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Proceedings INGCAT International NGO MObilisation Meeting Geneva, 15-16 May, 1999.

Why Tobacco Companies Behave as They Do
David Sweanor
Senior Legal Counsel, Smoking and Health Action Foundation, Canada.

In looking at tobacco-caused diseases and the role of the tobacco industry we canstart by looking at how we deal with other diseases.  For instance, in dealing with malaria we know that the disease is caused by a parasite, that the parasite is transmitted by mosquitoes and that the mosquitoes beenefit from environments such as a swamps.   There are various method s through which we seek to control malaria.  But any approach to malaria control in which mosquitoes were ignored would not likely be very successful.

Tobacco-caused disease can be looked at much as we would look at malaria.  These diseases are caused by an agent; the agent being tobacco products.  This disease agent, like th eparasites which cause other diseases, would be much less of a problem were it not for the fact that the disease agent has a vector - something that gets the disease agent to large numbers of people.  And, when looking at the diseases caused by tobacco products, that disease vector is the tobacco industry.

Seeing the tobacco industry a a disease vector helps in determining what sor of efforts we can undertake to effectively del with the epidemic of tobacco caused illness.   Since the major transnational tobacco companies are also legal entities publicly traded on major stock exchanges there are many ways to determine what causes them to act as they do, and to inform us as to how best to achieve public health aims.

Corporate disease vectors are, in many ways, different from the vectors for communicable diseases.  The motivation to survive and to thrive is, however, the same.  For tobacco companies, that means profits, which are determinaed by a combination of the products they sell, the people employed the regulatory environment within which this activity takes place.

The profit motive
The multinational tobacco companies, like all public companies, exist to make money for shareholders.  For tobacco companies the profits can be huge.  It is not unusual for these companies to be making returns on investment of in excess of 100% per year.   This is extraordinary for any company, and virtually unheard of for the sellers of an established product.  Yet tobacco companies are able to make such profits year after year.

The secret of tobacco company financial success is due to a combination of factors.   To begin with, the product is very cheap to make.  Cigarettes can be manufactured for less than a penny a piece.  In fact, in some markets in Asisa and Africa cigarettes are sold at retail (inclusive of taxes) at less than 20 cents a pack.

A product that is cheap to make is not necessarily a ticket to riches.  The financial success of the tobacco industry is based upon its ability to sell this inexpensively manufactured product with a huge markup.  Those cartons of 200 cigarettes the companies make for less than two dollars are often sold (before the addition of taxes and retailers' markups) for five times that amount.

These profit margins are attained, in part, because the tobacco industry is an oligopoly (i.e. an industry where a small number of players control the market).  In most countries a significant majority of all cigarette sales are controlled by no more than two companies.  These companies typically compete on issues of image rather than on price, which makes sense given the relatively low price-responsiveness for tobacco products.  Tobacco oligopolies lose money when they compete on price and make siginificantly higher profits whent hey coordinate price increases.  As the tobacco industry consolidates, the giants (Philip Morris and BAT) grow ever larger, national markets are icreasingly dominated by fewer players and the companies become more financially powerful.

The overall profitability of this industry is a result not just of having a very profitable product, but selling a lot of it.  The global market for tobacco products is huge.  Cigarettes alone account for an annual global market of $300 billion.   To put his in perspective, this is equivalent to the combined sales of the entire pharmaceutical industry.

Finally, these profits are maintained by the ability to the tobacco companies to pass on their costs to others.  Tobacco is a huge net drain on the world's resources.   With each cigarette consumed, humanity becomes poorer.  If the tobacco industry had to adhere to the principle of "polluter pays" it would be out of business.  The industry survives and thrives because it is able to keep its profits and to pass on its costs to others.  Governments, families and individuals end up burdened with the costs from smoking while tobacco companies retain the profits.

This profitability results in two main problems for tobacco control activities.   In the first instance it gives the tobacco industry a massive interest in opposing anything which could adversely impact upon its business.  Secondly, it gives the industry the resources with which to oppose any such measures.

The product Modern tobacco products are finely-tuned nicotine delivery devices.  Leading nicotine researchers have pointed this out, and the tobacco industry's own internal documents, released as part of recent U.S. litigation, show that these companies appreciate this fact.

Nicotine, as delivered by cigarettes, is highly addictive.  When absorbed into the lung via smoking, nicotine reaches the brain within seconds and gives a significant "spike".  As the effects wear off there is an urge for a further "spike" leading to another cigarette.  While most smokers will stat smoking for social reasons, they become dependent, and continue smoking as a way of obtaining nicotine.

The result of this dependence is that the tobacco industry has a market where the consumers cannot easily leave, regardless of how they personally feel about the product.   While a large proportion of smokers do want to quit, success rates are low, being in the range of 2%-5% for unaided quit attempts in developed countries (and unaided quit attempts have been, and still are, the norm).  This must have traditionally given great reassurance to tobacco companies.  They could raise their prices (and, hence, their profits) or witness major health promotion capaigns, and know that few of their customers would be successful in quitting.  Tobacco company documents illustrate this point.  The companies would monitor attitudes to smoking, intention to quit and quit attempts on an ongoing basis.  But they would also see that teh great interest in cessation actually resulted in relatively few of these smokers being successful.

From the perspective of the tobacco industry as a disease vector based upon economics, the nature of is product leads to various conclusions.  One is the importance of new recruits.  If people can be induced to try tobacco products there is a significant likelihood of a long-term flow of profits.  In addition, young people are worth more to tobacco companies than are older persons because young people offer a longer future revenue flow.

The people Tobacco industry employees are often very different from the people associated with other industries or occupations, and this is particularly so in countries where tobacco control activities are well advanced.  I have talked to tobacco executives who say that they have trouble socializing, that they are ostracized when they tell people what they do for   aliving.  They often have limited contacts, preferring the company of other tobacco company employees so that they do not feel as threatened.

But it has not always been so.  Several decades ago tobacco jobs were not all that different from other forms of employment.  There may have been moral concerns about tobacco use, but the product was not seen as fundamentally different froma wide range of other products.

As health concerns arose it appears that tobacco executives sought to "fix" the problems.  They talked of determining what was causing disease so that that substance could be removed from the products.  For a while they seemed tothink there could even be a marketing advantage to less harmful products, leading, in the 1950s, to some industry admissions which go beyond what we are used to even today.  It soon became clear, however, that cigarettes had no safe level of consumption. The product killed whenused exactly as intended and was the cause of an epidemic.  This greatly limited the scope for industry actions to reduce the death toll, and was further aggravated by the role of industry lawyers.  These lawyers sought to prevent crippling lawsuits by avoiding any direct or indirect acknowledgements of the magnitude of the risk from the products.

So what were tobacco executives to do?  From an ethical standpoint it could be said that the tobacco companies and their executives should have significantly changed their approach towards assisting efforts to reduce the use of their products.  But that did not happen, and for very good reasons.

To understand what did happen we need to look at corporate culture, which is largely dictated by corporate law and economics.  Acting in the interest of "public health" was simply not an option, as corporate lines of responsibility would prevent it.  Tobacco company executives, no matter how well intentioned, report to senior executives, who report to boards of directors, who in turn are guardians of the intersts of the share-holders