BAT to build first Western tobacco factory in China

British American Tobacco yesterday announced an expansion in the world's largest market for cigarettes after it concluded negotiations with the Chinese central government to become the first Western tobacco company to build a factory in the country.

British American Tobacco yesterday announced an expansion in the world's largest market for cigarettes after it concluded negotiations with the Chinese central government to become the first Western tobacco company to build a factory in the country.

Under the joint venture with China Eastern Investments Corporation, BAT will invest £800m in an attempt to tap into a market where there are approximately 300 million men and 20 million women hooked on Nicotine.

A company spokesman said the move was a "significant part of the jigsaw", but there were still some logistical issues to resolve before the production target of 100 million cigarettes a year, beginning in 2007, would be reached.

BAT sells cigarettes in China under the State Express 555 brand - the one apparently favoured by Chairman Mao - as well as Kent and other less well-known brands.

Martin Broughton, the former chairman of BAT who has been brokering the deal for the past three years, said: "I am extremely pleased with the central government's decision to allow BAT to significantly expand its involvement in China."

Recent years have seen sales in developed countries stagnate but BAT said yesterday's announcement was the result of a long-held company strategy to expand into new markets rather than a reaction to negative developments, such as the recent banning of smoking in public places in Ireland and New York.

Paul Adams, its chief executive, said: "We are committed to China for the long term." He went on to praise the Chinese government's "excellent effort" to continue developing the country's tobacco industry.

Market sources welcomed yesterday's announcement, saying that BAT's expertise in emerging markets made it well placed to exploit growth opportunities in a country that consumes a third of the world's cigarette production.

Last year, both Gallaher and Imperial Tobacco signed distribution deals with local producers but yesterday's move by BAT is the first time a Western firm has been allowed to invest directly in the Chinese cigarette market.

Shares in BAT closed up 27p to 868p.

China offered concessions to allow foreign firms to invest in the country during talks to allow it admission to the World Trade Organisation.

BAT has 180 factories in 60 different countries, employing 85,000 staff, including 350 already employed in distributing the billion cigarettes the company already sells in China.

It is estimated that 2 million people die of smoking-related diseases in China every year.

Yesterday's news comes as a welcome fillip to a company that last year announced a 26 per cent fall in profits as a consequence of restructuring costs.