Hand-Rolled Clove Cigarette Industry of Indonesia in Trouble
Production of hand-rolled clove cigarettes (kretek) fell 30 percent year-on-year (y/y) in 2016 due to stricter smoking regulations in Indonesia. Kretek is a clove cigarette that consists of tobacco (70 percent), and ground cloves, clove oil as well as other additives (30 percent). These clove cigarettes are the clear favorite of Indonesia's smoker community. It is estimated that 85 percent of all smokers in Indonesia prefer kretek cigarettes over white cigarettes. In total, around 55 million Indonesians consume tobacco-related products.
Djoko Wahyudi, Chairman of the Cigarette manufacturing association (MPSI), explained that in hand-rolled kretek cigarettes the tobacco level is more dense compared to machine-rolled kretek cigarettes and therefore it takes more time for people to consume handmade-rolled kretek. Considering more and more indoor spaces prohibit the consumption of tobacco-related products in Indonesia, people tend to purchase machine-rolled kretek because it takes less time to finish the cigarette. Therefore, they can finish the cigarette quicker at an outside location.
The hand-rolled cigarette industry in Indonesia has been under pressure for several years as this industry is less competitive compared to machine-rolled cigarettes. This means that many jobs have been lost in this industry and more may follow. The Indonesian government has been trying to lend an helping hand by implementing a lower excise on hand-rolled clove cigarettes (compared to machine-rolled cigarettes). However, many argue that the excise policy destroys the whole clove cigarette industry as mostly small and medium companies manufacture this product (and they struggle to bear any additional costs).
Still, in January 2017 the Indonesian government raised the cigarette excise tax by an average of 10.54 percent, while the value-added tax on cigarettes was pushed up 9.1 percent in the same month. These hikes pose serious challenges for Indonesia's cigarette industry but are regarded a good move for child protection and public health.
The government's tobacco roadmap, which included 5 - 7 percent (y/y) growth targets between 2015-2020 (and cigarette production to reach 524.2 billion "death-sticks" by 2020), was annulled by Indonesia's Supreme Court in December 2016 as the roadmap was not considered compatible with the nation's health targets.
Tobacco is the largest contributor to Indonesia's state income from excise with an estimated IDR 132 trillion (approx. USD $9.9 billion) in 2016.
Read more: Overview of Indonesia's Cigarette Industry