All Smoke And No Fire
Tobacco kills millions of people every year"�400,000 of them in the US. So the US health authorities have cut a deal with the merchants of smoke to let them continue their trade. The pay-as-you-kill scheme looks tough. The cigarette giants have to cough up $386.5 billion over 25 years "� or $10 billion to 15 billion a year. Thats more than double the industrys operating profits of $7.2 billion in the US. Whats more, the cigarette companies have to stop all advertising, on billboards, at sports events and even at points of sale. Worse, the Food and Drug Administration (FDA) will have the power to reduce nicotine levels in cigarettes, and the industry has to cut under-age smoking by 60 per cent in 10 years or pay $2 billion a year in penalty. Has the death knell been rung for the global smoke industry?
Not quite. When the news of the talks emerged, tobacco stocks were going up, not down. If the US Congress accepts the deal, the tobacco companies will be freed of all future worries. The $368.5 billion will settle claims by states, existing class action lawsuits and future lawsuits by individuals. The cloud of uncertainty which kept the industrys price-earnings ratio down will be gone. Fifteen billion dollars a year is a small price to pay for such peace of mind. Look at it this way. The US government last year collected about $13 billion in taxes from the industry. Taxes on cigarettes in the US are among the lowest "� 30 per cent. In most of Europe, they are above 70 per cent. So it is as if the US has brought its tax rate on par with global levels. If the US government really wanted to muzzle the industry, it would have doubled the tax rate to raise as much money as it is now raising from the deal, and then left the industry to face litigation.
What about the rest of the deal "� advertising, nicotine levels and under-age smoking? To begin with, the immediate impact of an enforced ban on advertisements could be higher profits. As for nicotine levels, various clauses in the deal will cramp the FDAs ability to bring them down. For example, the FDA has to present substantial evidence that their action will not create a black market. As for under-age smoking, the chairman of BAT is on record saying the targets are unrealistic. So the industry will end up paying the penalty -- what is an extra $2 billion in a $15 billion dollar deal? More important, everyone who partakes of the $ 15 billion dollars will have reason to keep the industry going.
Where will the industry find this money? There are two possibilities. One, increasing the price of cigarettes in the US which, however, might bring down sales. Two, focusing even more on the emerging markets of Asia, China and Latin America. So it looks as if the cigarette giants have got away lightly once again. But there could be trouble ahead for the industry if the deal starts off a chain of actions in other countries. Canada is already thinking of options. Britain may follow. It is time for India to sit up too, as the smoke merchants turn their attention to countries where the cost of doing their business is low.