Japan Tobacco Incorporated Business Information, Profile, and History

History of Japan Tobacco Incorporated

The government-owned monopoly Japan Tobacco Incorporated (Japan Tobacco) manufactures tobacco and salt and is one of the largest tobacco companies in the world by sales volume. It also has one of the highest capitalizations of any company in Japan, with paid-in capital of ¥100 billion. In April 1985 the company was privatized as a joint stock company with the Japanese government as sole shareholder. This paved the way for more aggressive marketing of the company's products and also diversification into non-tobacco businesses. In the past few years these have included pharmaceuticals, foods, engineering, and real estate. Tobacco sales in Japan, however, will remain at the heart of the company's operations for the foreseeable future.

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 the Cherry brand of 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.

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 other 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 has been entrusted by the Japanese government with full responsibility for the country's salt supply. The salt business has 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% 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.

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 R.J. Reynolds were the first to make inroads, with Lark, a Philip Morris brand especially designed for the Japanese market, becoming a best-seller. 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 has focused so far have been over-the-counter (OTC) cough remedies and nutritional supplement drinks. One of the company's successes is Kakimaro, marketed as a hangover remedy. Through international strategic alliances, JT Pharmaceutical has 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 make 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.

To sustain its growth Japan Tobacco must continue to diversify and expand its overseas operations, as no significant expansion seems likely in the maturing Japanese cigarette market. Domestic cigarette sales are still the driving force behind the company which is determined, through marketing, to hold onto its market share.

Principal Subsidiaries: 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.; Sports Club Trim 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 International 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.; Japa 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.