Japan Tobacco Inc.

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Japan Tobacco Inc.

2-1, Toranomon 2-chome
Minato-ku
Tokyo 105-8422
Japan
Telephone: (81) 3-3582-3111
Fax: (81) 3-5572-1441
Web site: http://www.jtnet.ad.jp

Public Company
Incorporated: 1949 as Japan Tobacco and Salt Public Corporation
Employees: 15,590
Sales: $35.6 billion (2001)
Stock Exchanges: Tokyo
NAIC: 312221 Cigarette Manufacturing; 312111 Soft Drink Manufacturing; 311412 Frozen Specialty Food Manufacturing; 325412 Pharmaceutical Preparation Manufacturing.

Japan Tobacco Inc., known as JT, is the world’s third-largest tobacco company. JT controls about 75 percent of the Japanese cigarette market, and about 8 percent of the cigarette market worldwide. Its leading brands are Mild Seven, Japan’s number-one seller, and Cabin, Caster, Seven Stars, and Peace. The company also owns international rights to the key brands Winston, Salem, and Camel, which it acquired from RJ Reynolds in 1999. These three brands, along with Mild Seven, are marketed through the company’s JT International subsidiary, headquartered in Geneva, Switzerland. Japan Tobacco is a diversified company with substantial interests in pharmaceutical development and sales, and in the sale and distribution of packaged foods and beverages. The company markets drugs that fight cancer and HIV, and operates joint ventures with pharmaceutical companies in Japan, the United States, and Europe. JT markets Green Giant brand frozen foods in Japan, as well as other prepared foods, and acquired the food operations of Asahi Chemical in 1997. JT also sells several leading packaged soft drinks and teas under the brand names Green’s, Roots, and others. In addition, the company has interests in printing, agribusiness, and real estate. Japan Tobacco was a state-owned monopoly until 1985. The Japanese government still owns two-thirds of the company, with the rest publicly traded on the Tokyo Stock Exchange.

Roots in the 19th Century

Japan Tobacco’s origins date back to 1898 when a government bureau was established within the Ministry of Finance to operate a monopoly on tobacco production within Japan. The tobacco industry in Japan can, however, be traced back to 1869, when Yasugoro Tsuchida, a Tokyo merchant, began the production of rolled cigarettes on a small scale. This represented the introduction of locally produced cigarettes and came less than 20 years after the first introduction of cigarettes to Japan as imports from Britain and the United States. In 1883, Iwatani Co. Ltd., a trading company, began the production and sale of Japan’s first popular cigarette brand, Tengu. In 1888, the government responded to the increase in tobacco smoking by placing a special tax on the products, with varying rates for rolled tobacco and cigarettes. Around this time the Murai Brothers Company began producing and selling Sunrise cigarettes and importing Hero cigarettes from the United States. In 1896, the company expanded into the Tokyo market, thus prompting a price war with Iwatani Co. Ltd.

At the time Japan was undergoing an accelerated period of industrialization. The Tokyo Stock Exchange opened in 1878, the Bank of Japan began operations in 1882, and the state-owned Yamato Iron and Steel Works began operation in 1901. In 1895, Japan established itself as a military power with the defeat of China in the Sino-Japanese War. Operations such as these needed funding, and the government realized that a tobacco monopoly such as existed in several European countries could be a lucrative source of revenue. In 1898, a tobacco bureau was established within the Ministry of Finance to operate this monopoly. In 1905, a salt monopoly was added to the bureau’s responsibilities. The bureau began marketing Cherry cigarettes in 1904, a brand still sold in Japan. In 1906, it began producing and selling its most popular brand at the time, Golden Bat. In 1900 Japan became one of the world’s first countries to pass a law forbidding the consumption of cigarettes by minors—those under the age of 18. For the next 30 years tobacco and salt production in Japan continued to be administered by this bureau within the Ministry of Finance. Profits went directly into state coffers and were regarded as a kind of tax by the authorities. The prices charged by the government on tobacco were relatively low while those on salt were minimal, and the monopoly was in some ways used as a means of controlling the nation’s economy, providing a regular source of income for the government.

Postwar Production

By 1940, Japan was heading towards war with the Allied Powers. The supplies of raw tobacco leaves from the West, notably from North and South America, were becoming less and less reliable. The government was forced to implement rationing of cigarettes in 1943. Following Japan’s defeat and subsequent occupation, the country’s economy was restructured by the Allied Powers. They felt it reasonable to keep the monopoly in place as a source of income for the cash-starved Japanese government. In 1949, the government bureau traditionally responsible for tobacco production became a public company, known as the Japan Tobacco and Salt Public Corporation. Although still a wholly government-owned concern, tobacco production and sales in Japan were now to be operated on a commercial basis and as a self-accountable business concern. The company began afresh, and in 1949 commenced the retailing of two brands—Peace and Corona, the former of which is still a top seller in Japan. In 1950, rationing of tobacco products was halted, and in 1952 finished tobacco products were exported from Japan for the first time, mostly to Southeast Asian nations. In 1954, a new consumption tax was established on sales of cigarettes with the proceeds going directly to the government rather than the Japan Tobacco Corporation. In 1957, the company introduced its most popular brand, Hope, and also set up a research center to study the effects of cigarette smoking on health. This came at a time when scientists in the United States were beginning to publicize the link between smoking and lung cancer. Japan, with its lower incidence of cancer, was more concerned with its very high rate of stroke-and stress-related deaths, and the research center studied the causes of these illnesses. The Japanese population continued to take up smoking at a prodigious rate, and by 1967 Japan Tobacco’s best selling cigarette brand, Hope, was also the world’s best selling brand. In the following year the company established a factory for producing cigarette paper and filters to cater for increased demand in Japan. Following reports of the health risks of smoking from both the West and to a lesser extent within Japan, Japan Tobacco began to issue health warnings on its cigarette boxes. The warnings were fairly low-key, however, and only advised the smoker not to overindulge in the habit.

Since the salt monopoly was established in 1905, Japan Tobacco in its various forms had been entrusted by the Japanese government with full responsibility for the country’s salt supply. The salt business had traditionally been conducted with the aim of maintaining stable salt supplies and prices. As Japan does not have any salt mines, Japan Tobacco has had to import most of its salt, mainly from China and Korea. In 1972, Japan Tobacco introduced a new method of producing salt in which sea water is separated from fresh water by membranes, and the salt allowed to permeate across the membrane. This method was introduced into all Japan Tobacco salt-making facilities.

In 1973, Japan Tobacco began the sale of Marlboro cigarettes under license from Philip Morris Co. Ltd. of the United States. As the largest tobacco company in the world, the latter was determined to make inroads into the lucrative Japanese market but was bewildered by Japan’s complex distribution system. Most of Japan Tobacco’s products were sold in small kiosks and vending machines, presenting an importer of cigarettes with a difficult and arduous task in cracking the market—a competitor would require a huge capital investment to set up such a network, and supply staff and maintenance staff would be required. Japan Tobacco at the time controlled almost 100 percent of Japan’s cigarette market. In 1974, the company began its paradoxical “smoking clean” advertising campaign. The advertisement featured models in outdoor surroundings, smoking Japan Tobacco cigarettes. The irony of the suggestion that smoking is a clean habit and results in good health was obvious, but it was nonetheless built into a national campaign. In 1977, Japan Tobacco introduced its current best-selling brand, Mild Seven.

Company Perspectives:

By circulating and expanding funds (“cash flow”) generated by high-quality business activities, JT is committed to fulfill—to the best of its ability and in a fair and balanced manner—its responsibilities to its shareholders, customers, employees, and society and to ensure their satisfaction with JT’s performance.

In the 1980s, Japan Tobacco faced increasing pressure from foreign cigarette manufacturers to allow them to sell their products more freely on the Japanese market. The Japanese government was under pressure to cut its huge trade surplus with the United States and therefore exerted pressure on Japan Tobacco to cooperate with foreign importers and allow them the use of distribution channels, notably Japan Tobacco’s large network of automatic vending machines. Philip Morris and RJ Reynolds were the first to make inroads, with Lark, a Philip Morris brand especially designed for the Japanese market, becoming a bestseller. In 1985, Japan Tobacco underwent a fundamental restructuring. The government reorganized the company by privatizing it and re-establishing it as Japan Tobacco Incorporated, a joint stock company with its shares fully owned by the Japanese government. In the face of increasing competition from foreign imports, the move was intended to make the company more competitive, while still giving the government a monopoly on cigarette manufacture in Japan. In 1987, import tariffs on cigarettes were lifted, making it possible for importers to sell cigarettes at approximately the same price as Japan Tobacco. Since 1987, as a consequence, both Japan Tobacco’s total sales and its share of the Japanese market have been declining. The company’s management realized that the new Japan Tobacco would have to diversify in order to sustain growth. Japan Tobacco International Corporation (JATICO) was established in 1985 to export cigarettes. First year sales were 7.5 billion cigarettes, which compared with the 270 billion sold domestically. The United States and Southeast Asia were the chief targets of JATICO’s products.

Japan Tobacco entered the pharmaceutical business in 1986, with the formation of JT Pharmaceutical Co. Ltd. This subsidiary took advantage of its parent company’s extensive research and development facilities. The main areas of the pharmaceuticals business on which the company focused at first were over-the-counter (OTC) cough remedies and nutritional supplement drinks. One of the company’s successes was Kakimaro, marketed as a hangover remedy. Through international strategic alliances, JT Pharmaceutical also entered the field of OTC ethical drugs.

Through other subsidiaries formed between 1985 and 1990, Japan Tobacco entered the food, fertilizer and agribusiness, and real estate businesses. The latter made use of Japan Tobacco’s real estate holdings which, like many Japanese companies in the real estate boom years of the late 1980s, it used to its full financial advantage through office letting, land sales, and renting.

Growth and Diversification in the 1990s and After

By the mid-1990s, Japan Tobacco was the fourth-largest cigarette maker in the world. It faced increasing competition at home from European and U.S. imports and at the same time eyed the opening of the potentially huge market in China. The company’s pharmaceuticals division grew rapidly, and JT invested some hundreds of billions of yen in diversified interests such as the beverage business, real estate, and health clubs. But tobacco remained the pillar of the company, accounting for almost 90 percent of the firm’s revenue. A significant proportion of Japan’s population continued to smoke, and the kind of class-action lawsuit that dogged U.S. tobacco companies was unheard of in Japan. Though growth in domestic cigarette sales was small, company managers maintained an optimistic outlook. Consequently the Japanese government arranged to sell one-third of the company to the public in 1994 to raise money. The government had previously privatized portions of other state-owned companies, including the telecommunications company Nippon Telegraph & Telephone and its East Japan Railways. The shares were first offered to large investors and then made available through a lottery system to individual investors. Yet in the midst of a falling stock market, response to the public offering was dull.

JT went ahead with various diversification projects in the mid-1990s. In 1996, the company entered a joint venture with the British company Grand Metropolitan PLC, owner of Burger King, to expand the Burger King franchise in Japan. Burger King was a distant third in the Japanese burger market, but both firms saw plenty of room for expansion. In 1997, JT acquired the food operations of the Asahi Chemical Industry Co., Ltd. This gave JT access to a wider market for its food business. Previously, the firm had reached primarily commercial customers with its frozen foods, but the Asahi purchase gave the company some well-known consumer brands. The company also sold beverages through a network of vending machines. JT reorganized its vending machine operating companies in order to widen its beverage market. In pharmaceuticals, the company also pursued joint ventures and made acquisitions. One significant acquisition was that of the Torii Pharmaceutical Co. Ltd. in 1998. JT bought up 53 percent of the company and then beefed up the company’s marketing.

The biggest coup for Japan Tobacco was its acquisition in 1999 of the non-U.S. operations of RJ Reynolds. The company shelled out $7.8 billion for Reynolds’ international operations. The deal established JT as the world’s third-largest tobacco company (behind Philip Morris and British American Tobacco) and made Japanese history as the largest foreign acquisition to date by a Japanese company. JT gained RJR’s three leading brands, Camel, Winston, and Salem. These brands were big sellers in places where JT had little inroad, including Eastern Europe and the former Soviet Union. Sales of brands with a global presence were growing at an estimated five percent annually, while overall cigarette sales growth was just one percent.

The acquisition was expensive and cut heavily into JT’s earnings, but the company saw its future in global expansion. Though 35 percent of Japanese adults smoked, a much higher percentage than in Europe and the United States, the smoking population was expected to peak in 2007. And although JT had not been sued over health issues, an awareness of smoking’s health risks was beginning to penetrate in Japan. The company looked to the opening of China’s market to cigarettes as a source of revenue and hoped to concentrate other foreign sales in Pacific Rim countries that still had growing markets for tobacco. By 2000, the company was pushing its leading Mild Seven brand in Malaysia, Thailand, and Singapore. The company gained a new president in late 2000, Katsuhiko Honda. Honda had negotiated the acquisition of the RJ Reynolds’ brands. International sales made up close to 40 percent of the company’s business by the turn of the century. The company also worked closely with its two global rivals, Philip Morris and British American Tobacco. Documents leaked by Advertising Age in 2001 showed that the three top companies had agreed to work together to limit their marketing around the world. Japan Tobacco and the others proposed to voluntarily limit advertising in publications with a substantial readership under age 18, to keep tobacco ads 100 meters away from schools, and in other ways restrict their advertising.

Key Dates:

1898:: A tobacco bureau is established by the Japanese government.
1949:: The company is incorporated as Japan Tobacco and Salt Public Corporation.
1967:: JT is the producer of Hope, the world’s best-selling cigarette brand.
1985:: The company begins exporting cigarettes.
1987:: Import tariffs are eased, opening Japanese the market to foreign tobacco companies.
1994:: The Japanese government sells one-third of JP to the public.
1999:: JT buys non-U.S. operations of RJ Reynolds.

Principal Subsidiaries

JT International S.A.; Torii Pharmaceutical Co. Ltd. (53%); J.T. Agris Co., Ltd.; J.T. Canning Co., Ltd.; J.T. Drinks Co., Ltd.; J.T. Foods Co., Ltd.; Chicago Foods Co., Ltd.; Lifix Co., Ltd.; My Circle Co., Ltd.; J.T. Real Estate Co., Ltd.; Your Factory Co., Ltd.; J.T. Enoshima Prince Hotel Co., Ltd.; J.T. Engineering Co., Ltd.; Tokyo Clinical Testing Co., Ltd.; Tokyo Establishment Enterprises Co., Ltd.; Murajo Production Centre; Enkai Enterprises Co., Ltd.; G-Tech Co., Ltd.; J.T. Anlits Co., Ltd.; Japan Tobacco I-Mex Co., Ltd.; Hokkaido Tobacco Services Co., Ltd.; Tokyo Tobacco Services Co., Ltd.; Chubu Tobacco Services Co., Ltd.; Kansai Tobacco Services Co., Ltd.; Kyushu Tobacco Services Co., Ltd.; Uny-Tobacco Services Co., Ltd.; Tohoku Filter Enterprises Co., Ltd.; Japan Filter Enterprises Co., Ltd.; Osaka Filter Enterprises Co., Ltd.; Neo-Filter Enterprises Co., Ltd.; J.T. CMK Co., Ltd.; J.T. Okamura Co., Ltd.; J.T.S. Electric Co., Ltd.; J.T. Nifco Co., Ltd.; Napps Co., Ltd.; J.T. Soft Services Co., Ltd.; J.T. Fashions Co., Ltd.; J.T. Kokubu Co., Ltd.; J.T. Act Co., Ltd.; J.T. Creative Co., Ltd.; J.T. Travel Co., Ltd.; S.K. Services Co., Ltd.; Planzart Co., Ltd.; C B One Co., Ltd.; Fuji Flavour Co., Ltd.; Japan Metallising Industries Co., Ltd.; Alpack Services Co., Ltd.; Nitto Industries Co., Ltd.; Tohoku Plant Services Co., Ltd.; Kanto Plant Services Co., Ltd.; Tokai Plant Services Co., Ltd.; Hachisendai Production Co., Ltd.; Kyushu Factory Services Co., Ltd.; Tobacco Benefit Association.