British American tobacco will peddle cigarettes nearly anywhere on the planet, North Korea included. For the last six years it's churned out millions of...

British American tobacco will peddle cigarettes nearly anywhere on the planet, North Korea included. For the last six years it's churned out millions of them from a factory near Pyongyang to sell to the locals. Much of the revenue from the joint venture with a state outfit lands in the coffers of one of the world's most repressive and vile regimes. But Paul Adams, British American's chief executive, doesn't mind. "Why shouldn't we sell there?" he shrugs from the comfort of his London office overlooking the Thames. "We will sell where it's legal, where we can operate to our own international standards, and where we can make money."

That calculus has helped turn BAT into the second-largest cigarette company in the world by volume. Last year it sold 689 billion cigarettes in 180 markets--more countries, it says, than any of its competitors. In the process, the $18 billion (2006 sales) company increased earnings by 7% to $5.5 billion. Its stock is up 130% in the three years since Adams became chief executive, dramatically outperforming that of its biggest competitor, a Kraft-hobbled Altria (nyse: MO - news - people ).

Smoking has gradually declined in the U.S. and other developed markets for years. Maneuvering around regulation and taxation has been a constant burden. Yet this industry seems impervious to challenges. If anything, tobacco's $246 billion settlement with U.S. state attorneys general may have strengthened the biggest players' grip on the market by raising the barriers to entry for upstart tobacco companies. Moreover, the potential for break-the-bank private litigation has diminished as the slew of lawsuits remains mired in the courts for now. The industry has even turned public health concerns into an advantage of sorts, spending millions each year to portray itself as "socially responsible."

Beyond that, though, tobacco sales are booming in parts of the developing world. More than 5 trillion cigarettes are sold in the world every year. Thanks largely to population growth, Adams projects that figure will hold steady until 2015 or later. Strong economies in the likes of Russia, China and Brazil will create demand for higher-end cigarettes, so Adams is focusing on a handful of premium brands he hopes will become the smokes of choice for the billions in these markets moving into the middle class.

Others have a similar strategy. Roughly 70% of Altria's $67 billion (sales) tobacco business is from outside the U.S. The merger between Japan Tobacco and Britain's Gallaher Group (nyse: GLH - news - people ) will give the new company, the third largest by volume, access to places like Russia, one of the world's largest markets. But BAT has potential advantages: First, it hedged its bets in the tricky U.S. market four years ago by selling its Brown & Williamson subsidiary to R.J. Reynolds. BAT is now merely an investor in Reynolds. Second, the company has vast experience in emerging markets, itself having emerged from an agreement a century ago between the British outfit Imperial Tobacco (nyse: ITY - news - people ) and American Tobacco to stay away from each other's domestic markets. By 1903 this new business, British American Tobacco, was in China. It was selling smokes in India two years later. It entered Indonesia in 1917 and Latin America soon after.

Today two-thirds of BAT's business comes from outside Europe; its biggest markets are in Russia and Brazil. But one pitfall of this strategy was that over time BAT ended up with stand-alone companies in dozens of places. In 2003 then chief executive Martin Broughton began to rein in the corporate empire, centralizing seed purchasing and back-office operations in London and eliminating factories. Broughton left to join British Airways (nyse: BAB - news - people ) as chairman, but his successor, Adams, continued the centralization. As a result the company has saved $1 billion so far.

Adams, 54, can trim but is also very much a marketing guy, a veteran of Pepsi (nyse: PEP - news - people ) and Colgate-Palmolive (nyse: CL - news - people ). He knows that the key to growth for any consumer goods company is innovation, and to get smokers to upgrade to his higher-priced brands he decided to offer something a little different, mostly in the packaging. For the Pall Mall brand, he jettisoned the standard rectangular box (with its sharp corners) in favor of rounded edges. For Lucky Strike he opted for a flip-top box, akin to the clamshell style of a mobile phone. "It is seen to be different," he says. "It is seen to be premium."

In Russia, where BAT faces intense competition from market leaders Altria and Japan Tobacco-Gallaher, it added details to the boring white-and-blue package on its Kent brand and now it looks more like an iPod. John Taylor, who heads the Russian business, says another brand had cheesy laser beams on the pack that might have worked years ago but would look passe now. Taste mattered, too. Taylor says that even outside the big cities Russians are starting to trade up from the old Soviet sticks. So BAT introduced a filter it says gives a smoother taste, and in Moscow a new segment of its superpremium Vogue brand tastes like a regular cigarette but gives off a blackberry, orange blossom or sandalwood odor. With few regulations and a historically smoker-friendly (cough!) environment, Taylor expects profits to treble in ten years. "Russians love to spend, God bless 'em," he says.

BAT's boldest experiment may be in South Africa, where it has introduced a kind of smokeless tobacco called snus, the Swedish word for snuff. Popular in Sweden but for now nowhere else, a snus is a sachet filled with a gram of tobacco that the user lodges against the upper lip and discards after about 20 minutes. The nicotine enters the bloodstream through the lining of the mouth. bat's competitors are also exploring the possibilities with the product, rolling it out in test markets in the U.S. Snus juices can be swallowed, making it arguably more palatable to women and less offensive to bystanders.

David Crow, who runs the South African business, says he spends most of his time trying to persuade regulators and parliamentarians that snus is less harmful than cigarettes and could reduce smoking. In the meantime he moved snus into 700 Pretoria and Johannesburg outlets and discovered markets among miners and office workers unable to smoke in their workplaces.

The six biggest tobacco companies now have half the world market, excluding China. BAT is still looking at potential acquisitions, including a number of state tobacco units that are likely to privatize in the coming months and years. One place it can't go is dictatorial Burma, where the British government has asked it to withdraw. But the big gap in BAT's world reach is China. It was forced out of the country at the beginning of the Cultural Revolution, and today the state monopoly, China Tobacco, chokes off supply by foreigners. That trade barrier causes much anguish at BAT, because one-third of the nation's 1.3 billion people smoke, making it by far the world's largest tobacco market. BAT can now send only 1 billion sticks per year into China--a market of 1.8 trillion sticks. But Adams says membership in the World Trade Organization may force China to open up at some point: "You can only be an island fortress for so long."

Smoke 'Em If You Got 'Em

Smoking is declining in most of the developed world. But the World Health Organization and industry analysts say developing markets will help keep the tobacco industry strong.

1/3 China's share of global cigarette sales, by volume, but mostly off-limits to imports.

200% Increase in cigarette consumption in developing world between 1970 and 2000.

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