After China, Indonesia is the second-largest cigarette market in Asia. Given that the Indonesian population numbers over 255 million and around two-thirds of Indonesian men consume tobacco-related products, it implies that there exists a huge market. The Tobacco Atlas states that there are 53.7 million active adult smokers and 2.6 million active youth smokers in Indonesia. These figures make Indonesia the third-largest cigarette consumer (after China and Russia). It is estimated that an Indonesian smoker uses about 5 - 7 percent of his/her monthly income to purchase cigarettes or other tobacco-related products.

Meanwhile, the World Health Organization (WHO) claims that a much bigger portion of the Indonesian population can be labelled 'smoker'. The WHO stated that there were 95 million smokers in Indonesia in 2015, and - more alarmingly - 20 percent of the Indonesian youth were categorized as smokers, while WHO research also indicates that the country's youth start smoking younger and younger. In fact, Indonesia's cigarette manufacturers are specifically targeting the nation's youth; a source of income for decades to come. It should also be pointed out that there are millions of passive smokers in Indonesia.

Another factor that supports cigarette consumption in Indonesia is that citizens have easy access to cigarettes, not just because of the wide distribution network that makes cigarettes available in all corners of the archipelago but also because of the relatively low price that is charged for a package of cigarettes. Nowhere on earth a package of cigarettes is as cheap as in Indonesia. On average, a package costs USD $1.4 a piece in Indonesia.

The raw materials that are required for the manufacturing process of cigarettes are mostly domestically-sourced, implying that foreign exchange volatility has limited impact on prices set by Indonesian retailers (this is also why the recent economic slowdown had a relatively limited impact on the nation's tobacco industry). Mostly domestically-sourced materials in combination with Indonesia's cheap labor costs make the tobacco industry's production costs low. Therefore, even the poorest Indonesians can often be seen smoking.

The kretek cigarettes are tremendously popular among Indonesian smokers. As about 85 percent of all smokers in Indonesia prefer kretek cigarettes over white cigarettes, these clove cigarettes are the clear favorite among Indonesia's smoker community. Kretek - a trademark of Indonesia - is a clove cigarette that consists of tobacco (70 percent) and ground cloves, clove oil as well as other additives (30 percent). Machine-rolled kretek cigarettes contribute around 75 percent to the total cigarette supply in Indonesia, while hand-rolled cigarettes account for nearly 20 percent.

The table below shows that the production rate of cigarettes in Indonesia grew continuously (pointing at rising cigarette consumption in Southeast Asia's largest economy) with the exception of 2015 when the nation's cigarette production fell 5.4 percent on a year-on-year basis to 336 billion cigarettes. This decline was attributed to people's weakening purchasing power amid the nation's economic slowdown and the higher tobacco tax. In December 2015 Indonesia's Industry Ministry said it expects the nation's cigarette production to rise to 524 billion cigarettes by 2020. There are around 700 cigarette manufacturers registered in Indonesia. However, only 200 to 300 of these companies are active.

Cigarette Production in Indonesia:

Year Cigarettes
2015 336 billion  -5.4%
2014 355 billion  +3.8%
2013 342 billion  +4.9%
2012 326 billion  +2.2%
2011 319 billion  +7.8%
2010 296 billion      -

Source: Gabungan Perserikatan Pabrik Rokok Indonesia (GAPPRI)

Meanwhile, Indonesia's cigarette exports have declined in recent years. However, exports contribute little to Indonesian tobacco producers' sales and profit figures and therefore the declining export number is not a key issue.

Indonesia's Key Players in the Tobacco Industry

The largest tobacco company in Indonesia - and overall one of the largest companies in the country - is HM Sampoerna. This company, which controls about 35 percent of the tobacco market in Indonesia, was sold to global cigarette and tobacco giant Philip Morris in 2005 (the New York-based firm controls a 92.50 percent stake). Therefore, HM Sampoerna is also the company that distributes the Marlboro brand, the world’s best-selling cigarette brand, in Indonesia. Other well-known brands of HM Sampoerna include Sampoerna Hijau, Sampoerna A Mild, and the legendary “King of Kretek” Dji Sam Soe. HM Sampoerna listed on the Indonesia Stock Exchange (IDX) in 1990. It is one of the top companies in terms of market capitalization on the IDX.

The second-largest tobacco company in Indonesia is Gudang Garam, controlling around 20 percent of the tobacco market. This company is also positioned within the top ten of largest companies listed on the IDX in terms of market capitalization.

Other key cigarette manufacturers - also listed on the IDX - are Bentoel Internasional Investama and Wismilak Inti Makmur. Two non-listed cigarette manufacturers that play a significant role in the industry are Djarum and Nojorono. Together, the six above-mentioned companies control Indonesia's tobacco and cigarette market.

Health Impact Tobacco Consumption: Jeopardizing Indonesia's Demographic Bonus

Widespread consumption of tobacco products in Indonesia implies negative consequences for the general health of the population. This also jeopardizes the fruits of Indonesia's demographic bonus. Indonesia is blessed with a large and young population (around half of the population is below the age of 30) and therefore the country contains a - potentially - large productive group of people that should boost the country's economic growth in the next two decades (a recent World Bank report sees an ageing Indonesian population after 2040).

This large, productive population is a valuable asset to the economy provided it can be absorbed by employment opportunities, enhance their skills, and remains healthy. Health is important to remain productive. Moreover, physical illnesses (such as heart diseases) cause economic costs that need to be carried by the government and society. Therefore, many institutions say the government needs to raise efforts to combat widespread smoking in Indonesia. However, the tobacco industry is also a great source of income for the government through excises and taxes. Furthermore, a growing tobacco industry also impact positively on other businesses. For example, Indonesia's media institutions obtain a significant part of their revenues through tobacco advertisement. Interestingly enough, several big media institutions in Indonesia are owned by politicians (or politically-linked businessmen) and therefore it is understandable that the government is not that eager to combat smoking in Indonesia in a more fiercely way.

Cigarette smoke inhaled by active smokers contains about 4,000 chemicals and is associated with at least 25 diseases in the human body.

Indonesian Government's Stance Toward Tobacco Industry

The Indonesian government is facing a dilemma: to curtail tobacco consumption in order to enhance people's health or miss out on additional tax income from the tobacco industry. As such, the government seems to take a 'middle-of-the-road approach' regarding its stance toward cigarette consumption. On the one hand it has implemented measures to discourage smoking but on the other hand it has refrained from implementing several key policies that would undermine consumption of tobacco in the nation. For example, Indonesia is one of the few Asian countries that is yet to ratify the World Health Organization (WHO)’s Framework Convention on Tobacco Control (FCTC). The FCTC mandates strict limits on tobacco advertising, sponsorship, production, sale, distribution and taxation in order to protect the present and future generations of people from the devastating health, social, environmental as well as economic consequences of tobacco consumption and exposure to tobacco smoke. Obviously, Indonesia's tobacco companies have objected to this document.

However, the government has also implemented various measures over the past couple of years that were aimed at curbing cigarette consumption in Indonesia. For example, scope for cigarette advertisement has been curtailed (but not prohibited), graphic warnings on cigarette packages have become mandatory, and the government raised excises on tobacco-related products more than once in recent years. Indonesia's larger cigarette manufacturers, those that control a large portion of the market, are expected to cope more easily with such tougher anti-smoking policies compared to the smaller ones as the larger companies have well established brands, better liquidity, higher cash reserves, the capacity to offer new innovative products and are more successful in curbing operational costs.

Updated on 31 May 2016