Obtained from plants within the genus Nicotiana, tobacco seeds take seven to ten days in order to germinate and three to four weeks before they are ready to be transplanted into fields. Sensitive to frost, tobacco is planted under both dryland or irrigated conditions and across diverse soil types. Requiring efficient drainage, tobacco plants perform well under substantial rainfall—500 to 1000 millimeters—and temperatures between 15 and 20˚C. Harvesting times vary by the type of tobacco, with cigars and cheroots tobaccos generally harvested 90 to 100 days after planting and chewing tobacco harvested 110 to 120 days after planting when the leaves pucker. Finally, tobacco leaves are traditionally cured and aged before consumption—a process which vastly improves both the product’s smell and taste.
A New World crop, tobacco was first cultivated by the peoples of ancient Mexico between 1400 and 1000 B.C. Following the Columbian Exchange during the 15th and 16th centuries, tobacco soon became a highly valued good of the increasingly globalized economy; in 1612, for example, tobacco became the first commercial crop grown in North America. When American James Bonsack invented the world’s first cigarette rolling machine in 1880, it ensured that even people of relatively modest means could regularly consume tobacco. With a ballooning population of consumers, Bonsack’s machine also laid the foundation for the large and influential tobacco companies of today. Despite many notorious lawsuits during the latter half of the twentieth century, the American tobacco business rode a wave of demand to become the country’s best performing industry of the era—between 1900 and 2014, the tobacco industry experienced annualized returns of 14.6 percent compared to a market average of 9.6 percent.
Much of this astronomic growth was due to a public that, for a variety of reasons, was generally unaware of cigarettes’ carcinogenic and addictive properties, ushering in a period of limited regulation under which the industry flourished. Even when the initial wave of tobacco regulations was passed in the US, cigarette and tobacco companies, and therefore farmers, adapted and thrived; when news first broke about the causal relationship between tobacco and cancer in 1952, US cigarette sales experienced multi-year declines for the first time since the Great Depression. In response, tobacco companies rapidly formed the Tobacco Industry Research Council—which recommended that companies mass-market filtered cigarettes as healthier options to more traditional forms of cigarettes—causing sales to quickly rebound.
The idea that filtered cigarettes are healthier turned out to be misleading, at best, and public opinion soon began to shift against the industry. In conjunction with the proliferation of anti-tobacco regulation around the world, these shifting opinions have precipitated a decisive drop in smoking rates of developed countries—in the US, rates dropped from 42 percent to 18 percent between 1964 and 2014. Some of these tough laws, however, have actually favored existing players. Bans on advertising tobacco products in most countries, for example, has lowered overall marketing costs of companies while simultaneously acting as a barrier for new entrants entering the market.
This lack of brand visibility for new entrants, coupled with strategic mergers and acquisitions over the last two decades, has whittled the industry down to the four major multinational tobacco companies—Philip Morris International, British American Tobacco, Japan Tobacco, and Imperial Tobacco; controlling 44.2 percent of the global market yet operating only domestically, the China National Tobacco Corporation is actually the world’s largest cigarette company by market share. Together, these five companies controlled a staggering 83 percent of the global market in 2016.
As traditional cigarette sales continue to plateau or decline in most developed economies, the industry’s largest players have shifted focus to alternative forms of tobacco and sources of revenue. Although they were pioneered by smaller niche companies, large corporations have since entered the smokeless tobacco space, which includes products such as electronic cigarettes. Both Imperial Tobacco and British American Tobacco have already made multi-billion dollar deals to acquire smaller companies with valuable smokeless tobacco products. In addition to shifting product focus, big tobacco companies have also emphasized the role of developing nations in their industry’s future. Especially in many African and Asian countries, tobacco companies believe that they can still increase sales of traditional cigarettes as well as source cheap tobacco leaves.
Well-versed in the art of public relations, big tobacco also continues to leverage the publicity generated from its regional investment pacts and humanitarian aid projects. The industry is eager to portray itself as a champion of developing economies yet simultaneously capitalize on countries’ ineffective health care in order to promote dependency on tobacco. Tobacco leaf buyers sometimes influence overproduction to keep prices low for tobacco leaf, and in certain markets they buy cheap smuggled tobacco leaves. These practices have ensured tobacco farmers earn low incomes, and without sufficient capital, many farmers remain captive to tobacco cultivation.
Shifts in Tobacco Production
Long the world’s largest producer of tobacco, the United States now ranks only fourth amongst global producers, trailing China, Brazil and India. Experiencing negative growth in production of about 8.8% CAGR from 1930 to 2016, the US tobacco industry has been hampered by stricter tobacco control laws, growing health concerns, and the enticing presence of alternative crops, as mentioned previously.
On the other hand, the world’s second largest tobacco producer, Brazil, has continued to ramp up total production—although this increase is solely due to improved yields. As a signatory of the 2003 WHO Framework Convention on Tobacco Control, Brazil has actually been harvesting significantly less area in the past decade, a product of its commitment to assist farmers in diversification away from tobacco farming.
As a major producer, Brazil’s potential drop in production is also likely to further motivate major cigarette companies to look elsewhere for greener, and less regulated, pastures. Especially when one considers production declines in the United States, a monopoly-dominated market in China, and government plans to ban foreign tobacco investment in India, the forces shaping the rapidly pivoting tobacco industry are apparent.
Regulatory Environment and Anti-smoking Campaigns
When litigations resulted in the United States’ Master Settlement Agreement in 1998—and revealed that the tobacco industry had withheld information regarding the carcinogenic nature of tobacco products—US lawmakers were quick to propose and sign tough tobacco regulations. Other developed economies have followed suit, and advertising in the media for cigarettes and tobacco products is banned in most countries. Big tobacco is also forbidden to run charities and other sponsorship events that might increase tobacco sales.
Many governments have since increased excise taxes on cigarettes and other tobacco products as a way to simultaneously reduce rates of smoking as well as to mitigate health care costs resulting from public tobacco use. Even the world’s largest consumer of tobacco products, China, increased excise taxes in 2015, leading to the country’s first decrease in sales volume since 1995. Other governments such as Russia are exploring gradual means of banning selling cigarettes to anyone born after 2015. Furthermore, excise taxes in Russia increased by 420 percent between 2007 and 2012—an annual increase of 40 percent. Dozens of other countries have too followed the WHO’s recommendation and imposed an excise tax of about 75% on the value of all tobacco products.
Industry Competition and Consolidation
An increasingly unfavorable regulatory environment has engendered intense competition within the industry for the next generation of tobacco products. One of the few areas still experiencing diverse and widespread growth within the tobacco industry, these next generation products are geared towards smokeless delivery of nicotine and other tobacco products, and big tobacco companies have been rapidly consolidating to ensure that they have the financial muscle in order to fund their research and development.
British American Tobacco, for example, is planning a full acquisition of Reynolds American for $50 billion, and if approved, the deal will create the largest tobacco company by sales revenue and market value. Notably, British American Tobacco is in fierce competition with Philip Morris International for the market of these “heat-not-burn” tobacco devices; British American Tobacco recently entered the Japanese market with a new reduced-risk tobacco product in order to compete with Philip Morris International, the market’s first entrant.
Even with the challenges, big tobacco is still a very lucrative business. This perhaps explains why the China National Tobacco Corp is owned by the government. India also recently shocked Philip Morris International by announcing a proposal to ban foreign investment in tobacco. Although this is nothing new, since India banned foreign investment in cigarette manufacturing in 2010, these criticisms of foreign tobacco companies may also be a veiled attempt to ensure that profits remain within the country. The new regulation also guarantees that foreign tobacco companies cannot take advantage of so-called next generation tobacco products such as e-cigarettes and other smokeless tobacco products. The tobacco market in India is valued at $11 billion. Public health concerns could also explain the need to control ownership of the domestic tobacco business within China and India. Given the significant size of the Indian market—roughly $11 billion—and India’s position as one of the largest producers of tobacco leaf, a ban on foreign investment in tobacco would be a big blow to diversification plans by multinational tobacco companies.
Shift to Markets in Emerging Economies
With capacity to increase sales of cigarettes decreasing in developed economies, big tobacco has shifted focus to more lucrative markets in developing economies within Africa and Asia. Countries like Malawi and Zimbabwe, two of the largest tobacco producers on the continent, derive a large share of income from tobacco and may struggle to easily replace an industry of such value. In Malawi, for example, tobacco is the most significant export crop and accounts for 60 percent of foreign currency earnings. The tobacco industry also creates thousands of jobs for the rural poor.
Across the Indian Ocean, Sampoerna—a subsidiary of Philip Morris International—is one of the largest companies in Indonesia. In stark contrast to its Western counterparts, Indonesia allows Sampoerna to advertise, pursue corporate social responsibility programmes, and even sponsor educational events. A study by Lentera Anak Foundation and Smoke Free Agents (both of which are tobacco control groups) found that 80 percent of the 360 schools they monitored were surrounded by advertisement for tobacco products. Big tobacco continues to enjoy such a favorable operating environment in Indonesia, in fact, that the country’s Industry Ministry proposed doubling cigarette production to 524 billion cigarettes between 2015 and 2020.
The path the tobacco industry is on in developed countries is decidedly uphill. Following the success of many international anti-tobacco campaigns and major litigations against the industry—among other roadblocks faced in recent years—major tobacco corporations are clearly in the midst of an existential crisis. And although populous developing countries and large-scale mergers have kept the industry afloat for the time being, the fierce competition over smokeless tobacco products highlights the growing necessity for new markets.
Yet at the same time, the industry is still making profits, and its forays into the developing world have gone relatively smoothly. With loose regulations across the board, the developing world provides the tobacco industry both an origin and destination for its products, and lower taxes and a market open to advertising are symbolic of the preferential treatment that large tobacco corporations receive in many countries. In these poor countries, rates of smoking are high—such as in Indonesia where 67 percent of males smoke, and the numbers of women and children smokers are rising. In Indonesia’s position only a few decades ago, however, countries that provided reliable markets in recent decades—such as Russia and China—have begun to enact laws and taxes aimed at slowing their domestic smoking rates.
The tobacco industry may still be able to reverse course, although it is not likely to do so by finding more smokers. Rather, the tobacco industry would benefit from investing more research and development into other medicinal or industrial uses for the crop. Given the inevitability of smoking’s decline, therefore, an oversupply issue for farmers is not likely a matter of if, but when. Especially if long term economic sustainability is the goal in these developing countries, farmers should strongly consider planting other crops. Considering the political ramifications alone, it behooves governments in these countries to shrewdly reconsider their cozy relationship with big tobacco and to start thinking about the future. Growers will need capital, and governments should begin to appreciate their growing leverage with the industry as production declines elsewhere.