JULY/AUGUST 1998 · VOLUME 19· NUMBER 7&8
THE TABACCO PAPERS
IV: Big Tobacco Goes Global
So declared the then-chair of BAT, Peter Macadam, in an address to the American Chamber of Commerce in London in 1980 <BAT100506546/6551>. In the nearly two decades since that speech, the international markets have taken on ever greater importance for the tobacco multinationals. Philip Morris and R.J. Reynolds, the two leading U.S. companies, sell nearly two-thirds of their cigarettes in foreign markets, and earn nearly half of their profits overseas.
The tobacco papers disclosed in connection with the Minnesota litigation
provide additional insight into just how highly Big Tobacco values markets
in the Third World and Eastern Europe and the former Soviet Union, the
steps it has taken to thwart international tobacco control activism, its
broad market development strategies overseas, its efforts to block national
tobacco control legislation and more. But as revealing as they are, because
the disclosed tobacco papers are those requested by the state of Minnesota
in relationship to its litigation, the documents provide only a glimpse
into Big Tobacco's overseas strategies and activities. What is undoubtedly
the overwhelming majority of important industry documents relating to
the international market remain sealed in industry file cabinets.
One special reason for rapidly addressing any overseas tobacco control measure has been industry fear of the domino effect: the notion that strong regulations in one country will serve as an example for similar measures elsewhere, including perhaps the United States.
"A policy whereby the Institute is involved in combating the intensive foreign anti-cigarette activity is necessary, because there has been no abatement of such activity, which bids fair to go to such extremes that harsh measures will be taken that will become precedents for similar measures in this country," wrote the Tobacco Institute, the industry trade association and political representative, in a 1973 draft memorandum proposing that it undertake a new program to address overseas issues <RJR502429369/9373>.
A similar sentiment appeared in a Philip Morris analysis of an industry legislative campaign in Argentina: "The impact of anti-tobacco legislation may have a domino effect in neighboring countries. Congressional approval of restrictions such as those contained in Argentina's Neri Bill can inspire other governments in the region to adopt similar legislation. Similarly, a presidential veto in one country can influence initiatives in nearby countries" <pm2023005316/5320>.
The industry has gone to extraordinary lengths to monitor and counteract the effect of the tri-annual World Conference on Tobacco or Health. Hundreds of internal industry papers report on what was scheduled to take place at the conferences, what actually happened, who attended and how much media coverage they received.
In anticipation of the fourth world conference, in 1979, the industry established a special task force to monitor and counter the efforts of tobacco control advocates. A subcommittee proposed a long list of surveillance and high-level political and public relations actions:
A follow-up memo, written a month later in February 1979 by a Philip
Morris executive, indicated that the industry was proceeding with its
delegate monitoring ("I have been told that the number of definite acceptances
is as yet very, very limited, and that a first list will probably not
be available before April 20"), preparation of position papers and contact
of agricultural ministries. The memo expresses some uncertainty about
the wisdom of approaching FAO <pm2501015287/
The internal industry papers show ongoing industry concern with the activities of the WHO. The 1973 Tobacco Institute proposal suggesting expansion of the Institute's activities to include international matters, for example, asserted that "The foreign anti-cigarette activity is largely a result of constant preaching by the World Health Organization delegates, who return home from conventions on smoking and health to badger their governments into taking action against tobacco" <RJR502429368/ 9371>. As the World Bank in the early 1990s decided to abandon support for tobacco projects and support tobacco control measures as a matter of sound economic development, Philip Morris worried in a 1992 memo about "the integration of the World Bank into the anti-tobacco-front formed mainly by WHO <PM2028464078>. (To head off the Bank joining anti-tobacco forces, the Philip Morris memo suggests, "Shouldn't we react maybe by alerting tobacco-growing countries, farmers unions, etc?")
One industry response to its concern about WHO has been to smear the agency. The Philip Morris files contain a fax from the PR firm Burson Marstellar of a 1989 paper by Paul Dietrich, a Catholic University researcher, attacking WHO "for funding wasteful programmes and top-heavy monument addresses rather than the critical health issues in the developing world" <PM 2501047810/7812>. Atop the paper is a notation that it should be circulated to tobacco trade press, travel trade press and feature editors.
Much more interesting than standard public relations stonewalling is top-level discussions within Philip Morris of the idea of adding U.S.-style health warnings on all of its exported cigarettes. In a July 24, 1991 memo, Murray Bring, counsel to Philip Morris and a lawyer at Arnold & Porter, a top Washington, D.C. firm suggested to Michael Miles, then Philip Morris CEO, "that we should consider placing health warnings on all of our exported cigarettes" <PM2023003838>.
"I have been in favor of doing this for some time," Bring wrote. "I believe that doing so would improve our litigation posture somewhat in the product liability area, and would eliminate a focus of considerable criticism from health organizations, shareholders and even some friendly members of Congress."
He added that when Geoffrey Bible -- the current CEO of Philip Morris -- headed Philip Morris International, "he had just about concluded that it would be sensible to place warnings on all exported cigarettes." Others, he wrote, including former CEO Hamish Maxwell, have not "object[ed] to the concept, in principle," but "have felt that we should not make this concession without getting something for it in return. For example, we might be able to use it as a bargaining chip in legislative negotiations."
Bring followed up in October 1991 with another note to Miles urging again
that Philip Morris, quietly and voluntarily, add health warnings to its
exports. He suggested issuance of a statement of policy that "Starting
[date], all cigarettes exported by Philip Morris contained health warnings.
To the extent that those warnings are not required by local law, we have
placed the rotating United States Surgeon General's warnings which are
required under U.S. law. "The warnings are set forth in the language of
the country to which the cigarettes are being shipped" <PM2023003853/3854>.
Philip Morris did in fact place labels on its exports, although it appears
the company uses English language warnings rather than those in the language
of the recipient country.
A Philip Morris document, "Veto of Anti-Tobacco Law, Case Analysis: Argentina," describes an industry-orchestrated campaign to defeat a far-reaching legislative proposal to eliminate tobacco advertising and promotion, and to restrict smoking in public places <pm2023005316/5321>. The bill passed the Argentine lower house in 1990 and the upper house on September 30, 1992, leaving the president with 10 days to veto the legislation or it would become law. "Industry's objective was to create an atmosphere in which presidential veto would be politically acceptable," the analysis states. Immediately, the industry activated an alliance of advertising agencies and others formed following passage of the bill by the lower house in 1990. "On October 5, tobacco industry organized a closed door working session with media owners, sports figures, advertising executives and other interested parties to initiate a campaign in favor of a presidential veto," according to the analysis. The result: "129 articles appeared in newspapers and magazines between October 1-15 of which 105 were favorable to the industry's arguments. Total estimated cost of coverage if media space and time had been purchased: US$2.8MM." On October 13, President Menem vetoed the bill.
Among the conclusions of the Argentine case study: "When a crisis situation emerges, such as the Argentine Congress' approval of tobacco advertising ban, a rapid response is essential. A contingency plan which clearly defines the role and responsibilities of each affected party is a prerequisite to effective, broad based counteraction."
Similarly, in Uruguay, a Philip Morris memo reports on a successful effort to head off proposed tobacco control legislation. "During the course of the past six months, the tobacco industry in Uruguay has demonstrated how industry-government deliberations can lead to a successful resolution," states a December 1982 memo <pm2023274146/4148>. Following proposal of a bill to ban tobacco advertising, require health warnings and restrict sales to minors, "Abal Ilnos., SA working with other industry members through the local cigarette manufacturers association took immediate action," contacting members of the parliamentary committee working on the bill and working closely with advertisers. "After a series of negotiations, the Public Health Commission of the State Council repealed the proposed legislation to ban advertising."
In each of these cases, well-organized industry associations played a key role in defeating public health legislation. The importance of local industry organization in Third World countries had long been impressed on Big Tobacco. In a hand-written note at the bottom of a 1970 memo from a Mexican cigarette manufacturer, a writer who appears to be a Philip Morris official states, "suggest if not already so constituted Mexico City manufacturers form a group of themselves to adequately represent industry. We have learned many lessons in countries. Prevention at minimum alleviates and buys time" <pm10051238982>.
Fighting The Ets Asian Contagion
"One key objective of the project has been to recruit and educate scientists who then would be available to testify on ETS in legislative, regulatory or litigation proceedings in Asia or elsewhere," the report states.
It explains: "This objective was based on recognition of the fact that there were essentially no local scientists with a background in ETS issues and that experience elsewhere has shown that it is essential to have credible, local scientists prepared to speak out when ETS becomes an issue, which often occurs on short notice."
Among the initial consultants, according to the report, was Dr. Wongphanich in Thailand. "Although not expected to act as a full-fledged consultant, our consultant relationship with Dr. Wongphanich was agreed to because of her position as president of the Asian Association of Occupational Health and her potential, partly as a consequence of that position, to support our activities in the Asia region." The project also recruited the expected successor to Dr. Wongphanich as president of the Asian Association of Occupational Health.
An example of the kind of research the consultants were expected to undertake was the "Asia Cities Monitoring Project," which would monitor air pollution in Asian cities, with the findings used to argue that "air pollution (particularly pollution from motor vehicles) is a serious problem in the target Asian cities and that the much less serious indoor air pollution problems that exist in those cities are, in turn, caused largely by pollutants that are generated outdoors."
Reporting as the project was moving into its second year, and following
extensive efforts to "orient" the new consultants through industry conferences
and exposure to industry-chosen scientific papers, the project coordinators
were optimistic about the future of project. "Having now achieved a reasonable
command of the relevant literature, and with a substantial level of enthusiasm
for the project, our consultants are prepared to do the kind of things
they were recruited to do -- which, in the final analysis, is the project's
B. Philip Morris in China
By 1993, Philip Morris concluded that the Chinese market opening was real, and "a bigger opportunity than we'd really focused on," according to a November 1993 memo from company CEO Michael Miles <pm204698206/8207>. Comments by company director and media mogul Rupert Murdoch, as well as a BusinessWeek story describing General Electric's Jack Welch's emphasis on China, Miles wrote, "doesn't 'prove' it's there for us, but it certainly indicates that our sense of a truly huge opportunity is shared by some other, very savvy international businessmen." Miles implored fellow executives "to at least think big," suggesting some consideration be given to the idea that Philip Morris offer "something in the billions for all or part" of the China National Tobacco Company (CNTC).
Three sets of Philip Morris three-year plans for China, all written in the 1990s, plus marketing analyses, suggest three company preoccupations -- gaining rights to produce in China, marketing and pricing issues -- plus some concern about a nascent anti-smoking movement in China.
Although the company's strategic plans show a desire to work with the U.S. government to open the market to imports, the company plans to expand its market share through locally manufactured cigarettes. "Over the long term," notes the 1992-1994 plan, "local production appears to be the only means through which we can gain broad access to the total Chinese market, as any growth in the domestic import segment will be severely limited by the tight foreign exchange controls and import quotas imposed by the CNTC to protect the Chinese tobacco industry" <pm2504007940/7964>.
For the foreseeable future, local production would be through joint venture
agreements with the CNTC. The 1992-1994 Philip Morris plan notes that
BAT, RJR and the South African Rothmans all had cooperative arrangements
with the CNTC. Philip Morris' arrangements at the time included two factories
at which it was providing technical assistance. Closer ties had been thwarted
by a conflict over Marlboro licensing disputes. Philip Morris has since
entered into much closer joint venture agreements with the CNTC.
A marketing review by Philip Morris Asia shows a gigantic leap in smoker awareness of Marlboro <pm2504052490/2501>. In 1981, 42 percent of smokers in Guangzhou, the southeastern city formerly known as Canton, were aware of Marlboro; that number soared to 100 percent in 1991. Marlboro brand recognition in Shanghai jumped from 57 percent to 99 percent over the same period. And in Xiamen, the Marlboro brand awareness rate rose from 28 percent in 1981 to 99 percent a decade later.
British American Tobacco's 555 brand, Marlboro's major direct foreign competition in China, achieved similar leaps in brand recognition, rising from 36 percent in Guangzhou, 8 percent in Shanghai and 37 percent in Xiamen to 98, 91 and 99 percent respectively.
These spikes in brand awareness of Marlboro and its chief competitors were the result of determined efforts by the foreign tobacco multinationals to publicize their brands aggressively and to attach certain images to them. The companies monitored the success of these efforts through careful research such as that documented in a Philip Morris "Premium Brands Study," based on a door-to-door study of 500 random smokers in Shanghai <pm2504019119/9149>. That study concluded that "Marlboro has no clear edge over 555 with regard to product image, class and trendiness. However, Marlboro is stronger in terms of masculinity and youthfulness."
The Philip Morris papers show significant concern over the competitive challenge of 555, also known as SE 555. "SE555 is close behind our heels in terms of marketing expenditure," says a presentation on the 1994-1996 Philip Morris plan for China <pm2504033297/3321>. "SE 555 builds huge outdoor signs to create a 'big brand' image and is aggressive at retail. It's also active in sports sponsorships."
To meet the 555 challenge, the Philip Morris documents show company plans to capitalize on Marlboro's "American" image, to build its association with youthful vitality through sports sponsorships and to rely heavily on television advertising:
Philip Morris has also sought ways to introduce other brands in the Chinese market, including especially Parliament. "Parliament's imagery appeals to consumers' aspirations for upscale western life styles," says the 1991-1993 plan, "and we believe the brand has good potential in Northern urban cities like Shanghai and Beijing, where living standards are higher than average" <pm2500098237/8268>.
The relative prosperity that many Chinese citizens have enjoyed in the last decade is heavily concentrated in eastern coastal areas, and so are Philip Morris marketing efforts. A presentation on the 1994-1996 Philip Morris plan for China effectively writes off the Chinese interior: "Under the austerity program [of the Chinese government], remote inland provinces will be hard hit by recession. Consumption power will be weakened. Therefore, we must rationalize our marketing resources to focus on priority markets" <pm2504033297/3321>.
The 1994-1996 plan identifies four key markets: Tianjin (located outside of Beijing), Shanghai, Guangzhou and Shenzen, a city bordering Hong Kong. It also designates seven cities as secondary markets, all but one on the eastern coast.
The Price of Success
Bumps in price in 1993 led Marlboro smokers to switch to lower priced local brands, according to the presentation of the 1994-1996 plan.
The restrictions on domestic manufacturing has meant that foreign cigarettes sold in China are largely imports. As a result, import taxes can have a decisive effect on product price, and the Philip Morris strategic plans show company efforts to persuade the government to lower tax rates.
Changes in the exchange rate, the 1994-1996 plan presentation explains, will significantly determine sales opportunities. In fact, China's currency has slightly appreciated from the estimate used in the presentation, meaning U.S. imports such as Marlboros are relatively cheaper for Chinese customers.
While seeking to manage external factors that increase price, the strategic
plans show, Philip Morris has also sought to increase price gradually
to improve profitability without price shocks that would cause Marlboro
smokers to switch brands.
Still, the tobacco industry is nothing if not always prepared. The 1991-1993 plan in particular reports company strategies to address an upsurge in anti-smoking sentiment in a country where almost 90 percent of men (but few women) smoke. Most disturbing, perhaps, is the suggestion that Philip Morris will spur the CNTC -- which in the early 1990s was open to collaborating with foreign public health advocates on developing tobacco control measures that would deter smoking and limit the influence of foreign companies -- to develop aggressive pro-smoking initiatives.
"Though immediate impact is not likely, we are preparing for increased anti-smoking activities," says the 1991-1993 plan. "Our key action will be to strengthen cooperation with CNTC, especially in sharing with them our expertise and resources to counter anti-smoking initiatives."
C. The USTR Connection
In practical terms, this promise primarily meant that the Office of the U.S. Trade Representative (USTR) would not push parochial tobacco interests in bilateral or multilateral trade negotiations. It also would govern the activities of a wide range of other government agencies, including the State Department and U.S. embassies around the globe.
In 1996, the U.S. embassy in Thailand appeared to violate the informal policy with a strongly worded letter demanding that the Thai government provide a cost-benefit analysis to justify an ingredient disclosure law.
Now internal tobacco industry documents show not that the USTR violated the no-tobacco promotion policy, but how USTR officials expressed regret about not being able to advance tobacco companies' interests and advised Big Tobacco on how to work around the no-tobacco policy.
Dancing With USTR
The Philip Morris papers show that, in May 1993, Leo Burnett Worldwide, a key tobacco industry public relations firm, arranged a meeting with Barshefsky and USTR staff to discuss a proposed tobacco ad ban in Taiwan <pm2500052165/2166>. Representatives from the tobacco industry did not attend the meeting; instead, Big Tobacco's interests were represented by the International Advertising Association, the American Association of Advertising Agencies and Hearst Publications.
"We discussed first the importance of USTR representing market access for freedom of commercial speech in trade negotiations with other nations generally," says a Leo Burnett letter to Philip Morris Asia's director of corporate affairs. "We then discussed the specific Taiwan situation, explaining that it was an advertising issue, not a tobacco issue."
"Ms. Barshefsky was intrigued by our positioning of the issue at a distance from a pure tobacco industry issue," the letter adds.
Barshefsky "encouraged" the tobacco industry's proxies "to again write, as we did last fall, to everyone in the administration who plays a role in determining American trade policy," according to the letter.
"We didn't win, but we are farther away from losing than we were before we had this meeting."
In August 1993, Craig Fuller -- a tobacco industry lobbyist and close adviser to former President George Bush -- met with USTR officials to discuss a range of issues. A memo from Fuller <pm2046988364> reports that the USTR officials asked Philip Morris for help -- to forestall a major political fight over approval of Most Favored Nation (MFN) trade status for China. "USTR's representatives were most interested in having us do anything we could to comment to both U.S. officials and Chinese officials on the importance of having clear steps defined and taken to avoid a crisis over MFN."
But while USTR officials were eager to help Philip Morris on beer-related issues, Fuller was told not to expect help on tobacco-related business. "We were informed that despite personal feelings to the contrary, USTR career officials are under instructions not to engage in any discussions regarding tobacco issues."
The effect was stark: according to a General Accounting Office (GAO) study, smoking rates rose from 18 to 29 percent among teenage boys in South Korea in the single year after South Korea opened its market to U.S. cigarettes. The rate among girls quintupled, to 8.7 percent, in the same year.
With the Bush USTR eagerly knocking down trade barriers in Asia, the task for industry was not to persuade USTR to take action, but to provide the agency with political space to do the industry's dirty work. Philip Morris created a USTR task force and a full-fledged "USTR Support Plan."
Philip Morris was particularly worried about the then-pending GAO report and the adverse publicity it might generate, as well growing involvement of U.S. and Asian tobacco control groups in protesting the actions of USTR.
The task force "agreed we should implement a plan that would have PM, other U.S. tobacco companies and third parties more aggressively tell our side of this story both here and in Asia," according to a June 16, 1989 memo <pm2023263571/3575>.
In a follow-up June 19 memo, Philip Morris articulated its USTR support plan, relying on help from the PR firm Burson-Marstellar and the well-connected law firm Arnold & Porter <pm2023263568/3570>. The memo outlines plans to: prepare brochures for distribution in Congress and the public; commission studies on the U.S. economic benefits of cigarette exports and on Asian cigarette consumption trends; develop material for U.S. embassies; design press material for Asia and the United States; write opinion pieces for daily newspapers; prepare print ads "for possible use if the issue escalates;" write a comparison of how other industries use USTR; "ask our friends in Congress to contact the GAO and either add to the scope of the current investigation or begin another investigation focusing on a wider range of issues;" and rely on Burson-Marstellar "to try to find an expert on the changing lifestyles of Asian women to show that smoking is only part of a larger picture."