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Philip Morris International's Most Brilliant Move So Far in 2017

By Dan Caplinger – Jun 28, 2017 at 12:27PM

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This strategic move should get key stakeholders on its side.

Philip Morris International (PM 1.10%) has used the power of the Marlboro brand to build a global empire, and in less than 10 years as an independent company, Philip Morris stock has soared. Yet to many industry watchers' surprise, Philip Morris has foreseen a future without cigarettes, and it's trying to figure out how to sustain the success of its business during a time of rapid and extensive transformation in the industry. The development of heated-tobacco technology has played a major role in Philip Morris' strategic vision, and the early promise of the iQOS system has led the company to make big bets on its eventual dominance among heat-not-burn tobacco products. Recently, Philip Morris made another brilliant move in its development and rollout of iQOS that should help it not only serve existing markets but build new ones more quickly.

What Philip Morris did with iQOS

Philip Morris International has made two major moves with iQOS production in the past month, and both have dramatic implications for the global market. Earlier this week, Philip Morris said that it had doubled its investment in its heated tobacco unit facility in Italy. The Crespellano plant in Bologna was completed in September 2016 and already employs more than 600 mechanical engineers, chemists, and other highly technical personnel. Now, Philip Morris plans to add another 500 million euro to expand capacity at the plant. As a company executive said, "We are now rapidly expanding our capacity to manufacture smoke-free products in order to meet growing demand from adult smokers." That customer base includes an extensive presence in Italy, with Milan having served as an early test market in late 2014 and with Philip Morris having done a subsequent national rollout throughout the nation.

iQOS system.

Image source: Philip Morris International.

The move in Italy came just a week after Philip Morris made an announcement that it would open a second factory toward boosting iQOS production capacity. The tobacco giant expects to invest $320 million in a new high-tech facility in Dresden, Germany. The facility should encompass 80,000 square meters and employ about 500 people once it becomes fully operational in 2019. Germany is a more recent market for Philip Morris' iQOS, which has been available for about a year in test markets that now include Berlin, Frankfurt, and Munich.

Philip Morris has announced additional expansion plans earlier in the year. In March, the company said it would invest 300 million euro toward converting a cigarette factory in Greece to produce iQOS heated tobacco products, creating 400 new jobs and allowing for production to begin this coming January. Combined with its existing production facility in Switzerland, Philip Morris believes that it can boost production capacity to 100 billion units annually by the end of 2018.

Why Philip Morris' plan is brilliant

Philip Morris is a global company, and it knows that it has to keep geopolitical and macroeconomic factors in mind when it makes strategic decisions. By boosting its production capacity through expansion in Europe, Philip Morris hopes to give the region that's still looking at exactly how it plans to regulate and tax reduced-risk products like heated tobacco an economic incentive to encourage the company's growth.

By doing so, Philip Morris has gained support from key leaders. When the company opened its Bologna plant last year, Italian Prime Minster Matteo Renzi was present at the event, praising the company for helping to support economic prosperity in Italy at a time when the country has been going through economic challenges. Similarly, Saxony Prime Minister Stanislaw Tillich had positive comments about Philip Morris' move in Germany, noting that Dresden is likely to become "a hub for the transformation of the tobacco industry and society at large."

When political figures support Philip Morris, the regulatory bodies they oversee are more likely to take economic considerations into account in choosing what restrictions to place on the company. That doesn't mean that Philip Morris will be able to sell iQOS and other products freely without tax or regulation, but it does raise the likelihood that any such impediments will be less onerous than they might otherwise be.

iQOS is destined to be a key part of Philip Morris International's growth strategy for the foreseeable future. As demand rises, there will be more call for added production, and Philip Morris will be wise to continue following this particular strategy in placing future facilities in other major markets where iQOS has the most potential to succeed and flourish.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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