/HECTARE)

Year Flue-cured Dark air- White Burley Others Total
Virginia cured Patta
1999- 27376 902 8069 237 19853 56437
2000
2000- 21301 571 4990 257 19853 46972
2001
 2001- 24570 751 4749 432 19873 50575
2002
2002- 20748 489 5469 933 18961 46600
2003
2003- 20660 355 5472 878 18276 45641
2004
2004- 26312 367 4929 943 *18276 50827
2005
Source: Pakistan tobacco board

Appendix 2

EXPORT OF TOBACCO AND ITS PRODUCTS DURING THE LAST FIVE YEARS

Year Quantity exported Value realized Total Value

Tobacco Cigarettes Tobacco Cigarettes (M.Rs) (M.US$)
(M.Kgs) (M.Nos) (M.Rs) (M.Rs)
1999-2000 3.90 16.060 273.13 7.440 280.57 5.420

2000-2001 5.98 11.770 578.05 6.220 586.18 10.032

2001-2002 3.20 108.240 231.11 49.180 286.41 4.659

2002-2003 5.49 74.23 316.75 45.62 362.37 6.25

2003-2004 8.27 163.96 642.74 124.35 767.09 13.23

2004-2005 7.17 44.73 626.67 46.94 673.61 11.23

Source: Pakistan tobacco board

Year Quantity exported Value realized Total Value

Tobacco Cigarettes Tobacco Cigarettes (M.Rs) (M.US$)
(M.Kg) (M.Nos) (M.Rs) (M.Rs.) .
1998-99 3.42 0.200 235.11 0.057 235.17 4.688
1999-2000 3.90 16.060 273.13 7.440 280.57 5.420
2000-2001 5.98 11.770 578.05 6.220 586.18 10.032
2001-2002 3.21 84.190 231.11 46.200 286.41 4.659
2002-2003 5.49 74.032 316.746 45.206 362.368 6.248
2003-2004 8.27 163.961 642.743 124.351 767.094 13.226

Source: Federal Bureau of Statistics, Government of Pakistan.