Tobacco Strategy Review
rundint of 14D
Situation preceding decentralization
Until 1985, the Group 'had a Central rtsaareb establishment
ngaged on fundamental research based in Southampton and five
ensag laboratories La the CAC countries,, each concentrating an
applied research and technology. The CAC countries funded the
central R&D programme at Southampton an a turnover-related
formula.
Decentr&lisatiou Plan
The concept agreed La March 1985 was that Southampton should
become integrated wttb NATUX-E (with a responsibility also for
ZATCo companies end that the six laboratories on an equal footing
would carry that part of the Group programme for which they had
particular need and expertise. Any projects not picked up by the
CAC laboratories and not specifically relevant to NATUXE/3ATCa
would be terminated. The Research Co-ordinator would ensure that
in this process any research activity that in hLe view should be
pursued for Group benefit would be identified and justified for
recent ion at Southampton.
Current position
We are uow 18 months Into the new arrangements with the
following results:-
I. The Southampton laboratory Is fully integrated with NATVKX.
Z. Project* from the former Group programme hove been retained,
transferred to CAC's or terminated.
3. 'There has been practically no increase in R&D staff at the CAC
laboratories despite the fact that Southampton lost 120 staff
(it bad been the Intention of the Laboratories to increase
resources but local economic pressures have so far prevented
this).
4. Xach R&D Centre has projects which are Identified as Group-
relevant and each pool& its findings; Rowever, these
activities respond to the perceived needs of its parent
company; practicalix none of this work is done for Group
reasons or benefit.
S. Southampton and Brazil represent exceptions La that they each
retain a proportion of fundamental research projects (and
appropriate staff) that are more clearly -defined as Group
strategic rather Chan company strategic.
Group Strategic Projects
The work In Brazil Is focussed on tobacco processing science 42h*
and to beginning to generate ideas chat have practical -Cho.
application, typical of which is Cho work an tobacco leaf quality C=0
Improvement by processing treatments.
BAT Co LTD - MINNESOTATOBACCOLITIGATION

2
The Southampton programme of fundamental research is long term
but in directed at business goals . Important topics include the
formation and control of individual smoke components which we
anticipate becoming a subject of regulatory intervention,, the
formation, and composition and control of sidestream/aubient
smoke, again increasingly the subject of regulatory interest, and
enhancement of smoke sensory attributes by modifications to
aerosol formation. The latter, which relates to nicotine release
from smoke* is considered a key approach to product taste and
flawour improvement and will be particularly relevant as
regulatory authorities create consumer interest in low tar/regular
nicotine products.
FollowIng the closure of the wain biological activity at
Southampton, a responsibility remains to monitor external
developments in biological testing and this is part of the
Fundamental Research activity. Finally, the kind of basic
research on process science that produced both LPEX, our own
expansion process, and DEER, our new tobacco extrusion/expansion
process, lie within this activity.
The * have been scrutinized by CAC experts since
Project Styx and the specific programmes for the most part
re-directed.
Options for Funding
We have looked at the concept of pooling the total costs of
Group projects (both those described as Group-relevant, but
carried out solely for the parent company's needs, and those
termed Group strategic) across the six centres and redistributing
on a turnover basis - This would call for strong accounting
control and would generate debate over proportions of work truly
defined as Group relevant. Our intention in identifying Group
projects is to ensure maximum communication of information and
this would be 'distorted' If financial considerations were to be
linked. This 'cross-charging' approach was therefore not pursued.
The second option was simply to let 'costs lie where they
fall'; this has considerable merit In view of the fact that
currently, Group relevant projects are simply those responding to
a company's specific interests but of broad value to the Group.
Recogulsing the special situation at Southampton and Brazil,
we should consider a refinement to the costs 'Lie where they fall'
concept. 'The cost of the Brazilian Group programme is LO.55 a
P.&. The costs amounting to approximately L2 a p.a. associated
with the Group fundamental research work at Southampton should be
Isolated since they are not simply attributable to BATUKE or
BATCo. in terms of funding this activity, we 1have the following
options:
co
IC>
all-
BAT Co LTD - MINNESOTATOBACCOLITIGATION

3
To stop tt.ts work and dispose of the facility.
The high calibre of the team at Southampton, coupled with
its flexibility in responding to fundamental and
challenging research needs, suggests that this team
should be retained. It amounts to 6Z of total Group R&D
spend and is still the strongest fundsuental research
resource we have.
2. Disperse the activity to other R&D Centres.
This van examined in A 1985 and, whilat it may. over
many years, be possible to build up this capability in
the other R&D Centres, this Is not possible In the short
term. It was recognised that this is the core work for
which Southampton is best equipped.
3. Seek funding from CAC companies.
Wit!@'the exception of saw, who ate yet to reply, all CAC
countries give full support to the Southampton
fundamental research programme and are prepared to assist
in its funding.
4. Seek BAT Industries (or BATCo funding on behalf of BAT
Industries).
If this were agreed, the responsibility would lie with
the Research Co-ordiaator to ensure that the work
programme is focu-ned and that findings are applied.
Recommendation
1. With one exception (see 3), no cross-charging between R&D
Contres should be considered.
2. The Group Strategic Projects in Brazil valued at EO.55
p.a. should continue to be funded by Souza Cruz.
3. The Group Strategic Projects at Southampton, valued at
L2 m p.a., should be retained, and these costs should be
met by CAC countries on an appropriate formula (see
attached) and the projects monitored by a small C&C
Steering Group.
L
A. L. Beard
ALaIDET C=:)
I 0 th October 1986 -.0
C)o
4=1-
4::1-
BAT Co LTD - MINNFIOTA TOBACCO LITIGATION

M21
The simplest formula for deriving the contributions from the
CAC countries (excluding Brazil) is to divide the L2 a iuto 5
equal shares of to. 4 a, i.e.
NATco 0.4 a (0.7 m)
USA 0.4 a (0.4 U)
Germany 0.4 U (0.4 a)
Canada 0.4 a (0.3 a)
Australia 0.4 a (0.2 n)
In practice, we nay anticipate a settlement from Canada at
0.3 a and Australia at 0.2 a. It Is proposed that the shortfall
is reflected in an increased contribution from BATCo.
ALEIDET
loth Octooer 1986
BAT Co LTD MINNEbOTATOBACCOLITIGATION