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Indonesia''s Kretek Development Under Great Pressure Source from: Tobacco Asia 09/29/2014  Indonesia has plenty to worry about when it comes to kretek, the indigenous cigarette that blends tobacco primarily with cloves and clove oil. An already hostile international environment cranked up the pressure with a new EU directive that includes bans on flavored tobaccos, which adds to Indonesia's ongoing dispute with the US at the World Trade Organization (WTO). And, in developments at home, hundreds of thousands face potential job losses in a changing Indonesian landscape.
Despite the bumps, domestically, at least, the sector overall looks set to continue the extraordinary success that led in just a few decades from a small cottage industry to a giant that enjoys the unique position of being an indigenous product that is far more popular than white cigarettes. The company is owned by Philip Morris International (PMI), who acquired a controlling stake in 2005. The surprise of the closure was compounded by the fact that the Jember plant was only one year old. So what had changed in such a brief period? Sampoerna says it opened the plant on the back of strong sales of kretek. Corporate affairs director Yos Adiguna Ginting explained that: "In 2010, as many as 74 billion sticks of kretek were sold. The next year, it rose to 79 billion sticks and finally to 80 billion sticks in 2012." But the bottom fell out, with 2013 figure of 74 billion sticks being no better than 2010. Sampoerna's share of the Indonesian kretek market dwindled from 11.2 percent in 2012 to 8.3 percent in 2013, and it continued downwards in the first quarter of this year. During that period the company reported revenue growth of 5% to IDR18.3 trillion (US$1.6 billion) from first quarter 2013. This compared to 13.2% year-on-year growth in the preceding 12 months. Sales of kretek generally remain strong in Indonesia, though, as does the general cigarette market, which is one of the world's largest. Sampoerna, for instance, isn't just the country's biggest cigarette maker, it is also the largest company in any sector on the Indonesia Stock Exchange (IDX), with market capitalization of IDR300.24 trillion recorded in March 2014. Overall cigarette production of 348 billion sticks in 2013 constituted an 11.9% growth from 2012. And around 85% of the country's smokers prefer kreteks to white cigarettes – not solely because of favorable levels of taxation compared to white cigarettes. People just love the taste and experience. The sharp decline in traditional hand-rolled kretek sales indicates the changing tastes of Indonesia's smokers, who are increasingly moving towards machine-rolled as the country becomes more affluent. According to the Association of Indonesian Cigarette Producers (GAPPRI), hand-rolled kreteks, which enjoyed a 32.8% market share in 2009, are now down to 26.07%. Machine-made rose from 59.24% to 66.20% in the same period. Sampoerna said it had been under "heavy pressures throughout 2013" because of "adult consumers changing their preferences". It was the introduction of machine-made kreteks to Indonesia in the 1970s that sparked the clove cigarette's rise to fortune. Before that all kreteks were hand rolled and largely consumed in small rural communities. With the advent of machine-made kreteks, making them appear closer to the "more sophisticated" white cigarette to consumers, they became increasingly acceptable. Kretek had arrived. If the downward trend in hand-rolled sticks continues, the writing could be on the wall for other facilities, including Sampoerna's five other plants in East Java. Suharjo, the secretary general of the Cigarette Industry Public Forum of Indonesia (Formasi) fears the worst. "There is an ongoing evolution," he said. "Now the public prefers machine-rolled cigarettes. If the government does not take steps to anticipate further changes, it is very likely that the whole hand-rolled clove cigarette industry will go down." In response, calls have been made to widen the excise duties between hand-rolled kreteks and machine-made. Support comes from the Industry Minister MS Hidayat, who was reported in The Jakarta Post saying, "The hand-rolled cigarette industry is labor-intensive and distinctive to Indonesia so we need to ensure its sustainability. If the factories shut down and the producers shift production to machine-rolled cigarettes, that will add to unemployment." In the production of hand rolled, pairs of women work together, each pair making over 5,000 cigarettes a day. If the sector does crumble, the outcome will be catastrophic for thousands of families. Countrywide, some 800,000 workers are dependent on the industry at factories such as PT Djarum, in Kudus, which hand roll popular brands such as Djarum Coklat, Djarum 76 and Djarum Istimewa. The excise tax levied per cigarette on hand-rolled kreteks currently runs from IDR80 to IDR 275 (around 2 US cents), and on machine-rolled from IDR245 to IDR375. Regional taxes in some areas of the country also add to the burden.
The hope is the government will respond favorably towards hand-rolled kretek in order to stave off a rise in unemployment figures, which currently stand at 5.7%, or 7.2 million people. The excise tax has risen steadily in recent years, and although the levels are not insurmountable for large companies, the kretek industry has traditionally had many small and medium-sized businesses. GAPPRI claims an astonishing decline in the number of Indonesian cigarette makers from 4,900 to just 800 in the five years until 2013. One thing the government has already done, to the dismay of the industry, is to recently introduce a requirement for health warnings to cover 40% of cigarette packs, including kretek. In the pipeline since 2009, the measure finally came into force in June. Its immediate success was limited, however. Reports emanating from ABC News and others said tobacco companies had largely ignored the deadline. In June, Indonesia's Food and Drug Monitoring Agency revealed that although the 672 tobacco companies nationwide had been presented with a choice of images to use 12 months prior, they had registered images for only 409 of 3,300 brands among them. Sampoerna said it still had to sell existing stock. A company spokesman, Tommy Hersyaputera, was quoted as saying, "We believe the government will implement the regulation consistently and fairly, so as to realize a climate of healthy competition among cigarette manufacturers, as well as providing clear information about the impact of smoking on health." Kretek is also coming under pressure internationally with more restrictions on cigarette flavors. The new EU Tobacco Products Directive, which came into force in May, includes a ban on flavored cigarettes. Member states have two years to introduce the legislation. And in the US the sale of clove cigarettes is already banned under the US Food & Drug Administration (FDA's) ruling in 2009, as part of the Family Smoking Prevention and Tobacco Control Act. However, there is opposition, claiming it is unfair for several reasons to include clove sticks under the US ban. Bramantiyoko Sasmito, brand manager for International Sales at PT Djarum, says, "It seems there is a generalization on the definition of flavors in cigarettes, where in most cases kreteks are being included. But kreteks are different to flavored cigarettes. They are a combination of tobaccos and natural cloves – not clove flavor. They are different to menthol or cherry or chocolate flavored cigarettes. And kreteks have been a cultural heritage of Indonesia since the 1880s." An Indonesian appeal to the WTO claimed, "The burden of that measure fell almost entirely on Indonesia". The WTO agreed that the FDA's measure was unfair, based on the fact the US still allowed the sale of menthol cigarettes. In a 2013 ruling the WTO stated the ban was inconsistent with the Technical Barriers to Trade Agreement (TBT) "because it accords clove cigarettes less favorable treatment than that accorded to menthol-flavoured cigarettes." The panel decided that clove and menthol-flavoured cigarettes are "like products". Despite the WTO stance, clove cigarettes remain barred from sale in the US. An Indonesian spokesman said, "It's baffling how the US, which is always demanding other countries abide by WTO disciplines and regulations, is now unable to correct its policy, which is clearly in violation of WTO provisions". The WTO is now arbitrating on Indonesia's request to suspend import licensing obligations and tariff concessions that it provides to the US under the General Agreement on Tariffs and Trade 1994. According to the Office of the US Trade Representative, Indonesia is the eighth largest export market for US agricultural products. The FDA, meanwhile, is looking again into its position on menthol cigarettes. It has issued an Advance Notice of Proposed Rulemaking (ANPRM) "to take public input [...] to inform its thinking about potential regulatory options". The body says it also plans to support new research on the differences between menthol and non-menthol cigarettes. In response to the US ban, many Indonesian kretek manufacturers upped the export of kretek cigars, which are not banned. According to research published in the BMJ this year, sales of kretek cigars increased in the US by more than 1,400 percent between 2009 and 2012. Related Updates |
