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Bumps on Indonesia's Tobacco Road SURABAYA - Every afternoon at 4:30, the thousands of women who roll clove cigarettes for Hanjaya Mandala Sampoerna file out of the company's three factories here, the pungent aroma of cloves clinging to their uniforms as fast as the company logo. For anyone who has visited Indonesia, nothing evokes memories of the trip like the smell of those cigarettes, the lingering odor of cloves blended with tobacco serving as a sweet, but toxic, national perfume.
More than 6 of 10 Indonesians smoke, according to official estimates, and most smoke clove cigarettes, known as kreteks for the crackling sound they make as they burn. Even so, 2003 has not been good for Sampoerna. The company, which makes the country's most expensive kretek, said in September that it had sold 8.1 percent fewer cigarettes in the first half of 2003, sending net profits down 10 percent, to 796.2 billion rupiah ($93.8 million).
"We're not expecting any growth in profits this year," said Alex Wreksoremboko, a spokesman for Sampoerna. Instead, the company is just trying to keep profits steady. "And even that is getting hard," he said. So far, Sampoerna said it had not had to lay off any of the 21,000 women who roll its cigarettes. But higher taxes are excluding cigarette makers from what is otherwise a retail boom, analysts say. Strong consumer spending is driving up sales of everything from cars and motorcycles to shampoo and noodles.
Among the dozens of tiny companies around Indonesia that make kreteks, Sampoerna is a giant: it has been making them since 1913 and today is the country's second-largest cigarette maker, behind another family-run company, Gudang Garam. Sampoerna's hometown, Surabaya, is the Winston-Salem of Indonesia, and the company's posters, billboards and banners are virtually everywhere.
Though the Asian financial crisis of 1997 and 1998 dented sales, Sampoerna emerged largely intact, one of the first Indonesian companies able to sell bonds to investors again when the crisis subsided. With $1.6 billion in sales in 2002, Sampoerna is one of the most popular blue chips on the Jakarta Stock Exchange.
Sampoerna also has the distinction of making one of Indonesia's oldest and most expensive kreteks: Dji Sam Soe, a hand-rolled, unfiltered cigarette that is smoked more like a Cuban cigar. "They are the Rolls-Royce of cigarettes," said Heriyanto Irawan, head of research at UBS Securities Indonesia. The company hires only women to roll them, saying that men lack the patience to roll thousands of identical cigarettes a day.
Since Sampoerna's founder rolled the first Dji Sam Soe, his descendants have introduced a panoply of brands intended to appeal to evolving habits, including a filtered kretek called A Mild, with less tar and nicotine. But Dji Sam Soe remains Sampoerna's best-selling brand, with 51 percent of the company's total sales in the second quarter of 2003.
Kreteks are potent. Each Dji Sam Soe contains twice the nicotine and triple the tar of a conventional cigarette. And though Dji Sam Soe is favored by smokers across Indonesia, kreteks are an indulgence of the working class, with at least a third sold one by one. Most middle-class Indonesians, if they smoke at all, smoke Western-style cigarettes, analysts say.
Indonesia's estimated 140 million smokers consumed 215 billion cigarettes in 2002. Indonesia's Health Ministry estimates that 57,000 Indonesians die of smoking-related diseases every year, and the government has promised the World Health Organization that by 2005 it will place restrictions on cigarette advertising and on smoking in public spaces.
The government has been raising its cigarette excise tax steadily over the last few years, but that tax is intended to raise money, not discourage smoking. Indonesia is struggling to fill a budget deficit it projects will amount to 2 percent of gross domestic product in 2003. Smaller companies are taxed at lower rates, and, to protect jobs, hand-rolled kreteks are taxed at a lower rate than machine-rolled ones.
Still, the tax on hand-rolled kreteks made by large producers like Sampoerna has risen roughly 30 percent since 2001, earning the government 15.7 trillion rupiah ($1.9 billion) in 2002. The tax on cigarettes now accounts for roughly 10 percent of government revenue.
Cigarette makers and distributors have absorbed much of the tax increase, so the average street price has risen only about 10 percent, said Ferry Wong, an analyst at BNP Paribas Peregrine in Jakarta. Still, the increase has forced many poorer Indonesians to smoke less or to switch to cheaper brands, a trend that has cost more expensive cigarettes like Dji Sam Soe market share.
Revenues from the excise tax have suffered, as well, falling 40 percent below the government's target in the first half of 2003 as sales dropped. Amid an industry outcry, the government has indicated it will not increase taxes again in 2003. "The concern is that if they keep doing this, it will backfire in terms of tax collection," said Tjandra Lienandjaya, head of research at G. K. Goh Securities, a Jakarta brokerage firm.
But even better news for Sampoerna and its competitors, analysts say, is likely to come with elections in 2004. Political parties typically pay poor citizens up to 50,000 rupiah each (about $6) to attend rallies. That extra spending money almost always translates into increased spending on small luxuries, said Mr. Wong at BNP Paribas Peregrine.
So the women at Sampoerna's fragrant factories may have little cause for concern about their jobs.

Posted in General @ 10 October 2003 00:02 CET by Jeroen · 'Blog' RSS feed · permalink

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