has flourished in Indonesia in recent years in a wide range of economic activities. When traveling to Jakarta by airplane it is interesting to see the checkerboard pattern of vast shrimp farms with green ridges between the productive water homes for shrimp. Rising export values for petroleum, gold, seafood, and some agricultural commodities enabled Indonesia to have a healthy balance of trade in recent years. Rising purchasing power for many consumers recently bolstered demand for tobacco products.
Philip Morris Invests in Sampoerna’s Factories and Marketing Operations. Putera Sampoerna built up the second largest manufacturer of tobacco products in Indonesia and Philip Morris purchased most of the shares of Sampoerna in 2005. He built up a profitable business in the manufacture of mostly kreteks, with headquarters and a large factory in Surabaya. Output of cigarettes and kreteks by HM Sampoerna increased from 35.6 bn pieces in 2003 to 42.6 bn in 2004. The fast pace of expansion and operating income of about $360 mn equivalent in 2004 apparently made the stock more attractive. Sampoerna has profitable marketing facilities.
Shares for Sampoerna have been active on the stock exchanges in Jakarta and Sarabaya in recent years as reports of advancing sales and strong profits attracted attention. By 2004, Sampoerna accounted for nearly a fifth of the sales of cigarettes and kreteks in Indonesia. The increase of 19.8% for sales in 2004 was dramatic in comparison to the 2.3% to 64.7 bn pieces for Gudang Garam, the leading manufacturer of tobacco products in Indonesia, and the increase of 7.7% to 39.1 bn pieces for Djarum, the third most important producer of tobacco and cigarettes. Sampoerna is expected to become even more competitive with the two other major manufacturers with investments from Philip Morris.
Growth in Sales by Other Tobacco Product Manufacturers Varied. A smaller producer of kreteks and cigarettes also had a rapid growth for sales in 2004. The rise for production by Noyorona increased 58.3% to 5.97 bn pieces in 2004. Output by the manufacturer Bentoel rose 13% in 2004 to 4.14 bn pieces. A combination of many smaller manufacturers had output of about 40 bn pieces in 2004 and approximately 44 bn pieces during 2006.
Demand for tobacco products rebounded in 2006 as higher per-capita income and an advancing overall economy bolstered purchasing power. Efforts to maintain plenty of secure employment opportunities contributed to Indonesia’s policy of keeping some state enterprises while new private firms began operating in the same line of business. This has meant more jobs for the people who relied upon income from jobs and places like estates producing rubber of palm oil. With an abundance of rubber, Indonesia has become a major manufacturer of tennis shoes with a rubber bottom. Multinationals are welcome in various fields. Toyota has a modern facility to assemble automobiles in Jakarta.
A prosperous economy helped to keep sales of tobacco products at a high level in 2006, although tax hikes in 2005 pushed retail prices to a higher level. The higher prices may have hampered prospects for the pace of growth in sales by Gudang Garam, because of its great share of sales of kreteks in the lower price range.
The conversion rate for the Indonesian rupiah had fluctuated in recent years. In March 2007 it took about 9,174 rupiahs to buy one U.S. dollar. Concern about inflation and the eroding value of the rupiah may add to the way some consumers may not hesitate to spend quickly the money they earn. Some urban Indonesians have become wealthy from investments in manufacturing, trade, stock market gains, and real estate.
Philip Morris has been the leading producer of regular cigarettes, called white cigarettes in Indonesia. They are manufactured primarily from flue-cured tobacco, while most kreteks have a high proportion of dark tobacco. Output of white cigarettes by Philip Morris in Indonesia declined 8% in 2004 to 8.37 bn pieces. Production of regular cigarettes by BAT declined 2.2% in 2004 to 5.43 bn pieces.
Sampoerna has some popular kretek cigarette brands, including A Mild and Dri Sam Soe. It has brands at different price ranges to attract a wide set of customers. Exports of cigarettes and kreteks from Sampoerna operations averaged about 6 bn pieces annually during 2002-04, and Malaysia was a major market. That was a major share of total exports of about 22 bn cigarettes and kreteks annually from Indonesia.
Tobacco Industry Important for Indonesia’s Economy. Many self-employed family members operate small stores and kiosks in Indonesian cities where cigarettes, kreteks, other tobacco products, snacks, and soft drinks are sold. An estimated 5 mn people are employed in the tobacco industry and marketing operations in Indonesia. In addition to the three large manufacturers of kreteks, and two major producers of white cigarettes, about 350 smaller firms produce kreteks. Some smaller manufacturers of kreteks include spices in addition to cloves in their products. About a third of the 220 mn Indonesian people smoke.
Machine-made kreteks account for about 57% of output. About 500,000 workers are employed making kreteks by hand, including products with a variety of spices and flavoring ingredients.
Rising Taxes Account for Over Half of the Price for Tobacco Products. Tax collections from sales of tobacco products in Indonesia were estimated at about $3.6 bn, and the level for 2006 was probably slightly higher. In addition to the 40% ad valorem excise tax, a value added tax is imposed, usually about a tenth of the retail price. Prices for white cigarettes increased to an average of about $1.15 per pack of 20. Marlboro is the leading brand sold in shopping malls and stores in Jakarta. Imported cigarettes have not been a significant part of the market recently because of ample supplies of a wider range of brands from domestic sources.
Indonesian Exports of Tobacco Products Face More Competition. More countries in Asia have produced cigarettes for export. South Korea, Hong Kong, and China have become more active in exporting cigarettes to Southeast Asia. This has hampered prospects for advancing shipments to tobacco products from Indonesia to Cambodia, Vietnam, and Thailand, previously more important markets.
Indonesia’s exports of tobacco products reached $183.5 mn in 2001, including about 33 bn cigarettes and kreteks. Indonesia has considerable imports of cut tobacco and tobacco in bulk for blending in the manufacture of certain brands of cigarettes.
Other countries belonging to ASEAN (Association of Southeast Asian Nations) were the leading customers for Indonesia’s cigarette exports in 2001-04. Reduced exports to Asia by 2006 tended to boost the share of total exports going to the United States. Total exports of cigarettes and kreteks from Indonesia declined from a peak of 25.8 bn pieces valued at $157 mn in 2002 to an average of about 22 bn pieces during 2003-06.
Exports of Tobacco Products to ASEAN Countries Recently Declined. The leading destination for Indonesia’s cigarette exports in 2002 was Cambodia, the destination for 9.3 bn pieces. Shipments to Cambodia in 2006 were only about half the 2002 level. Thailand was a market for 8.15 bn pieces in 2004. Singapore was a customer for 3.4 bn pieces in 2002. Exports to Malaysia averaged about 6 bn pieces during 2004-06, compared with 3.2 bn pieces in 2002.
Free trade arrangements through ASEAN helped Indonesia boost exports of cigarettes and kreteks, but they did little to allow greater imports. That appears to stem from the fact that cigarettes made in other ASEAN countries would have a higher retail price than products made locally.
Indonesia Accounted for 99.6% of U.S. Imports of Clove Cigarettes in 2006. U.S. imports of clove cigarettes increased 3.5% in 2006 to 397.8 mn pieces, when Indonesia accounted for 99.6% of the arrivals. U.S. imports of clove cigarettes from Indonesia showed an upward trend in recent years, rising from 190.3 mn pieces in 2002 to the peak of 396.2 mn pieces in 2006. Also in 2006, U.S. imports of other non-clove kreteks reached 5.3 mn pieces, compared with 71,000 pieces in 2005. U.S. imports of white cigarettes from Indonesia declined from 61.7 mn pieces in 2005 to 58.3 mn pieces valued at $417,000 in 2006.
Leaf Production Was Higher in the Past. Indonesia has greater output of both dark and flue-cured tobacco in the past. Total leaf tobacco production declined from 143,700 tons (dry weight) in 2004 to about 127,000 tons in 2005, and remained near that level in 2006. Indonesian farmers harvested about 226,329 tons of tobacco in 2002, including 136,413 tons in East Java, 46,130 tons in Central Java, 4,505 tons in West Java, and 1,852 tons in North Sumatra. Production of cigar tobacco flourished in Sumatra before World War II, but competition from producers in Latin America tended to limit prospects for a rebound in that industry in recent years.
Exports of Leaf Tobacco Drifted Downward between 1998 and 2005. Indonesia’s leaf tobacco exports declined from 46,969 tons valued at $147.6 mn in 1998 to a low of 34,658 tons valued at $71.3 mn in 2000. Indonesia is a source of flue-cured tobacco at prices below $1,800 per ton for manufacturers in the United States, Malaysia, Singapore, and Russia. Rising exports to the United States helped to allow a rebound to about 40,000 tons for Indonesia’s leaf tobacco exports in 2006.
The United States became the leading destination for Indonesia’s tobacco exports when shipments advanced a tenth in 2003 with to 5,075 tons, pushing Belgium into second place. This was the beginning of an upward trend. U.S. imports of leaf tobacco from Indonesia increased 63% to 12,162 tons valued at $19.5 mn for an average price of $1,603 per ton in 2306. Indonesia’s leaf tobacco exports to Russia averaged about 2,300 tons annually during 2004-06.
Some fluctuations have occurred for Indonesia’s sales of dark tobacco to importers with warehouses in Rotterdam, Hamburg, and Bremen. Exports of leaf tobacco from Indonesia to Germany during 2004-06 were about a third below the 3,000 tons shipped in 2002.
Flue-cured tobacco exports averaged about 9,000 tons annually during 2002-05, compared with 5,172 tons in 2001. Production of flue-cured tobacco averaged about 41,000 tons, annually during 2002-04, and during 2006 a rising share of the crop was exported. Exports of dark-air cured cigar tobacco averaged about 15,000 tons annually during 2001-03, but declined as competition from countries in Latin America gained momentum by 2005.
Leaf Tobacco Imports Show Upward Trend. Indonesian imports of leaf tobacco increased from 33,919 tons in 2004 to about 37,131 tons in 2005 and were slightly above that level in 2006. China has become a more important supplier as imports from Zimbabwe blinked out. Brazil increased deliveries of flue-cured tobacco to Indonesia in recent years. Total U.S. tobacco exports to Indonesia declined 36% in 2006 to 2,721 tons, valued at $17.1 mn.