Subject: [cwj 18] As fewer people light up, Japan Tobacco branches out
From: Corporate Watch in Japanese <cwj@corpwatch.org>
Date: Wed, 17 May 2000 13:48:23 -0700
Seq: 18

May 15, 2000
Nikkei Weekly

 As fewer people light up, Japan Tobacco branches out
 Feeling peachy New generation of employees forges into food,
pharmaceuticals in bid
 to reinvent cigarette maker

AYA FURUTA
Staff writer

 JT, the logotype of monopolistic cigarette maker Japan
 Tobacco Inc., has grabbed the attention of teen-age girls.
 About 7% of them start smoking before they turn 18, and
 many more have started drinking the popular peach-flavored
 beverage produced by the company.

 The drink, a smash hit that sold about 220 million bottles in
 fiscal 1999, is part of Japan Tobacco's strategy to move
 beyond the cigarette business and into food and
 pharmaceuticals sales. The company is "in the midst of its
 second inauguration," Japan Tobacco President Masaru
 Mizuno is fond of saying. A business plan adopted in
 February calls for the creation of core food and drug
 businesses and the global expansion of the tobacco business.
 The hit peach drink sold a staggering 380 million bottles in fiscal 1998.
It is a light,
 watery drink with the sweet, fruity flavor of peach. It was the first hit
beverage for Japan
 Tobacco since it got into the business in 1986.

 The peach water was developed in 1996 from an idea of Masayo Ishida, 26
years old at
 the time, who worked in the marketing section of the drink business. There
were many
 similar kinds of drinks with citrus flavoring at that time, Ishida said,
but "I had an
 intuition that peach flavor would make the best match with a waterlike
drink."

 Ishida is one of a new generation of Japan Tobacco employees who joined
the company
 because of an interest in something other than tobacco. She was interested
in the drink
 business before she entered Japan Tobacco and had been applying for jobs
at food
 makers.

 This new generation of employees has grown quickly. The company's food
section has
 about 600 employees, three times its number two years ago.

 Diversification is nothing new for Japan Tobacco. It has been looking for new
 businesses since it was partly privatized in 1985. "It is inevitable that
domestic
 (demand for) cigarettes, the main source of our cash flow, will be
decreasing in the
 future. We need other sources," President Mizuno said.

 The percentage of Japan's population who smoke has been decreasing
slightly in recent
 years. Anti-smoking campaigns are not as successful in Japan as they are
in the U.S.,
 but they are gradually appealing to society. Imported cigarettes now claim
a quarter of
 the market, and Japan's low birthrate is expected to result in a
decreasing number of
 adults from 2009.

 After trying many businesses, including real estate and the machinery
business, the
 company chose two to concentrate on - foods and drugs. Both are, however,
currently
 losing money.

 Japan Tobacco intends to make its food business profitable by the year
through March
 2002 and achieve 150 billion yen ($1.37 billion) in beverage sales and 75
billion yen in
 ready-made food sales by March 2005. The sales are currently about 50
billion yen for
 each. To achieve its goal, the company is investing at the cost of current
profit, said
 Tetsuji Kanamori, managing director of the food business. "We are building
brand
 identity. Our business is still small, but we do invest as much in
advertising as other
 major beverage companies," he said.

 After the success of peach water, Japan Tobacco is targeting tea and
coffee, which are
 consumed more than fruit drinks. The company launched a green-tea drink in
April and
 plans to release a coffee drink in autumn. 

 Japan Tobacco's strategy for expanding its business is to take over other
companies. It
 bought the Japanese subsidiary of U.S. food company The Pillsbury Co. in
1998 and
 the frozen-food business of Asahi Chemical Industry Co. in 1999. The
company also
 bought several vending-machine companies. 

 Japan Tobacco plans to break even in its drug business in the year through
March
 2006. Buying 53% of midsize pharmaceutical firm Torii Pharmaceutical Co.
in 1998
 resulted in consolidated sales growing to about 70 billion yen.

 Since it launched the business in 1988, JT has been aggressively expanding
its
 alliances with overseas partners for drug discovery. The company is
investing 30% of its
 30 billion yen in annual research-and-development spending in overseas
partners,
 especially U.S. venture companies such as Cell Genesys Inc. and Corixa Corp. 
 Yasuo Urata, director of research planning, said Japan Tobacco would
target only
 outstanding, innovative drugs. The abundant profits from tobacco allow the
company to
 take risks in targeting such drugs. Making alliances with ventures helps
the late starter
 acquire global competence in research. 

 Japan Tobacco gives its drug business a lot of autonomy to help it move
fast. "JT is
 much quicker in their decision-making than other Japanese pharmaceutical
 companies," noted a high-ranking executive of a U.S. biotechnology venture
company
 that collaborates with Japan Tobacco.

 Japan Tobacco's drug business has not yet released an original commercial
product,
 but there are four candidates in the second phase of clinical development
that may be
 released in a couple of years. 

 The company intends to put four candidates into clinical development every
year from
 now on. To strengthen clinical development, the company expanded its U.S.
subsidiary
 in April. Japan Tobacco plans to conduct clinical trials in the U.S.
before it tests its
 candidates in Japan in order to spur drug development.

 The biggest hurdle for the firm's pharmaceutical business could be public
resentment
 against the company for selling both cigarettes and drugs.

 Takashi Kato, managing director of the pharmaceutical business, insists
the tobacco
 business does not hinder its activities. "Doctors would use our drug as
long as it is
 good, even if they hate smoking," said Kato. But Urata at research
planning admitted
 that some overseas laboratories refused to collaborate with the company
because it is
 selling cigarettes.

 Japan Tobacco is also looking to expand into overseas markets. Though the
tobacco
 market is flat in Japan, the U.S. and Europe, other regions are showing
growth. The
 company invested $7.8 billion to take over RJR Nabisco Holdings Corp.'s
global
 tobacco business, except for sales in the U.S., last May.

 The first phase of Japan Tobacco's global expansion has not gone well. The
company's
 subsidiary for international business posted a 1999 Ebitda loss of $421
million (Ebitda
 is an acronym for earnings before interest, taxes, depreciation and
amortization) due to
 sluggish demand in its major markets, Russia and East Europe. The company
revised
 projections for consolidated net profit in fiscal 1999 from 73 billion yen
to 48 billion yen. 

 Senior Executive Vice President Hideo Tada said the situation is
improving. "Demand in
 Russia is recovering. People are shifting from cheap cigarettes to
middle-priced ones,"
 said Tada.

 Japan Tobacco is also pushing into China, a country that accounts for 30%
of the
 world's cigarette consumption. The market is not currently opened to foreign
 companies, but that may change if China joins the World Trade Organization. 
 Japan Tobacco formed an alliance with Shanghai Gaoyang International Tobacco
 Co. last year to manufacture JT tobacco in China. The production will be
launched in
 several months. 

 But as Japan Tobacco transforms itself from a cigarette maker to a giant
in three
 markets, one problem persists: The large share of the company that the
government
 owns keeps it from acting like other private companies. Law determines
that two-thirds
 of the company should be owned by the Ministry of Finance, which restricts
the
 company from raising funds in financial markets. The company president has
always
 been a former ministry bureaucrat.

 But that chain is about to break. Senior Executive Vice President
Katsuhiko Honda,
 who has never been a bureaucrat, is to become president in June. "I will
make efforts to
 amend the law to have the government sell all stakes in JT. It is
important for JT to
 acquire autonomy in management," he said.

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