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Committed to quality

| February 1, 2011

The EDAPS Consortium continues to live up to its Golden Leaf Award in the BMJ most committed to quality category.

By Brandy Brinson

After the Ukraine-based EDAPS Consortium won its Golden Leaf Award last year (See “And the winners are…,” Tobacco Reporter, December 2010), the company said it was ready to prove the quality of its products and solutions on new international markets, and that the award would encourage it to continue raising the bar for excellence in both the quality and security of its solutions for the tobacco industry. And indeed, since last November, EDAPS has been busy innovating to secure the collection of excise duties on tobacco products and protect against counterfeiting.

Formed in 2004, the EDAPS Consortium is a global group of high-tech companies that possesses its own world-level scientific base and a highly technological production and service network. It says it is the only group in the world with in-house capabilities to produce and implement the most highly secure identification documents and corresponding electronic systems.

Having implemented more than 300 major projects, EDAPS combines unrivalled expertise in securing documents and products by using unique proprietary technologies in the fields of lasers, polycarbonate, biometrics, demetallized holograms, electronic systems and contact and contactless chips, says Nataliia Kochubey, vice president of the EDAPS Consortium.

EDAPS has 3,245 staff members, including 110 engaged in research and development. More than $250 million has been invested to create the EDAPS production and R&D infrastructure.

The company is led by Alexander Vassiliev, who serves as chairman of the board. Iryna Obydenko serves as president of EDAPS. She is also deputy chairman of the board of the Commercial Industrial Bank.

Tobacco

EDAPS became involved in the tobacco industry through developing a comprehensive solution that uses forgery-proof tax and control stamps with holographic security elements (HSE), combined with a track-and-trace information system to secure the collection of excise duties as well as to curb tax stamp counterfeiting.

In the production of the HSEs, EDAPS’ member company, Specialized Enterprise Holography, uses state-of-the-art technologies, including electronic lithography and advanced demetallization technology. EDAPS solutions have enabled government agencies to more than double excise tax collections from cigarettes and tobacco products. EDAPS can help the tobacco industry restore revenues being lost through illicit trade.

EDAPS says its tax stamp solution offers:

  • superior security—a robust combination of a comprehensive electronic system, encrypted information, Public Key Infrastructure, on-paper advanced security features and enhanced holograms, which makes any forgery immediately and easily recognizable;
  • a comprehensive approach—includes proven enforcement methodology that addresses human psychology, regulatory framework ensuring issuance, circulation and verification of tax stamps on tobacco products;
  • ease of use—EDAPS tax stamps are printed or applied with no waste using universally available equipment that generally forms an integral part of packaging lines, making tax stamp authenticity easily verifiable and traceable (naked eye, via the Internet and SMS).

Kochubey says the hologram is key for developing secure tax stamps. “The secure hologram is a major overt security element that cannot be reproduced using printing techniques. The employment of secure holograms considerably undermines counterfeit risk. Moreover, visual authentication of such holograms does not require any special skills, making holograms a reliable and convenient tool for prompt product authentication by both experts and ordinary customers, which similar holograms widely implemented in Euro banknotes testify to.”

Tax stamps include:

  • Highly enhanced and holography-based security elements
  • Advanced security printing features
  • Unique number
  • Secure barcode technology
  • Options of low/no cost—sizable economic benefit.

Along with HSEs, the EDAPS tax stamp embraces a wide range of security printing technologies: antiscanner background grids, pseudo-embossed images, micrographics, microtext, elements printed with visible and invisible UV inks, thermochromic ink and other security features. In addition, the tax stamp number is printed in special ink that changes its color when it is permeated through the entire layer of the stamp and is clearly visible on both sides.

New products

EDAPS recently developed a track-and-trace system that facilitates the monitoring of excise duty revenues, stems illicit trade and promotes legitimate trade of excisable products.

A distinctive and efficient security feature of a tax stamp is its individual serial number that is a combination of a regional and a unique multidigit code. This unique integrated code-facilitating track and trace of tax stamps throughout the supply chain is generated by the sophisticated database system.

The track and trace system offers:

  • Tracking of the amount and origin of excisable products throughout the supply chain (from the production line to the point of sale, including options for aggregation assessment).
  • On-line and real-time reporting and accounting that reflects data on excisable products/tax stamps/tax revenues.
  • State-of-the-art and highly reliable data exchange technologies
  • Time and cost-effective solution.

 

The track-and-trace system’s specificities of authentication include:

  • Naked eye: overt secure features not requiring the application of a special tool, skill or knowledge
  • Digital: serial number or barcode verification via the Internet, phone or SMS
  • Expert: extremely user-friendly detectors for performing forensic authentication

Competitive edge

Compared with its competitors, EDAPS says it is the only enterprise in the world that has in-house facilities and production lines for the issuance of tax stamps with HSEs. It also has a state-of-the-art database and verification technology as well as profound experience in addressing administrative and enforcement issues.

EDAPS has acknowledged experience in rendering expertise and production capacity to automate the revenue tax collection system enhanced with high-security elements. A vital aspect that EDAPS has introduced into the revenue tax collection system is the possibility to deliver tax stamps, accompanying systems and services to ensure technically competent expertise, and software programming and project management, as well as to provide production machinery and tools, if required, and to offer training courses, which in fact represents a true turn-key solution.

The EDAPS technology has a sound track record: One designed and implemented system promptly doubled excise tax collections. For three years from the project implementation date additional tax collections have reached almost $5 billion, which exceeds the amount annually collected through the traditionally applied tax stamp system.

“Recovering billions of dollars in lost tobacco taxes has become possible only owing to a radically innovative approach of EDAPS—a comprehensive solution which integrates forgery-proof tax stamps incorporating various high-security elements into the robust automated tax control system,” says Kochubey.

EDAPS has successfully implemented nationwide projects in Ukraine, with a population of 45 million, and in Kenya, with 39 million citizens. Since 2002, the EDAPS’ member-enterprise SE Holography has rendered technical support for the tobacco tax stamp control system supplied to the Ukrainian Ministry of Finance. Its efficiency was proven by 50 billion collections from tax duties. This system includes the issuance of tax stamps, the creation and administration of the system database, further maintenance and elaboration of enforcement methodology and technology. Consequently, Ukraine has decreased the spread of counterfeit tobacco products and raised the amount of excise revenues. As compared with 2008, the excise collections in 2009 grew by $400 million—an increase of 80 percent.

The quality of the products and the experience of EDAPS on highly secure ID documents and IT systems have been recognized by organizations such as the ICAO, OSCE and Interpol as some of the best in the world. The EDAPS-produced De Beers Diamond Passport provides for the first time a forgery-proof certification of De Beers diamonds and jewelry items.

Future devices

There are many challenges to overcome moving ahead with security. Andriy Tymoshenko, director of production of SE Holograpy, says the global spread of holographic technologies seriously diminished faith in their reliability. “Massive production of counterfeited holographic security features in the Far East and Asia creates numerous problems in brand protection and document security. Thus it is necessary to look for other optical phenomena to create distinctive and easily recognizable features.” Looking ahead, she says the latest achievements in nanotechnology and materials science offer enough ideas to move forward.

There is now a global trend to use more and more complex technological solutions in the development of security devices. Tymoshenko says, “This has to be not a simple aggregation of different proven solutions but creation of new products where components of different physical natures interact with each other. The most promising approach is the combination of RFID tags and diffractive optical elements. In this case the RFID antenna may be an integral part of the optical security feature.”

Beyond mechanization

| February 1, 2011

The potential and limitations of automation in the tobacco industry

By George Gay

There is what seems to be a fully automated system within my head that allows me to grasp what somebody is saying when they tell me they have just bought a blue car, even though they don’t provide information about the shade of blue. I have never understood how it works, but I seem to have somewhere in my brain a subconscious picture of a universal blue. I guess everybody does, so we are able to speak quite happily to one another about something being blue without having to be specific. In fact, it is only when we get specific that the disputes start. You turn up in your blue car and I complain that it’s green.

I was reminded of this when recently I started to speak with a number of people about automation as it applies to the tobacco industry. It was possible to talk about automation quite freely until, suddenly, you became aware that perhaps what was being discussed was not automation as you knew it, but mechanization, or the application of IT systems, or something else entirely.

Here is what Wikipedia has to say about automation: “Automation is the use of control systems and information technologies to reduce the need for human work in the production of goods and services. In the scope of industrialization, automation is a step beyond mechanization. Whereas mechanization provided human operators with machinery to assist them with the muscular requirements of work, automation greatly decreases the need for human sensory and mental requirements as well.”

This is a good, clear definition, but it raises some issues when applied to the tobacco industry. If we insist on including the reduction of human work within the definition—and I have to admit that my “universal automation” probably does make such an inclusion—how can we explain the fact that further automation is being applied to tobacco factories where the head count reached a minimum some time ago?

Head counts

I guess the first thing I should say is that nobody I talked with mentioned the idea of reducing the number of people employed, at least not without being prompted to do so. Certainly, Andreas Kuemperling, who is responsible for business development at Siemens, was fairly dismissive when I mentioned that favorite vision of the 1980s: the tobacco factory without people. Theoretically, he said, such an idea was possible, but in practice it wasn’t realistic partly because you were handling a natural product and partly because the equipment was not 100 percent reliable—failures were possible. Today, Kuemperling added, machines were already taking decisions based on the rules of automation and software was becoming more and more important, but the final decision had to be left to a qualified operator.

In fact, Tomasz Kramek, the business development manager at the Polish subsidiary of the ITM Group, made the point that in the recent past there had been instances where factory head counts had been allowed to rise slightly. Kramek, who was previously chief of ITM’s automation department, told me that 10-15 years ago there had been huge pressure, especially in respect of primary departments, to use every means of automation to reduce the number of people. But since then it had become clear that this was not always the best strategy because it could result in a reduction in the quality of the product.

Kramek made me sit up at this point. There was clearly a conflict if one of the goals of automation was the reduction of people, but the reduction of people in primary departments beyond a certain level—a level that automation could apparently support—might lead to a reduction in product quality. After all, product quality maintenance, if not improvement, must also be one of the goals of automation.

The difficulties arose in primary because it was thought at one time that the whole process could be controlled from a central room using sensors and monitors, Kramek explained. But this was probably a mistake—a step too far. Tobacco was a natural product and there was a need for experienced people who, from time to time, could touch the tobacco, examine it visually and smell it, and these were tasks that it was not possible to automate.

This is not to say that labor reduction is not an aim of automation in tobacco factories. The situation varies from plant to plant, with those in the West generally being already automated while some of those in other regions still operate using considerable amounts of manual labor. Even in the West, there is still potential to reduce head counts slightly in some factories, especially in secondary departments, though whether such reductions would be an economic advantage is a moot point. Increases in automation might allow for the reduction of people, but they might also require the substitution of less qualified people with those more qualified, which might mean that there was little change in the wage bill.

Skill levels also come into play in developing countries. Automation in these countries might be rejected on the grounds that particular factories do not have enough money to invest in such systems, and it might be rejected because of socio-political reasons, but it might also be a non-starter because of the unavailability of enough people with the skills to oversee highly automated systems.

The true benefits

So if there is no or little economic advantage to be had in reducing the number of people employed in a factory, why should a manufacturer introduce automation? Well, according to Kuemperling, the three main drivers beyond safety, which is a given, are productivity, efficiency and flexibility.

Flexibility? Again, I was pulled up. Surely, automation is about a lack of flexibility—about imposing on machines a set of rules to ensure they operate in a predetermined, repeatable way? Not so, said Kuemperling; each automation or IT system was only as good as its design, and whereas a good design had to be based on rules, it had to be capable also of handling exceptions. Automation systems, for instance, could aid brand changes, calculating, among other things, at what time new blanks had to be sent from the store to the machine. But such preplanning had to be capable of taking into account the fact that things could go wrong; that there could be a materials break and a machine shut down. So if, as part of a complex production plan, when you were dealing with 20-50 manufacturing lines, you had to reorganize your production, automation systems capable of communicating through all levels could help the production management make the right decisions, on time.

Planning and the organization of work flows were aspects of automation that were emphasized by Siemens, which, working across a very broad range of industries, has a portfolio of automation products that amounts to “several tens of thousands of components” and is able to offer the benefits of the cross fertilization of ideas from industry to industry. In fact Kuemperling made the point that in factories that were already highly automated, planning might be the one area where further automation was possible. There was room for such advances because planning was such a complex matter, he said. Whether you considered such planning to be automation or IT was a questionable point, he added, but it had to do with automation because you needed to generate real-time information and provide your planning to the machines.

Kramek looked at the idea of flexibility from a different angle. Manual operations could be seen as being more flexible, he said, but such operations could raise question marks over the security of the process. With manual operations there was always the danger of wrong components being included in products and the uncertainty of whether this had indeed happened. Either way, this could be an expensive exercise. Automated systems, on the other hand, provided a full track of what had been included, where and when. In this way, they could minimize or even eliminate such mistakes, thus offering savings, especially given that the payback time on some of the equipment and systems was as little as a year.

I find flexibility to be an interesting attribute of automation partly because I can remember the time when a reasonably observant smoker could notice differences between the cigarettes in a single pack that had been produced on a mechanized line. And, I know this is heresy but I quite like such differences, so I asked Christian Schulze, business development manager at Beckhoff Automation’s food, beverage and tobacco industry division, whether automation could be geared to produce, on the same machine, productively and efficiently, products that were different, one to the other.

I have to say that he wasn’t greatly enamored of this idea, pointing out that this was not what automation was about, but he said that in theory it was possible. It was now possible to use small stepper or DC motors to change the operation of the machine while it was running. That was really easy, he said, so it would be possible to produce products that were different one to the other.

Schulze though, was more interested in talking about the more practical sides of automation: the fact, for example, that it could be used to make existing machines faster and more productive while improving the quality of the output. This sort of thing was now possible because, using industrial PCs (IPCs), the cycle time or control time was 100 microseconds, 1,000 times faster than what could be achieved with a PLC. So, with more information, your product could be made a little better. Not hugely better, Schulze said, but perhaps 2-5 percent better in respect of material and energy usage and production speeds. Savings of even that magnitude, he added, given speeds of 400-800 packs a minute, by the end of the year added up to significant sums.

The reference to existing machines above is an interesting one because it can be applied to refurbishments, something for which Beckhoff’s systems are said to be ideal. Beckhoff, said Schulze, used open, standard systems, so it wasn’t necessary to change everything on a machine that was undergoing refurbishment. New technology could be added but, at the same time, old technology could be retained where that was appropriate.

Beckhoff uses its open systems to good advantage, also, in unifying technology. Exploring a further horizon of automation, Schulze mentioned how modern buildings—their heating/cooling systems, elevators and lighting, for instance—were automated using computer programs. And with Beckhoff’s systems it was possible to run the building and machine automation systems with the same program. This meant that you needed just one engineer to maintain the primary, secondary and building automation, so the major manufacturers, who currently used a separate engineer for their primaries, secondaries and buildings, could save on engineers.

And, of course, automation doesn’t have to be confined within your buildings. It can be used for tracking and tracing individual products once they’ve left the factory, something that was future technology 10 years ago but that is standard now, said Schulze. Such systems, he added, were possible with a PLC but were expensive, whereas Beckhoff’s technology allowed the cost to be reduced.

This I guess is automation on the grand scale, but automation can be highly valued, too, on the small scale. Kramek described how automation had been used to allow the expansion of the role of the lowly tobacco silo, without any physical changes being made to what essentially is a box. Whereas the traditional role of the silo had been to hold one type of tobacco, automation had allowed the inclusion of more than one type without mixing, and also the concurrent loading and discharge of different tobaccos from the same silo.

Some years ago, this would have made as much sense as my idea about using automation to make products different, one to the other, but with the burgeoning of product portfolios, it obviously has application in today’s factories. Kramek told me that whereas some years ago a factory might be operating with only two or three blends, some now had to deal with 100-150 different recipes. In some cases, the smallest order from secondary was for the production of 1 million sticks.

Perhaps in the end we will need automated cyborg machine operators to deal with such complexity—and of course it would help the cause if they were smokers.

 

 

 

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On demand

| February 1, 2011

New printing technology simplifies primary, secondary packaging processes for Top Tobacco

By Paul Schildhouse

The roll-your-own cigarette and pipe tobacco industry is a small but growing segment of the tobacco industry. Sales have increased over the past five years, according to the U.S. Alcohol and Tobacco Tax and Trade Bureau. Since 1987, Top Tobacco, with headquarters in Lake Waccamaw, North Carolina, USA, has manufactured roll-your-own cigarette and pipe tobacco products for individuals who prefer to make their own cigarettes or smoke a pipe instead of purchasing machine-made products.

Because Top Tobacco offers a variety of products, package sizes and package types, the company uses variable data printing solutions that allow it to customize both primary and secondary packaging and avoid storing preprinted materials. Top Tobacco utilizes small-character continuous inkjet printers, laser printers and large-character marking systems from Videojet Technologies Inc.

Richard Hopkins, plant engineer for Top Tobacco, says the decision to use variable data printing systems has brought a huge advantage for Top Tobacco. Hopkins estimates the ability to print variable data on demand has increased uptime compared with previously used printing methods and has allowed Top Tobacco to purchase generic films, foils and shipping cases. Information required on each product is preprinted onto the packaging, but Top Tobacco no longer needs to store preprinted packages or cases for each product brand and size.

Advantages

Before installing continuous inkjet printers for primary packaging, Top Tobacco used a variety of printing methods for coding on polypropylene or foil pouches, including inked embossed rollers and hot-inked embossed rollers. The rollers required line operators to remove the typeset and change it for each new product on a production line. In addition, Top Tobacco had to devote warehouse space to storing preprinted corrugated cases in a variety of sizes to ship its products to retail outlets throughout the United States.

“Having generic packaging requires less management of preprinted packaging to ensure the right packages are used every time,” Hopkins says. “Plus, we now use considerably less floor space to store a few case sizes instead of dozens of cases with different sizes and different information.”

Requiring fewer preprinted cases and packaging has made it easier for Top Tobacco to forecast its packaging needs, so suppliers can be placed on a set schedule to regularly deliver more materials. This enables Top Tobacco to avoid unplanned orders for packaging materials.

Ensuring fresh product

Prior to distribution for retail sale, Top Tobacco packages cigarette and pipe tobacco into cans, polyethylene pouches or foil pouches, with product sizes ranging from 0.35 ounces to 1 pound. The cans and pouches are then packed into cardboard shipping cases, palletized and shipped to Top Tobacco’s distribution center in Glenview, Ill.

Cans and pouches containing Top Tobacco’s products are imprinted with production date codes using Videojet 43s inkjet printers and Videojet 3320 laser coders. With the Videojet printers, dates can be automatically changed and Top Tobacco can print production dates that include hours and minutes, which was not previously possible with the rollers.

The cartons used for shipping the cans and pouches of tobacco are coded by Videojet 2320 large-character printers. The cartons require printing on two adjacent sides, so one side of the box is printed first, and then the box is bump-turned to allow for printing on the adjacent side. The boxes are marked with product-specific alphanumeric codes and barcodes for tracking and production dates.

“The date codes printed on each pouch or can are referenced by our sales force to ensure customers are getting the freshest product available,” Hopkins says. “Warehouse personnel check the date codes regularly to make certain that product is properly rotated through the warehouse during distribution to keep fresh product moving out to retail outlets.”

The barcodes on the corrugated cases enable distributors to easily keep track of products entering and leaving the distribution center. Therefore, it is essential the codes are crisp and clear so barcode scanners can read the codes the first time without requiring multiple scans, which can hinder productivity.

Intuitive interfaces

All the Videojet printers are used continuously during Top Tobacco’s production hours. Each production line has its own set of printers, which are preloaded with variable data coding requirements for each product produced on that line. When a product changes on a line—which occurs approximately once per week—the operator needs only to select the job product code from the preloaded list.

“Changing products is very simple with the Videojet printers,” Hopkins says. “The operators require very little training or assistance because selecting a job is about as easy as selecting a song on a jukebox.”

In addition to the intuitive printer interface, Top Tobacco also appreciates the long periods between maintenance required by the Videojet printers. Hopkins notes that common maintenance tasks are easy to learn and perform as a result of the self-diagnostic features available on the printers. The printers display help screens to walk operators through routine maintenance, which reduces downtime that can shut down an entire production line.

“Whenever you can decrease the amount of time a technician must spend with a piece of equipment, you have gained an advantage,” Hopkins says. “Since these printers need less attention from our technicians, our operators are able to handle product changeovers and our maintenance personnel can concentrate on other tasks.”

Top Tobacco also consulted with Videojet when determining the appropriate printers to use on its production lines and to select the best inks for its substrates. For example, because the pouches can come in various colors, Top Tobacco uses both blue and black ink in the Videojet 43s printers. The blue ink shows up better on darker colors, and Videojet helped ensure the ink would be compatible with both the printer and the substrate.

“Videojet has always been available to us whenever we’ve had challenges with new packaging or needed to consult a field technician,” Hopkins says. “The technicians are well-trained, and our representatives really know their products and have demonstrated a real dedication to ensuring we are investing wisely in our printing technologies. We feel like Videojet is a true partner.”

By choosing variable data coding systems, Top Tobacco has been able to spend less time worrying about coding processes and packaging materials and more time focusing on its core service of producing and distributing fresh, quality tobacco products.

 

Paul Schildhouse is secondary packaging product manager at Videojet Technologies Inc.

 

Fanning out

| February 1, 2011

The Indian group of companies that includes Chaitanya Packaging now also supplies rotary dies for use on packaging and converting machines.

 

By George Gay

 

As I traveled with T.R. Prabhu, the chairman of a group of companies that includes Chaitanya Packaging, between some of his factories and godowns on the outskirts of Guntur, India, he made the point that somebody had to provide meaningful employment for the people who lived in the numerous and populous villages we were passing through.

 

He made his comment after I had expressed curiosity about the rate of increase in the number and diversity of the businesses that made up his group. Prabhu had just mentioned that he was about to start a company that would build machinery, and I knew that the print was hardly dry on the business cards for his Diehard Dies Pvt. Ltd. enterprise.

 

The group’s flagship business is the 19-year-old Tulasi Seeds, which produces vegetable seeds, with emphasis on chilies, and hybrid cotton seeds in a process that incorporates technology licensed from Monsanto. “We are the third-largest cotton seed company in India,” said Prabhu. “It’s all sold in India at the moment, but we are looking for opportunities to go to Africa.”

 

Surprisingly for a man who controls a number of diverse businesses, Prabhu talks with expertise and in detail about each of them, almost as if he is in daily control of them all. And he speaks and acts with precision, often repeating what he has said in different ways to ensure the meaning is clear.

Another of his enterprises cultivates about 400 acres of land with vegetables and fruit, especially lemons and mangoes.

 

And, as is mentioned above, his new venture is Diehard Dies, which he started to put in place in November 2009. This company uses machinery imported from Germany and raw materials imported from Europe to produce flat and rotary dies for use on converting and packaging machines for folding cartons and corrugated boxes. Diehard Dies, Prabhu explained, was the first company in India to make such rotary dies.

 

“In addition, we make flexible steel label-cutting dies, and we are the first company in Southeast Asia to do that,” he said. “This is a 100 percent export business.

 

“Making flexible dies is a very difficult manufacturing process that requires a high degree of precision. The labeling industry is very automated and needs sophisticated dies. No other company in the Middle East or Africa can produce such dies, so my target comprises customers in all of the countries of these regions—50-60 companies in South Africa alone.”

 

Diehard Dies offers also embossing blocks, gold-finishing bocks and Braille embossing dies in a range of materials including brass, copper and magnesium.

 

Meanwhile, the group includes a company that manufactures stationery under the Tulasi brand name and what Prabhu describes as a “small” software company based in Hyderabad.

 

Packaging

 

But the number-two company in the group, measured in turnover, and the company of most interest to the tobacco industry, is Chaitanya Packaging, 65 percent of whose output is bought by tobacco companies.

 

Chaitanya, which produces C48 cases under the Power-400 brand name, supplies 75 percent of India’s demand for these 200 kg cases, and exports them to Bangladesh, Dubai (for cut rag), Malawi, the Philippines, Tanzania and Turkey.

 

Chaitanya started its C48-case exporting business with sales to Bangladesh about six years ago, and by last year some 40 percent of its output was destined for sale overseas. And perhaps that figure has increased by now. When I spoke with Prabhu, he was in discussions about possible export sales to Indonesia, Malaysia, Thailand and Zimbabwe.

 

So was Chaitanya successful, I asked? “Yes,” was Prabhu’s short answer.

 

And why was that? “We are continuously upgrading the box making machinery we use, which is imported from Taiwan,” he replied. “We are continuously modernizing so as to increase productivity and quality. Chaitanya is an ISO9001:2008 certified company.”

 

And what about the group as a whole; was that successful too? “Highly successful because of continuous R&D to improve productivity and quality,” he said.

 

Overall, the group’s annual turnover is about INR3 billion ($65 million). And that figure is expected to reach $100 million within about two years.

 

As well as having a big turnover, the group is highly profitable, according to Prabhu, but at the moment this level of profitability is largely down to the seeds business. The packaging business was not particularly profitable because it competed in a very competitive marketplace and margins were thin, he said.

 

Finally, I asked Prabhu how he saw the future of the tobacco industry as it related to his packaging business.

 

“From what I see the tobacco industry will be doing about the same acreage in the next 10 years,” he said. “It may not grow overall, though I think it will grow year on year in India. So I foresee good business for Chaitanya Packaging. My target is to grow its sales turnover by at least 50 percent during the next two or three years. We can do it—with more competitive prices and better qualities.”

That’s good news for Chaitanya, good news for the group and good news for locals looking for employment.

Long march

| February 1, 2011

China remains the world’s biggest producer and consumer of tobacco products. Succeeding there requires an equally big commitment.

TR Staff Report

Despite growing health awareness and attempts to clamp down on smoking, the Chinese tobacco industry continues to thrive. Industry sales and government tax collections increased almost 17 percent in 2010, according to the State Tobacco Monopoly Administration. But those juicy figures don’t necessarily translate into easy money for foreign manufacturers and suppliers. As many have found, success in China requires patience, determination and a long-term commitment.

The Chinese tobacco industry earned nearly RMB600 billion ($90.66 billion) from sales and taxes in 2010, up from RMB513 in its previous fiscal year. According to Research and Markets, there are about 410 million smokers in China, about one-third of the population. That means the country has more smokers than the United States has people. As China’s economy continues to grow, smokers are demanding more medium- and high-grade cigarettes, which carry higher profit margins and tax rates.

In 2009, the government raised taxes on premium cigarettes (those costing more than RMB7) to 56 percent from 45 percent. The tax on lower-grade cigarettes jumped to 36 percent from 30 percent. As a result, the median price of a pack of cigarettes in China is now RMB5.

At the same time, Beijing has come under pressure to address from health advocates to crack down on tobacco consumption. When China signed up to the World Health Organization’s Framework Convention for Tobacco Control, in 2005, it agreed to restrict smoking by 2011, in part through public smoking bans, price increases and higher taxes.

But according to a recent report, Tobacco control and China’s future, China has fallen short of meeting its obligations.

The report, which was issued by a group of Chinese health advocates, officials and economists, laments that China only last year announced a ban on smoking at primary and secondary schools. And it wasn’t until May that the government banned smoking in state-owned hospitals and government buildings.

What’s more, compliance has been lax. The authors note that smoking remains rampant in hospitals and government offices, while attempts to ban advertising for cigarettes on radio, television and in newspapers have failed because of legal loopholes.

The report attributes the lack of progress to an inherent conflict of interest: the STMA is responsible for both tobacco sales and the implementation of anti-smoking laws. The authors also cite widespread ignorance about the health risks of smoking.

So despite efforts to clamp down on tobacco consumption, China is likely to remain the world’s single-biggest tobacco market for years to come, making it an attractive destination for Western tobacco companies and their suppliers, who are facing stagnating sales at home.

But attractive is not the same as easy. Even though China joined the World Trade Organization in 2001, foreign cigarette makers are still finding it challenging to do business here. Tariffs remain high, limiting cigarette imports. Reported imports were valued at only $76.02 million in 2009, according to Research and Markets. Illicit traders, meanwhile, are doing brisk business: The value of the smuggled market is estimated at $5 billion annually.

In 2005, Philip Morris International announced a deal to manufacture small quantities of Marlboro cigarettes under license in China. But the creation of joint ventures between foreign and Chinese cigarette makers remains off-limits, as does local production by non-Chinese companies. British American Tobacco learned this the hard way in 2003, when the STMA spoiled its plans to open a mainland factory.

China justifies its restrictions on foreign tobacco investments by pointing to the saturation of the local tobacco market. There is no need for additional cigarette production capacity, according to the official line.

If anything, the STMA wants production capacity to come down. Since the turn of the century, it has been closing unprofitable factories and encouraging less viable plants to merge into bigger, more efficient enterprises. The numbers of factories and cigarette brands have come down consistently in recent years. There are reportedly 30 factories today, compared with 150 several years ago. Research and Markets says the number of cigarette brands was 150 at the end of 2009, down from 758 in 2002.

Domestic taste preferences also limit the appeal of international brands, which tend to be American-blend cigarettes. Chinese smokers prefer Virginia-style cigarettes, and sales of American-blend brands remain concentrated in the coastal, urban areas, where Western expatriates tend to live.

Roger Penn, director of Mane’s tobacco business unit, says his company worked on developing an American-blend cigarette for China many years ago, but the concept never caught on. Even as Chinese consumers become more receptive to foreign trends, they are unlikely to embrace American-blend cigarettes in large numbers. Penn draws an analogy with Canada, another Virginia market. “Canada borders a major American-blend market, the United States, but Canadian smokers have not made the transition,” he says. In the wake of Canada’s ban on tobacco ingredients, a switch to American-blend cigarettes is more elusive than ever.

While foreign suppliers to the tobacco industry face fewer restrictions than do foreign cigarette makers, they too find doing business in China challenging. Still, with the right combination of persistence and tact, it is possible to succeed, as the experience of some companies suggests.

NCD Infrared, a supplier of moisture testing equipment, entered China in the 1980s and has managed to grow its business ever since. Today, the company has a market share of between 80 and 90 percent in China. Its Chinese division employs 40 people.

“Perhaps the biggest challenge is finding the right partner,” says Ian Benson, sales and marketing director at NDC Infrared. “You need to invest in a mainland network,” says Benson. “Working through a Hong Kong-based agent is not enough.”

After finding a suitable local partner, suppliers must show serious commitment. The relationship does not end with the sale. “The Chinese appreciate a long-term approach,” says Benson. “You must look after your installed base.”

According to Benson, competing on price only is not a winning strategy in China. “The Chinese are extremely discerning customers. They want the best in the world. Our prices are higher than those of the competiton, yet we are still successful.”

And it helps, of course, if your company offers products for which demand is rising. Take filters, for example. Chinese cigarettes contain higher levels of tar than those sold in many other countries. The majority of Chinese cigarettes have tar levels greater than 10 mg. In neighboring Japan and Korea, by contrast, 7 mg is the norm.

The STMA intends to reduce the tar level of Chinese cigarettes by 0.5 mg every year. The challenge is reducing tar levels while maintaining the unique smoking characteristics of Chinese cigarettes. A relatively simple option would be to increase filter lengths, but this increases the use of materials such as cellulose acetate and thus increases cost.

Filtrona has developed a number of solutions to address such concerns. The company’s ROA filter, for example, uses less raw materials but offers the same retention and pressure drop as a conventional mono-acetate filter. The company has also developed a technology to make paper taste like more expensive acetate. According to Filtrona’s sales director for China, Paul Morris, the modified paper filter has higher retention properties than does cellulose acetate, allowing Chinese cigarette manufacturers to economically reduce tar levels without compromising the natural taste characteristics of their cigarettes.

China’s sheer size makes it a powerhouse in the tobacco industry—one that Western suppliers will go out of their way to court. But while much has been made of cultural differences, these are ultimately outweighed by the similarities. Like their counterparts in Europe and the United States, Chinese cigarette manufacturers want to offer superior products and stellar service—but at a price that does not break the bank.

 

 

Tax to the max

| February 1, 2011

The challenge of squaring public health with government revenue objectives

By George Gay

I think that I should declare an interest. It has to be said that I am not an objective observer when it comes to taxation. I tend to the view of the 19th century French economist Frédérick Bastiat, who apparently defined taxation as state-sanctioned plunder. Don’t get me wrong—I am quite prepared to admit that governments have to indulge in a little plundering. I just wish they would be more open about it.

In the normal way of things, marauders storm ashore, sack part of your village and plunder much of what isn’t nailed down, but they leave enough standing to allow regeneration—so there will be something to plunder when they return. And, to be fair, governments largely follow the marauders’ code on plunder. They take just enough to render their victims too weak to protest but strong enough to continue indulging in all of those pursuits that are taxable—every pursuit you can think of, that is.

Tobacco taxation is a different matter, however, because here governments have been plugging the idea that their policies constitute a moral crusade, and there is nothing so crushingly pitiless as a moral crusade. In this case, the marauders’ code can be consigned to the flames because governments are increasing taxes on tobacco not to fill the holes left in their coffers by profligate spending, you understand, but because they want to help the very people they are taxing. It almost brings a tear to your eye.

But not quite. There’s something odd about this moral crusade. The line we are fed is that taxation is raised to the point where people can no longer afford to consume tobacco products, and, because consuming tobacco is bad for them, their not being able to do so must offer a benefit. Under a system of “tax to the max,” the sinners are saved and proudly take their places behind the gleaming banner of health and vitality.

Assumptions

The first thing that has to be said about this nonsense is rather obvious but is nevertheless worth saying. This tax to the max policy is based on the view that one group of people know best and must be allowed to impose the totality of their beliefs on another group; it is, after all, a crusade. And it seems to stand no matter how much evidence comes to light to question these beliefs.

Following on from that, a few people, I think, would agree with me that the decision to launch such crusades are made with those in the vanguard having exaggerated the negative aspects of tobacco consumption—sometimes grossly so—and ignored the positive aspects of it. And more than a few people would agree that the crusade is launched on the assumption that—against all the evidence put forward by the crusaders themselves—tobacco consumers are able to give up these products.

One common riposte to this last criticism has it that addicted consumers who are no longer able to afford to buy tobacco products can avail themselves of quit products, sometimes at no direct cost to them, though the success and failure rates of these quit products are normally not mentioned.

But this is not quite right. The evidence coming out of Japan at the moment would tend to indicate that these products are not always around when they’re needed. Writing in The New York Times last month, Hiroko Tabuchi described how Japanese health professionals and many of the nation’s smokers were grumbling because, three months after the imposition of a massive tax rise on cigarettes, it was still difficult to get supplies of Pfizer’s quit-smoking drug Chantix.

I don’t think that you have to be a cynic to wonder why, given that one of the stated aims of the tax hike had been to get people to quit, the government did not work with the providers of quit products to ensure adequate supplies; or am I expecting too much?

Still; the shortages might have been a mixed blessing for some. On the same day as the Tabuchi story, Kent Faulk was describing in The Birmingham Post how nationwide in the U.S. 1,200 lawsuits were being brought against Pfizer in relation to Chantix. Smokers and their families allege that Chantix left would-be quitters with a variety of psychological problems, allegations that Pfizer denies.

Bankrupt crusade

One thing that is certain is that the outcome of the moral crusade isn’t guaranteed; otherwise, given the figures often quoted for the number of people who “want” to quit tobacco, it would be easy for a government to put the taxation on tobacco products up by a million percent, hand out quit aids and watch the massed ranks of crusaders lead all of the former tobacco users into the promised land.

So what is wrong here? Well, just about everything, but I want to look at only a couple of issues. Firstly, if you want to examine how bankrupt is the moral crusade that is built upon the policy of tax to the max, you need look no further than Canada, though what has happened there has happened in some other countries also, to a greater or lesser extent. Canada’s tobacco taxation policies have encouraged the illicit trade to such an extent that, overall, this trade now accounts for about one-third of the market. In one province, it accounts for nearly 50 percent of cigarette sales.

The general response to this situation is not to reduce tobacco taxation but to try to increase enforcement and, presumably, in the process, criminalize rising numbers of people. You have to wonder at what point the authorities will admit that the volume of illicit sales indicates that a significant minority of the country’s population believes that tax to the max policies are unfair. At what point will they wonder if these people haven’t got a case? At what point will they ask themselves whether putting more and more people on the wrong side of the law truly represents a moral crusade? At what point will they be moved to reconsider what sort of a society they want to foster?

I fear it will be a long time. This is not the first time in recent memory that Canada has found itself in a similar situation. And, coincidentally, as I was writing this piece, Imperial Tobacco Canada issued a press note lamenting the Minister of Health’s decision to abandon her commitment to tackle the nation’s contraband.

The press note said that the Royal Canadian Mounted Police had reported recently that there were now 50 illegal cigarette factories and more than 300 smoke shacks selling tobacco on First Nations reserves in Canada.

After announcing in September that tackling illegal tobacco was her priority, the note said, special-interest anti-tobacco groups, most of them funded by her own department, lobbied the minister heavily to focus on increasing the size of health warnings on legal products.

“Three months ago, the minister of health said illegal tobacco was her priority,” said a clearly frustrated John Clayton, who is vice president for corporate affairs at Imperial. “However, she has done nothing to crack down on the illegal trade since then. Instead, she caved in to the pressure of a handful of anti-tobacco groups.”

Questions

At first sight, the phrase “tax to the max” looks straightforward enough, but stare at it for long enough and a number of questions start to arise. Two obvious questions are: What is the max and who determines what is the max? But, to me, the most interesting question is, what is tax? In the EU and elsewhere, tobacco consumers are being forced to pay hundreds of millions of euros to fund various initiatives to combat the illicit trade in tobacco. I’m not sure what this money is called by those who receive it—whether it is referred to as a penalty, fee, contribution, bonanza, lottery prize or whatever—but, basically, it is a stealth tax levied on the consumers of licit products that is handed over to various agencies to fund seemingly predictably unsuccessful attempts to reduce the illicit trade in tobacco that is a direct result of the price of cigarettes being too high. Is this rational? Is this fair? Is this all part of the moral crusade? To me it looks like a dog chasing its tail.

Meanwhile, in the U.S., most consumers of licit products are made to make payments—through the manufacturers of the products they consume—under the Master Settlement Agreement (MSA), though, as far as my memory serves me, no tobacco consumer ever agreed to making such donations. Again, this is put forward as being part of some moral crusade, but it is far from that. The agreement is spun as being a punishment on the tobacco manufacturers, but, again, it is not; it is a tax on tobacco consumers. And it wouldn’t be so bad if all or at least most of the money raised from this tax went to fund tobacco control programs, as you might rightly expect, but it does not.

By the way, if you aren’t convinced that MSA payments are just taxes by another name, you would do well to check out what is going on in Texas at the moment. According to a story by Gary Scharrer for the online version of The Houston Chronicle, Texas is one of two states (the other being Florida) that are parties to the MSA but that don’t require companies that were not signatories to the agreement to participate in it.

But Texas has a problem: a budget deficit of more than $20 billion, according to recent estimates; so Altria has suggested that part of this hole could be plugged by drawing the non-participating companies into the “agreement.”

Here is what Scharrer quoted Justin Phillips, a spokesman for Global Trading, a small tobacco wholesaler based in Enid, Oklahoma, USA, as saying: “The big tobacco companies are trying to shift the market share to their favor by placing a tax [my emphasis] on smaller companies that were not involved in the (late 1990s) settlement.”

As is hinted at above, the max in tax to the max cannot be limitless. The max is simply the level that allows governments to wheedle as much money out of tobacco consumers as they possibly can, but it involves a difficult calculation. Governments have to be on their guard that they don’t overstep the line of diminishing returns—the point at which the theoretical increase in revenue from increased taxes is wiped out by people refusing to buy tax-paid products. So what this means is that in those jurisdictions where tobacco tax is purportedly increased to the max to try to stop people smoking tobacco, tax levels are largely determined by the strength of the illicit trade. The moral crusade is being led by gangs of criminals. Quite.

Bailouts

At this point and somewhat uncharacteristically, I’d like to take a diversion to examine what seems to me to be an inconsistency in many governments’ taxation policies. As is described above, these governments say they increase the taxation that has to be paid by the consumers of tobacco products because those consumers are addicted to a product that has a negative effect on the health of society. The thrust of these increases is aimed at breaking the bonds of this addiction and thereby increasing the health of the community.

The trouble here is that there is at least one other group of people who may be closely equated with tobacco consumers but who are treated in a completely different way. I’m talking, of course, about a certain class of banker. These bankers are addicted to a product that—as has been proved beyond any question in the recent past—has a negative effect on the health of society. But the reaction of governments in this case is not to try to break the bankers’ addiction to greed but to feed it. Although governments wouldn’t dream of handing tobacco products to nicotine addicts, they seem not to think twice about throwing money at those addicted to greed.

Why is there this divergence of approach? It’s difficult to say, but the only real difference that I can see between the tobacco users and the bankers is that the former are, in the main, relatively poor financially and therefore powerless, while the latter are relatively rich financially and therefore powerful.

Ireland is one country where smokers have been pilloried and taxed to the max and beyond, and where the bankers have failed comprehensively; so in the normal way of things, the former are helping to bail out the latter. I have written elsewhere in this issue about Ireland, but the story from that country is so monumental that it bears repeating. At the end of last year, the Minister of State for Health, Áine Brady, told the Dáil that currently 29 percent of the population smoked despite a ban on tobacco smoking in public places, the abolition of packs of fewer than 20 cigarettes, the ending of in-store displays and advertising, and the retail price of cigarettes being, at €8.55 ($11.06) a pack, “the highest in the world.” In 2004, 27 percent of the population smoked.

Clearly, not only does the tax to the max crusade against tobacco fail the test of morality, it fails the test of efficacy. It is a failure, but that won’t make any difference. Most governments seem not to be concerned about such failures.

At this point, it would be interesting to turn the focus to Japan, where, normally, they seem to take an orderly approach to things, including tobacco taxation. Well, that was the case until last year when, in the run-up to an unprecedented tax increase on Oct. 1, which, together with a manufacturer’s increase by Japan Tobacco, raised the retail prices of some brands by 40 percent, the market was thrown into chaos.

In September, cigarette sales, at 37.4 billion, were up by 88 percent on those of September 2009, due to a last-minute rush ahead of the excise increase. But sales were said to be down by 70 percent in October, and one estimate had it that this year they could be down by 17 percent to 180 billion. They could even fall to 165 billion.

You have to wonder what would convince a government to decide—it cannot have been unaware of the consequences—to create such chaos in a market where it has the major financial stake. The charitable interpretation might be that it genuinely wanted to cut smoking in a country where a lot of men continue to indulge in the habit. And, to be fair, if this were the intention, then it has been successful, at least for the time being. Although about 20 percent of people who quit smoking in light of the Oct. 1 tax hikes quickly returned to their habit, by the beginning of November 62 percent of those who stopped smoking due to the price increases had not smoked a single cigarette in the meantime.

I’m still not convinced, however. Call me cynical, but I have a funny feeling that this will end up doing little else but increasing the government’s revenue from tobacco taxes. Still, I’m willing to eat my words if it turns out that both the incidence of smoking and tobacco tax revenue fall.