Cigarette smoking was once considered to be elegant and glamorous. Movie stars, athletes, politicians, and other public figures were often photographed holding or smoking a cigarette, and tobacco companies aggressively pushed their products as a basic commodity in the same way firms today market soft drinks and fast foods. Driven in part by the allure of fashion and in part by this aggressive marketing, the annual consumption of cigarettes by U.S. smokers increased steadily from 54 per person in 1900 to a high of 4.345 in 1963.
In 1964, however, things began to change. The U.S. Surgeon General released a report that demonstrated a clear link between cigarettes and lung cancer. During subsequent years numerous reforms were put in place that affected the ability of tobacco firms to market their products in the United States. Among the most stringent were bans on television and radio advertising, mandatory warning labels on cigarette packages, high sales taxes, and age restrictions for the legal purchase of cigarettes. There measures, combined with increased public awareness, caused the annual consumption of cigarettes by U.S. smokers to drop to less than 2,500 in 1999.
There are three major international cigarette makers today. Phillip Morris, the world's largest, is a U.S. firm that manufactures such brands as Marlboro, Benson & Hedges, Parliament, and Virginia Slims. R.J. Reynolds, also a U.S. firm, markets Camel, Doral, Salem, Winston, and other brands. British American tobacco (BAT), a British firm, sells such brands as Kool, Raleigh, Viceroy (BAT's U.S. operation is called Brown & Williamson).
As pressures to curb cigarette smoking in the United States increased during the 1970 s and 1980 s, the big three sought to diversify their tobacco sales geographically by focusing their efforts on markets other than Western Europe on North America. These new markets offer two major advantages. First, many of them place few restrictions on tobacco sales. Second. growth prospects in these markets are higher because of rising incomes and reductions in trade restrictions.
Central and Eastern Europe offer significant opportunities. Communist government officials actively promoted the use of cigarettes and vodka. These commodities were cheap to make, and their addictive character helped maintain order and discipline in society. Indeed, after the collapse of communism and the move toward an open market in Russia, cigarette shortages caused riots in Moscow. Not surprisingly, then, cigarette makers rushed to enter the former Sovier, bloc countries, where total annual cigarette consumption is estimated to be as high as 700 billion, compared to 500 billion in the United States.
Phillip Morris, R.J. Reynolds, and British American Tobacco have discovered that consumers in this region crave affordable, high-quality, Western-style products. Cigarettes seem to fill at least part of the bill. The three firms have plastered cities throughout Central and Eastern Europe with billboards featuring the Marlboro Man - an icon of America, the West, freedom - or symbols of other Western brands. Not surprisingly, the number of smokers in Central and Eastern Europe continues to escalate. Philip Morris sis perhaps the most successful firm in this region so far, partly because it was able to buy the Czech cigarette monopoly, Tabak, in 1992 during that country's privatization program. Philip Morris also has purchased majority interests in formerly state-owned cigarette factories in Hungary, Kazakhstan, Russia, and Ukraine. The other major producers also have staked out positions in the region. R.J. Reynolds operated two joint ventures in Ukraine with local companies, and BAT bought a controlling interest in Uzbekistan's leading cigarette producer.
Asia is another major battlefield. The Japanese have long been heavy smoker. The Japanese market was essentially closed to foreign firms until the Bush administration in the late 1980 s pressured the Japanese to reduce their high tariffs on imported cigarettes and end Japan Tobacco's monopoly over the domestic market. Because Japanese consumers have long been interested in products they strongly associate with the United States (such as Levi Strauss jeans, McDonald's restaurants, and Disney films). U.S. cigarette makers are now finding Japan a fertile market for their brands.
The story is similar in the Philippines, China, Taiwan, Korea, Vietnam, Malaysia, Hong Kong, and Indonesia. Aggressive adverting, often targeted at young consumers and women, is inducing more and more people to become smokers. For example, a 1985 survey of high school students in Taiwan found that only 26 percent of males and 1 percent of females had ever smoked a cigarette. Six years later, a similar survey found 48 percent of males and 20 percent of females had smoked.
These efforts and strategies have been very controversial, raising ethical concerns about the behavior of the firms and the U.S. government. Critics argue, for example, that the tobacco giants are being socially irresponsible by taking advantage of uninformed, impressionable consumers who do not fully understand the health risks of smoking.
The tobacco companies respond that they are doing nothing wrong. They point out that local governments, especially in Central and Eastern Europe, have encouraged their investment. They also note that they are simply taking advantage of legal market opportunities that already exist. Indeed, failing to do just what they are doing might seem to be a distinct to their stockholders and employees.
Among the most controversial issues are the marketing practices international tobacco companies employ. China provides a good case in point. That country has a law that prohibits the advertising of cigarettes, but the law bans only the display of and actual mention of a cigarette. Philip Morris actively promotes its Marlboro brand without ever showing a picture of or mentioning cigarettes. One of its radio commercials, for example, proclaims, "This is the world of Marlboro. Ride through the rivers and mountains with courage. Be called a hero throughout the thousand miles. This is the world of Marlboro". Philip Morris's efforts appear to be paying off. Its brand recognition is high among Chinese consumers. One canton factory manager, when asked by an interviewer why he smokes Marlboro, replied, "Marlboro shows my superior position to others. I'm more privileged".
More controversial has been the role of the U.S. government. Although it discourages cigarette usage at home, it played an active role in opening foreign markets to U.S. tobacco firms. In the 1980 s the U.S. Trade Representative (USTR) (the government agency in charge of international trade negotiations) successfully hammered out agreements with Japan, South Korea, Taiwan, and Thailand to end their restrictions on the sale of foreign cigarettes. The USTR attacked foreign countries for utilizing public policies the U.S. government itself had adopted. Taiwan, for example, previously disallowed all cigarette advertising as a means of discouraging cigarette consumption. As a result, the most cigarettes were consumed by adult males in 1986, however, the U.S. government exerted access to its market by U.S. firms. Bowing to this pressure, Taiwan not only opened its market to Philip Morris and R.J. Reynolds but also relaxed its regulations on cigarette advertising. These Western firms have focused their marketing efforts on teenagers and females, believing older males will continue to smoke domestic brands. U.S. brands now sell well among those targeted audiences. When Taiwanese health officials tried to strengthen the warning labels on cigarette packages, ban smoking by those under 18 and prohibit vending machine cigarette sales, the USTR counterattacked, claiming these efforts would hurt U.S. tobacco companies. The USTR took similar stances in trade negotiations with Japan, South Korea, and Thailand, threatening these countries with Super 301 retaliation if they did not open their markets to U.S. cigarettes.
All in all, the international marketing efforts of U.S. cigarette makers seem to be working. Exports account for about 30 percent of U.S. cigarette production, and the firms" primary target markets - teenagers, females, and the affluent - are purchasing U.S. cigarettes in record numbers. But the controversy over such marketing practices intensified in 2000 , with the initiation of a major effort by the World Health Organization (WHO), a Geneva-based branch of the United Nations, to curb tobacco products. WHO estimated that if current consumption trends continue, 500 million people currently alive will die from tobacco use. It is proposing that all UN member raise tobacco taxes, eliminate cigarette smuggling, and ban tobacco advertising and sponsoring of sporting and music events.
QUESTIONS
1. Summarize the basic ethical and social responsibility issues that this case illustrates.
2- If you managed an international tobacco firm, what actions would you take today to protect your market opportunities abroad?
3- Do you think other foreign cigarette makers, such as those in Japan, will ever be able to crack the U.S. market? Why or why not?
4- In most Asian cultures cigarette smoking is restricted to males. Should foreign cigarettes makers respect the cultural values of these countries and restrict their marketing efforts to males? Should females be targeted for marketing as well?
5- In February 1998 the U.S. State Department changed its tobacco policy, instructing all U.S. embassies to stop promoting sales of U.S. tobacco products. U.S. embassy personnel also are directed "to support, rather than challenge, local antismoking laws and regulations that may reduce U.S. tobacco company sales, as long as they are applied in a nondiscriminatory manner to both imported and domestic tobacco products". Do you agree with this policy change? More generally. what is the appropriate role of the U.S. government in foreign tobacco marketing?
6- What policy should the U.S. government adopt regarding WHO's plan to reduce tobacco use globally? What position should Philip Morris, R.J. Reynolds, and British American Tobacco adopt?
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