RE-ENGINEERING THE DRUG BUSINESS

The vial of heroin lands in my lap, and for a few uncomfortable seconds, as
an undercover police officer and a very jittery drug dealer both grope my
midriff, I worry someone will panic and go for his gun.

The dealer is shouting -- for his money, for us to hurry -- peppering his
exhortations with unprintable expressions. He looks no more than 20, with
baggy trousers, high-top sneakers and a Baltimore Orioles baseball cap
perched at a rakish angle. His grasping fingers, I can't help noticing, are
bejeweled, like those of the rap artists one sees on MTV videos.

Lost in the chaotic exchange, and now rolling on the littered floor of the
unmarked police pickup truck, is the small vial of heroin. It contains a
milligram of opiate in fine powder form and is sealed with a color-coded
plastic cap. The top is pink in this instance, but it's also available in
an assortment of other hues, each denoting a variation in purity and price,
to tap the widest possible customer base. If that sounds incongruously like
something out of an M.B.A. textbook, that's because it is: the strategy is
called microbranding, and it is the reason so many different varieties of
Coca-Cola sit on grocery shelves these days.

The pink-top I have just clumsily purchased has its particular niche, or
target market: the ''kids from the counties,'' as middle-class teenagers
from the suburbs are known in Maryland. They are the same trendy audience
that advertisers slaver over, and Baltimore's inner-city dealers have
tailored the pink-top to their finicky needs. The product is just strong
enough so that it can be snorted -- all the rage nowadays -- yet, at $20,
cheap enough that it won't make too much of a dent in its average
customer's weekly allowance.

Beneath its veneer of violence, narcotics trafficking is a surprisingly
sophisticated industry, marketing-driven just like any consumer-products
business. Only illegal drugs are a bigger business than most, generating
global revenues in excess of $400 billion annually, according to a United
Nations study. From source to street, pushing drugs shares many common
elements with hawking soda pop or cigarettes. It requires lots of working
capital, steady supplies of raw materials, sophisticated manufacturing
facilities, reliable shipping contractors and wholesale distributors, the
all-important marketing arms and access to retail franchises for maximum
market penetration.

Just as in most sectors of the economy, innovation and technology are
engines of growth. New uses of old products like heroin, or the
introduction of synthetic drugs like methamphetamine and Ecstasy, keep pace
with the changing demands of the marketplace, redistributing income from
traditional profit centers like marijuana and cocaine. As in the automotive
industry, different source nations compete in the global arena, with
producers popping up in one country as quickly as they are pushed down in
another. Occasionally, aggressive upstarts catch complacent giants
unawares, as the Japanese did with Detroit carmakers in the 1980's.

The principal difference between the narcotics trade and legitimate
commerce, of course, is that the drug business must operate in the shadow
of the law. This throws the entire organizational chart out of whack.
Transportation becomes paramount, consolidation and vertical integration --
those cherished buzzwords of merger-hungry multinationals -- impossible. As
a result, the narcotics industry has adapted what might be called the Osama
bin Laden approach to management: base your operation in remote safe
havens, the more war-torn and chaotic the better; stay small and shifty;
use specialized subcontractors or freelancers on a need-to-know basis; vary
your routes and routines whenever possible; and most important, always
insulate yourself with plenty of expendable intermediaries in case someone
gets caught and talks.

Sept. 11 and its new world of heightened border controls has made
decentralization doubly important for international smuggling networks, be
they Chinese, Colombian, Turkish or Nigerian. Ever since the big Cali and
Medellin cartels were wiped out nearly a decade ago, virtually the entire
narcotics trade has radically slimmed down. With the added pressure of 9/11
security measures, drug kingpins have adopted the mantra of their more
enlightened corporate cousins, that size does not necessarily create
efficiency, and that to survive you have to stay nimble.

Heroin is the perfect drug for the new age of small-batch manufacturing and
decentralization, a high-value-added commodity where a little goes a very
long way. In fact, it's so well suited to the changing times that many
cocaine traffickers are retooling their production lines to include heroin
and joining the global trend toward leaner, meaner, terrorist-style operations.

The restructuring is helping the business survive what could otherwise be a
difficult period. Despite the military and security measures taken to fight
international terrorism and shore up America's borders, Heroin Inc. has had
a remarkably good fiscal year. The industry has managed to sustain gains
made during the boom of the late 1990's, largely shrug off 9/11 and make
further inroads in cocaine markets in the United States. Supplies in
America are at an all-time high.

European operations are thriving as well. The Taliban's 2000 ban on poppy
cultivation in Afghanistan has had little effect on the bottom line, with
existing stockpiles and rerouted deliveries from Southeast Asia more than
making up for the temporary shortfall. And the European sector is looking
forward to a strong year in 2002. Now that the Taliban has been routed,
bumper harvests are projected for Afghanistan. Elsewhere, analysts predict
that Colombian distributors will continue their ambitious expansion plans
in the eastern United States. And China's entry into the World Trade
Organization is expected to further open a vast new market for both
domestic consumption of heroin and its transit to other countries.

The only uncertainty clouding the business's outlook is the long-term
effect of Sept. 11. In the post-9/11 era of linking drugs with terror, of
beefed-up border security and improved communication between international
law-enforcement agencies in both intelligence-gathering and interdiction,
the industry is likely to grow even more diffuse. Power will continue
shifting from remote producers to highly specialized smuggling
subcontractors, and outsourcing in general will become the crucial factor
to survival and success. The signs of the industry's new business model can
already be seen at the very earliest stages of heroin production, in the
distant and troubled lands where poppies grow.

The men with guns and gold watches live down in the valleys below. But it
is high in the mist-shrouded mountains along the border between China and
Myanmar, as Burma is now known, where the monsoon washes away roads linking
lonely villages without electricity or running water, that heroin begins
its long journey to America.

By the time it reaches the streets of Baltimore, the world's most powerful
narcotic will have traveled through half a dozen countries, soared at least
5,000-fold in price and changed hands a hundred times. The first fingers to
touch it, though, belong to a slender 36-year-old mother of seven.

Xiamin Dwan Swan and her husband, Ju -- like the other 40 families who live
in this hilltop hamlet in Myanmar -- have been farming opium for
generations, ever since the British introduced poppy cultivation to these
parts more than a century ago. It's not a lucrative living, judging by the
straw huts, mud floors and barefoot children, but it is the only one that
the residents of Chaw Haw have ever known.

The ritual begins every September, when the steep fields are burned and the
poppy seeds scattered. They thrive in these altitudes, just about the only
crop that does, but it is not only a quirk of climate that allows them to
do so. A key competitive advantage of this rugged landscape is that it lies
beyond the reach of any law-enforcement agency. As is the case in the
world's other opium-producing regions -- the guerrilla-controlled jungles
of Colombia, the lawless fiefs of Afghanistan -- central authorities have
no say here. Power is exercised by renegade insurgent groups with prickly
notions of territorial sovereignty, not to mention private armies 15,000 to
20,000 strong.

By February, Xiamin Dwan Swan and her husband begin the harvest by scoring
each poppy pod with a needle-like knife. A creamy gum oozes from the cuts,
and once it turns black it is scraped off with a crescent-shaped tool that
has been in her family ever since she can remember. It is painstaking work,
and for their labor the Dwan Swans earn $600 annually, barely enough to
feed their children, three pigs and two ornery dogs. Brokers come from the
valley in early March to purchase the raw opium gum, which sells for about
1,500 yuan per vis -- the equivalent of about $135 a kilogram. (A vis is a
unit of measure equal to 1.6 kilos, or about 3 pounds.)

''I don't know who buys our harvest,'' Xiamin says, which is the smart
answer, but probably not true, given that she and her husband have most
likely been dealing with the same broker for the past 20 years. Nor does
she claim to know what happens to her harvest once the brokers collect it
from Chaw Haw and other villages. This is probably true, since refineries
buy their opium gum from the brokers rather than risking exposure by
dealing directly with hundreds of separate suppliers.

That is just the first of many layers of insulation that characterize the
heroin trade and must be factored into the cost of doing business. For
their services, the brokers, usually tribal elders, charge a 20 percent
markup, sometimes more if they have lent villagers money in anticipation of
their crop. In Helmand Province in Afghanistan, for example, some farmers
grew so indebted during Mullah Omar's fatwa banning poppy cultivation that
for a time after being liberated by American forces, they were selling raw
opium to creditors for as little as $35 per kilogram. (That short-lived ban
temporarily toppled Afghanistan from its nearly decade-long dominance among
global opium producers, allowing Myanmar to briefly claim the dubious
title, with up to 60 percent of the world total. But once the final tallies
are in for this year's harvest, Afghanistan is once again expected to
regain the top spot, followed by Myanmar, Colombia and Mexico.)

Unlike poppy cultivation, refining is a complicated, capital-intensive
process, limiting the number of players with the financial wherewithal to
participate. This phase of the business is controlled mostly by the Wa,
Kokang and Shan warlords, who run rebel states within Myanmar. ''They tax
it, or receive money for protection,'' says Kyaw Thein, a Burmese brigadier
general. Indeed, ask a Wa official about opium, and he'll rattle off his
town's yields as if he's quoting from the municipal budget. ''Four
thousand, six hundred vis,'' says Lu Kyar Shin, a Wa mayor who sports a
Rolex and a sidearm. ''Down from 10,000 vis a few years ago.''

Like the cocaine labs of Colombia, Myanmar's heroin refineries are
temporary facilities buried deep in the jungle. They are set up to fill
specific orders and can be quickly struck down in case the heat is on. But
that only happens occasionally, when central authorities stumble on a
refinery that falls within their territorial jurisdiction.

Burmese officials proudly display the precursor chemicals seized in one
such recent raid. The materials stand stacked in neat rows of blue and
white industrial drums, filling a courtyard lined with papaya trees and
barbed wire: 900 gallons of calcium hydroxide needed to cook raw opium into
morphine, the first stage of the refining process; liquid ether smuggled
into Myanmar by Indian networks; and Chinese-made ammonium chloride, which
transforms the morphine into the lower-grade No. 3 heroin, or ''brown
sugar,'' as it is popularly known; and finally, out front in a place of
honor, 150 gallons of hard-to-come-by acetic anhydride, the key ingredient
to producing the 90-percent-pure No.4 heroin destined for American and
European markets, the notorious China White.

Though China White is often packaged by refiners in 700-gram bricks, known
as units, the universal measure in the global narcotics business is the
1,000-gram kilo. A kilo that will ultimately fetch in excess of $200,000
(wholesale) in New York City costs as little as $2,500 in Myanmar. That, at
least, is what Saikyaw Myat, an unemployed stonemason, was expecting to get
for it before being busted by an undercover agent. Ma Lwan Gyi and her two
young friends, Ma Kaing Hland and Ma Ban Mong, were nabbed in a similar
sting. They had each been promised $20 to deliver a kilo of the famed
Double Lion brand into town. All four now sit in leg irons in a stifling
corrugated-steel prison, a labyrinth of low wooden cages constructed from
thick teak bars, forbidden to move from the lotus position, where they are
to contemplate the error of their ways for the next 10 years.

The modest price of the China White they carried illustrates how in the
overall cost structure of the heroin industry, refining is not a
particularly large profit center. That's because the risks of interdiction
within Myanmar are too low to factor significantly into the final price.
The markup on the finished product is about 20 percent, in line with other
forms of contract manufacturing in Asia like semiconductors or cellphones,
where the real money goes to designers and distributors.

Once the sourcing and processing stages are complete, isolated countries
like Myanmar or Afghanistan lose their competitive advantage. ''The Wa or
the Kokang don't have the sophistication or international networks to get
their product to market,'' explains Maj. Win Naing, who heads the narcotics
task force in the bustling northern Myanmar border town of Muse. ''They
leave that to foreigners.'' Much the same holds true with Afghan growers,
who despite being the source of 80 percent of the heroin in the $12 billion
European market, earned at most only a modest $56 million from opium sales
last year, according to a United Nations survey.

The real profits in heroin, to borrow a term from the embattled accounting
industry, are all downstream -- in transportation and distribution.

To reach global markets, heroin leaves Myanmar through two principal
pipelines. With each route, a different set of players, with specific
expertise, is involved. The first, and most used, is north through China's
Yunnan Province to Hong Kong or the free-trade zones around Guangdong.
Chinese smuggling syndicates ply this route, charging as little as $1,000
per kilo to sneak the contraband across the border from Muse to as much as
$10,000 per kilo to get it all the way to Hong Kong. One such group
operated until recently in Muse, where the border with China is a
four-foot-high fence that runs right through the center of town. The
syndicate was headed by a 39-year-old Chinese national by the name of Tan
Xiaolin, who set up shop in a large pink-and-green villa a few hundred
yards from the frontier. Until his arrest last year through the joint
efforts of Chinese and Burmese authorities, he had smuggled more than three
tons of pure heroin to Hong Kong, where different trafficking organizations
with a more international orientation sent it on to Sydney, Vancouver and
the United States. Tan has since been extradited to China and, according to
Burmese officials, sentenced to death.

The harsh penalties handed out in Asia for trafficking do not seem to be a
great deterrent. That, say American officials, is because you can often buy
your way out of jams or simply purchase protection from underpaid local
Communist authorities. United States drug-enforcement officials, however,
concede that the inner workings of the balkanized China pipeline are
somewhat of an intelligence black hole because of spotty relations with
Beijing. Much more is known about the second major route out of Myanmar,
which travels south and then east, through Thailand.

Much as he tries, Mike Carter finds it hard to blend in with the crowd at
his posting in the northern Thai city of Chiang Mai. For one, Carter, a
special agent for the Drug Enforcement Administration, is a very large
individual; well over six feet tall, a close-cropped former marine who went
to college in Texas on a football scholarship and used to maul opponents as
a 250-pound linebacker. Then there is the 9-millimeter Glock tucked into
the waistband of his jeans. And those dark, wraparound aviator sunglasses.

Even though he has picked up Thai and speaks it more or less grammatically,
there's not much chance of passing himself off as a native. So he lurks in
the shadows, behind the tinted windows of his silver Toyota, playing a
supporting role, waiting for the drugs to come across the border.

Today he has brought some cash to entice traffickers, to expedite matters.
It lies temptingly in a green satchel on top of my bag, five million baht,
just over $116,000 at the current exchange rate. It's what's called ''flash
money,'' and it will be shown to a Burmese broker by an undercover Thai
policeman posing as a customer.

The deal is set to go down in Chiang Saen, at the confluence of the Mekong
and Ruak Rivers, where Myanmar, Thailand and Laos meet: the heart of the
Golden Triangle.

''This all used to be poppy country, and 10 years ago there were refineries
everywhere on the Thai side,'' Carter explains as we drive on broad,
freshly paved roads. With all the tour buses and golf resorts around, it's
difficult to imagine Thailand as a major heroin producer. But it once was a
world leader, until the economy picked up and pressure from the
international community forced traffickers to relocate across the border in
Myanmar. Much the same happened in Pakistan, Turkey, Bolivia and Peru in
the 1980's, as successful eradication efforts and increased standards of
living forced production to shift to the more lawless and impoverished
corners of Afghanistan and Colombia. That fluidity is another key feature
of the rapid-reaction narcotics business: push it down in one place, and it
simply pops up somewhere else. In that sense, heroin is truly a global
commodity.

Carter's cellphone rings. It's Col. Dussadee Arajavuth, the head of the
Narcotics Suppression Bureau, or N.S.B., in northern Thailand. The Burmese
broker, he informs Carter, has taken the bait. Now it's only a matter of
time and patience. While we wait, Colonel Arajavuth arranges for me to meet
with one of his prized sources, a foot soldier in one of the warlord armies
that smuggle heroin across the Thai border. We meet in a hotel room in
Chiang Rai, not too far from where the N.S.B. keeps a safe house.

''The heroin leaves the refineries in caravans,'' the informant begins.
''There are usually 50 to 100 people in each caravan. Half are porters
carrying up to 500 units of heroin, the other half are soldiers.'' The
soldiers, he continues, are heavily armed with rocket-propelled grenade
launchers and are provided -- for a fee -- by either the United Wa State
Army or the Shan State Army, insurgent groups that operate close to the
Thai frontier. The final destination is either Thailand proper or
Tachileik, a rough Burmese border town that apparently inspires such dread
that the superstitious residents of Mae Sai, on the Thai side, have erected
a black steel scorpion the size of a tank to ward away their neighbors'
evil spirits.

In Tachileik, brokers like the one Agent Carter is currently trying to set
up take delivery of the heroin, which, because of high transportation
costs, rises in price to $4,500 per kilo. There are approximately 20 such
brokers representing the Wa and the Shan in Tachileik, says the informer.
''Everyone knows who they are.''

[contineued in Part 2 at http://www.mapinc.org/drugnews/v02/n1145/a01.html ]