Indonesia Tobacco Sector Brief March 2019
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Indonesia the world highest
By World Health Organization latest data (2016) Indonesia ranked the highest in terms of adult male smoker, at 76,1% of total male population aging 15 years above. Second place occupied by Tunisia at 65.8%, then Kiribati at 58.9%. The trend of smoking prevalence in Indonesia for adult male has been an upward line with 60.6% at the year 2000 dot. This trend has indeed in contrast to what is happening around the world (see Graph 1). Meanwhile, world average of smoking prevalence for male adult was 44.2% in the year 2000 and 34.6% in 2016.
The habit of smoking
Smoking dates back to the early 16th century when tobacco brought by the Portuguese were consumed by the then Indonesian kingdom, and later on by almost all level of society. Indonesia original cigarettes, known as kretek cigarettes, are made with a blend of tobacco, cloves and other flavors. Unexpectedly, in its history kretek cigarettes had been applied to effectively cure chest pains. Be it rumor or otherwise, the news spread and to have leveraged the habit of kretek smoking in Indonesia.
Indonesia has yet to sign the FCTC
In June 2016, the government re-iterated its stance to not to ratify the WHOβs Framework Convention for Tobacco Control (FCTC) currently joined by 183 countries around the world, again with the objective to protect stakeholders involved to produce a cigarette. That Indonesia does not sign the FCTC agreement implies that Indonesian cigarette producers have more flexibility to produce, sell, and advertise their products in the domestic market compared to those which have signed the FCTC agreement. For example, Indonesia sells cigarettes at a relatively cheap price. The price of a pack of Marlboro cigarettes is an equivalent of USD6 in Indonesia, compared to USD19 in Australia. Less regulated excise application permits lower costs and thus a more flexible selling price.
Employment being the main consideration
As an emerging country with a relatively low income per capita, Indonesian government pays focus on figure of employment. The cigarette sector not only involve workers at the factory but also at the clove farms, also those who involved throughout the chain for the product to reach end customers.
In addition, over the years Indonesian government received a significant amount of revenue from excise and other taxes collected from cigarette producers. Last year, excise collected form tobacco related product reached IDR159.7tr or representing 8.2% of total Indonesia revenue (to compare: in 2018, Indonesia health budget was IDR111tr , while deficit of national health insurance program was IDR10tr). (see Graph 2 and 3).
Still, the sectorβs excise scheme did not allow for small and medium cigarette producer to prosper. The number of the cigarette produced has shrunk from 1,000βs in 2014 to only 400 2017, according to government data.
As such, Indonesian government has to create an optimal amount of excise and tax rates so as to protect most vulnerable party in the sector. At the other end, though, the dynamic of the sector has created the highest scale producers to be among those who survived and hence be the mainΒ cigarette players in Indonesia.
Sector product mix
Current product composition in the cigarette sector (see Graph 4) points to 39% consumption of SKM FF (Sigaret Kretek Mesin Full Flavor) or clove-mixed cigarette with relatively higher content of tar and nicotine, 38% of SKM LTLN (Sigaret Kretek Mesin Low Tar Low Nicotine) or clove-mixed cigarette with low tar and low nicotine, 18% of SKT (Sigaret Kretek Tangan), and the remaining 5% is white cigarette. The SKM LTLN segment has gained traction in the last decade that reflect Indonesia young demographic profile, in our view.
Despite declining growth, the highest male smoker in the world
Due to the size of the population, Indonesia ranked highest in the world in term of male adult smoker, despite the declining growth of sales volume over the years (see Graph 5). Meanwhile, at present, 4 (four) main cigarette producers are listed in the Indonesian stock exchange, namely HM Sampoerna (HMSP), Gudang Garam (GGRM), Wismilak Inti Makmur (WIIM),and Bentoel Internasional Investama (RMBA). These companies contribute the most for government revenue in terms of excise duties and related tax collected from cigarette products in Indonesia.
Concluding remark
While at the moment revenue from cigarette sector can not be underestimated, the government should consider extra effort to join the wagon to sign the FCTC, so as to further reduce sticks consumption. At the other end, about the same level of revenue can be extractedΒ from the smaller number of cigarette producers in terms of layers of higher taxes, we argue. Β Β Indonesia coming higher economic growth should Β indeed be reflected also in a higher level ofΒ civilization, in our view.