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Discussion paper for PDC Jan. 1997 License manufacture of BAT International Brands There are a number of scenarios for Brand Licensing by the BAT Group, the main possibilities will probably come under these four headings ; a) License manufacture in wholly owned or controlled subsidiaries. b) License manufacture in minority held associates. e) License manufaoture by non BAT companies under "active" supervision. d) License manufacture by non BAT companies under "passive" supervision. Examples of a) would include e.g. BAT Benelux, BAT Suisse, Pakistan Tobacco Co b) would include e.g. ITC India, STC Denmark, IMASCO Canada e) would include e.g. BAT UK&E Jordan d) would include e.g. Blue Nile Sudan, Burundi and others Control of the Brand rests initially with three UK sources which should interact routinely Brand Marketing Local operations Technical aspects and QUAINT the Brand Group, Millbank, Stalnes, the appropriate RBU, in the UK case either AMESCA or/Lsia Pacific, BTC Southampton. There arc a number of routes through1 which ~. International B~nd product can be naarketed by the four sources above. 1) Import of finished product from an approved BAT source 2) Manufacture from cut tobacco from an approved BAT source 3) Manufacture from imported leaf tobacco from an approved BAT source 4) Manufacture from local / imported leaf to local recipe ( Import 1) ( Import 2) (Import 3) ( Local ) Normally, it would be expected that a Company would start at Import 1 or 2, and progress to Import 3 over say a two year time scale according to product quality and local blend development to approved Brand Group standards. A set of guidelines for the local company to achieve, covering these routes, is appended To guarantee Brand integrity, all licensees should ideally have the same peffurmnnce criteria in terms of PQRS and / or QUAVNT, plus a sensory backup in CPT or MASQ, and should report performance not only in sales & volume terms but also in terms of product performance in market vs salient local and International competition. Recogrfising that local circumstances may dictate, either for supply or financial reasons, that not all Brand Standards can be accommodated, the thrust must be to get as dose as possible to International norms in presentation, physical product quality and smoking quality 321003006

Presentation Packaging - all variants BAT Associates to ensure all print and packaging materials adhere to the correct colour standards for the products being manufactured, including line extensions. Cigarettes The Brand Standard manuals show the correct paper markings, tipping shades and die print logos and colours and must be obeyed. Physical Product quality Physical product quality should be at least in the "good" category as defined by PQRS In the event that it is agreed for local reasons that product does not need to have the complete Brand spec., ie no carton outer, or naked wrap or paper wrap, this element's score may have to be neglected otherwise it can unnecessarily pull down the otherwise overall "good" score into the" fair" or "needs improvement " range Smoking quality Smoking quality may depend on the stage of development of the brand and it's market positioning. Thus Import categories 1-3 should be of equivalent nature to the parent ( wherever sourced). The smoking ~'f~ali~, ~fthe Local product ~h~u.ld be a~ ~le~e, tc t':t~" G~Id SYandm'd" as is realistic for the mark~ and should retain the essential smoke sig-natt~re of the brand unless some espedal local facters change matters. Materials Licensees are required to sourc~ materials to BAT specifications, and ideally via Procurement UK. However, licensees must acknowledge that while suppliers may be able to meet BAT specifications, the practice of always buying at the lowest landed cost is often illusory, and that a small increase in cost can actually give considerable savings through lower waste and higher machine efficiencies, as well as producing a better product. Quality Assessment Local The producing Company should idemlly have in place the necessary manufacturing controls, PQRS systmn, personnd, laboratory and smoke panels to assure outgoing product quality prior to release to th¢ market against a sign offfrom an agreed Quality Inspection team or individual. International The producing Company is to submit, on a rolling six monthly basis, samples collected ex market by an individual unoormecte, d with the manufacturing operation e.g. someone in market research. These samples to be analysed at BTC Southampton, and r¢ported to the nmct Brand User's meeting as an International Audit. All Companies may request from BTC Southampton a diagnostic of their product performance, together with any suggestion for improvement 321003007

License Review It is suggested that on a yearly basis, all Companies of any status a) to d) who manufacture the Brand and any of it's variants are reviewed by the relevant BTC Technical Manager and team for conformance to brand standards. This process would favourably coincide with one of the half yearly audits ofthe Brand, and is intended to give a true global overview Alternatively, this could be either through review of the results era specific Audit alone, or during a general or specific visit to the Company. It is the intention to set high but attainable standards, and to require Companies to achieve these at the cost of non renewal of the license Terms of reference for license continuation / withdrawal PQRS It will be the responsibility of the Licensing Company to provide on going information on the technical aspects of the brand and any variants. These must include PQRS analyses performed by a competent panel, or if agreed that Mini PQRS can replace full scale, by a competent individual, on a monthly basis at minimum. LfPQRS c~.a~: b~ fl~ne to the, :~'eqt~ke, d stand~=d i~caIiy, help can b~ sought from BTC Southampton or some accessible gea BAT Op Co with the nece~a~y f~i~ties. SpeCifications Licensees are also responsible for do~menting brand specifications used for their products and reporting these and any updates to Technical Brand Managers at BTC Southampton. This data must include all materials specifications and blend specifications if of local origin Analysis MASQ If the licensee has local laboratory facilities, samples of the brand and salient competition products should be analysed ( RBA 5) on a monthly basis and copies of this data should be copied to BAT for information to ensure that brand st~de.~ds are being maintained. It is again the responsibility ofthe Licensing company to perform, or sub central, a masked ( blind ) consumer smoking trial of brand and variants vs key local competition, and to report the results to BAT. This must be done at least once per year for ]BG comment and to enable any necessary product development • needs to be identified Again, if this cannot be done to the required standard locally, help can be sought from BTC Southampton or some accessible area BAT Op Co with the necessary facilities. Market testing must be conducted to BAT norms as set down by Market Research, Stalnes 321003008

Developments All proposed developments of the brand, either revisions to the parent or BTC South~pton ~ that resour~s ~d p~odti~s c~ b~ ~located on a "whole br~d "basis. Product Briefs For any brand developments, a completed Product Brief should be prepared for discussion, this to outline the r~fionale for the development, time scales and how the development is to be resourced firstly locally, and secondly whether BAT assistance will be required. C.C.Greig 06/01/97 321003009