The domestic tobacco industry is facing a downturn in the sale of hand-rolled clove cigarettes, as consumers shift to machine-made ones – a situation that could see job losses in the industry

Dim outlook for hand-rolled clove cigarettes

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Linda Yulisman, The Jakarta Post, Jakarta | Business | Mon, June 02 2014, 12:07 PM

The domestic tobacco industry is facing a downturn in the sale of hand-rolled clove cigarettes, as consumers shift to machine-made ones — a situation that could see job losses in the industry.
Market share of hand-rolled cigarettes has fallen from 32.8 percent in 2009 to 26.07 percent at present. In contrast, sales of machine-made clove cigarettes have risen, leading to an increase in market share from 59.24 to 66.2 percent during the same period.
This year, producers expect sales of hand-rolled cigarettes to increase slightly by 1 percent, below the 4 percent estimate for sales of all types, according to the Association of Indonesian Cigarette Producers (GAPPRI), which represents clove-cigarette manufacturers.
Last year, sales of hand-rolled cigarettes amounted to 90.09 billion, according to data on excise taxes submitted by the industry.
“This situation may ring an alarm bell for producers, leading them to wonder whether production of hand-rolled cigarettes can be sustained,” said GAPPRI secretary-general Hasan Aoni Aziz.
The question mark surrounding the survival of hand-rolled clove cigarettes recently entered the spotlight when Indonesia’s largest cigarette maker, PT HM Sampoerna, decided last week to close its factories in Lumajang and Jember, East Java, affecting more than 4,000 workers.
Without a policy to maintain different excise duties for hand-rolled and machine-rolled cigarettes, more companies may close their operation, Hasan added.
The excise on hand-rolled clove cigarettes ranges between Rp 80 (US$ 0,0069) and Rp 275 per cigarette, while excise on machine-rolled clove cigarettes ranges from Rp 245 to Rp 375.
The excise tax policy has been repeatedly blamed for the declining number of clove cigarette manufacturers in the past few years, as small and medium enterprises could not bear the additional costs from the continual increases in excise.
The number of cigarette makers nationwide fell from 4,900 in 2008 to only 800 in 2013, GAPPRI data reveals.
Sampoerna, whose majority shareholder is Philip Morris International Inc., claims that its market share of hand-rolled clove cigarettes has consistently dropped, from 30.4 percent in 2009 to 23.1 percent last year, despite retaining its position as market leader in the segment.
Abhisam DM, chairman of the Clove Cigarette Community, said that without government intervention, sales of hand-rolled clove cigarettes may tumble further in the next few years, leading to the demise of the industry.
Echoing Hasan, he said different excise duties between hand-rolled and machine-rolled cigarettes should be put in place to help small and medium producers, which did not have the leverage to cope with the taxation.
“In the past, amid the massive expansion of the machine-rolled cigarette industry, the government stepped in by imposing a cap on the production of hand-rolled cigarettes to avert massive layoffs,” he said.
Indonesia’s hand-rolled clove cigarette industry now employs around 800,000 workers, according to GAPPRI.
Industry Minister MS Hidayat acknowledged that the issue of labor was one of his prime concerns because a halt in manufacturing hand-rolled clove cigarettes would also impact the supply chain, from tobacco farmers to cigarette retailers.
“We realize that the demand for hand-rolled clove cigarettes is declining, but even if the market improves, the companies that previously relied on human labor may shift to machines and this would increase unemployment. This is something we will try to address,” Hidayat said.
Surytanto Yasaputra, corporate secretary of Surabaya-based cigarette maker PT Wismilak Inti Makmur, confirmed that the consumption of hand-rolled clove cigarettes had declined during the past decade, but he said he remained optimistic about sales.
“Our baseline in the overall market is still very small; therefore, we see enormous room for growth,” he said.
Wismilak aims to sell around 3 billion cigarettes this year, up by 25 percent from last year, and is eyeing a 40 percent rise in the sale of hand-rolled cigarettes to around 650 million.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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