Authors: Richard Kluger
Most perilous of all was the effort to penetrate the Dark Continent toward the end of the ’Sixties by opening operations in Nigeria, the richest and most populous of the black African nations. Yet it was still a land of wrenching poverty. A black Philip Morris sales executive named Tom Shropshire, whose job had been to push exports of the company’s brands throughout West Africa, told the peripatetic Murphy that a local tobacco company owned by Unilever some 250 miles inland from the capital could be bought. No sooner was the takeover accomplished, with Shropshire placed in charge, than the Biafran war of secession began, shattering the country’s tenuous stability. Smuggled British cigarettes undercut Philip Morris’s legitimate prices because the contraband was tax-free. “Dash,” the local term for payoffs to officials, was a way of Nigerian business life. “You couldn’t even get out of the airport at Lagos Without paying a small bribe,” one Philip Morris executive recalled. And labor relations at the factory were a tangle of strife-ridden rivalry spilling over easily into animosity among workers from different tribes. Advancement was gained more often by purchase than merit, and the hierarchy of authority was so rigidified that, as Richard Vail, a Philip Morris lawyer who specialized in labor relations, remembered, “You had to teach the workforce not to prostrate itself every time the personnel manager walked in the door.” When Vail tried to put in place a fringe benefit common in other countries where Philip Morris operated plants—accident insurance worth $50,000 for each of the company’s traveling salesmen—the exasperated Shropshire intervened. “You want to start another civil war here?” he demanded, pointing out to Vail that this was a place where every cigarette salesman who rode the back country on his bike led a precarious existence and for the kind of money Vail was
proposing as the insurance benefit, each one’s life expectancy would be brief indeed.
Life in the tropics was not without its buoyant moments, to be sure. As a tribute to Shropshire’s managerial patience and kindness to his workers (by helping them, for example, obtain beef, a commodity in short supply), a party was arranged at which the Philip Morris boss was to be presented with a cow. John Murphy, in one of his regular swings through the provinces from the company’s overseas headquarters in Switzerland, was asked to make the presentation. Showing up for the occasion in a bright yellow blazer, Murphy was advised at the critical moment to step outside of Shropshire’s house and latch on to the gift, said to be standing in wait “just up the block.” The distance turned out to be quite a ways up a dusty street, past a military post, and the cow turned out to be a bull on a rope held by a waif. Murphy took highly tentative possession of the line, managed to tangle it around a telephone pole within a few steps, and, after sweatily extricating himself and his snorting charge, marched as unobtrusively as it is possible for a huge white man in a yellow blazer leading a bull to look while passing an army barracks and fearing he might be mistaken for a cattle rustler. The randy animal, presented to Shropshire before a houseful of admiring subordinates, proved a bit of a problem later that evening on being penned up in the rear yard. It shredded fencing with its horns, lured a cloud of flies with its stench, and, all in all, created an unmanageable uproar. “You son of a bitch!” Shropshire snarled on the telephone the next day to the departed Murphy, who, though innocent of the ruse, soon found the company’s spotless headquarters in Lausanne the beneficiary of a very messy caged pig, air-freighted via Lagos and generating instantaneous chaos until the Great Philip Morris Animal War was called to a halt.
For years the Nigerian operation made no money but at least kept the Philip Morris flag aloft long enough to establish familiarity with its brands. Not until a generation later, after the company withdrew from controlling ownership, selling off to local proprietors and retaining about 25 percent of the equity, did it begin to realize a small return on its investment.
X
ITS
early misadventures abroad left Philip Morris wiser and on the alert for less hazardous opportunities to establish a profitable operating base. One arose unexpectedly in 1963, when the owners of the company’s Swiss licensee, Fabriques de Tabac Réunies (FTR), fell out with one another. FTR, which held about 20 percent of the Swiss cigarette market and had done well with Marlboro and other licensed PM brands, especially in the southern, Italian-speaking section of the country, invited Philip Morris to bid for it.
George Weissman, sensing a gem in the offing, opened the talks with the tradition-minded Swiss in his relaxed manner, but soon turned the real bargaining over to John Murphy. One of Weissman’s strengths was that, like his superior, Joe Cullman, he knew his own limits and understood how to delegate to technically trained subordinates. One of Murphy’s first moves was to hire a blond, ruddy young Scotsman named Ronald Hew Thomson, who had read law at Cambridge and, after becoming a chartered accountant, had worked for a large Swiss bank and in the Geneva office of the international accounting firm of Coopers & Lybrand.
Thomson, whose hiring would prove a fateful step in Philip Morris’s climb over the ensuing quarter-century to leadership in the European market, was not an ordinary bean counter. Armed with a hair-trigger brain, a surfeit of self-confidence, and a fierce competitive instinct that had made him a nationally ranked rugby player, he began sifting through FTR’s ledgers. The three sets of company books—standard operating procedure on a continent where entrepreneurs historically parted with tax payments grudgingly (if at all)—disclosed that FTR’s assets were, by American accounting methods, worth a good deal more than the Swiss calculated. And Thomson at once saw one of the major advantages for Philip Morris in owning FTR rather than licensing it: “Its cash flow was dramatic,” he recalled. Acting as a collector of excise taxes, U.S. cigarette companies had long been the beneficiary of a practice unique to their industry; since cigarette taxes were so much higher relative to prices than sales imposts on almost all other products, and the manufacturers, furthermore, were not required to turn over their tax receipts from wholesalers to the government for weeks or sometimes months, they had a ready reservoir of cash to help meet their daily costs of doing business and to avoid interest charges on loans they did not have to take. This bottom-line benefit was greater still in Europe, where cigarette tax rates were so much higher than in the U.S.
FTR was also attractive because it was manageable. Switzerland was a prosperous, compact marketplace with a population slightly smaller than New York City’s, excellent air and rail connections from its central location on the continent, a large tourist trade to present U.S. blended cigarettes to, and ready access by its nationals, thanks to the country’s long tradition of neutrality and international banking, to markets and financiers everywhere. And FTR itself was a profitable company with strong financial controls and a hardworking labor force.
For all that, Philip Morris almost lost the deal because of the unleashed pugnacity of its designated chief negotiator, crotchety general counsel Paul Smith, who flew in from New York to drive the hardest possible bargain. “His creed was that you’ve got to be prepared to lose a deal to get a deal,” Thomson recalled. “You couldn’t tell if he was brilliant or just cuckoo.” On arriving for the negotiations, Smith separated himself from the rest of the Philip Morris
legal team for a few days and worked himself into a state of advanced contentiousness. Once the talks began in earnest with the FTR officers, he kept them off balance through two ploys: displaying his mastery, to the letter, of their governing rules, such as asking precisely which paragraph of the Swiss code of corporate obligations applied to the point at hand, and retreating into total silence when questions were put to him—and the longer he held his tongue, the more bewildered and tense the Swiss negotiators became. “It was as if there were a one-sided dialogue being conducted,” said Thomson. Smith turned up the heat so much at times that the Swiss, slow to rage but finally on the brink of fury, had to be calmed by Weissman and Murphy in a classic good cop/bad cop scenario. In the end, Philip Morris walked away with FTR for a bargain price of about $12 million.
The contrast between the hierarchical Swiss way of doing things and American informality was immediately apparent when the Philip Morris brass winged over for a celebratory bash, held at a picture-perfect auberge outside Lausanne, to which the top three levels of FTR management were invited along with their wives. Such inter-strata mingling, along with the entirely uncustomary inclusion of the women, added to the discomfiture of the Swiss, already dreading that their new American overseers would arrive with the swagger of conquering heroes. But Joe Cullman confirmed that that was the way he wanted the party run—democratically—and so the chill in the air in the rathskeller where the pre-dinner cocktails were served matched the frosty temperature outside. Instead of the easy mingling of guests that marks such occasions in the U.S., the Swiss lined up strictly as protocol dictated, by rank and seniority, as if at a diplomatic reception, and so had to be greeted in proper order by their hosts amid much bowing and scraping. The mood remained frostbitten through the meal and until Cullman’s after-dinner remarks. They had all been employees of a Swiss company, he told them, “but now you are part of a growing international operation. Someday I’ll be seeing some of you working for our Venezuelan affiliate or in Australia or at our New York office, because you are good managers.”
After their new lord and master excused himself, the FTR people, who had taken hardly a sip of fermented liquid, began to relax a bit and confessed their bafflement over Cullman’s meaning to Philip Morris underlings who remained on hand. As the company’s vision of a truly global enterprise, staffed by the most deserving employees regardless of their country of origin, was explained to them by the likes of James Bowling, Philip Morris’s public-relations virtuoso, the Swiss grew excited at the prospect of inhabiting a less parochial world. “Their sense grew not that they had been captured and were about to be occupied,” Bowling recalled, “but that they had been freed—and they got drunk as lords.”
From the beginning, FTR’s performance outstripped Philip Morris’s expectations.
A few kinks had to be worked out, not always to the pleasure of the Swiss, such as curtailment of the long-standing acceptance of kickbacks from suppliers, perceived as a courtesy by the FTR people but as a masked expense—and less than entirely ethical—by their Philip Morris watchdogs. Most of the company’s traditional ways of operating, though, were admirable. “The Swiss are remarkable—they just get things done,” recounted Ronald Thomson, who remained on the scene for two years as the company’s chief financial monitor and liaison between Neuchatel and New York.
With unabashed pragmatism, FTR pushed sales with certain wholesalers who, upon duly paying their Swiss excise taxes, smuggled the cigarettes, especially Marlboros, in ever-growing numbers by truck over the Alps into Italy. There they quickly found their way onto the street and thus deprived the Italian government, which taxed smokers more heavily than the Swiss did, of considerable revenue. Unwilling or unable to crack down on this illicit transalpine traffic, in part because a sizable number of its citizens were making their livelihood from it, the Italian government’s tobacco monopoly was receptive when FTR’s Aleardo Buzzi, a suave, handsome Swiss of Italian extraction, urged them to counter the problem—obviously beyond FTR’s control as well, Buzzi noted, since the wholesalers had strictly abided by Swiss rules—by stepping up their own licensed production of hard-to-get Marlboro and other FTR brands, even at the expense of lower sales for M.S., the Italian national brand. Buzzi’s persuasiveness helped open the door to more aggressive marketing of Philip Morris brands, which a generation later would command one-third of the Italian cigarette market. FTR, meanwhile, was soon earning as much each year as Philip Morris had paid to buy it.
The Swiss and Italian ventures contrasted sharply with the Philip Morris effort in France, where the government monopoly, known by its acronym, SEITA, distributed the U.S. imports through strictly regulated and state-run tobacco shops. Marlboros sold for a 25 to 33 percent premium above the French brands, Gauloises and Gitanes, the state-subsidized “black” smokes favored by nearly 95 percent of the French market as much for a symbol of national pride as for their taste. Even so, the Philip Morris brands were kept at too low a price to pay their way; the company would lose money for fifteen years in France before it began winning large numbers of converts to the milder and sweeter Marlboro blend.
XI
GEORGE WEISSMAN
, whose bold initiatives abroad helped get him named president of Philip Morris in 1967, was succeeded as head of international operations by Hugh Cullman, a more cautious, buttoned-up kind of
executive. He was experienced in the leaf and manufacturing end of the tobacco business but less familiar with and adept at the marketing side. He tried to compensate for his shortcomings by working hard and absorbing as much data as he could cram into his briefcase for overnight review. “Hugh was an information maniac,” one company associate remarked. “All facts and factoids were equal to him.” But everyone agreed that Hugh Cullman had dedication, an admirable range of knowledge, and the ambition (which he kept well disguised) to succeed his older cousin Joe as CEO. If Joe favored his younger cousin’s aspirations, he gave little sign of it.
Hugh Cullman was smart enough not to try to run the international operation by the numbers out of New York. Instead, he gave the able subordinates he inherited, like Murphy and Thomson, enough running room. Thomson especially, after an obligatory and unhappy stint in the New York home office, felt unleashed on returning to Lausanne, by then the coordinating point for the company’s European, African, and Middle Eastern efforts.
Not long after Thomson took charge of that territory, he and Murphy, with whom he had a tigerish but mutually respectful relationship, apprised New York of an opportunity to reverse Philip Morris’s lagging, indeed nearly invisible, presence in Great Britain, a cigarette market about one-fifth the size of the U.S. pie. Without a serious Virginia-leaf contender in the field and aware that its “Marlboro Country” theme evoked an impression more of savagery than rugged individualism among Britons, Philip Morris could only nibble at a market in which Imperial Tobacco brands held a massive two-thirds share and its only real competitor, Gallaher Limited, had 27 percent as of 1967. Under an arrangement that would have been prevented by U.S. antitrust regulations, Imperial held a 36 percent piece of Gallaher’s equity, which it decided to unload in the spring of 1968 at twenty shillings a share, using the receipts to diversify out of tobacco.