Globalization

Globalization has been used to explain the increasing degree of international economic integration that emerged as a feature of many industries during the late twentieth century. In the tobacco industry, however, the origins of globalization can be found unusually early. Indeed, by the closing years of the nineteenth century, tobacco goods were already being manufactured and marketed by firms whose operations spanned a variety of countries. One tobacco product in particular was responsible for this early example of successful international economic integration: the machine-made cigarette. By the year 2000, over 80 percent of all tobacco grown in the world was destined to be consumed in cigarettes, the majority of which were produced by just three leading multinational corporations: Philip Morris, British American Tobacco, and Japan Tobacco.

A Product with Global Potential

Mass-produced hand-rolled cigarettes first began to emerge as a significant form of tobacco consumption in the United States after the American Civil War (1861–1865). Using the flue-cured Bright tobacco leaf grown in Virginia, tobacco firms experimented with different blends of leaf that could be smoked in the form of a cigarette. Targeting the more affluent and sophisticated urban consumers, these relatively expensive hand-produced items became an important aspect of the development of branded products that symbolized the beginning of the era of mass-produced consumer goods. What might be considered as the first modern American cigarette was launched by the New York firm of F. S. Kinney in 1872 when it marketed the brand Sweet Caporal using a blend of flue-cured Virginian and Turkish leaf. Following Kinney's lead, other firms, such as the Virginia-based enterprise of Allen & Ginter, developed brands that replaced the costly imported Turkish leaf with flavored Burley tobacco grown in Kentucky to produce an all-American blend. To promote its brands, Allen & Ginter packaged its products with picture cards as an innovative marketing technique.

By 1880 sales of cigarettes in the United States had reached 500 million per year, and both Kinney and Allen & Ginter had begun to seek out export markets for their products. In Britain, where a small trade in the hand-rolled items had been developed by firms such as W. D. & H. O. Wills of Bristol, imported American cigarettes became a fashionable item of consumption, although the Customs authorities frowned on the adulterated products that contained flavored tobacco and, as a result, British consumers developed a taste for pure Virginia leaf cigarettes rather than the American blended version. In many other countries of Europe, the production of tobacco goods was controlled by a state monopoly, and this situation meant that in France, Spain, Italy, and Portugal, for example, consumers were offered little choice of manufacturers' brands.

Although hand-rolled cigarettes grew in popularity, the continued expansion of output required the employment and supervision of an increasingly large female workforce and allowed few gains in productivity because the cost of labor accounted for around 90 percent of the total. The globalization of the cigarette industry thus only began in earnest following the mechanization of the production process. Of the various attempts that were made to produce a machine to manufacture cigarettes, the most reliable was developed by an American engineer named James A. Bonsack. His invention was capable of producing 200 cigarettes per minute, equivalent to the combined output of around forty to fifty hand-rollers. In England, Bonsack granted an exclusive license for his machine to the Wills firm, whose Woodbine cigarette brand became a marketing sensation following its launch in 1888. In the United States, meanwhile, Bonsack's invention was exploited most successfully by the North Carolina–based firm of W. Duke & Sons. Led by the astute and ruthless business tycoon James B. Duke, the company used the cost advantages it derived from mechanization to expand its cigarette sales rapidly across the United States. Using a mixture of price-cutting, advertising, and corporate acquisition, Duke's firm was strong enough by 1890 to browbeat its four main domestic cigarette manufacturing rivals into a joint venture named the American Tobacco Company, which then accounted for over 90 percent of all cigarettes manufactured in the United States.

From Exports to Foreign Investment

Immediately following its formation, Duke's American Tobacco Company used its monopoly power in cigarettes to continue the strategy of market expansion. In domestic terms, this involved further infiltrating and gaining control wherever possible in the markets for other tobacco products. In the cigarette business, Duke's earlier campaign of domestic expansion was now transferred into foreign markets. Initially, this international growth was founded on developing an export trade in cigarettes manufactured in America. Duke sent experienced tobacco men such as Richard H. Wright and James A. Thomas on tours of duty into Europe, Asia, and the Pacific Rim to gather orders for the company's products. During the 1890s, leading cigarette brands of American Tobacco such as Cameo, Old Gold, and Pin Head found new consumers in Britain, Germany, the West Indies, India, South Africa, Australia, and, particularly, Japan and China. Such was the extensiveness of the company's bill poster advertising that, in many parts of China, the characters "Pin" and "Head" were taken to be the generic name for cigarettes.

British firms, such as Wills, John Player & Sons, and Lambert & Butler, followed Duke's example and began to set up branches outside the United Kingdom to promote their products. Wills in particular scored considerable success with brands such as Pirate, Scissors, and Diamond Queen. By the beginning of the twentieth century, one-third of American Tobacco's cigarette output was being produced for export, and around 20 percent of Wills's tobacco products were being shipped abroad. To consolidate this trade, in the face of local competition and rising tobacco tariffs, Duke's firm began to make strategic investments in foreign markets. In 1894 American Tobacco formed three subsidiary companies in prefederation Australia, in each case operating in conjunction with other manufacturers. The following year the American Tobacco Company of Canada was founded by Duke's firm in order to acquire control of the two leading Montreal-based tobacco businesses. The pattern was now set for a process of international corporate expansion in the tobacco business.

An International Cigarette Cartel

Duke's foreign investments were by no means always welcomed by firms or governments in the host country. A campaign of political resistance developed in Japan, for example, following the acquisition by American Tobacco in 1899 of the controlling interest in the Kyoto-based Murai Brothers firm, culminating in the nationalization of the entire tobacco manufacturing industry in 1904. Opposition was frequently also encountered from within the trade. Thus when, in September 1901, Duke's firm purchased control of the Liverpool-based Ogden Tobacco Company, a concerted campaign of commercial warfare was waged by the leading British tobacco companies, spearheaded by Wills, who banded together to form the Imperial Tobacco Company. This federated concern encompassed more than a dozen firms and ultimately negotiated American Tobacco's withdrawal from the British market in 1902, following a period of desperate competition that spilled into international markets and became known as the Tobacco War.

The terms that were negotiated between Imperial and American Tobacco in 1902 ushered in a new phase of international expansion in the embryonic global tobacco industry. An agreement signed in September 1902 gave Imperial and American Tobacco exclusive rights to one another's brands in Britain and the United States respectively. Outside these two markets, this vast portfolio of brands was allocated to a newly formed joint venture called the British-American Tobacco Company (now British American Tobacco), in which Duke's firm was allocated a two-thirds interest. British American was therefore created as a multinational company. As well as owning brand rights in international markets, the new firm inherited all the export trade and foreign assets that its two parent companies had built up in the preceding decade.

A Pioneering Multinational Company

Between its formation in 1902 and the end of World War II, British American was virtually unchallenged as the leading international firm in the global tobacco industry. During this time the company continued to expand the export trade from its factories in Britain and the United States. More significantly for the future shape of the industry, however, the company made significant investments in cigarette factories and distribution systems in other parts of the world. The company's main area of success was in China, where it built a huge production capacity and a distribution system that utilized local tobacco merchants whilst retaining control and accountability to the company's regional head offices. Unmarried young men, mainly American, aged under twenty-five were recruited and posted to China on tours of duty that normally lasted four years. Expatriate employees of this kind formed the vanguard through which western business methods were transferred into other economic and social systems.

Methods of market entry varied from country to country. In India, no domestic cigarette producers existed and hence British American set up its own factories and distribution system into which it gradually assimilated local employees. In Latin America entry more often took the form of corporate acquisition. In 1914 in Brazil, for example, British American bought control of Souza Cruz, a company that had been set up ten years earlier by a Portuguese immigrant and which already operated its own factories in Rio de Janeiro, Bahia, and Santa Cruz. Over time therefore, as it developed local production capacity, the balance of activity undertaken by British American in foreign markets shifted from an export business to local production and distribution. As the company gained control over foreign firms as its subsidiaries, it also acquired and developed many new cigarette brands for these markets that reflected local tastes and cultures. Ruby Queen was a derivative brand of Wills's Diamond Queen that traded outstandingly well in China where red is considered auspicious Elephant brand succeeded in India, and the brand Bicycle was aimed at upwardly mobile consumers in West Africa.

For a period during the 1920s a few other tobacco companies did begin to expand their operations into foreign markets in order to challenge British American's domination. Following the dissolution of the American Tobacco Company in 1911, some of the successor companies did make foreign investments, and a group of financiers also used the opportunity to set up the Tobacco Products Export Corporation, which briefly offered a threat to British American in China and elsewhere. Competition from the British firm Ardath was ended when British American jointly acquired this firm with Imperial, and thereby gained control of the successful international brand State Express 555. With the onset of the Great Depression after 1929 much of this international rivalry came to a halt, although the Japanese Toa Tobacco monopoly began a concerted and ultimately successful attempt to capture much of the cigarette market in Manchuria and northern China. The surge in nationalist sentiments that characterized the 1930s led British American to adopt a lower international profile in many markets, where earlier boycotts of their products (notably in China, Germany, and India) had already encouraged the company to downplay its international identity. In 1934 in China, for example, the company adopted the Chinese pseudonym Yee Tsoong to replace British American and tried to encourage more investment from local sources.

The Spread of Flue-Cured Leaf Tobacco

British American's strategy of developing local production in the majority of its markets was further supported by encouraging local cultivation of Virginian tobacco leaf. To do this the company formed the Export Leaf Tobacco Company, which handled leaf procurement and provided expertise to support local cultivation. Seedlings were developed for the varying climatic and soil conditions, and the company established extension services and leaf-handling facilities at which local cultivators could sell their crop of flue-cured Bright tobacco leaf. Important regions of tobacco growing designed to support cigarette manufacturing were established in China, India, and Brazil. In India, for example, a British American subsidiary—the Indian Leaf Tobacco Development Company—was set up to promote tobacco growing and given further encouragement by the adoption by the British government of favorable tariffs on Empire products under the Imperial Preference scheme. Thus, between the wars a substantial increase occurred in the amount of land devoted to growing tobacco leaf for cigarettes, particularly in the nonindustrialized regions.

In the period since World War II the trade in tobacco leaf has become an important aspect of the global tobacco industry. The formation in 1918 of the Universal Leaf Tobacco Company in the United States created a leaf-handling organization that exploited the cultivation of tobacco leaf in China to set up a tobacco-trading subsidiary there in 1925. Since this time, Universal has grown into a major transnational tobacco processing and trading company whose operations make up an aspect of the global commodities trade linking the producers of raw materials with the manufacturers of final products.

A Global Tobacco Oligopoly

The outbreak of World War II had a dramatic impact on the competitive conditions of the global tobacco industry. After 1945 British American found their position under threat in many of the strongest markets. The communist revolution in China in 1949 was a particularly devastating blow, ending hopes of a revival in their sales there, and significant reversals were also experienced to their position in Egypt, Indonesia, and India. American firms, conscious of the adverse publicity arising from the health consequences of smoking, began to make a more concerted effort to challenge for a share of international markets. Liggett & Myers, R.J. Reynolds, and Philip Morris all began to engage in overseas expansion during the 1950s, particularly into the markets of Latin America, using a combination of direct investment and licensing. The German Reemtsma and the South African–based Rothman's International also made inroads during this period as the competitive structure of the international cigarette industry adopted a strongly oligopolistic dimension.

After the mid-1960s all the world's leading privately owned tobacco manufacturers were growing concerned about the accumulating evidence linking tobacco smoking to lung cancer and other debilitating conditions. The industry-wide response was to adopt a strategy of growth through diversification, and by the end of the 1970s the leading group of international tobacco firms had each developed a nontobacco arm: British American evolved into BAT Industries, R.J. Reynolds became RJR Nabisco, Philip Morris merged with the food manufacturer Kraft, American Tobacco transmuted into American Brands. Diversification had in most cases involved international investments and thus, as a strategy, had created a group of global industrial conglomerates.

The Modern Global Industry

Despite this loss of focus, certain international features of the tobacco industry continued to emerge. Cigarettes and light tobacco became increasingly important across international markets, filter-tipped cigarettes grew in popularity and led to increased emphasis on image over taste in the marketing mix, American blend cigarettes attained increased popularity over the pure Virginia article, and international brands moved back into the ascendancy. Riding on the back of these trends, Philip Morris successfully developed its Marlboro brand as the world's leading cigarette and wrested away from BAT the leading position in the international industry.

Although the tobacco industry had in many senses undergone a process of globalization before World War II—when British American operated plants in over fifty countries—it was only in the 1990s that the industry could be said truly to have adopted a global form. Trade liberalization demanded the dismantling of the system of state monopoly producers, of which Japan Tobacco emerged as a genuine multinational firm when it purchased the R.J. Reynolds brands, while the collapse of communism meant that the huge markets of Eastern Europe and China opened to foreign manufacturers' products. This growth was coupled with consolidation. Pressured by corporate raiders, the leading tobacco companies unwound their earlier diversification strategy and used the capital to fund growth via acquisition. Philip Morris and British American Tobacco both successfully expanded into Eastern Europe, and the latter firm acquired Rothman's International in 1998.

See Also American Tobacco Company; British American Tobacco; Industrialization and Technology; Philip Morris.

? HOWARD COX

BIBLIOGRAPHY

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flue-cured tobacco also called Bright Leaf, a variety of leaf tobacco dried (or cured) in air-tight barns using artificial heat. Heat is distributed through a network of pipes, or flues, near the barn floor.

acquisition the purchase—sometimes called a merger—of a smaller company by a larger one. During the late twentieth century, major tobacco companies diversified their holdings through acquisition of nontobacco products.

tariff a tax on imported goods imposed by the importing country to protect native industry from foreign competition, protect jobs and profits, and raise revenue. Tariffs typically raise consumer prices of effected products.

subsidiary in commerce, a branch or affiliate of a larger unit that provides components or support services.

embryonic in the early stages; undeveloped; nascent.

auspicious showing promise for success; favorable.

nationalism the belief that the narrow, selfish interests of one's country should supersede international standards of behavior.

boycott an economic sanction imposed by an interest group to influence policy. In the 1900s, tobacco growers in Tennessee and Kentucky refused to sell leaf to the American Tobacco Company until prices were raised.

oligopoly control of a commodity or service by a small number of companies. A marketing environment in which a few vendors have control of a product. Oligopolies tend to suppress competition and fix prices.

diversification in agriculture, to avoid overdependence upon one crop by producing several different crops.

conglomerate a large business enterprise usually composed of several smaller companies or branches.

consolidation when numerous smaller units are combined into a larger one. In agriculture, consolidating small farms into one large farm usually makes operations more efficient and profitable.