Leading tobacco exporter Adams International employs thousands of
tobacco farmers in the Northeast. Gary van Zuylen talks to managing
director Wing F Chung about the industry's future in Thailand.Even
with his market sliding and his costs rising, Wing F Chung feels sure
that he can keep 32,000 farmers in a second job and divert his tobacco
sales away from the United States and into China.
As managing
director of the joint venture tobacco exporting company Adams
International Co, Chung says that all is not good in world markets,
yet Adams is on a path of growth, albeit more slowly than before.
Chung expects 1993 sales to reach Bt400 million, and while this
doesn't make the company a serious tobacco player in the global sense,
Chung still needs to closely monitor cigarette consumption trends.
As one stage, the United States took 80 per cent of Adams' tobacco
harvest. Now it accounts for 50 per cent and Chung concedes that the
percentage will continue to drop. The reasons center around a two per
cent annual decrease in cigarette demand caused by health concerns and
a price war between the major brand names and their generic
counterparts at the check-out counter.
"We have to look for new
markets," admits Chung. China is an obvious buyer, while other
markets in Indonesia and South Korea are showing potential. But while
Adams looks East, so does just about every other tobacco manufacturer.
This has caused international kilogram prices to slide somewhat, but
generally, at last for Adams, they have hovered over the past two
years or so, enabling the company to raise its revenues based on
higher production.
Three types of tobacco are grown, Fluecure -
named after its curing process, air-cured or Burley, and Aromatic,
which is better known as Oriental. Blended cigarettes use a mixture of
all three types, while say the British 555 brand is made from
Flue-cured. Adams harvests only the Oriental type.
In Thailand,
about 85 per cent of the state-owned Thai Tobacco Monopoly's (TTM)
cigarette production is blended, with the rest being a split between
just Burley or Oriental. For example, Krong Thip is made from Oriental
leaves.
But the local market means little to Adams as it was formed
as far back as 1964 with the sole purpose of exporting. Only should
TTM suffer a shortfall, would Adams be in a position to sell some of
its yield into the TTM pipeline, and that isn't a common occurrence.
Oriental tobacco leaf is suited to a hot, arid climate and that makes
Thailand's northeast region near perfect, says Chung. Apart from
tobacco, the generally underprivileged farmers are left to choose
either tapioca or jute as an additional source of income that the
lucky ones can grow in between a double rice crop, or for the others
after the rice harvest in the months of October through to February.
Tobacco is, however, a labor-intensive crop, Chung says. All told,
Adams supervises the planting of 45,000 rai and this yields about
7,000 tons of the final product. After the farmer harvests his crop,
which can be six times during the growing period, the company
guarantees the purchase. Adams' buying prices for the 10 grades of
Oriental leaf are set by monitoring committees working alongside the
TTM.
Chung reckons that farmers subsidize their annual income by as
much as B16,000 to B19,000 per rai per annum and that makes Adams the
sort of fairy godmother of Ban Phai district in Khon Kaen. Adams has
500 crop inspectors and a casual labor force of 2,000 manipulating the
tobacco leaves in its processing factory.
The roots of the Adams
International company were founded by Chung's immigrant Chinese father
K.S. Chung is the early 1960s. He had been involved in the tobacco
trade since his entry into Thailand the decade before and while the
elder Chung saw growing potential in the poor northeast, few others
backed him up.
Despite having the odds stacked against him, by 1969
Adams had its Ban Phai warehouse built and a long surviving
partnership was formed with the big 100 year-old American tobacco
trading house of the same name, which is now part of the US-based
global Standard Commercial Group. The business was handed down by the
elder Chung to his American-educated son Wing Chung in 1989.
Adams
see as its competitors tobacco growers in Greece. Turkey, Bulgaria,
and up until recently many in the former Yugoslavia. The Soviet Union
was also a large supplier of Oriental leaf, previously growing an
annual output of around 300,000 tons, but its tobacco industry crashed
along with the political and economic turmoil that accompanied the
disintegration of communism.
But what has kept Adams largely free of
problems has been the Oriental brand's ability to withstand any price
collapse, Chung says for example, the price of Fluecure and Burley
tobacco has slumped about 20 per cent because of over production in
Brazil, Zimbabwe, and to a lesser extent in China
Respective
countries have had to stockpile and Chung reckons that another two to
three years will be required before the slack is taken up and prices
have any chance of rising.
As for the Oriental type, it too has not
seen any growth. But it is the depressed world economy that has caused
prices to slide about five to 10 per cent and not overproduction. But
luckily for Adams, Oriental consumption appears to be on the rise in
some of the more dynamic economies of Asia and Eastern Europe.
"To give a guide to the size of the market in China," says
Chung, "the United States consumes about 600 billion cigarettes
annually, while China takes 1,600 billion." At three times
the size of the US, all cigarette makers are heading East, including
the giants, RJR Nabisco, RJ Reynolds, Philip Morris, and British &
American Tobacco (BAT) Industries.
For Adams though, Chung reckons
that it has the advantage of both a Chinese heritage and being
geographically close, "To sell tobacco to China's
state-controlled monopoly takes time," he warns.
Chung sees two
areas as being crucial to his business' success. More immediate
are methods essential to cutting production costs, Chung feels that
the best way of doing this is to educate the tobacco farmers as their
ability and theoretical knowledge is only at a basic level
New
farmers are constantly entering the fray and many are reluctant to
listen to the Adams' supervisors, choosing instead to follow their own
long-held and often ill-gotten beliefs.
One example, says Chung, is
how during prolonged spells of dry weather, a farmer will spray water
over the tobacco leaves, thinking that the moisture will benefit the
crop. In fact, says Chung, this damages the leaf and quickly reduces
the quality of the harvested product. Water should be placed at
the roots, he says.
It is over the long term though, that Chung
admits to some pessimism, saying that maybe his children may not have
a business to step into someday, While he says that there will
always be a market for tobacco simple because governments around the
world are eager for the taxes collected, the reality is that the
industry will remain exposed to price cutting wars as cost and health
issues take a grip in a sinking retail market.
In the US, a 40 cent
cut last April in the retail price by brandname cigarette maker Philip
Morris came about because consumers had flocked to discount
cigarettes. This caused a price war, temporarily adding to the woes of
everybody in the industry. There are signs now, however, that
prices are edging upwards and this comes alongside the growing
strength of the pro-tobacco lobby groups.
But in the American market
there is also a push by governments to increase taxes on cigarettes
and Chung says that the product is very price sensitive, simply
because smokers are after nicotine, not a particular taste,
Politically, each government can say that higher costs will deter
smokers and therefore decrease the pressure on healthcare, while in
reality they are just looking towards increasing their revenues, adds
Chung.
Another hurdle, especially in Europe and the US, is that
tobacco is subsidized, In fact, it is said in the US that out of all
the farmers, tobacco farmers are the wealthiest. In Europe, the
European Community (EC) protects the commodity, making it difficult
for Adams to sell its unsubsidized crop, says Chung.
Adams's
managing director claims that the health and tax issues already apply,
albeit less severely, to undeveloped Asian markets including China. It
is this climate, with 32,000 Thai partial dependents, that Adams has
to work within.
