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Current issue EDITORIAL

JTI Catapults itself into the World Market

    In early March, Japan Tobacco announced it would acquire the non-U.S. tobacco business of RJR Nabisco in a US$8 billion deal. RJR Nabisco at the same time announced it would also spin-off its tobacco business in the U.S., effectively forming three separate companies.
    Industry personnel expressed surprise at the deal. After all, it was no secret that Philip Morris coveted its arch-rival's international business, especially in light of British American Tobacco's recent takeover of Rothmans. Others were puzzled: "Japan Tobacco Who?"
    After a few days, most analysts agreed that, at $8 billion - reportedly $2 billion more than Philip Morris' offer - JTI paid too much, immediately expressed by a plummeting share price. However expensive, the acquisition catapults Japan's leading cigarette marketer from a domestic giant with a comparatively meager international presence, to a world-class player with factories, brands, and distribution networks virtually around the globe.
    Reynolds has several factories and is especially strong in Eastern and Western Europe and Russia. These factories add to JTI's domestic factories and its lone factory outside Japan, the Manchester Tobacco Company, in Manchester, England.
    JTI has been building its international presence. In Asia, the group's Mild Seven is the leading import brand in Korea and Taiwan, beating out stiff competition from Philip Morris's (PM) Marlboro and British American Tobacco's (BAT) State Express 555. And, of course, JTI is Japan's market leader.
    Digesting the cultural differences between JTI and RJR may not be as easy as writing a check. On the surface, the two companies - although sharing the same tobacco industry - could not be more different.
    A Virginia farm boy who moved to Winston, North Carolina in 1874 and at the age of 24 set up a tobacco company founded Reynolds as a private company. Conversely, Japan Tobacco was set up over a 100 years ago by the government to monopolize the tobacco and salt markets. Even today, JTI struggles to look more like a 1/3 publicly owned entity it is today, than the government body operating in protected markets that it was a decade ago. Company spokesmen at JTI said that Japan Tobacco planned to keep Reynolds' operations culture separate, and that remains to be seen.
    However, more than other former Asian tobacco monopolies, JTI has shown the most gusto in shaking off its bureaucratic image than other regional tobacco monopolies. Since the United States forced open Japan's cigarette market in 1986 under threat of trade sanctions, JTI had to almost overnight transform itself into a marketing company rather than simply a manufacturer of cigarettes. The company was thrust into a newly competitive environment with experienced market "newcomers" like PM, BAT, and yes, RJR.
    In the former tobacco monopoly countries (including Korea, Taiwan, and Thailand), Japan has the most level playing field between importers and domestic manufacturer: taxes, regulations, and even pricing are the same. The only thing foreigners cannot do in Japan that JTI can is manufacture cigarettes, a mute point given the high cost of manufacturing there combined with relatively low import duties.
    Although offering several recognizable products including Salem, Camel, and Winston, Reynolds' Asia regional presence has been flagging for years as the company struggled under the debt accumulated by its very famous leveraged buyout several years back. Without a clear focus and support, Reynolds was losing market share in several regions, although maintaining a lucrative showing in Japan with its Salem. Under the terms of the sales agreement, Japan Tobacco will acquire all of the business and trademarks of R.J. Reynolds International, including the international rights to Camel, Winston, and Salem.
    Reynolds is adept at marketing and working in a competitive environment whilst offering a range of products. Japan Tobacco is a one-brand company. Although Mild Seven has shown some regional strengths, it does not have the international appeal of a State Express 555. Most of its international sales outside its home market go to Japanese expatriates.
    After announcing the deal, Japan Tobacco said it would "basically maintain" the present system of RJR Nabisco's international tobacco operations and follow a business plan under the current management of the U.S. producer.
    "JT aims to become diversified and international growth company centering on the tobacco business and this deal is an extremely important step towards that target," the firm said in a press statement.
    JTI's takeover of RJR may have the side effect of quashing the American anti-smoking industry's successful campaign to promote the belief that western tobacco companies - facing purportedly "dwindling" markets at home in the 1980's, came to Asia with this new product called a cigarette and got them all to smoke. How Japan Tobacco, headquartered in Asia and "pushing" cigarettes in Europe fits into that remains to be seen.
    Yet, it is clear, that with the purchase of Reynolds, JTI moves into the major leagues internationally. It may have also bought upon itself the unrelenting scrutiny under which the other major tobacco companies operate.