By Stas Vazhenin Compiled for Microeconomics class 01-06-2012 Prof.

Hilditch

INDUSTRY REPORT TOBACCO INDUSTRY

By Stas Vazhenin Compiled for Microeconomics class 01-06-2012 Prof. Hilditch

Outline I Introduction II Main body A. The products provided B. Top five firms in the industry
a. The firms value of sales

b. The number of people employed c. The amount of capital invested C. The problems in the industry a. Changes in government controls 1. The initiatives by the WHO
2. The new laws by the world governments directed to raising the prices

for tobacco products along with raising the percentage of taxes for the companies in the industry D. The strategies of firms in the industry purposed for solving the emerged problems
E. The prospective of the industry

III Conclusion

By Stas Vazhenin Compiled for Microeconomics class 01-06-2012 Prof. Hilditch

Industry Report Since the date of its formation, tobacco industry appears to be one of the most successful and profitable industries. Every year, more than 5 000 000 000 000 cigarettes are produced in the world. Around 300 billion US dollars are earned by the companies in the industry. In the following paper, the current situation in this business area will be examined.

The products provided The products provided by the industry are cigarettes, smokables, snuffing tobacco and the other related goods.

Top five firms in the industry Top five firms in the industry are China National Tobacco Co., Philip Morris International Inc (Altria Group Inc), British American Tobacco, Japan Tobacco International and Imperial Tobacco Group.

China National Tobacco Co. China National Tobacco Co. is the monopolist in the industry. More than 33 % of

world tobacco products are manufactured by this company (China National Statistics Bureau Yearbook 2010). The company is owned by the government of China, and is 3

By Stas Vazhenin Compiled for Microeconomics class 01-06-2012 Prof. Hilditch

located in the city of Beijing, which is one of the biggest industrial cities both in the world and in the country. The companys value of sales is around 32 billion US dollars (China National Statistics Bureau Yearbook 2010). Around 500 thousands of people are employed in this company which comprises 0.4 % of total employment in China (China National Statistics Bureau Yearbook 2010). The amount of capital invested is approximately 4.18 billion US dollars (China National Statistics Bureau Yearbook 2010).

Philip Morris International Inc (Altria Group Inc) Philip Morris International Inc (Altria Group Inc) is the second largest company in

the industry. It is located in New York City, USA. The company holds 17.6% of global market (Masina 2010). Its revenue is 89.8 billion US dollars annually. The number of people employed is 200 thousand. The amount of capital invested is 2.7 billion US dollars (Masina 2010).

British American Tobacco British American Tobacco located in London is the third largest company in the

industry with the annual value of sales of 43.0 billion US dollars which comprises 15.1% of the worlds market. The number of people employed is 100 thousand. The amount of capital invested is 2.2 billion US dollars.

Japan Tobacco International Japan Tobacco International located in Geneva, Switzerland is the fourth largest

company in the industry occupying 6.4% of the global market. Each year, the value of 4

By Stas Vazhenin Compiled for Microeconomics class 01-06-2012 Prof. Hilditch

sales reaches 39.6 billion US dollars (Masina 2010). The number of people employed is 60 thousand. The amount of the capital invested is 1.4 billion US dollars (Masina 2010).

Imperial Tobacco Group Imperial Tobacco Group located in Bristol, England is the fifth largest company in

the industry with the annual value of sales of 25.2 billion US dollars (Masina 2010). The company holds 3.7 % of global market. The number of personnel employed is 25 thousand people. The amount of invested capital is 1.1 billion US dollars (Masina 2010).

The problems in the industry The problems in the industry are not many as its products are in constant demand by the population of the entire world. However, the industry still has its major problem coming from the organizations promoting healthy lifestyle such as the World Health Organization (WHO) and the United Nations Organization.

Changes in government controls With the development of medicine in the twentieth century, the issue of prohibiting the production of cigarettes appeared to be burning (Lee 1998). However, it was quite clear that it could be hardly possible to make people reject their favourite habit. Despite this fact, world governments made numerous efforts to implement strategies reducing the use of tobacco among their citizens. Nowadays, the situation 5

By Stas Vazhenin Compiled for Microeconomics class 01-06-2012 Prof. Hilditch

with governmental policies directed to reduction of smoking and the functioning of the tobacco industry appears to be rather problematic as well. The policies developed by the governments aim to lessen the advertising time for cigarette manufactures, to prohibit smoking in public place along with selling cigarettes to the individuals who are under eighteen. In addition, the manufacturers of cigarettes are obliged to warn their customers about the potential dangers to their health, which are caused by smoking. All of this definitely leaves its trace on the industrys functioning. Yet another and the most critical problem for the industry is caused by governmental control is in the law demanding to raise the prices for the tobacco products. In addition, the taxes implemented to the manufactures of tobacco products are also very high. As a result, customers are not able to buy the industrys products as actively as they did before. This is the most significant problem which occurred in the industry during the last decades.

The Strategies of Firms in the Industry Purposed for Solving the Emerged Problems The world tobacco manufactures understand the peculiarity of their business including the harm they cause to peoples health. They do acknowledge that their productions are harmful for the environment. On this reason, their efforts are directed to minimizing harm that is caused by their business. In particular, they try to apply new production methods in order to minimize harmful emissions into the environment. They also relocate their productions into the remote areas. These companies combine their efforts in banning cigarettes sales for young people. One more area in which the 6

By Stas Vazhenin Compiled for Microeconomics class 01-06-2012 Prof. Hilditch

companies of the industry work is technological progress purposed for producing cigarettes less harmful for peoples health. Breed (2012, par. 78) states:
The creation of new filtered cigarette brands were seen by the industry as the optimal solution. In the rushed attempt to find newer and better filters the industry even utilized asbestos in the Kent micronite filter. Additionally, it seems that some of the flavoring additives currently placed in low tar cigarettes may be harmful.

Conducting their negotiations with the governments, they emphasis their role in employing people which is their strong argument in the dialogue. They also strive to popularise their business by sponsorship. Tobacco companies are often reported to be the major sponsors of a variety of sport events along with the campaigns aimed to provide help for people from poor countries. However, not all of the strategies by the tobacco companies are honest and fair. Particularly, massive scale and scope of this industry effort illustrate how corporate interests, when threatened by global public health initiatives, sidestep competitive concerns in order to coordinate their activities (McDanel, P, Intinarelli, G & Malone, R 2012, par. 45). According to Breed (2012, par. 3),
The tobacco industries have offered millions of dollars to research personnel exploring various issues. The specified range of topics for these studies is interesting: genetic differences between smokers and non-smokers, personality traits of smokers, immunologic factor in cancer, general studies on heart diseases, lung defense mechanisms and on smoking and other behavioral factors in heart diseases. This list of topics is vague and incomplete, but does illustrate several foci of their interestMuch of this research could lead to conclusions removing tobacco from the focus of public and legislative activity.

Thus, the tobacco companies resort to the use of a variety of unfair practices in order to secure high levels of their profitableness. Among the other unfair practices are advertisements on TV showing smokers as happy and healthy people. The representatives of the tobacco companies put a lot of efforts in order to have indirect 7

By Stas Vazhenin Compiled for Microeconomics class 01-06-2012 Prof. Hilditch

advertizing in popular TV series, movies and shows.

The prospective of the industry With regards to the prospective of the industry, it seems that it will continue to be profitable and utterly successful despite the efforts of the organizations striving to promote healthy way of life without smoking. It is true that some success was achieved by the representatives of such organizations especially after the1980s (Lee 1998). A number of people will definitely respond to the efforts of such organizations as WHO rejecting smoking. However, the majority of people are accustomed to connive to their desires even if they are connected to unhealthy practices (Bardsley, & Olekalns1999). According to Lee (1998, p. 17), despite the claims of organizations that receive funding from tobacco tax revenues, punishing and preaching have not been, and are unlikely to be, significant factors influencing smoking rates, especially among teens. Thus, the conclusion can be made that the tobacco industry will continue to thrive despite the efforts of world governments directed to popularizing healthy way of living. In conclusion, the situation in the tobacco industry appears to be stable and efficient for successful profit making. Despite some significant difficulties caused by the efforts of the organizations promoting healthy way of living for the industry, the development in this sector of market will continue to be steady. This is explained by the customers conduct was they are determined to buy the products of the industry under any conditions. Even the implementation of new tax strategies along with obliging the cigarette manufactures to constantly raise the prices for their products do not present significant difficulties for the industry. The giants of tobacco industry including China 8

By Stas Vazhenin Compiled for Microeconomics class 01-06-2012 Prof. Hilditch

National Tobacco Co., Philip Morris International Inc (Altria Group Inc), British American Tobacco, Japan Tobacco International and Imperial Tobacco Group report about steady profit making along with the constant growth in a number of their sales sectors.

References Bardsley, P, & Olekalns, N 1999. Cigarette and Tobacco Consumption: Have AntiSmoking Policies Made a Difference?, Economic Record, vol. 75 no. 23, pp.225228. Breed, L 2012, Strategies of the Tobacco Industry, viewed 30 May 2012, <http://archive.tobacco.org/resources/history/strategieslb.html>. China National Statistics Bureau Yearbook 2010, Statistics Press, Beijing: China. Lee, D 1998, The Government's Crusade against Tobacco: Can It Ultimately Succeed?, USA Today (Society for the Advancement of Education), pp. 16-78. Masina, L. 2010. Boom Time for Tobacco Sales?,The World Health Organization Annual Report, pp. 56-89. McDanel, P, Intinarelli, G & Malone, R 2012, Tobacco industry issues management organizations: Creating a global corporate network to undermine public health, viewed 30 May 2012, <http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2265275/>.