Ashes to Ashes (141 page)

National health officials, more humane than their Communist predecessors, began to insist early on that cigarette purveyors be reined in. But while Western Europe, under its newly functioning economic union, was imposing a single standard of tobacco regulations, including advertising bans and a phased mandatory reduction in the tar yield to 12 milligrams per cigarette by the late ’Nineties, the fledgling democratic governments of Eastern Europe set down widely varying rules and standards, with enforcement lax at first in most countries. Soon, though, there was a perceptible tightening, as in Russia, where cigarette commercials were being taken off television by 1995 as an unwelcome by-product of the nation’s still fragile freedom of speech. Meanwhile, cigarette sales proliferated, and Philip Morris was shortly reporting a narrow profit on its new operations and quantum leaps in sales (tripling in Eastern Europe, for example, from 1993 to 1994). Indeed, the company’s international tobacco operations were posting unit gains of 10 percent a year, far more than compensating for the erosion of its American market. PM’s overseas net seemed likely to surpass its domestic cigarette profits before the year 2000.

For all that, the most prized cigarette market of all—China, with one-quarter of its 1.2 billion people believed to be smokers and comprising more than 30 percent of the world’s smoking population by the early 1990s—remained tantalizingly out of reach to the international tobacco companies. Only a trickle of foreign brands was sold under close government scrutiny,
mostly to tourists, as the Chinese Communist leaders jealously guarded the cigarette trade as their largest single source of tax revenues and prime fount of capital formation.

The ambitions of American and other tobacco companies to part the Bamboo Curtain served as a standing reminder to the Chinese of the vicious practices of British merchants in the first half of the nineteenth century to finance their purchases of tea and silk by persuading their government to help them foist imported opium on a resistant and still largely feudal society. Shooting their way into the Chinese market when necessary in what became known as the Opium Wars, London entrepreneurs, like their latter-day counterparts in the U.S. cigarette business, justified their incursions into often hostile Asian markets as contributions to their own nation’s balance of trade. Nicotine had replaced opium as the best-selling drug in China by the early part of the twentieth century, when British-American Tobacco crushed the native cigarette industry through ruthless pricing practices, dubious legal maneuvers, and purchased political influence. BAT dominated the market until World War II forced it to close down, and the Communist takeover thereafter ended foreign economic activity altogether.

But smoking knew no political favorites nor was its economic exploitation restricted to predatory capitalism. The leaders of Red China, in particular Chairman Mao Tse-tung and Premier Chou En-lai, were legendary smokers, and cigarettes were one of the few consumer products kept in cheap and ready supply, though by no means adequate to fulfill the demand for a mild opiate by a vast populace struggling for national cohesion and social justice within a rigidly conformist state. And it had long since become a widespread sign of civility in China to pass around cigarettes at the beginning of state, community, and family functions. It scarcely mattered that the leaf raised by some 90,000 Chinese tobacco growers made for a harsh smoke, with twice the tar and nicotine levels of U.S. cigarettes and rarely mitigated by filter tips. They came in pretty packs with a thousand different names, like Panda, Peony, Butterfly, Golden Orchid, and Sailing Boat, produced by nearly a hundred clanking old factories run by the national Ministry of Light Industry and sold in the 1980s at the subsidized price of twenty to thirty cents a pack. Even so, the tobacco habit, practiced mostly by men in a resolutely sexist society, claimed 15 percent or so of the typical Chinese household’s income. Enlisting technological assistance from American tobacco companies anxious for any toehold in that immense but closed market, China succeeded in doubling its cigarette output between 1978 and 1986 and once again by the early ’Nineties, as production reached a reported 1.7 trillion units a year, three and a half times total U.S. consumption. Far from inviting foreign capitalists to dip into this seemingly bottomless market, China’s economic ministers began casting eyes on the
world export market, especially in other Communist states that could not satisfy their peoples’ appetite for smoking.

In a society where starvation had chronically threatened a large portion of its multitudes, few worried about the health risks of smoking—and, indeed, not many Chinese could afford to smoke heavily enough to be at high risk from the practice. But with production and creature comforts on the rise, the effects slowly began to take hold. One large prospective study running from 1972 to 1981 disclosed a lung cancer toll comparable to that afflicting U.S. smokers—8.8 times higher than for nonsmokers and an 80 percent higher mortality rate. Official concern about the problem emerged with the ascension of Prime Minister Li Peng, a nonsmoker, whose health overseers were newly attentive to predictions by Western scientists that unless the nation’s passion for smoking was soon moderated, some 2 million Chinese could die annually from tobacco-related diseases by the end of the first quarter of the twenty-first century. Efforts slowly began to reduce the toxic yields of Chinese cigarettes, educate young people on the wasting consequences of habitual use, disallow smoking on public transit, and limit its advertising.

Covetous of an immense consumer supply that now seemed to be receding from their reach, Western cigarette makers did the only thing they could while playing a waiting game—built fame for their brand names by advertising them without ever showing or mentioning cigarettes or smoking. Thus, Philip Morris sponsored a national soccer league for a time, and one of the more popular radio programs in China was “The Marlboro Music Hour,” featuring a generation of gyrating American heartthrobs from Elvis Presley to Michael Jackson. Following U.S. comedy shows on Chinese television, commercials displayed the names of BAT’s brand State Express 555 and footage from the old “Marlboro Country” ads—rousing music, snorting stallions, and all, though the average Chinese couldn’t get near the product.

Partly in return for President Bush’s support of a “most-favored nation” status—
i.e.
, the lowest tariff rates—for the swiftly growing export of Chinese goods to the U.S. despite Beijing’s continuing practice of political suppression, American trade officials in the closing days of the Bush administration won an agreement from Beijing to admit a large number of U.S. products for sale in China by 1995. Included on the list were cigarettes. But it was an agreement in principle only; the details remained to be worked out. Just how difficult that might prove in the case of cigarettes, a mainstay of the Chinese economy, became apparent by the summer of 1994, as China hiked its tobacco tariffs and hinted at raising the cigarette excise tax; later in the year, on the eve of the supposedly new open-market policy, the National People’s Congress voted tougher restrictions on cigarette advertising, banning it on billboards and in films and further limiting smoking in such public places as transit waiting
rooms, meeting halls, and sports stadiums. Health warnings were being drafted for inclusion on all cigarette packs, and the government announced that in 1997 Beijing would be the site of the tenth world conference on smoking and health, with the theme “Tobacco—the Growing Epidemic.”

Even so, Western tobacco companies were hopeful. As Philip Morris’s Geoffrey Bible, a veteran of the international tobacco wars, confidently noted, “There is already much awareness of branded products in China—and people everywhere aspire to the gold standard.” The door to the world’s largest smoking market was opening, if only a millimeter at a time. The immediate problem of cultivating it would not be government restrictions so much as low Chinese incomes, a dire shortage of hard currency to pay for imports, and the widespread piracy of famous foreign products. Such problems would persist even if communism withered and a market economy replaced it in the new millennium. But sooner or later, access would come, assuring the proliferation of U.S. and other global brands, sustaining tobacco profits, and seducing millions more to an early death.

Blowing Smoke

WHEN
Hamish Maxwell completed his farewell address to Philip Morris stockholders at their April 1991 annual meeting in Richmond, Joseph Cullman, the retired chairman and chief catalyst of the company’s ascent to the top ranks of American industry, jumped up from his front-row seat to lead the applause. Maxwell was the best chief executive PM had ever had, Cullman would later say, because he had not only solidified the company’s leadership in the domestic tobacco market and extended it abroad but also engineered the takeover of three giant food companies to make Philip Morris the largest U.S. entry in that industry as well—and accomplished the feat without excessive acrimony, indeed with some civility. “A masterly move,” Cullman called it, “done with great style and polish.”

Wall Street agreed, having bid up Philip Morris stock so steadily that company shareholders had earned a 40 percent compounded total return on their equity over the seven years of Maxwell’s chairmanship. As a sign of gratitude, the PM board rewarded the retiring CEO with a good-bye gift worth $24 million in compensation, stock, and options. But the triumphs of one generation’s leadership can speedily devolve into pressing problems for the next, and in Philip Morris’s case the nature of the challenge was foreseeable. Almost overnight Maxwell had created a titanic business by diverting the excess cash from fabulously profitable tobacco operations to shape a far larger, potentially more enduring enterprise. But after two decades during which the company’s profits had doubled on average every four years, how could the corporate machinery continue to churn out earnings of such magnitude and at such a velocity,
particularly in light of the far lower operating margins in the keenly competitive food industry?

During the first months of 1991, Wall Street wondered aloud who would take charge at Philip Morris, the hottest and most controversial moneymaker in corporate America. Although the tobacco side of the business still had promising growth prospects abroad, the whole thrust of Maxwell’s master plan had been to make tobacco the fuel to turn PM into a global colossus in the food business, a sure winner over the long run on an increasingly overpopulated planet. The new PM chairman, then, probably ought to be a food man, and Maxwell was confident that he already had the right one on board in Michael Miles, the lanky Midwesterner he had coveted as part of the Kraft, Inc., acquisition.

There were a number of qualities in Miles that Maxwell greatly admired: a good analytical mind, an aggressive marketing style, a gift for public speaking but a disinclination to gab freely in private, and a controlled intensity in his methodical approach to every problem. “Well, did you have a great year, Mike?” Miles recalled Maxwell asking him in their review session at the end of his first year running Philip Morris’s complex food operations. “I’ve never had a year I could honestly call great,” Miles answered truthfully but with a laugh, knowing full well that his boss was a man of the glass-is-half-empty school of incentive management.

Two years later, after Miles had demonstrated skills as an economizer by cutting out some duplicative functions, facilities, and personnel in PM’s sprawling food business and gifts as a marketer by extending product lines, particularly appealing to the growing number of health-and diet-conscious consumers, Maxwell had no trouble in winning unanimous approval from his directors for the low-key Chicago man with the no-nonsense style and impeccable chief executive’s bearing. The only real concern about Mike Miles was whether, as a nonsmoker; he had the knowledge and the mettle to run a company whose core was still tobacco. Surely there seemed to be enough talent left on the tobacco side to provide Miles with the know-how to keep the industry leader advancing. In William Murray, Maxwell was bequeathing to Miles a devoted detail man who might have been a serious contender for the CEO post but for a dogged, by-the-numbers approach to management. Murray became Miles’s chief subordinate, even as he had been Maxwell’s, and czar of tobacco operations, with Murray’s fellow Australian, Geoffrey Bible, in charge of the overseas business. The spirited William Campbell continued at the helm of the U.S. cigarette unit; the iconoclastic David Dangoor was advanced from the international side to oversee domestic marketing; and James Morgan, ardent articulator of Philip Morris image-marketing and five-year PM dropout after quitting to run Atari, was back at Maxwell’s invitation in corporate planning and available for regular consultation. So were Maxwell, George Weissman,
and Joe Cullman, all retaining offices at 100 Park Avenue, just across the street from Miles’s executive suite.

Still, turning over direction of the company to a non-tobaccoman was a revolutionary step, as the press noted when Miles’s election was announced in the spring of 1991. Asked if the continuing medical, social, and political agitation over smoking did not concern him and whether his selection did not in fact signal a turn away from tobacco by Philip Morris, Miles replied, “The cigarette business is great, profitable, and growing, so it looks like the future to me. I just wish we could produce similar economics in the food business.” Why was it, then, reporters pressed him, that he himself did not smoke? His answer presaged lingering suspicions over his claimed serenity in playing the role of the capitalist world’s chief peddler of cigarettes, a product accused of annually killing multitudes: “I used to smoke, and for some reason that I can’t even remember now, I lost my taste for it. … I used to eat a lot of scallops and don’t anymore. It’s just one of those things.” Millions of smokers had quit over the previous two decades as the health charges grew louder, but probably very few of them could not remember the reason—including Hamish Maxwell, who stopped the year before, after undergoing heart bypass surgery. At the stockholders’ meeting a few weeks after his election, Miles was reminded of the difficult position he had won for himself when a Philip Morris shareholder stood up to lament the fate of the company’s chief rival, RJR, after it had been taken over by what he called “the biscuit makers,” meaning executives from Nabisco. He told the PM management arrayed on stage that it was tobacco that had made the company what it now was, adding, “I would hate to see Philip Morris turned over to the salad-and-mayonnaise makers.” Former mayo-maker Miles rose and in his best abbreviated style answered, “Comment taken—please don’t be concerned.”