Chapter 18, Part 2

By Frank Tursi, Susan E. White, Steve McQuilkin and Ken Otterbourg
JOURNAL REPORTERS
© 1999 Winston-Salem Journal

J. Tylee Wilson had a Southern-sounding name, but he was all Yankee, and a newcomer to tobacco to boot. He came to Reynolds from Chesebrough-Pond's -- the maker of Vaseline Intensive Care, Q-Tips and other products. Some domestic tobacco executives dismissed him as a toothpaste salesman.

Cordial but cool, Wilson dressed in three-piece suits and had little time for chit-chat. He arrived at meetings early and sometimes started them early. He winces when he hears his management style referred to as Prussian. There is a difference between being tough minded, he said, and just plain tough. ''I don't have time for incompetence,'' Wilson said. ''It breeds itself.''

The R.J. Reynolds Tobacco Co. was once the largest cigarette company in the United States with a powerhouse of best-selling brands: Winston, Salem and Camel. But times changed, and as the case against smoking became more pronounced in the 1960s, RJR failed to adapt to the marketplace. Its rivals would eventually rush past it, and RJR's efforts to catch up would have a profound impact on the company and the cigarette industry.

Wilson's start as president of R.J. Reynolds Tobacco International Inc. was humble enough. The first day found him alone in a temporary office in what was then the NCNB Building in downtown Winston-Salem. The future home for the international offices, the World Headquarters near the Whitaker Park factory, was not yet completed.

Wilson's first two tasks were to get a quick education on the international tobacco business and build a new management team. For the education, he leaned on Dale Sisel, then international's top financial executive, and G. Dee Smith, who was running RJR-Macdonald, the Canadian subsidiary that Reynolds had bought in 1974. He moved both executives back to Winston-Salem and made Smith his president and chief operating officer. Wilson moved up to chairman and chief executive. Jerry Long, the marketing expert, would complete Wilson's inner circle.

''Jerry Long, probably, even now looks back and says `I don't know how I got so far' '' said Peter Hoult, a former chief executive with RJR-MacDonald. ''He had no star whatsoever, but whatever Tylee wanted, Jerry Long would deliver it in spades.''

Like Paul Sticht, Wilson, Long and later Ed Horrigan were consummate outsiders. Unlike Sticht, they didn't mind confrontation. They shared an in-your-face confidence and an ability to motivate the troops below. ''I may be a Yankee son-of-a-bitch,'' Long told his subordinates in international, ''but I'm your Yankee son-of-a-bitch.''

It was that kind of toughness RJR would need if it were to make any headway.

The foreign cigarette business -- then as now -- was a confusing tangle of rules and regulations requiring patience and flexibility. Each country had its own tastes -- in Malaysia, for example, men thought menthol cigarettes were damaging to their virility -- and way of doing business. Foreign governments often operated the tobacco companies, using them as easy way to raise money. They frowned upon competition and exacted a heavy price from American companies wanting to enter. There were also problems with payment. Exchange rates fluctuated widely, and in some countries RJR had to use a barter system, exchanging cigarettes for chickens, shovels or leaf tobacco.

''When you go international there are so many different plays by country, monopoly countries and so on, that you've got to be very flexible and you've got to be willing to get into a market and be there for the long pull,'' said Horrigan, who ran the international tobacco company in 1978-1980. ''If it's a joint venture, it's a joint venture. If it's a license, it's a license. If you can produce there, you produce there. If you ship from the United States, you ship. You need to be able to play any one of those cards in the deck.''

Wilson, ever the organization man, set up a reporting and financial system that tied the foreign offices into one central system, based in Winston-Salem. And he and his team began doing whatever it took to gain access to foreign smokers. The results were impressive. From 1975 to 1981, international sales increased more than 150 percent, from $806 million to $2.2 billion. Profits increased fivefold, from $31 million to $178 million.

Reynolds did it piece by piece, country by country. It worked with Imperial Tobacco of England to distribute Imperial's cigarettes in Germany. It signed licensing agreements. It beat Philip Morris to China, selling Winstons and Mores there in early 1980. And it pushed the U.S. government to make cigarettes a trade issue with such countries as Japan that were flooding the United States with imports while keeping American products out.

At times it was a tricky task. One executive suspected of receiving kickbacks was a member of the Palestinian Liberation Organization and kept a gun in his desk drawer. Dee Smith remembers sitting in an office in Geneva with Hermann Haerri, then head of the European/Middle East area, and Sam Witt, at the time Tobacco International's general counsel. The three accused the executive of embezzling $3.5 million. ''His eyes got big and he said, `You're accusing my family of being dishonest,' '' Smith said. ''And we thought, `Hell, we're going to get a letter bomb.' ''

Reynolds forced the executive to pay back most of the money.

Although Reynolds was making progress in its international sales, it wasn't enough. Philip Morris was just as aggressive and quick to move into new markets. RJR wasn't narrowing the gap. Sisel said that the company's successes masked the problem: It would never catch Philip Morris doing business as usual. ''If I look back on my career,'' he said, ''I would say perhaps my biggest regret is not being completely successful in getting across the point that we were operating at a competitive disadvantage and that we should be doing something major and better tap what potential might be out there.''

RJR's chance came in September 1980, when Sticht arranged a meeting with Anton Rupert of Rothmans International. The companies were already doing business together; they had a licensing agreement in New Zealand. What Sticht was proposing was something more sweeping. RJR would take a 50 percent interest in Rothmans, giving Reynolds the clout needed to battle Philip Morris and British-American Tobacco.

What happened next is still unclear and a topic of disagreement to this day. Sticht, Sisel and other executives flew to Cape Town, South Africa, in April 1981 to sign the deal, agreed to after meetings in Madrid and London. But Rothmans had gotten cold feet. RJR had been operating under the assumption that it would ultimately take control of Rothmans. The South Africans say they had understood that the deal was to be a partnership, nothing more.

The door was open, and Philip Morris swooped in. Its chief executive, George Weissman, quickly flew to Cape Town and hammered out a deal to buy about a quarter of Rothmans for $350 million.

It was a global embarrassment, and Sticht was furious. He felt that Rupert had reneged on a deal. He released a series of letters between Rupert and himself in an attempt to show Rupert's duplicity.

What they showed was the cleverness of Philip Morris. The RJR team had structured its proposal to make sure the deal didn't run afoul of Europe's strict antitrust laws. Sticht said that RJR's lawyers had advised them that a true partnership would be illegal. Philip Morris took the opposite approach. It took dead aim at the laws, daring the governments of Europe to oppose the partnership. And they did. Philip Morris would fight over the Rothmans deal for years, but it would eventually get what it wanted, which to a large degree was to keep RJR from getting what it wanted.

''They stole it from us,'' said Long. ''We negotiated for two years and lost it over a weekend.''

Taken Hostage

Henry Ramm had retired in 1970. And perhaps by the end of the decade his warnings about the risks of overseas investment had been forgotten. Events in the Middle East would be painful reminders of his position.

First came Kuwait in 1977, when the government nationalized the oil fields and refinery operations leased by RJR's Aminoil subsidiary. There were more than 30 years left on the lease. With it went $244 million in yearly revenues and profits of about $8 million.

Iran exploded two years later. Even before Iranian revolutionaries stormed the U.S. Embassy and took 52 Americans hostage, insurgents had seized RJR's tobacco factory and unsold cigarettes there. Overnight, one of its biggest markets vanished. Reynolds had sold $95 million of cigarettes there in 1978, and its manufacturing assets there exceeded $70 million.

At first, Reynolds officials were confident that the political turmoil would pass. ''I'd like to see what happens a year from now,'' Witt told the Journal in January 1980. ''After things have had a chance to settle down, I feel that Iran might return to the Western way of doing business -- a re-establishment of normal relations.'' (Winston-Salem Journal footnote)

That didn't happen. Reynolds filed suit in November 1981 with the Iran-United States Claims Tribunal in The Hague, Netherlands, after negotiations with Iran broke down. On Aug. 7, 1984, the company was awarded $49.8 million. That covered the cost of cigarettes seized by the Iranian government. It didn't cover the lost profits and investment the company had made in Iran.

''And in one fell swoop our international tobacco earnings were hit to the tune of $50 million,'' Horrigan said. The company started a concerted effort to expand its base by spreading its earnings over more countries. ''We were never going to have another Iran that would impact so dramatically on the company that you can't recover from it,'' Horrigan said.

That thinking would be ignored. In the 1990s, RJR's international business would roll the dice again, this time in the former republics of the Soviet Union.