KT&G Corporation

views updated

KT&G Corporation

100 Pyongchon-dong, Daeduk-ku
Daejun
South Korea
Telephone: (+82) 42 939 5000
Web site: http://www.ktg.co.kr

Public Company
Incorporated: 2002
Employees: 4,635
Sales: KW 1.8 trillion ($1.57 billion) (2002)
Stock Exchanges: Korean
Ticker Symbol: KTG
NAIC: 312221 Cigarette Manufacturing; 424590 Other Farm Product Raw Material Merchant Wholesalers

KT&G Corporation is the new name for the former Korean government-controlled Korea Tobacco & Ginseng Corporation. Since its privatization, completed in 2002, and the spin off of Korea Ginseng Corporation, KT&G has focused on defending its nearly 80 percent market share at home and stepping up its cigarette export sales. By 2003, exports of KT&G-branded cigarettes have topped 10 percent of the group's total sales. KT&G, the world's seventh largest tobacco company, expects to crack the top five before the end of the decade. The company's impending entry into the huge Chinese market is slated to increase the share of exports to as high as 25 percent of KT&G's total revenues by 2005. The Middle East and other Asian markets presently form the largest share of the group's exports, at 80 percent; the company generates some 17 percent of its sales in the North and South American markets. KT&G has also risen to the challenge of foreign competition at home, where the final trade barriers were lowered at the turn of the century. As part of its effort to maintain its share of the Korean market, where more than 70 percent of men and a rising percentage of women smoke, KT&G has been rolling out a new line of premium tobacco brands, including Seasons, Humming Time, Lumen, Esse Lights, and the ultra low-tar Raison, all launched in 2002. Taking part in the thaw in relations between North and South Korea, KT&G formed a cigarette manufacturing joint-venture outside of Pyongyang. In South Korea, the company operates five cigarette production plants and two leaf processing facilities, as well as its own printing plant. In 2003, the company began plans to build a foreign production facility in Turkey. While remaining committed to growth in its tobacco business, in 2003 KT&G launched a diversification drive, targeting expansion into the biotech sector. KT&G is listed on the Korean Stock Exchange. In 2002, the company posted revenues of KW1.8 trillion ($1.6 billion).

Ginseng and Tobacco Monopoly in the 20th Century

The use of ginseng as an herbal remedy goes back some 5,000 years. Modern usage of the root began in the 19th century, and by the beginning of the 20th century demand had outstripped supply. By then, Korean red ginseng had gained a reputation as being among the finest grown in the world; at the turn of the century, the country became the first to cultivate red ginseng for sale. The Korean royal government quickly exerted its control over the crop, establishing the Samjeongkwa, or Ginseng Management Division, which took over monopoly control of ginseng cultivation and sale, both in the domestic and export markets.

In 1980, the newly established Bureau of Taxation, part of the Ministry of Finance, took over the Ginseng Division, a move that was supported by the passage of legislation, the Red Ginseng Monopoly Law, that officially gave the Korean government oversight over all of the country's ginseng operations and development. That monopoly was to remain in effect until the late 1980s. By then, Korea had become the world's largest supplier of cultivated ginseng, which was marketed under the brand name adopted in 1940, Cheong-Kwan-Jang.

Parallel to its control of the country's ginseng sector, the Korean government also took over operations of another important crop and product group, tobacco, passing the Tobacco Taxation Law in 1908. Tobacco also was brought under the authority of the Bureau of Taxation, which became the sole conductor of tobacco growing and cigarette production in the country.

The country's tobacco and ginseng interests were transferred to the Department of Monopoly, under the Ministry of Finance, in 1948. The importance of both crops to the Korean economy was underscored in 1952 when they were placed under a separate entity, the Office of Monopoly. In the years following the Korean War, as South Korea rebuilt its economy into one of the region's powerhouses, tobacco sales grew strongly. The Office of Monopoly responded by increasing its area of cultivation and building a network of leaf processing and cigarette manufacturing facilities throughout the country. The Office of Monopoly also became responsible for developing a vast network of sales points—some 170,000—throughout the country.

By the mid-1960s, the country's production of tobacco and cigarettes had risen sufficiently to enable it to begin exporting cigarettes. Korea's proximity to other Asian markets gave it an edge in the region. As in South Korea itself, tobacco consumption throughout Asia was extremely high. Korea also entered a number of other markets, including the Middle East.

Facing Competition in the 1980s

Into the 1970s, tobacco remained the Office of Monopoly's major revenue source. Nonetheless, the company's ginseng operation had also grown strongly, building on its control of the world's largest supply of cultivated ginseng and successfully maintaining the reputation of Korean red ginseng as the world's highest quality ginseng. In 1976, the ginseng division launched construction of the Korea Ginseng Factory. Completed in 1978, the facility enabled the Monopoly Office to increase both its supply of ginseng and range ginseng-based products.

Into the 1980s, the Korea Tobacco & Ginseng Corporation Office of Monopoly lived up to its name, controlling 100 percent of South Korea's tobacco market. Indeed, the Korean government had added new legislation as a means of supporting its monopoly, passing laws that made the possession of foreign-made cigarettes and other tobacco products illegal. Western tobacco companies, reacting to sharp declines in tobacco consumption in their traditional territories, began lobbying for increased access to Asian markets, many of which, like Korea, had long kept out the far-larger U.S. and European groups.

In the early 1980s, pressure from the U.S. government began forcing open the Asian market. By 1986, Korea, fearful of losing trade in the United States, agreed to allow foreign cigarettes to enter its market. Imports, however, were limited to just 1 percent of the total domestic market. In addition, sales of foreign cigarettes were initially restricted to just 500 locations. That provision was dropped in 1987 when foreign cigarettes became available at all of the country's tobacco stores.

Nonetheless, the high price of foreign cigarettes—at three times the price of domestic brands—helped the monopoly to maintain its grip on the home market. At the same time, a boycott movement, led by the country's tobacco farmers, kept foreign cigarettes from making significant inroads into the market.

At this point, the monopoly recognized that it would have to restructure in order to face the future, if only because of the increasing competition in its export markets, where sales of Western cigarette brands jumped nearly 100 percent by the end of the 1980s. The company had already received a preview of the coming competition when it attempted to enter the Japanese market in 1985 with two brands, Pine Tree and Ararang. Japanese consumers, who had been introduced to the milder flavored U.S.-style cigarettes, balked at the heavier taste of the Korean brands, and the company was forced to end the experiment in 1989. By then, the Office of Monopoly had begun restructuring, leading to the creation of Korea Tobacco & Ginseng Corporation in 1989.

The new structure now adopted a true customer service orientation, abandoning its former indifference to product quality, at least as far as its cigarette production was concerned. The company also began stepping up its export sales initiatives. In 1990, the company succeeded in entering the soon-to-collapse Soviet Union, where cigarette shortages had led to riots that summer, securing a contract for a shipment of five million packs of cigarettes.

Privatized and Diversified in the New Century

By the mid-1990s, Korea Tobacco & Ginseng's new emphasis on quality had begun to pay off. At home, the company was able to minimize the impact of the entry of the new foreign brands, which appealed especially to the country's youth, by launching its own Western-style brands. The company was then able to launch its new range of products on the export market, and in 1992 opened an overseas liaison office in Hong Kong. That office was converted to a full sales subsidiary, Korea Tobacco & Ginseng Hong Kong Ltd., in 1994. The following year, the company re-entered Japan, signing an agreement with that country's Mikuni to import one million packs of cigarettes.

In the late 1990s, Korea Tobacco & Ginseng stepped up its preparations for the coming abolition of its domestic monopoly, slated for 2001. The company began restructuring, announcing a plan to trim its payroll, which neared 9,000 employees, and shut down some of its most inefficient factories. That process got underway in 1996, when the company announced its intention to eliminate more than 400 jobs. Although criticized for dragging its feet, the company ultimately succeeded in slashing its payroll to less than 5,000 jobs by the beginning of the new century.

Company Perspectives:

In 2002, Korea Tobacco & Ginseng adopted a new name and corporate identity. While we are proud of our tradition, we believe the simple elegance of the redesigned KT&G logo embodies the essential values of our organization today. It represents our open and ethical approach to business and our concern for the environment and our customers. What's more, it symbolizes our confidence that those values will soon be familiar to millions more people around the world, as we aspire to become a global name in the tobacco industry.

A major part of the privatization process was that Korea Tobacco & Ginseng's had restructured itself as a joint-stock company in 1997. The company then spun off its ginseng operations—which had lost its own monopoly in 1996—as a separate company, Korea Ginseng Corporation, in 1999. Korea Ginseng nonetheless remained a wholly owned subsidiary of Korea Tobacco & Ginseng, which went public on the Korea Stock Exchange at the end of 1999. As part of the public offering, the Korean government agreed to allow as much as 25 percent of the company to be owned by foreign corporations.

KT&G began preparing for the full opening of its market to foreign competition in 2001, making continued improvements to the efficiency of its manufacturing facilities. The company also began developing a new range of brands designed to enable it to reposition itself in the premium cigarette market, where margins were higher but where competition was the most intense. At the same time, KT&G began negotiating an entry into the crucial Chinese market, which, with its huge population and rapid growth of cigarette consumption, promised to be one of the world's top tobacco markets in the future.

KT&G's entry into China occurred by the way of North Korea. In 1999, the company began talks to form a joint-venture agreement in order to construct a cigarette manufacturing facility outside of Pyongyang. In 2000, the two sides launched two jointly developed brands, and in 2001 they reached an agreement, hailed as a sign of a thaw between the two Koreas, to build a plant with a capacity of two billion cigarettes per year. The agreement gave KT&G access to the rail link between North Korea and China, which also extended into Russia and Central Asia, including Uzbekistan and Afganistan. KT&G's access to the rail link not only gave it the promise of additional markets but also far lower transportation costs for its other Asian and Middle Eastern markets.

KT&G met the abolition of its monopoly in 2001 head on with the launch of a new brand, Cima, a premium-priced brand featuring a high-end filter, mild flavor, and low nicotine content. This marked the first of a whole range of new premium brands, which by the end of 2002 included Seasons, Humming Time, Lumen, Esse Lights, and the ultra low-tar Raison. In that year, the company was fully privatized as the government sold the rest of its stake in the company. The company then adopted a new name, KT&G Corporation.

KT&G's new brands helped it defend its market; by 2003, however, foreign brands had gained a 20 percent share of the Korean cigarette market. The company expected to counter this development with its increasing export sales, which were set to explode as the KT&G finalized agreements with the Chinese government to allow its brands into that country. KT&G's plans now called for exports to reach as high as 25 percent of the company's sales by 2005 and for the company, by then ranked as number seven among the world's tobacco companies, to crack the global top five. As part of that effort, KT&G announced its intention to build a new factory in Turkey in 2003.

As KT&G expanded its tobacco sales, it had already begun to diversify its operations. The biotech sector held particular interest for the company. In 2002, KT&G paid KW18.8 billion to join the Celtrion joint venture with VaxGen, which had been working to develop an AIDS vaccine. Then, in August 2003, KT&G announced that it had agreed to pay KW14.6 billion to acquire Youngjin Pharmaceutical. The company intended to use the acquisition in conjunction with the research efforts conducted at Korea Ginseng in order to impose itself as a new major player on the pharmaceutical market. KT&G turned with fresh confidence into the new century.

Principal Subsidiaries

Celtrion (50%); Korea Ginseng Corporation; Youngjin Pharmaceutical.

Principal Competitors

Philip Morris Australia Ltd.; British American Tobacco; Djarum PT; Ben Thanh Tobacco Company; Japan Tobacco Inc.; Shanghai Tobacco Group Corporation; Etsong Tobacco Group Company Ltd.; Perusahaan Rokok Tjap Bentoel PT.

Key Dates:

1899:: Ginseng Management Division is created under the royal government of Korea.
1908:: Ginseng Division is placed under the Ministry of Finance, which also takes over the tobacco monopoly.
1952:: The Office of Monopoly, which takes over ginseng and tobacco monopolies, is created.
1965:: Cigarette exports begin.
1986:: The Korean market is opened to foreign cigarette brands for the first time.
1989:: The Office of Monopoly becomes Korea Tobacco & Ginseng Corporation.
1996:: The Korean government ends its ginseng monopoly.
1999:: Korean Tobacco & Ginseng spins off Korea Ginseng Corporation as a subsidiary and goes public on the Korean exchange.
2001:: The tobacco monopoly ends.
2002:: Korean Tobacco is fully privatized, changes its name to KT&G, and enters into a joint venture with Celtrion biotech.