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January 2005
Philip Morris USA: Making Good
By Susanne B. Deitzel

     Nestled on a 2,100-acre campus replete with Canada geese, several ponds, old growth hardwood trees and expansive green fields, is an important operations center of Philip Morris USA.

     Far from the image of smoke-coughing factories and industrial coldness, the Philip Morris manufacturing facility in Cabarrus County is the picture of bucolic tranquility. The splendor of the surroundings of the cigarette manufacturing behemoth is but one example of the dissonance between perception of the company and its reality.

     Of course, we would be remiss not to address the elephant in the room: we all know ‘what happened to the Marlboro Man.’ However, as the knowledge of smoking-related health hazards has increased, Philip Morris has redirected its efforts. The company’s goal is to retain market share of adults who choose to smoke, and to align itself within its communities with good works.

     Cabarrus County recently heralded the announcement of the plant’s $200 million investment to upgrade facilities and improve production, securing over 2,600 existing jobs. After the loss of over 3,600 Pillowtex jobs, the Philip Morris investment was welcomed with well over 2,600 sighs of relief.

 

Putting Money Where Its Mouth Is

     The $140 million of the $200 million investment will provide for 12 high-speed cigarette-manufacturing modules, which will replace 18 lower speed models. The new equipment is expected to increase productivity by as much as 16 percent, which will solidify the existing jobs at the plant. The modules will be installed bimonthly over the next two years, with the first unit already activated.

     A portion of the remaining $60 million is funding an Automated Storage and Retrieval System, which is used to store and deliver direct materials such as papers, filters and packaging. Implementation of this system frees plant employees from time-consuming pulling and loading duties, and enhances safety. Also, the system’s new climate-controlled environment will extend the shelf life of these materials dramatically, lowering costs.

     Says Gary Ruth, vice president and general manager of the Philip Morris plant, “We are one of, if not the largest facility of our kind in the world, and by virtue of the fact that we chose to bring these upgrades to Concord, we hope that North Carolina sees our commitment to the state, the community and to our employees.”

     The state lobbied hard for the Philip Morris investment, and overcame a bid by Richmond, Virginia, for the upgrades. As recently as December 2003, a company spokesperson claimed that the Richmond-based company had “no plans to expand in North Carolina.” That was, however, before significant incentive proposals. North Carolina provided $1 million in incentives from the One North Carolina Fund to increase jobs, and $100,000 from the Incumbent Workforce Program to train employees. There was also $3.6 million awarded in property tax incentives from the city of Concord and Cabarrus County.

     While the use of incentives is a source of debate among lawmakers, the supporters appear to have won overwhelmingly in recent months; most contend that the use of incentives benefit not only the companies receiving them, but also function to seed the economy for related businesses and spinoffs.

     In a press release announcing the investment, Governor Mike Easley commented, “Our investments in education, work force development and infrastructure are essential in competing for jobs in today’s global economy. North Carolina understands that to get and keep companies like Philip Morris, we must continue to invest wisely.”

     Says Ruth of the incentives, “The incentives were an important component of the decision to invest in Concord, however, it was only one of many important factors.”

     The Philip Morris decision was undeniably a big win for the region. The company contributes approximately $268 million annually through employee wages and taxes, and in 2003 purchased more than 160 million pounds of tobacco at a cost of more that $300 million. This figure represents more than 45 percent of all the tobacco grown in North Carolina.

     Add 250 employees under contract in six privately owned tobacco receiving stations, $51 million dollars paid in goods and services to North Carolina suppliers, $18 million dollars to North Carolina freight companies, and $15 million to North Carolina warehouses, and it becomes easy to see how losing a company like Philip Morris would have a huge domino effect in the community.

 

Not Just Blowing Smoke

     This is not to say that Philip Morris doesn’t have its detractors.

     Its archrival, R.J. Reynolds is located due northeast in Winston-Salem, and the two companies are often at odds concerning legislation in the cigarette industry. Currently the competitors are in opposition over FDA regulation of cigarettes. R.J. Reynolds prefers the FDA stay out of the picture, claiming the regulation will grant Philip Morris USA unfair advantage. The most recent version of the proposed FDA regulation maintains limits on product standards and advertising, among other factors; competitors state  ‰ the regulation would function to solidify Philip Morris’ dominant market position.

     Philip Morris, on the other hand, considers smoking a public health issue that should be covered under the FDA. Says spokesman Bill Phelps, “The country needs a comprehensive, consistent policy toward smoking. Our position is that smoking is a public health issue and that public health officials should have some authority over it.”

     For those who think Philip Morris USA is just blowing smoke, the company can back up this position with cold, hard facts. The company consistently advertises the hazards of teen smoking, while decreasing its cigarette advertising for the fifth consecutive year. Magazine, newspaper and retail advertising have been supplanted by price and promotions like the ‘Marlboro Rewards Card,’ which functions to target the adult smoker, rather than recruit new smokers. Philip Morris also funds and promotes a ‘Stop Smoking Initiative’ on its Web site, and funds considerable research into healthier versions of its product.

     The industry’s position is precarious; in what other business does a company have to advertise against its product yet continue to be profitable in a declining market?

     Says Gary Ruth, “The smoking industry declines 1 to 2 percent annually in the U.S.; our intention is to grow market share for those adults who choose to smoke. If an adult person smokes, we want to be their choice.”

     He adds, “It is also important for us to listen to the public’s perception of what we should be doing in regard to public health. That is why we were the only company to support FDA regulation. We intend to fully live up to the expectations of our community.”

     By all counts, Philip Morris USA is heavily invested in its community. The company has given over $1 million in annual charitable donations, provided 43 scholarships through its Tobacco Farmer Partnering Program, provided over $17 million dollars to N.C. State for a tobacco genome initiative, and provides $1 million annually in grants and contracts in the college’s School of Agriculture and Life Sciences.

     Philip Morris employees also gave $875,000 of their own money to charity, and are encouraged to volunteer time to local charitable organizations.

     Ruth demonstrates a strong appreciation for his employees: “We recognize the deep commitment and hard work of our people. We are proud of our work force, and proud to be able to pay one of the highest wages in manufacturing. Needless to say, I am very glad that the investment will make us able to keep their jobs secure.”

 

Bright Present, Cloudy Future?

     The equipment up-fit streamlines the manufacturing process, increasing employee skills while simultaneously producing a cost-competitive product. Says Ruth, “This investment has allowed us to keep this facility whole, and to fully utilize the space we have here. Plus, as employee attrition occurs, we hope to continue rehiring.”

     He adds, “Local and state government and every organization we encountered along the way in this decision were incredibly helpful. This process keenly demonstrated not only Philip Morris’ commitment to the region, but also state and local leadership’s commitment to businesses and jobs as well. We feel incredibly fortunate.”

     While the Concord plant appears to be a shining example of how new technology can steady rapidly declining manufacturing industries, one gets the feeling that there are still clouds on the horizon.

     Philip Morris, like its primary competitors, continues to abide by the 1998 Master Settlement Agreement (MSA), which restricts lobbying, confines advertising practices, and pays billions of dollars in awards to states for health care costs. To date, North Carolina has received 650 million from the agreement. In the meantime, several small newcomers to the industry are not required to abide by the agreement, thereby avoiding the drain on their coffers.

     In October, the U.S. Justice Department brought a racketeering lawsuit against the tobacco industry, which could potentially result in a $280 billion penalty. A win for the prosecution could reportedly bankrupt the industry. The trial was undertaken in September and is expected to last six months.

     Add to these concerns a declining U.S. market, increased taxes, opposition groups and restricted advertising, the whole endeavor appears to be a huge uphill battle.

     Yet, Ruth is happy that Philip Morris is in a dominant market position, and that his charge is to solidify that leadership with the plant’s new digs. He is glad his employees were able to have a relaxed holiday season without the threat of layoffs, and that his company was able to support a community that really needed some good news.

     Heading into the future, Ruth will continue to manage his amiable workforce amid the whir and flurry of state-of-the-art technology on the Philip Morris campus. He says, “It is just too difficult to speculate exactly where the industry is headed. It has become the nature of the business to be well-equipped for any possibility.”

     For the time being, the heartbeat of the Philip Morris plant is strong, and so is the resolve of the company. Concludes Ruth, “We are committed to being the best company we can for our consumers, our employees and our community. We feel like a lot of other people in the region – very blessed to be here.”

 

Susanne Deitzel is a Charlotte-based freelance writer.
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