Philip Morris International Astride the World
Editorial
Phil Gardiner, Dr. P.H.

In one bold stroke, Altria Group Inc. announced that it will spin off Philip Morris International (PMI), its fast growing child and in doing so position itself for the global tobacco wars of the 21st century. From its new home base in Lusanne Switzerland, PMI, the largest non-governmental tobacco concern (1) and the 3rd most profitable consumer goods company (1) has set its sights squarely on the developing world of Asia, Africa, and Latin America. While PMI isn’t under any conditions abandoning markets in the developed world, its new home puts it much closer to their main targets for their 21st century offensive. Moreover, the exodus from the United States will allow PMI to operate without the restrictions placed on it by tobacco control laws in the United States, and as the Wall Street Journal put it: “The move will make it easier for the tobacco behemoth to market an array of new smoking concepts, each targeted to different foreign populations, who, collectively are expected to smoke 5.2 trillion cigarettes this year.” (1) With fewer restrictions and better access to bigger and growing markets, PMI is poised to reap tremendous profits and in its wake increase death and disease worldwide.

The Split: Parting is such sweet sorrow
The Altria Group, parent company of Philip Morris USA (PMUSA) and PMI has strategically decided to decouple its tobacco operations, effective March 28, 2008. PMI, without US governmental regulation, is set to continue its stunning growth, which in 2006 amassed revenues of $48.26 billion, as compared with $18.47 billion for PMUSA. (1) Altria will become a much small company with PMUSA and SAB Miller, the parent company of Miller Brewing, as its core businesses. Additionally, Altria will close its headquarters in New York City and relocate to Richmond, Virginia, the home of the newly announced $500 million research center. (1)

Wall Street has greeted the spin favorably and feels that it will be good for PMUSA. Brian Hindo, writing in the January 29th issue of Business Week states, in the short term, most analysts considers Marlboro, with 41% share of the U.S. cigarette market, a fairly recession-proof product. (2) Esther Kwon, an equity analyst at Standard & Poors concurs, “It’s pretty low on your list of things to cut back.” (2) Moreover, the spin off will allow Altria to use more of its cash to increase its already generous dividends to its share holders. And while pending court cases, a more strictly regulated market has kept Atria stock price down; most analysts see a higher valuation for an independent Philip Morris International. (2)

Vanessa O’Connell writing for the Wall Street Journal (WSJ) was almost giddy about PMI’s new prospects:
“The move would free the tobacco giant’s international operations of legal and public relations headaches in the U.S. that have hindered its growth. The separate entity, for example would be exempt from U.S. tobacco regulations and out of reach of American litigator. Importantly, its practices would no longer be constrained by American public opinion, paving the way for broad product experimentation.” (1)

Clearly Vanessa O’Connell and others at the WSJ are bullish on PMI as a non-U.S.-based stand-alone tobacco company; however, she and others might keep it in mind that all the restrictions and headaches that will be avoided by the move, have saved countless of millions of lives. Furthermore, “paving the way for broad product experimentation” is PMI and WSJ speak for and all out assault of new tobacco products on and in the developing world (see below).

The developing world under siege
With smoking rates up a stunning 42% in Pakistan, 36% in the Ukraine, and 18% in Argentina, PMI is ready to take on the entire global tobacco market. Already, PMI has 15% market share of tobacco sales outside the United States and is preparing to make other major moves. With one important shift, PMI plans to entirely stop the importation of cigarettes from the U.S. Currently, 57 billion cigarettes are produced in the U.S. and shipped by PMI to their international markets. However, staring in a few months, all PMI cigarettes sold internationally will be produced in its own 42 manufacturing centers, the largest of which are in Holland, Russia, Germany, Turkey, and the Ukraine.

PMI is targeting brand and company acquisitions in a broad array of countries, including Pakistan, Mexico, Columbia, and Indonesia as its main stalking horse in its 21st century global offensive. In Pakistan, during the first quarter of 2007, PMI acquired an additional 50.2% stake in Lakson Tobacco Company Ltd., which increased PMI's total ownership interest in Lakson from 40% to approximately 98%, for $383 million. (3) In Indonesia, PMI bought Sampoerna, the Indonesian tobacco leader, in 2005 for $5 billion dollars knowing that smoking rates are estimated to increase there 16% by 2011. In Columbia, PMI acquired Coltabaco for $300 million strategically positioning itself in the 4th largest tobacco market in Latin America. And in Mexico, last year PMI completed the acquisition of an additional 30% stake in its Mexican tobacco business from its joint venture partner, Grupo Carso, S.A.B. de C.V. PMI previously held a 50% stake in its Mexican tobacco business and the transaction brought PMI's stake to 80%. This transaction had a value of approximately $1.1 billion. These acquisitions coupled with strong sells across Eastern Europe and Turkey, increased PMI’s cigarette volume production by 43 billion units, or 5.7%, to 804.5 billion; truly the global industry leader. (Readers interested in learning more about PMI economic performance worldwide should go to:
http://online.wsj.com/article/PR-CO-20080130903844.html?mod=wsjcrmain
(Their world wide financial maneuvering is truly breath taking).

The take over of other national companies accomplishes among other things two important objectives. Firstly, it should be noted that the Marlboro brand lost 1.9 percent market share outside the United States in 2006. Hence, the buying of other country brand names and company acquisitions allows PMI to not only compete, and make a profit, but also enables them to offset loses when they occur. Secondly, it is much better from a marketing point of view to show up as Sampoerna Tobacco in Indonesia as opposed to solely as Philip Morris.

The situation in Turkey is instructive and representative of PMI’s duel strategy of takeover and positioning of their products. Turkey is the 6th largest cigarette market in the world. In 2005, PMI volume increased by 8.6% and their market share there rose to 41.5%. Andre Calantzopoulos, PMI’s CEO speaking on the successes in Turkey, was ecstatic: “Our performance there in 2005 was outstanding . . . Not only did we take over market leadership from the national company Tekel, we also had a quality year [which] fueled growth for premium Marlboro and Parliament.”(3)

And while there will be jockeying with British American tobacco for Kenyan and Indian markets, PMI has set its sights on the real prize, China. There are 350 million smokers in China that is 50 million more than the entire population of the U.S. (2). China is not only the largest tobacco producer in the world, but China consumes about 40% of the world’s cigarettes (2). PMI has cut a very sweet deal with the Chinese government that will allow them to market select Chinese products produced by the China National Tobacco Corporation in Central and Eastern Europe and Latin America. On the other hand, and the real deal, PMI will be able to produce its own Marlboro brand at Chinese state-owed factories. This is no small matter, since currently PMI is limited to importing its cigarettes for sale in China and those are restricted by stringent quotas (1).

Even though China is a signatory to the World Health Organization’s (WHO) Framework Convention on Tobacco Control (FCTC); has instituted a citywide smoking ban in Beijing covering restaurants, offices, and hotels; and is trying to clean up its act to make the 2008 Summer Olympics “smoke-free”, the reality shows that you can’t change social norms over night. Enforcement has been lax, to say the least. Hirohisa Shimura, a tobacco industry analyst at UBS in Tokyo stated that “It will take time; Chinese people are well-known for their fondness for smoking. You can’t change such national character easily.” (2). Stella Bialous of WHO concurs, “there are 350 million smokers in China – these people are not going to quit tomorrow.” (2) And while this may not be good news for the health of the Chinese people, and the millions of visitors China attracts, it is great news for PMI.

New Brands: The shock troops Leading PMI’s global assault will be a host of new brands, most of them with increased tar and nicotine levels. One new product, Marlboro Intense, concentrates the tobacco of a regular length cigarette, into a half and inch shorter rod leading to more potent puffs. The logic here is that with indoor smoking bans, especially in the developed world, it allows people to get more tar and nicotine in a shorter time when they step out for their nicotine fix. Andre Calantzopoulos, PMI’s Chief Executive says there are already “possibly 50 markets that are interested in deploying it.” (1)

The military analogy wasn’t a slip of the tongue; Marlboro Intense is the front line troops in PMI’s global assault on the health and well-being of the world. And if history is any guide, Marlboro Intense will find their way to be sold as single cigarettes (loosies) in poor countries around the world just as single cigarettes are sold here in poor communities of color.

Another new product, Marlboro Mix 9, is a high-nicotine high-tar kretek (i.e., clove cigarette) introduced in Indonesia 2007. (1) To give this product local appeal, Marlboro Mix 9 is infused with cloves and other favoring to actively compete with the many other kreteks and bidis brands of Southern Asian and Indonesia. Already, 90% of the Indonesian tobacco market is dominated by clove-infused Kreteks (33). Marlboro Mix 9 is selling for about $1 for a pack of 12. Then there is Marlboro Filter Plus that is currently being sold in Korea, Russia, Kazakhstan and Ukraine. The novelty with this product is PMI has included tobacco in the filter of the cigarette. PMI claims that adding tobacco to the filter not only makes the cigarette smoother, but also lowers the tar level. It escapes this writer how increasing the amount of tobacco in a cigarette will decrease its tar content — Oh, those Philip Morris scientists! And wait, the pack's lid slides straight up, and then folds back, much like a cell phone (I am so excited I am running out to buy a pack now!). (1)

And just when you think that you have seen and heard everything from Philip Morris, they proudly trot out MarlboroWides! These shorter and fatter cigarettes were unveiled in Portugal and France in 2006. By 2007 they had made their way to Indonesia where they are flavored by cloves to ensure they would be competitive among the clove-dominated market. However, the real take home message is this cigarette, like many of the new PMI products, is that it has twice the tar and twice the nicotine levels of a conventional U.S. cigarette, thus making them even more addictive and deadly. (1)

Philip Morris astride the world: No prisoners
It is estimated that 10 million people will die a year from tobacco related diseases by the year 2030 making it the single biggest cause of death worldwide (5) and Philip Morris has positioned itself to get most of the credit, read profit, from this carnage. The World Health Organization estimates that 700 million children are exposed to secondhand smoke, and every day another 80,000 to 100,000 people—many of them children and adolescents in Asia, Africa, Latin America, and Eastern Europe—begin smoking. (5) Unfortunately, but not unexpectedly the largest increases in smokers will be among women in developing countries, the very target of PMI’s 21st century strategy.

A Yale University study estimates that 10 million to 20 million of the world's starving and undernourished people could be fed if farmers grew food on their land instead of tobacco. (5) However, this idyllic situation is unlikely to happen because many farmers get foreign-exchange guarantees for their crops from big tobacco companies. Indeed, PMI’s assault is not only laying waste to the people of the world but this all out offensive has serious implications for the earth itself. According to the United Nations Food and Agricultural Organization, nearly 600 million trees a year are cut down just to provide the fuel needed to dry tobacco! (5) (Can you say Global Warming?)The old adage: What is good for the goose is good for the gander, couldn’t be further from the truth when it comes to worldwide tobacco usage. The goose in this case is of course Altria/PMUSA/PMI and the gander being the public health of the world. At its core, there is a fundamental contradiction in Altria spinning off PMI: What is good for Altria and PMI economical is a plague on the world. Frankly, PMI only prospers if millions of people die.


References
1. O'Connell, V. Philip Morris Readies Aggressive Global Push Division; Spinoff Enables Blitz of New Products; High-Tar Smokes in Asia. Wall Street Journal, January 29, 2008; Page A1.

2. Hindo, B. Altria’s Split: Where There’s Smoke . . .A Switzerland-based Philip Morris International will make it easier to pursue the hordes of smokers in lightly regulated markets. BusinessWeek, January 29, 2008.

3. Calantzopoulos, A. Remarks by Andre Calantrzopoulos, President and Chief Executive Officer, Philip Morris International Inc. at JP Morgan Global Tobacco Conference. JP Morgan Global Tobacco conference, London England, June 30, 2006.

4. Pekkanen, J. Washingtonian.com, December, 2007; http://www.washingtonian.com/articles/people/5856.html