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Philip Morris
International is a multinational company that based in United States which employs
in the manufacture and sales of cigarette and tobacco products since 1847. The
corporate headquarter is in New York however its operational headquarters are
in Lausanne, Switzerland. Philip Morris International operates 48 production
facilities in 32 different countries (Philip Morris International Website),
including Philippines. According to Fortune, Philip Morris International is
ranked 100 with total revenues around $31,217 million, profits of $ 8,756
million and total asset of $ 38,168 million. In tobacco industry, Philip Morris
is the second largest producers of cigarette which control an estimate 14,4 %
of the international cigarette market (Euromonitor, 2017). Its main brands are
Marlboro, Dji Sam Soe, L&M, Longbeach, Minak Djinggo, ST Dupont Paris, U
Mild, Philip Morris, Red and White, Basic, Bond Street, Chesterfield,
Parliament, Lark, Merit, Morven Gold, Muratti, Skjold, Good Companion, Multifilter,
Virginia Slims, IQOS and many others brands depends on nations.

Philip Morris
goals is to design a smoke-free future by develop and sell smoke-free
alternative, transitions cigarettes to smoke-free alternative, and propose
regulatory policies that encourage the replacement of cigarettes by smoke-free
alternatives (PMI). Philip Morris International has a vision to transform their
business by manufacturing and selling smoke-free alternatives to replace
cigarettes. Around 1,1 million people around the world consume tobacco
cigarette. In order to achieve this goal and mission, Philip Morris
International needs to expand their business around the world so it can be
affected in all regions.

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In 1955, Philip Morris
International (PMI) was appeared in Philippines. Philip
Morris International had come up with a licensing agreement with local tobacco
manufacturer La Suerte Cigar & Cigarette Company to manufacture and sell
Marlboro in Philippines. In order to handle all sales and marketing in
Philippines, in 1995, Philip Morris International was established Philip Morris
Philippines Inc. (PMPI). In 2002, Philip Morris International ended their
contract with La Suerte Cigar & Cigarette Company. On the other hand,
Philip Morris International was established Philip Morris Philippines
Manufacturing Inc. (PMPMI) to take over all manufacturing and operations of
Philippine businesses. Philip Morris Philippines Manufacturing Inc. has one
factory in Tanauan, Batangan that was started in 2003. The most popular and best selling product of the company is Marlboro. In
2010, Philip Morris Philippines Manufacturing Inc. and Fortune Tobacco
Corporations was come up with an agreement to unite their business, named
PMFTC, Inc. .  Fortune Tobacco
Corporations is one of the most influential domestic tobacco companies in
Philippines. When both of the companies agreed to make a joint-venture company,
it takes control of 90% tobacco industry in Philippines. Both of the companies
were holding an equal economic interest to achieve their interest in this
country. The chairman of the company was still Lucio Tan on the other hand
Philip Morris International still manage day-to-day operations.

According to the
2009 Global Adult Tobacco Survey, Philippines was having extremely popular
cigarette smoking that approximately half of adult males smoke (CDC, 2010). The
Philippines was the 15th largest consumer of cigarette in the world.
Therefore, it was a big chance for tobacco multinational company to pursue Philippines
market and investment, including Philip Morris International. The Philippines
was attractive for multinational companies because it has steady economic
growth and a large, young and growing population that near 100 million people.
However, in 1990s, La Suerte Cigar and Cigarette Company and the Fortune
Tobacco Company (FTC) have been the most popular producers. FTC had 67% market
share and La Suerte holds a 25% share (Shafey, Dolwick, Guindon, 2003). In
order to pursue this big important market, Philip Morris International was
aggressively done their business in Philippines. They also saw an important
chance from the government domestic policies to show its business interest ability.

The Philippines
was attracting to multinational company especially in tobacco industry because
Philippines is one of the emerging countries that become the 34th
largest economy in the world and 13th largest economy in Asia (IMF,
2016). In 2016, Philippines’s nominal GDP per capita amounted $2,951 below two
of another ASEAN country, Thailand and Indonesia (World Bank, 2016). Philippines
has been changes from agriculture based into service and manufacturing based
that make Philippines become a new industrialized country. However, poverty,
health problem and political corruption still remained unresolved. According to
Transparency International, Philippines score 35 on the 2016 Corruption
Perception Index. The corruption index was high because its history and current
situation in the Philippines. Since 1980s, Philippines was recorded in the
Guinness Book of World Records for doing the biggest corruption all the time
that referred to Ferdiand Marcos period of dictatorship (Moratalla, 1997). According
to President Aquino’s Commission on Good Government, Transparency
International, and the U.N. Commission on Drugs and Crime, Marcos era and his
cronies were able to acquire $10-15 billions in assets from many conducted
operations. Internal PMI correspondence said that corruption, bribery,
smuggling and dirty politics was doing so well and continuing to benefit the
officials (Heymans, 1963). Therefore, the tobacco company got the economic
advantages from cronyism before. Most observers view that the Philippines was
institutionally weak and often corrupt (Hutchcroft, 2008;
Hutchcroft & Rocamora, 2003). The
private firms can seek their preference policy to government and mostly
successful.

Not only
corruption, but also poverty remained unresolved in Philippines domestic
problems. According to Philippines Statistic Authority, Philippines poverty
incidence among employed and unemployed Filipinos are registered at 18,0% and
16,4% respectively, in 2015. However, the difference with employed and
unemployed Filipinos was declining every year. 
Smoking was one of the factors that affected Philippines poverty.  An average smoker used their 10% income to buy
cigarettes. The price of cigarettes in Philippines also relatively low than any
ASEAN Nations. In order to prevent further impact, government of Philippine
ratified World Health Organizations Framework Convention on Tobacco Control
(WHO FCTC) in 2005. This framework was used to implement a range of tobacco
control provisions such as higher excise taxes on tobacco products, smoke-free
public places, warning labels on tobacco products and bans on marketing tobacco
products.

Tobacco continues
to give bad impact to Filipinos such as kills approximately 71.850 Filipinos
each year. It will be continued to be one of the world’s most pressing public
health challenges. Now, 16 million of adult was smoking and more than half a
million child also smoke. According to 2017 census, the population of
Philippines are 100,981,437 and annualized growth rate around 1,72%. Smoking
was one of the burden dead globally. Moreover, in low- and middle-income
countries (LMICs) will be affected greatly than in high-income countries
(Mathers and Locar, 2006). In the Philippines, it was estimated that 20% more
men and 10% women die of tobacco related diseases than the middle income
countries (Eriksen, 2015).

Table 1.1
Philippines Foreign Direct Investment (FDI)

Foreign
Direct Investment

2014

2015

2016

FDI Inward
Flow (million USD)

5,740

4,937

7,912

FDI Stock (million USD)

56,646

58,522

64,249

Number of
Greenfield Investments***

171

179

170

FDI
Inwards (in % of GFCF****)

9.8

7.9

10.9

FDI Stock (in % of GDP)

19.9

20.0

21.1

Source: UNCTAD

 

According to the
table above, Philippines Foreign Direct Investment (FDI) has been increasing
steadily in recent years. In 2016, FDI inflows nearly hit US$ 8 billion with
the main investors Japan and US that concentrated in the manufacturing and the
finance industry. Philippines preferred form a joint stock company by foreign
investor. According to Santander, FDI Inflows into the Philippines still
comparatively weak despite of the country’s comparative advantages such as a
large domestic market, a well-skilled and English-speaking workforce,
considerable natural wealth, and a geographical location in a dynamic region.
There are some factors that discourage the investment such as corruption, high
power cost, the bad quality of infrastructure, lack of judicial security and
tax regulations and foreign ownership restrictions.

Philip Morris
International came up to Philippines market by a licensing agreement with La
Suerte Cigar & Cigarette Company in order to familiarize its manufacture
brands. Jeffrey Drope, Jenina Joy Chavez, Raphael Lencucha & Benn McGrady
in The political economy of foreign
direct investment—Evidence from the Philippines argued that Philip Morris
International wanted to use local company to increase its political influence.
If Philip Morris International can get the domestic politics influence, it can
be affecting their ability to do business. However, it worked out otherwise.
Fortune, the local based company was funded the campaign efforts of several
election. Therefore, both the legislature and key ministries (DOF, Department
of Trade and Industry (DTI), Department of Agriculture (DA) and Department of
Health (DOH) sided with Fortune to log out Philip Morris International. Philip
Morris International unable to secure tax legislation that can be favorable to
its business goals.

Philip Morris
began with to use a licensing agreement strategy to enter markets around the
world. Later on, they will adopt an acquisition strategy and geographic
expansion to increase its control and interest in these locations (You, 2002). In
order to get into Philippines cigarette market, Philip Morris International
made a new strategy to form a joint-venture company with Fortune Tobacco
Company. Philip Morris International strategy in the Philippines was more into
political influences to pursue its intention to do more favorable business.
Philippines already has the high market shares in tobacco industry because
Filipinos loved to smoke with tobacco. Furthermore, the political instability,
corruption, and unstable tax regulations and restrictions are the factors that
troubled Philip Morris International to expand its products in the Philippines.
However, all of these factors also became Philip Morris International challenges
to get into Philippines market. Philip Morris International approached
Philippines government by having a licensing agreement or a joint venture to
facilitate it products in Philippines easier. When the government of
Philippines ratified World Health Organizations Framework
Convention on Tobacco Control (WHO FCTC) in 2005, Philip Morris International
also develops their Corporate Social Responsibility (CSR). Philip Morris
International also focuses on consumers’ satisfaction. Subsequently, the
company innovate products that less harmful for health caused by tobacco
products.

In order to analyze Philip Morris
International expansion strategy, we will use the Porter’s Five Forces
Framework that developed by Michael Porter. First is the threat of new
entrants. Philip Morris International is the second largest tobacco company in
the world. They already have their markets and brands that people are aware and
loyal to its brands. Despite the high benefit of the tobacco industry that may
attract new firms, the threat of new entrants was very low. Maybe the new firms
that want to acquire domestic market can be entered the tobacco industry.
However, if the new firms want to expand globally, they need to prepare the
relatively high cost to compete with top tobacco firms, like Philip Morris
International. It will be hard to survive in this industry if the new firms did
not have a huge amount of economies scale. The new firms will need to face
several legal and regulatory by the governments. Even in the case study of
Philippines, Philip Morris International was having a hard chance to maintain
the regulations in Philippines. 

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