Stakeholders in Indonesia’s cigarette manufacturing industry were not amused when the Indonesian government announced its plans to raise minimum prices of cigarettes and to increase the excise tax on tobacco products per 1 January 2020. Reportedly, the central government plans to raise the excise tax on tobacco products by an average of 23 percent, which will then raise the minimum price of cigarettes across categories by an average of 35 percent.

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Although Indonesia's cigarette industry is considered to be a sunset industry (which refers to an industry that has passed its peak or boom periods) there are two factors that may somewhat pause the industry's decline on the short and middle-long term.

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Market share of HM Sampoerna, Indonesia's largest tobacco company, has declined. In the first half of 2017 the company's market share fell to 32.9 percent from 33.4 percent in the same period one year ago. Falling market share is related to the lower production volume of the company as well as falling cigarette consumption of the Indonesian people. HM Sampoerna is controlled by global cigarette giant Philip Morris International.

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Produsen rokok terbesar Indonesia, HM Sampoerna, diprediksi akan melanjutkan rights issue yang telah direncanakannya kendati kondisi pasar saham sedang lemah. HM Sampoerna, anak perusahaan dari raksasa rokok dan tembakau yang bermarkas di Amerika Serikat (AS) Philip Morris International, harus memenuhi persyaratan minimum free-float di Bursa Efek Indonesia (BEI) yang baru-baru ini diubahkan.

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Dalam rangka mematuhi peraturan yang baru, Philip Morris International Inc. akan meningkatkan rasio free float dari unit Indonesianya HM Sampoerna di Bursa Efek Indonesia (BEI) dari 1,82% menjadi 7,50%. Per Januari 2016, semua perusahaan yang terdaftar di BEI diharuskan menjual setidaknya 7,5% dari saham mereka kepada publik. Kendati begitu, saat ini Philip Morris memiliki 98,18% dari saham HM Sampoerna, manufaktur rokok terbesar di Indonesia dan salah satu perusahaan terbesar di BEI dalam konteks kapitalisasi pasar.

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The number of smokers in Indonesia continues to rise from year to year. Based on the latest data from Basic Health Research (Riset Kesehatan Dasar) a total of 58.8 million Indonesians aged over ten years smoked in 2013, more than ten times the population of neighbouring Singapore. In one year, these smokers lit around 225 billion cigarettes making Indonesia the third-largest tobacco consumer after China and India. More alarming, about four million of these Indonesian smokers are children between the age of 10 to 14 years.

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HM Sampoerna, Indonesia's largest tobacco producer by market capitalization (controlling about 23 percent of the Indonesian tobacco market), plans to increase its free-float shares by 5.68 percent (valued at USD $1.27 billion) in order to meet the minimum free float requirement of 7.5 percent set by the Indonesia Stock Exchange (IDX) in a regulation introduced in January 2014 and which will come into effect on 30 January 2016. By this date all listed companies on the IDX must have a minimum free float of 7.5 percent.

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Indonesian tobacco giant Hanjaya Mandala Sampoerna (HM Sampoerna), subsidiary of Philip Morris International, is studying the requirement to increase its free float ratio from (a mere) 1.82 percent to 7.50 percent. Last year, the Indonesia Stock Exchange (IDX) announced that it would force listed companies to offer at least 7.50 percent of their enlarged equity to the public. This rule will come into effect in January 2016. HM Sampoerna is the third-largest Indonesian company in terms of market capitalization (IDR 295 trillion).

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Starting from January 2015, Indonesian tobacco products are subject to an average tax rise of 8.7 percent. The excise tax on machine-rolled cigarettes becomes IDR 355 (USD $0.03) and on hand-rolled cigarettes IDR 290 (USD $0.02) per stick. The tax hike is implemented by the government in a move to increase state income through tax revenues. The higher excise tax is expected to have a minor effect on tobacco sales in Indonesia as retail prices for cigarettes remain among the lowest in the Southeast Asian region.

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The Indonesian government is advised to make a new roadmap for the cigarette (and tobacco-related products) industry that includes targets for the short, middle and long-term. Moreover, the roadmap should involve strategies that aim to find a middle way between reducing cigarette consumption (protecting citizens' health) in Indonesia while at the same time optimizing lucrative state revenue from this industry (as well as safeguarding the jobs of the nearly six million of Indonesians who are working in the cigarette supply chain).

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The tobacco and cigarette business in Indonesia is big business. Two tobacco companies are positioned within the top ten of largest companies listed on the Indonesia Stock Exchange (in terms of market capitalization) as there exists a huge market for cigarettes in Indonesia with some 65 percent of Indonesian men being smokers (due to Indonesia's socio-cultural context few Indonesian women smoke). Moreover, the Indonesian government seems unwilling to limit cigarette consumption (both active and passive smoking) among the population.

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Shareholders of the largest cigarette manufacturer of Indonesia, Hanjaya Mandala Sampoerna (HM Sampoerna), approved the company's plan to execute a 25-for-1 stock split. The move, aimed at making shares more affordable for retail investors thus boosting liquidity, will raise the company's total outstanding shares to 116.3 billion pieces. Since 2005 HM Sampoerna has been owned by international tobacco giant Philip Morris. The US-based company controls a 92.5 percent stake in HM Sampoerna.

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Indonesia's slowing economic growth, weaker purchasing power and an 8.7 percent increase in excise on tobacco products (in early 2015) had a relatively small impact on the financial performance of Indonesia's listed tobacco companies HM Sampoerna, Gudang Garam, Bentoel Internasional Investama and Wismilak Inti Makmur. Whereas companies active in various other sectors of the Indonesian economy were plagued by falling revenue and profit figures, these tobacco firms still posted solid gains in revenue and - to a lesser degree - net profit growth. This shows that Indonesian smokers are faithful to their "death stick".

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One of the last decisions of the Susilo Bambang Yudhoyono administration before being replaced by the new Joko Widodo-led administration was to raise the tobacco excise by an average of 8.7 percent per 1 January 2015. This excise will be applied to all tobacco-related manufactured products. The higher excise, stipulated by a Finance Ministry decree, will boost state income and will also help to curb smoking. About 65 percent of Indonesian men smoke, supported by the cheap price of a package of cigarettes.

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Widespread cigarette consumption among Indonesians (especially men) can have a negative impact on the country’s current demographic bonus. One of Indonesia’s strongpoints in terms of economic make-up is that it has a large and young, thus potentially productive, population. Indonesians in the productive age (15 to 64 years) outnumber those that are categorized as youth (below 15 years) and elderly (over 65 years). This large productive group should provide a boost to Indonesia’s economy in the next two decades.

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