Indonesian Cigarette Industry

Indonesia was noted as the world's fifth-largest tobacco market. In the country with 50% of population living under $2 a day, cigarettes priced at around $1 a pack, the cheapest in the world. More than 6 of 10 male were smokers, and most smoked clove cigarettes, known as kreteks for the crackling sound they make as they burn. The spice, which is native to Indonesia, added to tobacco, imparting a sweet scent and emitting eugenol, a chemical that numbs the throat. The rich aroma of kretek clove cigarettes was one of the most evocative scents of Indonesia. However, kretek deliver double the nicotine and almost triple the tar of conventional cigarettes, according to a 2002 paper in the journal Pharmacology Biochemistry and Behavior.[1]
In 1950s, the industry was under pressure from the machine made white cigarette, though many smokers remained loyal to kretek due to great a price disparity. The United National Statistical Yearbook 1963 noted that Indonesia produced 21,198 million cigarettes in 1960. This included only machine-produced white cigarette. In the same year, 21,356 million kretek cigarettes and about 1,000 million klembak cigarettes were also produced. Called as collective native cigarettes, kretek and klembak cigarette were produced on simple hand-rollers in which the industry employed around 70,000 workers while around 11,000 employees worked for white cigarette industry.[2]
For the Indonesian Government, tobacco was largest source of revenue after oil, gas, and timber. In 1996, it was about 10% of the total tax revenue, recouping around US$4 billion 1996.[3] Tobacco tax was an easy, reliable form of taxation, a steady, internal revenue, unlikely to suffer from any external shocks, and unlikely to create any sudden crisis, in contrast to the instability of oil revenue and other export orientated products which were subject to the fragile of international shock.

Top Indonesian cigarette makers included Gudang Garam (GGRM) and Handaya Mandala Sampoerna (HMSP), which were among the biggest firms in the Indonesian Stock Market (IDX). During the Asian financial crisis of 1997 and 1998, HMSP expanded to be the first Indonesian companies. With $1.6 billion in sales in 2002, Sampoerna was noted as the most popular blue chips on the Jakarta Stock Exchange.[4] In 2004, the white cigarettes declined due to the minimal marketing activities of international players – such as BAT Indonesia Tbk, PT and Philip Morris Indonesia PT. Conversely, the popularity of kreteks continued to prevail.
In 2006, ‘Mild’ kreteks continued to perform robustly, as an increasing number of regular kretek smokers shifted to mild kreteks. Despite the presence of numerous mild kretek brands in Indonesia offered at lower price points, HMSP’s A Mild succeeded to outperform these brands. This was due to its first-comer advantage and effective mass media advertisements. A Mild was particularly popular in urban centers, such as Jakarta and Surabaya, where consumers were less price sensitive and more concerned about brand image and quality.[5]

In 2008, tobacco industry in Indonesia still played an important economic role, with tax on cigarettes accounting for about 10 percent of government income, while the sector provides millions of jobs. Even though, the government imposed an excise rate of about 40 percent from the maximum cigarette excise tax to 57 percent. Under the existing excise scheme, the government adopted a combination of tariffs, linked to factors such as production volume, retail price, cigarette type and the cigarette-making process.

In 2008, overall volume performance of tobacco products in Indonesia showed a growth decline. This was due to inflated daily living costs as a result of the government’s policy to reduce the nation’s fuel subsidies early in 2008. There was slow economy growth as a consequence of various national disasters in the latter half of the review period. Mass Indonesian consumers were, therefore, impelled to be economy with cheaper alternatives and thriftier consumption.

Since 2005, cigarettes became an expensive indulgence for most Indonesian consumers. This was because of consecutive price increases implemented by the manufacturers as a result of the government’s policy to increase the retail price of cigarettes per stick (HJE), and then again in 2006. Manufacturers and retailers made stringent efforts to dampen and lessen the impact of price increases. However, price-sensitive low-income consumers were forced to both cut back on their daily consumption and seek cheaper alternatives.

Indonesia aimed to lower cigarette production growth to 5 percent in 2009 from about 7 percent growth. It expected production to decrease to 240 billion cigarettes in 2009 from an estimated 247 billion cigarettes in 2008. The country was targeting excise tax revenue in 2009 of 48.2 trillion rupiah ($4.42 billion), an increase of 2.7 trillion rupiah compared to the revised 2008 state budget.[7]

Indonesian cigarette firms would have to pay an additional 7 percent excise tax soon, as the governments seek to curb smoking in one of the world's largest tobacco markets. A new ministerial decree, which would come into effect on Feb 1, 2009, adjusted the retail price range for cigarettes and increase tax costs by an average of 7 percent. The policy was a gradual step towards simplifying the excise schemes. The increase would vary, depending on the previous retail sales price.

In 2009, the country was targeting excise tax revenue of 48.2 trillion rupiah ($4.42 billion), an increase of 2.7 trillion rupiah compared to the revised 2008 state budget. Despite its reluctance to sign the Framework Convention on Tobacco Control (FCTC), Indonesia had a road map to support the convention and aims to limit cigarette output to 260 billion cigarettes by 2020 ($1 = 10,900 rupiah).[8]

[1] JZ Su and Leroux, 2005, Cigarette Ignition Propensity Testing, irc.nrc-cnrc.gc.ca/pubs/rr/rr194/rr194.pdf
[2] Anonym, Clove and Kretek, September 1965.
[3] See SEARO Tobacco Control in Indonesia, see also Adioetomo et al, 2005, Cigarette Consumption, Taxation, and Household Income, World Bank Development Network, siteresources.worldbank.org
[4] www2.kompas.com/business/bursa/0203/14/3760.htm
[5] Tobacco Indonesia, ResearchandMarkets, http://www.researchandmarkets.com/reports/300936/
[6] http://www.wartaekonomi.com/indikator.asp?aid=8208&cid=25
[7] Indonesia cigarette firms to pay 7 pct more '09 tax, Reuters, Wed Dec 10, 2008
[8] Reuter, December 10, 2009. http://www.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUSJAK40198720081210