The World Health Organization Takes On Big Tobacco (But Don't Hold Your Breath) Anti-smoking advocates are mounting a global campaign. It's going to be a long, hard fight.
(FORTUNE Magazine) – If you're like most people, you probably didn't know that May 31 was World No Smoking Day. But that Thursday, as you sat at your desk and stared at your computer, anti-smoking activists all over the world were getting together and trumpeting their cause. Clerics in Egypt issued an edict stating that smoking violates the rules of Islam. The authorities in Lesotho initiated a ban on smoking in all government buildings and vehicles. There was a celebratory chicken-and-chardonnay luncheon at the United Nations in New York City; in Switzerland, health officials burned "Cowboy Bob," an effigy made of wadded-up cigarette ads. American movie stars and athletes made public service announcements. So did officials in China.
Luncheons and bureaucratic edicts are seldom the stuff revolutions are made of, but while World No Smoking Day may sound toothless and irrelevant, it actually signals a big and important phenomenon: The anti-smoking fight is going global. Energized advocates are pooling their efforts into an ambitious long-term push to curb smoking in the wealthy nations where it has flourished and to keep it from catching on in the developing nations where it hasn't.
There's more to this than pronouncements and demonstrations: There's education, legislation, and a new heap of litigation. Before long, tobacco opponents should even have a World Health Organization-sanctioned global treaty, the Framework Convention on Tobacco Control (FCTC)--an agreement that promises to influence legislation around the world. The FCTC could make it easier for governments to implement tobacco controls; it could also put in place a system to monitor compliance. Such steps could prevent hundreds of millions of people from picking up the habit.
What the FCTC won't do is bring an end to tobacco use--or, for the foreseeable future, to Big Tobacco. The market is simply vast: some $300 billion a year in sales, with taxes accounting for about half that amount, according to industry sources. Public health types say that they'll be very pleased if the FCTC manages to hold the number of smokers steady, at 1.25 billion, over the next 20 years. Companies like Philip Morris, British American Tobacco, and Japan Tobacco should have plenty of potential smokers to court for many years to come.
Whether Big Tobacco will woo those prospective customers successfully, however, is another question. Weak as it may seem when it comes to eradicating smoking itself, the FCTC could--possibly--affect the rules of the cigarette-marketing game. Just because there will be more than a billion smokers in the year 2020, that doesn't mean they'll all buy Marlboros and Camels.
An important thing to understand about Big Tobacco is that its future lies, in large part, in the developing world. "You buy Philip Morris in the long term for their international business," says Bonnie Herzog, an analyst at Credit Suisse First Boston in New York City. "That's their growth engine." To get an idea why this is, all you have to do is take a casual look around: Smoking, at least in countries like the United States, has become decidedly unfashionable. You can't smoke on planes anymore. You can't light up in your office. If you live in California, you can't even have a cigarette over a drink at your favorite bar.
Experts don't base their assessments on what they see in their local pubs, of course. Much as epidemiologists chart the ebb and flow of infectious diseases, researchers working with the WHO have developed a four-stage model to explain how smoking tends to spread--and the model clearly demonstrates why new markets are the battleground. The underlying principle is that the addictive nature of smoking, in combination with the lag time between when a person begins smoking and when he or she gets sick from it, creates a predictable pattern in smoking rates. The cycle takes decades to run its course. In stage one, the number of smokers in a given population is low--either because tobacco is unavailable or because it is unaffordable. In the second stage, smoking starts to catch on; the rates for men shoot up past 50% and rates for women creep up to as high as 40%. In the third stage, smokers start dying en masse--particularly men, causing male smoking rates to fall steadily. And in the fourth stage, both male and female smoking rates decline. Men's mortality drops off. Lagging a few years behind, women's mortality continues to rise.
The model is based on the smoking adoption patterns seen in Western countries, and it assumes that smoking rates rise as economies industrialize and people have more money to spend. (Broadly speaking, this is perfectly plausible: Tobacco companies will attest that their sales go up as GDP rises.) Rich nations are far along on the curve: The U.S., Canada, Australia, and Western Europe are entering stage four. Eastern Europe and Japan are in stage three. China, India, and other developing nations are in stage two, the smoking-boom phase. Sub-Saharan Africa is in stage one.
The model suggests that smoking rates will never crash suddenly to zero. People generally begin wanting to quit only when they see their neighbors get sick and die--i.e., after puffing away steadily for 40 years. And because tobacco is addictive, wanting to quit and actually quitting are very different things. When you consider also that the stage-two countries where cigarette-smoking uptake is soaring are also the countries where population growth is greatest--China, India--it becomes very clear why the developing world could become a gold mine for the tobacco companies. (It also becomes obvious why people at the WHO say they'd be thrilled merely to keep the number of tobacco smokers where it is today. If the model is an accurate predictor, there will be far, far more than 1.25 billion people smoking by the time 2020 rolls around.)
The WHO would love to nip Third World smoking in the bud, to keep those stage-one and stage-two countries from having to go through stages three and four. It's a tall order, yet there's reason to believe the FCTC could make some inroads. In a number of countries, regulations championed by anti-smoking activists have already lowered smoking rates.
Take South Africa. When apartheid ended, new President Nelson Mandela brought in health ministers who worked to ban cigarette advertising, raise tobacco taxes, and make all public places smoke-free. Smoking rates dropped 22% by 2000. Canada carries things a step further: In addition to all that South Africa does, it requires manufacturers to print large--and horrifically graphic--photos and health warnings on packs of cigarettes sold in its stores. Canada has enjoyed an annual 2% decline in smoking rates over the past 20 years. The U.S. has had its anti-smoking coups too--although overall its record is mixed. In 1970 some 44% of American men smoked. Today only 28% do, and the number is dropping steadily. At the same time, the U.S. government continues to offer price supports to tobacco growers; and arguably, American pop culture still glamorizes smoking far more often than it knocks it.
The FCTC proposes to collect measures like those that have worked so well in South Africa, Canada, and the U.S. in a single document to guide countries that have not yet initiated tobacco control. "In a lot of countries, a well-crafted FCTC can serve as a much-needed model," says Ross Hammond, a San Francisco consultant who works with the Campaign for Tobacco-Free Kids. The treaty might recommend placing restrictions on where people can smoke, outlawing lighting up in government offices, airplanes, and hospitals. It might promote educational programs that explain, in plain language, exactly how cigarettes affect the human body. It might enforce rules against marketing to teens, which, according to a recent study by the WHO and the Centers for Disease Control, is intense in the Third World (where cigarette companies still distribute free samples). It could work to curb smuggling. It could jack up the price of cigarettes by urging countries to levy high taxes. At its strongest, the convention would also ban tobacco advertising and sponsorships.
Some people inside the industry think such controls are directed squarely against the tobacco multinationals--that the FCTC won't do much at all to curb smoking writ large, but could go a long way toward making it hard for the big companies to sell their products in developing nations. "The thing you find yourself asking is," says Michael Prideaux, head of corporate affairs at British American Tobacco (BAT), "Is this designed to help public health, or is it designed to hurt the international companies?" Adds Michael Smith, an analyst at Morgan Stanley in London: "Talking to the World Health Organization, it's clear that it's Philip Morris and BAT they're interested in."
Big Tobacco, after all, is selling image as much as it's selling a nicotine buzz. But the appetite for expensive, branded cigarettes could fall off if tough marketing curbs prevail and it gets harder for companies to advertise. Brand cachet (and sales) will suffer, too, if the WHO succeeds in getting governments to put big ugly warnings like Canada's photos of bleeding brains and rotting teeth on otherwise elegant packs of premium butts. What's more, if the WHO does persuade nations to tax cigarettes heavily, high prices might push Third World smokers toward cheaper alternatives, like hand-rolled or counterfeit cigarettes--which, unlike the big companies' exports, could evade the tax radar. "People are willing to trade down when packaged cigarettes get too expensive," says Morgan Stanley's Smith.
China could turn out to be a unique headache for Big Tobacco. With 320 million smokers, the market is almost unimaginably large. But China may very well decide to protect its state monopoly, China National Tobacco Corp. So far, the signals are mixed. BAT, for example, recently was able to lease land for a factory in Sichuan, but the government-sanctioned tobacco-industry association protested loudly against rumored large-scale production plans.
It will take a long time for any broad changes to come about; the FCTC will have influence only when countries ratify it. The WHO wants to have the convention signed, sealed, and delivered by May 2003; while Smith thinks the WHO can pull it off, many Wall Street analysts who follow the tobacco multinationals don't expect to see anything solid for more like ten years. "It's such a lengthy process, and it's going to be very hard to get all the countries to pull together," CSFB's Herzog says. "If anything happens, it will take a long time, and it will be diluted from what it is now." Agrees analyst Jonathan Fell of Merrill Lynch in London: "I don't think this is going to be huge. The more detailed, the more prescriptive this gets, the more difficult it will be to reach a consensus."
Indeed, disagreements are already popping up at the WHO. There has been debate about wording and bylaws, even about how many votes it should take to ratify the convention. Anti-smoking people complain that powerful countries, including the U.S., Germany, and Japan, are trying to weaken the agreement. "If the U.S. cannot play a positive role, its delegates should just stay home," says Cassandra Welch, director of field advocacy for the American Lung Association. When the head of the U.S. delegation, Thomas Novotny, announced his resignation on Aug. 1, many believed he was protesting Bush Administration proposals that would soften advertising restrictions and ease taxation requirements.
Ratification is not the only obstacle; after the WHO delegates vote on the convention, someone has to enforce it--and there is no guarantee that governments will fall into step. In 1998 the four largest U.S. tobacco firms settled with 46 American states, agreeing to fork over $206 billion over 25 years to offset the cost of smoking-related illnesses. But some of those states are already beginning to soften their anti-tobacco positions; Florida's pension fund, for example, just dropped its four-year ban on investing in tobacco stocks (which are up 7.5% for the year at press time, vs. a 10% decline for the Fortune 500 index). In some countries, including China and Turkey, tobacco production is government owned. The European Union tried to impose a ban on tobacco advertising, but the European Court of Justice overturned the directive last October.
Taxation, too, can be a thorny issue. Around the world, countries reap anywhere from 0.5% to 9% of their annual tax revenues on tobacco sales. Evidence suggests that when governments raise taxes on tobacco they make money off the deal, at least in the short term: A 1995 study cited by the World Bank showed that the United Kingdom's tax income from tobacco sales has risen in the 30 years since the country started raising tax rates (and lowering smoking rates). Still, many governments worry that they'll lose money if they raise taxes on cigarettes, because too many smokers will decide to quit. Admits Hammond: "The success of the FCTC is very uncertain. It depends on how serious governments--especially countries like the U.S. that wield so much influence--are going to be about bringing this under control."
All the players can do for now is hold their ground and wait to see how it all shakes out. Big Tobacco has long been accustomed to working under stiff regulation. Says Philip Morris International senior vice president David Greenberg: "Whatever the rules are, consistently applied to all companies, we're happy to compete." Meanwhile, his company is doing what it can to fight against strict marketing controls and against outright bans of tobacco products. BAT's Prideaux is also engaged, but less inclined to mince words. "You could make real progress if people took a grown-up attitude," he says. "More than a billion people are going to smoke, no matter what. I hope regulators will see that it's better to work with the industry. If we become smaller players, the bulk of the business goes to organized crime," he says. In other words, governments should deal with the devil they know--Big Tobacco--rather than the devil they don't.
Anti-tobacco advocates are hanging in there too. They'll likely be debating FCTC specifics for months; honing regulations, country by country, for years; planning World No Smoking Days for decades. And that, to them, seems okay. "We won't see results from this work for another generation," a WHO official remarked on World No Smoking Day, as he looked around the room during the U.N.-sponsored luncheon. His wine glass half full, he turned cheerfully to his colleagues and joined in as they toasted their cause.