March 18, 2009 News & Features » Cover Story


Marlboro Countries 

World leaders are up in arms about a global health crisis that could claim a billion lives. And their adversary has a familiar name: Philip Morris.

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As in any Russian city, cigarette smoke wafts just about everywhere in the industrial town of Perm on the edge of Europe near the Ural Mountains. In Soviet times residents puffed on crude unfiltered smokes or a pungent local filter cigarette brand with a white bear as its emblem.

These days, however, the butts of choice are a bit fancier and more potent. The switch started in 1991 when the Soviet Union broke apart. Perm suddenly became an open city after decades of being sealed off to foreign visitors because of its secret missile factories and political prisons. An invasion of foreign cigarettes quickly marched in, with brands Dunhill and Pall Malls and cheap Chinese smokes seizing a foothold.

But the most popular smoke, then and now, is Marlboro, made overseas by Philip Morris International, the former sister company to Richmond-based Philip Morris USA. Until December, Philip Morris USA's factories, including its 1.6 million square foot facility just off Interstate 95 south of downtown Richmond, churned out 78 billion cigarettes for Philip Morris International in the past two years.

The two companies became separate legal entities a year ago, but the growing global tobacco crisis raises significant ethical questions for both of them. Racked by lawsuits, Philip Morris USA struggles to rebuild its image as a health-savvy and socially conscious company, while its former sister exploits global opportunities by selling more potent and deadly products around the world.

The issue resonates in Richmond, whose economic history was built in large part on the golden leaf. With at least 10,000 people directly connected to the tobacco industry, many Richmonders seem to be in a state of constant denial about the well-documented health effects of tobacco. Raising taxes on tobacco, for instance, is a nearly impossible proposition in the General Assembly. Among its first acts in the 1600s was to approve a tobacco price-support system.

“There's moral blindness. As long as you are making a buck you don't care how many people you kill,” says John Banzhaf, executive director of Action on Smoking and Health. Banzhaf, a Washington-based lawyer who famously led the movement to get tobacco ads off television in the 1950s, says no one should be shocked by Philip Morris USA's doppelganger.

“They long ago ended all semblance of ethics. They lie, distort and use deceptive tactics,” he says. “This is just the latest in a series of such things.”

Philip Morris International has a great market in places like Perm. About 40 percent of Russian teenagers smoke by the time they're 18. Some 60 percent of all Russian men smoke daily. Philip Morris International, based in Lausanne, Switzerland, wants Russian women to take up the habit too. “They've introduced specially flavored cigarettes and ones with special filters to get women to smoke,” says Sergei Mokryshin, a local contractor in Perm.
That's not all. The company is testing a series of new — some more potent — tobacco products around the world. One is Marlboro Intense that was test-marketed in Turkey last year. A shorter version of the flagship smoke, Marlboro Intense has tobacco packed more densely so a smoker can get a quicker nicotine kick when time is of the essence — say, eating out at a smoking-restricted restaurant or working in a smoke-free building. Another product, fatter cigarettes called Marlboro Wides, was test-marketed in Portugal in 2006. The following year, the company introduced Marlboro Mix 9, a high tar and nicotine cigarette, in Indonesia, where more than half of all males smoke daily.

“There's no question that PMI is marketing cigarettes with higher, intensive nicotine and greater levels of toxic substances than they ever did in the U.S.,” says Matthew Myers, president of Tobacco Free Kids, a Washington-based anti-smoking group.

Monica Montero, a Philip Morris spokeswoman in Switzerland, retorts that Marlboro Wides and Marlboro Intense do not have more tar and nicotine than ordinary Marlboros. She acknowledges that another new product called Marlboro Filter Plus has differing levels of tar and nicotine.

Whatever the addictive content, Philip Morris International is exploiting lucrative global opportunities for getting more people to smoke, or, as Montero says, “compete for our share of the adult tobacco market.”

Last year, Philip Morris International's revenues increased 12.7 percent to $25.7 billion despite a global economic slowdown. Total shipments of Marlboro overseas were 78.5 billion units, an increase of 2 percent. Among the company's strongest markets are Indonesia, Mexico, the Philippines, Turkey, and, of course, Russia. Net profit margins were better than 10 percent in 2008, an enviable level considering how the downturn has slammed companies across the globe.

For investors, all of this makes Philip Morris International's stock a sexy rock star among a sea of tawdry, recession-racked dullards. Analysts such as Goldman Sachs rate PMI a “buy” for its “sustainable longer term earnings growth.” Erik Bloomquist, a tobacco industry analyst with the London office of JPMorgan Chase and Co., says “PMI is recession-resistant and the outlook is robust.”

He praises Philip Morris' “strong brands with increased innovation, its pricing leadership in many markets around the world and the relatively stable volume, regulatory and tax outlook in those markets.”

There's just one hitch. No matter how much tobacco companies like Philip Morris try to spin the facts or come up with less damaging products, they're lending a hand in one of the biggest mass deaths in history, anti-smoking advocates say.

The World Health Organization reports that unless steps are taken to tax, restrict or convince people not to smoke, a stunning one billion people will die of tobacco-related illnesses in the 21st century. That makes enjoying cigarettes a global calamity worse, at least in sheer numbers, than the Bubonic Plague that killed about 100 million people by 1400. War deaths are no match. In the last century, a piddling 70 million people died in armed conflict.

The latest edition of The Tobacco Atlas, released by global lung and cancer groups on the eve of a major tobacco health conference March 8-12 in Mumbai, India, estimates that next year, tobacco will kill 6 million people. Of these, some 72 percent will be in poor and middle-income countries that already battle diseases such as tuberculosis or AIDS. They are ill-equipped to take on even more tobacco-related health problems.

Yet since 1960, tobacco production has increased 300 percent in countries such as Malawi, while decreasing 50 percent in high-income countries such as the United States and parts of Western Europe. As such, profitable tobacco replaces food production on 4 million hectares of the world's farmable land — nearly 10 million acres and equal to all the orange groves and banana plantations in the world. But the negatives of tobacco cost the world economy $500 billion a year, according to the World Lung Foundation and the American Cancer Society, a sum that exceeds the combined health care budgets of every low- and middle-income nation in the world.

Take Russia, for example. Tobacco-related illness is the leading cause of death for 40 percent of all Russian men ages 35 to 69, although only 7 percent for women in the same age group.

The effects are downright Malthusian. Since 1996, Russia's population has dropped to about 142 million, a decrease of 6 million because of health problems such as alcoholism, traffic accidents, domestic violence and, naturally, tobacco consumption, according to Euromonitor International, a London-based consulting and marketing group.

About 400,000 Russians die each year from tobacco-related illness such as cancer, heart disease or emphysema. That's about the same death rate as in the United States, with one critical difference — the U.S. population is double that of Russia.

Switch the location to Richmond and another irony emerges — just how differently the once-sister companies of Philip Morris USA and Philip Morris International project themselves.

As part of a reorganization, the two were spun off as separate entities in March 2008. A few years before that, Philip Morris USA and its parent, Altria, had moved their headquarters from Manhattan to Richmond in the former Reynolds Metals building off West Broad Street. Philip Morris International, five times larger in terms of revenue, is based in tidy Lausanne, Switzerland, with a commanding view of Lake Geneva.

Philip Morris wanted to return to its Richmond roots and enjoy its tobacco-friendly environment. Of Philip Morris USA's 10,500 employees, 5,500 live and work in Virginia, mostly in the Richmond area. About 5,700 more people are company retirees living mostly in the local area and enjoying Philip Morris' traditionally generous employee benefits. Richmond gets a further boost because the company is consolidating all U.S. cigarette manufacturing at the 200-acre Richmond plant, having shut down a factory in Louisville, Ky. Another plant in Cabarrus County, N.C., will be closed next year. In the United States, Philip Morris is a factor in charity, having donated $11.1 million to various Virginia arts, education, nonprofit organizations and environmental groups in 2008. Virginia Commonwealth University is a major benefactor, too.

So moving the headquarters to Richmond seemed logical. It also saved the company $60 million in New York rents in buildings where anti-smoking laws restricted the use of its products. Bill Phelps, a spokesman for Altria, says the corporate strategy was to bring more value for shareholders. The sum of all the parts of Altria, the holding company for Philip Morris USA and Philip Morris International and other subsidiaries, was less than what the stock prices would be of the groups if they were split apart. “The stock price didn't reflect the value of the individual stocks,” Phelps says. So, Kraft Foods was let go in 2007, and Philip Morris International in 2008.

Critics say there was another goal with the breakup — to free up parts of the former Philip Morris empire from health-related lawsuits. In the United States, Philip Morris has been slammed for decades for billions of dollars in lawsuits, and in 1998 was one of four major tobacco companies that agreed to a monster $365 billion settlement that greatly restricted marketing and required them to put money into special funds to emphasize the health risks of smoking. Virginia gets about $4.2 billion a year for 25 years from the agreement signed by 46 states and Philip Morris USA, R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp. and Lorillard Tobacco Co.

Philip Morris USA's marketing reflects the settlement because it contains information about smoking hazards and has a program to discourage youths from smoking. Its Web site states: “As the manufacturer of products intended for adult consumers, Philip Morris USA is committed to helping reduce underage tobacco use.” Its Youth Prevention Program includes anti-smoking propaganda and grants to school districts that discourage smoking.

But Richard Daynard, a law professor at Boston's Northeastern University, questions the effectiveness of the Web-based anti-smoking campaign: “The U.S. company has very carefully been trying to cast itself as trying to tell the truth, but it's only on the Web site and only about 1.2 percent of its customers look at the Web site.”

Philip Morris USA says it's dedicated to developing less-damaging, smokeless tobacco products such as snus, a spitless form of snuff. But the company has been having trouble tinkering with the product. It discontinued its test-marketing in Atlanta late last year and announced it was revamping the product for future test markets in Arizona.

Altria spokesmen such as Phelps are quick to distance themselves from the overseas Philip Morris, saying that it's a different and legally separate company that they have little connection with, outside of sharing brand names. “I don't see why Style Weekly is interested in Philip Morris International since it doesn't have anything to do with Richmond,” Phelps says.

He insists that there are no shared products or production facilities, at least not since December. Nor does Philip Morris International benefit from the new $350 million research facility at the Virginia Biotechnology Research Park in downtown Richmond. Philip Morris International's Montero, however, says that the two companies have some ongoing agreements related to intellectual property, but declines to provide details.

The benefits of such a split, whether legal or illusory, are clear for the international company. Because it operates in the global arena with a wide variance of oversight, taxation and health restrictions, Philip Morris International is largely free to sell tobacco products with very little marketing and governmental restrictions. Critics see the split-up as a bit of legerdemain. “They can say, ‘We are no longer responsible for our kid,’” Daynard says. “But they sure left him with enough resources.”

Myers of Tobacco Free Kids says the idea that the two companies are separate is laughable. “Look at the chief executives and they are the same ones as before,” he says. For example, Louis C. Camilleri, chairman and chief executive of Philip Morris International, held the same positions at Altria from 2002 until the split last year, as did Philip Morris International's chief operating officer, Andre Calantzopolous.

What's next for Philip Morris International? While its business future seems bright, efforts continue to slow down its marketing. The latest attempt was the 14th World Conference on Tobacco and Health March 8-12 in Mumbai. Some 3,000 participants attended, including members of the World Health Organization, various anti-smoking groups, and health and political officials from around the world.

Myers, of Tobacco Free Kids, attended the Mumbai conference and says that the confab will refocus global efforts by anti-smoking groups to step up efforts in the WHO Framework Convention on Tobacco Control, which calls for worldwide efforts to stop tobacco advertising, sponsorships of rock concerts, stronger regulation of cigarette manufacturing and higher taxation.

Last year, WHO, which is the health arm of the United Nations, issued a 342-page survey on global smoking trends. It noted that an estimated one billion people will die of tobacco-related illnesses during this century. By 2030, some eight million people a year will be dying of smoking-related causes. Some 80 percent of them will be in developing nations with limited public health systems. The report urges such initiatives as monitoring tobacco use, protections from second hand smoke, offering help for users to quit, health warnings, banning tobacco ads and raising tobacco taxes.

The effort has the support Bill Gates and New York Mayor Michael Bloomberg. Both men announced a $500 million contribution to fight smoking last year. One key element of the effort is missing, however. The Bush administration refused to have the United States ratify the WHO convention against tobacco.

President Barack Obama endorsed the treaty as a U.S. senator, and anti-smoking advocates expect the United States to sign on. One oddity, however, is that Obama is said to light up about half a pack of cigarettes a day. His habit drew criticism at the Mumbai conference in India, which has the world's second-highest number of smokers.

The official line at Philip Morris International is that it supports what it calls evidence-based regulation of tobacco products. Spokeswoman Montero says that the company backs efforts to stop illegal trading in cigarettes, mandatory health warnings on packs, minimum smoking ages and some bans on advertising, such as outdoor billboards and in print, television and on the radio.

Myers says that “it is the height of irresponsibility for PMI to market intense levels of nicotine and higher levels of toxic substances.” He also says the company shouldn't be allowed to sponsor rock concerts and other events that encourage underage people to smoke.

So it seems that efforts to avert what the WHO calls a smoking calamity during this century are moving slowly at best. Given the varying degrees of awareness of the health risks and cultures, it will be difficult to reduce much smoking. China, for example, has the world's largest smoking population, and western companies are gearing up to exploit it. PMI, for instance, doesn't do much business in China, but hopes to through a recent joint venture it has set up with a Chinese company.
And even in countries that have signed the WHO convention, it isn't clear what impact it might have. The Moscow government signed the treaty, and tobacco ads are theoretically banned in newspapers, on TV and radio and outdoor billboards. But advertisers still find ways to circumvent the law in Russia. Advertisers put up ads in numerous underground pedestrian passageways that run underneath streets or next to subway escalators, claiming that these locations aren't covered by the treaty.

In Perm, Sergei Mokryshin, the local contractor, says the advertising ban is noticeable, but people smoke anyway, many of them Philip Morris International brands. That may be good for tobacco growers in Virginia and the rest of the South. PMI's Montero notes that her firm continues to be “a major buyer of tobacco in the U.S.” and that high-quality, United States tobacco is a crucial component for their premium global brands.

But it also presents a special irony. During the Cold War, Perm was so rich in military targets that it was high on the nuclear strike list for U.S. war planners. It's no longer a wartime target, but the new threat may be even deadlier.  

Universal Appeal
The global golden leaf benefits another Richmond-based company, Universal Corp. But unlike Philip Morris USA, there's no question that it profits from international tobacco sales because that's its primary business.

The company, based just off West Broad Street, sells tobacco to cigarette makers in 36 countries, including the United States, Zimbabwe, Russia, Thailand and in India and China, which have the world's largest numbers of cigarette smokers. Business has been good. Sales increased by 6.9 percent to $2.1 billion in 2008, although stock prices have been cut roughly in half in the past six months by overall market turmoil.

Its board includes locally prominent directors. Most famous is Eugene P. Trani, outgoing president of Virginia Commonwealth University, who's been a director of the company since 2000. He is a member of the board's audit and pension investment committees and in addition to his annual fees as a director, he owned 13,250 shares of Universal stock as of last June. The stock value today is nearly $350,000.

Universal and Philip Morris have no direct ties, but it's all in the family. Trani drew criticism last year because of his support for unusually restrictive research contracts that the university entered with Philip Morris USA, after a front-page article exposing the relationships appeared in The New York Times.

A faculty panel later recommended against such contracts that give Philip Morris control over the research results.

Universal has run into controversy elsewhere too. In 2006, it turned itself in to federal regulators because an overseas employee made about $1 million in illegal payments that may have violated the Foreign Corrupt Practices Act.

A Universal spokeswoman declines to comment on any aspect of the company's business. On its Web site, George C. Freeman III, president, chairman and chief executive, underlines his commitment to “a policy of social responsibility.” The statement talks about occupational safety for its workers, soil conservation, reforestation and not using child labor. At no point does Freeman address the health impacts of the tobacco his company sells globally. — P.G.



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