Big Tobacco's Global Reach: A Post Series • Part One: U.S. Aided Cigarette Firms in Conquests Across Asia • Part Two: Thailand Resists U.S. Brand Assault • Part Three: In Ex-Soviet Markets, U.S. Brands Took on Role of Capitalist Liberator

By Glenn Frankel and Steven Mufson
Washington Post Staff Writers
Wednesday, November 20 1996; Page A01

Last of Four Parts

In the ornate Negotiation Room at the headquarters of the China National Tobacco Corp. in Beijing, two renowned anti-smoking crusaders and executives of the world's largest producer of cigarettes forged an unlikely alliance two years ago.

Judith Mackay, a Hong Kong physician who has campaigned throughout Asia for tough tobacco control laws, and cancer epidemiologist Richard Peto of Oxford University had come to seek the powerful, state-controlled monopoly's help in ensuring that proposed regulations banning cigarette advertising in China be as stringent as possible. Their goal was simple: to help protect China's health by blocking foreign tobacco companies such as Philip Morris Inc., R.J. Reynolds Tobacco Co. and British-American Tobacco Co. from gaining a foothold in the Chinese market.

Peto put it bluntly. According to minutes of the 1 1/2-hour meeting, he noted that strong regulations would not only shield Chinese young people from the lure of American advertising, it would "protect the [Chinese monopoly] from foreign marketing competition."

After listening to Mackay and Peto, Jiang Ming, director general of the monopoly, agreed to allow the two activists to make recommendations and review the final draft of the regulations. Speaking through a spiraling haze of cigarette smoke, Jiang agreed they all had the same goal: "serving the Chinese people."

In the worldwide conflict between the international tobacco industry and the anti-smoking movement, China is the ultimate battlefield. With an estimated 350 million smokers, China has many more customers than the United States has people. Tobacco companies see it as the grand prize, the place where they can recapture and far outstrip the sales volumes they are losing in the West. China already is overtaking countries such as France, Italy, Germany, Denmark and Britain in the number of cigarettes smoked per person, and it is one of only six countries in the world where per capita cigarette consumption is steadily rising.

For the same reasons, anti-smoking campaigners see China as the crucial theater where they must challenge the industry in order to mitigate a public health disaster already in the making. Everywhere the companies have ranged throughout Asia and Eastern Europe over the past decade, health activists have followed, building fledgling tobacco control movements modeled largely along American lines.

But as the January 1994 meeting in Beijing illustrates, the contest in China is not a simple, two-way struggle but a complex, three-sided affair in which the Chinese play a crucial yet ambivalent role.

China's state monopoly -- which produces 1.7 trillion cigarettes per year, three times the total number sold in the United States -- wants the advanced technology and marketing know-how that companies such as Philip Morris and RJR possess in abundance. It cautiously has accepted the companies as limited partners in a handful of Chinese factories, while seeking to deny anything but the most restricted access to its jealously guarded market.

The Beijing government, which gets 12 percent of its annual revenue from cigarette sales, wants to protect the monopoly from foreign competition. At the same time, however, an increasingly vocal public health lobby is seeking to undermine the monopoly's influence within the government and to demonize cigarettes in a society where smoking has long been a symbol of affluence and sophistication.

It is a complex and sometimes dirty war. Critics contend that the international companies have turned a blind eye to massive cigarette smuggling operations that have helped "soften" the Chinese market by creating a demand for their brands [see story on Page A23]. They also charge that the companies have appealed blatantly to women and young people with the advertising and marketing campaigns that are now being restricted by the government -- a charge the companies vehemently deny. Meanwhile, Mackay and other anti-smoking activists have come under fire for forging their alliance of convenience with the state monopoly.

The role of Washington is equally ambiguous. Four years ago, near the end of the Bush administration, the Office of the U.S. Trade Representative (USTR) negotiated an agreement in which China promised to eliminate tariffs and other barriers on American cigarettes and 105 other categories of products within two years. Yet when it comes to tobacco, Beijing has made it clear that China has no intention of honoring the pact, and the Clinton administration has shown no enthusiasm for enforcing it. "We have received no request from the tobacco industry to intervene on finished tobacco products," said a USTR spokesman.

For now the companies are sitting tight, knocking very gently on a door that remains all but closed. "Anyone competing for China has to take the long view, to work with the monopoly and go with it wherever it's going," said Robert Fletcher, chairman of the Tobacco Institute of Hong Kong, an industry trade group. The potential reward, he added, is "a future that is very, very bright."

Joint Ventures

Shortly after learning about the invention of the cigarette rolling machine in 1881, James B. Duke reportedly asked his subordinates to bring him a world atlas, according to the book "Big Business in China" by Sherman Cochran. The future tobacco tycoon, a founder of the British-American Tobacco Co. (BAT), flipped through the pages, looking not at the maps but at population statistics, until he came to China. There he saw the figure: 430 million.

"That," Duke declared to aides, "is where we are going to sell cigarettes."

By the turn of the century, BAT's sales reps were storming through China like an invading army, selling millions of cigarettes and driving out local manufacturers. The campaign continued until the company was evicted after World War II when the Communists seized control of the country and nationalized the tobacco industry. Foreign cigarettes were condemned as an evil of the capitalist West, yet remained popular; Mao Zedong was a notorious chain smoker of BAT's popular 555 State Express brand.

After China legalized foreign investment in 1979, BAT and its fellow multinational companies came knocking again. This time, however, they took the role of collaborators rather than conquerors. The China National Tobacco Corp. (CNTC) was eager for Western technology to expand production and serve a growing population of smokers. It signed up for 10 joint ventures with BAT, Philip Morris and other foreign companies. One of the biggest was the joint RJR/CNTC factory in Xiamen in southeastern Fujian Province. Opened in 1988, the Xiamen plant annually produces 2.5 billion Camels, Winstons and Golden Bridges -- a popular local brand.

"We feel we have a good working relationship with the CNTC," said Jan F. Smith, a spokeswoman for R.J. Reynolds International. The Xiamen plant, she added, "was an excellent opportunity to gain a pioneering position in the world's largest cigarette market."

Still, despite the fact that the plant turns a profit for both RJR and its Chinese partners, it is tightly restricted. Everything -- from the leaf it uses to the retail price of each pack -- is controlled by the state monopoly. Each year the factory has applied to the government to increase its production quota to 3 billion cigarettes; each year the application has been rejected.

With the help of foreign partners, the CNTC tripled its production between 1978 and 1992, according to Peto's estimates. The monopoly also began to export Chinese tobacco products to other Asian countries. Today the CNTC boasts more than 500 brands, 183 cigarette factories, 150 tobacco drying plants, 30 research institutes and 520,000 workers.

Nonetheless, the CNTC announced in July that China would launch no new joint ventures with foreign tobacco companies over the next five years. Officials cited over-capacity as the reason. "Because cigarettes are a special commodity, if we produce too much it's useless," said Zhou Ruizeng, director of the foreign affairs office of the State Tobacco Monopoly Administration, in an interview. But anti-smoking activists believe the Chinese also were motivated by fears that foreign companies would use joint ventures to garner a larger share of the Chinese market.

Although restricted, the joint ventures have given foreign companies an opening they have quickly exploited through advertising. Philip Morris and BAT each spend more than $20 million in advertising in China, according to estimates from an industry source, with RJR close behind.

The companies use an aggressive advertising style once common in the United States. And although cigarette ads were formally banned as early as 1984, the companies have skirted restrictions by advertising brands without explicitly showing or mentioning cigarettes. They sponsor popular sports such as Marlboro national football games, Kent billiards contests and the Beijing Salem tennis tournament, as well as the Marlboro Music Hour, one of China's most popular radio shows.

"Foreign companies know how to do promotion and build image," said a U.S. company representative in Beijing who asked not to be identified. For example, he said, "Tennis is a symbol of the middle class, so Salem wants to build an image that its cigarette is a product for the white-collar class. Marlboro is famous and makes people think about something rough, very masculine."

BAT is perhaps the most aggressive company in pursuing younger Chinese. Three nights a week, for instance, it transforms the Nightman Disco in Beijing into a free-floating advertisement for its 555 brand. Slender Chinese women in blue tops, miniskirts and boots all emblazoned with the 555 logo greet people at the door, handing out free cigarettes. Customers crowd the smoke-filled dance floor, writhing to rock music below two huge banners with the 555 logo that proclaim: "Be free from worldly cares."

Still, the American companies have been sufficiently frustrated to seek help from Washington. During the Bush administration, they complained to U.S. Trade Representative Carla Hills about China's trade barriers against cigarettes; in 1991, Hills' office obligingly added cigarettes to a long list of American-made products subject to discriminatory treatment. Washington also threatened to impose retaliatory tariffs against China's own exports if Beijing did not eliminate the restrictions. In October 1992 the Chinese government agreed to lower barriers on the entire list and gradually open its market to U.S. exports. In return the United States dropped the trade investigation and pledged to "staunchly support" China's application to join the General Agreement on Tariffs and Trade.

When it comes to cigarettes, however, Beijing has not loosened restrictions. China lowered tariffs in 1993 at a time when the CNTC failed to meet local demand, then doubled them again the following year, virtually wiping out all imports. Today, the tax on imported cigarettes is set at 260 percent, and Chinese officials estimate that foreign brands hold no more than 3 percent of the legal Chinese market -- a tiny share that still amounts to 50 billion cigarettes per year.

But Washington has played down China's failure to honor the agreement. A few months after the pact was signed, the Clinton administration came into office declaring a new and far more wary approach to helping American tobacco companies abroad. In trade talks with China, cigarettes have all but vanished from the agenda.

Pact of Convenience?

The multinational tobacco companies consider Judith Mackay a particularly painful thorn in their side. A senior executive for Philip Morris International last year described her as the focal point of "a well-organized and very, very sophisticated" worldwide conspiracy against the industry -- a charge she derides as "utterly ludicrous."

Born and raised in a small village on the northeast coast of England, Mackay got her medical degree from Edinburgh University and married a Scottish doctor who had opened a practice in Hong Kong. After raising two sons, she began working full-time on tobacco control issues in 1984 at age 40. Five years later she established the Asian Consultancy on Tobacco Control, a one-woman, two-telephone office that she runs out of her home and funds on a shoestring with work for the World Health Organization.

When Mackay started out, only two Asian countries, Singapore and Hong Kong, had serious tobacco-control legislation on their books. She traveled from Mongolia to Vietnam carrying model laws in her briefcase, holding seminars and lobbying health ministries. Spurred by Thailand's success in challenging the entry of American tobacco companies, other Asian countries began to take notice. By last summer, Mackay estimated that 33 of the 35 countries she had visited had adopted some form of anti-smoking restrictions.

Mackay and her British colleague, Richard Peto, who has specialized in studying and projecting the grim toll from tobacco-related diseases, made their first trip to Beijing in 1987 at the invitation of the Chinese Public Health Ministry. Peto warned that China's dramatic success in lowering the child mortality rate and increasing life expectancy meant people were facing the West's chronic diseases of middle age: high blood pressure and smoking-related illnesses.

Peto calculated that China already was suffering a half-million deaths per year from tobacco-related disease, and projected that the figure would reach 2 million by 2025. "My message was very simple," he recalled. "If the Chinese smoke like Americans, they'll die like Americans."

A small anti-smoking movement already was taking root, funded by the Public Health Ministry and the newly established National Institute of Health Education. The movement gained modest fame in 1988 following the observance of a No Tobacco Day in Beijing when someone handed a note to Deng Xiaoping in the National People's Congress, reading, "Please do not smoke in the Presidium." When Deng good-naturedly agreed to the request, the news was widely reported.

Mackay and Peto quickly realized that the huge national tobacco monopoly was a crucial factor in any tobacco control effort because of its enormous influence. While they acknowledged that collaborating with a company that produced as many cigarettes as Philip Morris, RJR and BAT combined was in effect sleeping with the enemy, they concluded that the monopoly was more benign on health issues than its foreign competitors.

"Some people think you're getting in bed with the devil," Mackay said. "But the local firms are nowhere near as bad as the multinationals. They don't deny the health evidence or obstruct tobacco control efforts, and they don't advertise or promote their products. You can at least talk to them and find shared concerns."

Mackay has made 23 more trips to China, and she had her first meeting with Jiang Ming of the CNTC in 1989. Citing the experiences of Latin American countries in the 1950s and '60s, she warned Jiang that the multinationals would be very friendly at first, offering technical cooperation and joint ventures to get their foot in the door. Later they would begin to compete directly with the monopoly and threaten trade sanctions. Finally, they would squeeze the monopoly until it collapsed. Her purpose was, as she put it later, "to plant even a seed of doubt in their minds that today's friends [the multinationals] may be tomorrow's enemies."

Jiang thanked her for the warning, but said the monopoly knew how to deal with the foreign companies. "We are not afraid of them," he told her. "No one can come in here and conquer China."

Over the last seven years, Jiang and his fellow executives have cooperated with Mackay in several important areas. They agreed to gradually decrease the level of cancer-inducing tar in their cigarettes by half by 2000. They allowed a 1992 law that substantially increased funding for anti-tobacco education and required health warnings on all cigarette packages while banning advertising. And they promised to keep the multinationals on a short leash.

Mackay's critics in the tobacco industry contend she has forged a cynical pact of convenience with its competitors that may someday backfire.

"Judith Mackay is a very clever person and what she does she does well," said the Tobacco Institute's Fletcher. "But the key to it is, whether by design or not, she has fallen upon a political alliance with the government. She provides them cover. It's not a health issue for them but a matter of preserving their own monopolies."

A New Strategy

But the struggle over China's fate has only just begun. Next year the World Health Organization will stage its World Conference on Smoking and Health in Beijing, an event that will mark a coming of age for China's growing anti-smoking movement. At the same time, however, Beijing is moving toward membership in the World Trade Organization, a move that will require it to remove or significantly lower trade barriers and remove many of the chains from foreign companies, such as the international tobacco industry.

"In general, when it comes to the Chinese market, we feel we need to be patient," said Jan Smith of RJR. "We feel there will be growing opportunities in the long term."

The CNTC has its own strategy for the future -- one that could prove chilling to anti-smoking crusaders. Despite vocal opposition from the Public Health Ministry, the tobacco monopoly has won support from government economic planners for a 5 percent increase in cigarette production over the next five years.

A key element in the strategy is a long-term shift similar to that adopted by Japan Tobacco Inc. in the mid-1980s. As foreign tobacco companies enter the CNTC's market, the Chinese giant plans to enter theirs. Already the CNTC reports exports of more than $400 million per year.

"China is fully capable of making high-quality cigarettes to cater to the demands of some countries and regions," Jin Maoxian, a retired senior administrator, said at an international tobacco conference in Vienna two years ago. He added: "China needs the international market and the international market needs China."

While Mackay insists she is making progress throughout Asia, she readily acknowledges that hers is an uphill struggle.

"People in America assume that because cigarette use is coming down there, somehow the war against tobacco is being won," she said. "But it's not. It's just being shifted from the rich countries to the poorer ones. At best we're waging guerrilla warfare against a powerful army, and on a global basis I fear that we're still losing."

Frankel reported from Washington and Hong Kong, Mufson from Beijing.

ABOUT THIS SERIES

This series of stories -- based on reporting in Bangkok, Beijing, Boston, Hong Kong, Kiev, New York, Taipei and Washington -- focuses on American tobacco's watershed move overseas. It is based on interviews with many of the principals, government records and memos from the files of the U.S. government and the tobacco industry, some of which have never been disclosed before.