After the Indonesian government abandoned the idea to increase excises on cigarettes, the production of cigarettes in Indonesia is expected to increase to between 355 and 360 billion cigarettes in 2014. However, in order to meet that target, it is also important that the country's macroeconomy - particularly the inflation rate - remains stable. This year, Indonesian cigarette production is expected to reach 340 billion cigarettes. Indonesia has one of the world's largest markets for cigarettes.
However, despite the absence of an increase in excises in 2014, there will still be a 10 percent (regional) tax increase applied to prices of cigarettes next year. According to Indonesia's tobacco industry, this 10 percent increase is moderate and will not hurt expansion of the industry. As such, the production and consumption of cigarettes will be able to grow throughout 2014. In 2015, however, there may be an increase in excises and tax (amounting to 18 percent in total), which can curb the industry's growth.
There are a number of reasons why foreign companies remain interested to invest or expand in Indonesia's tobacco industry. Firstly, Indonesia has a vast population numbering over 240 million people. About two-third of all Indonesian men smoke cigarettes, while a characteristic of the country is that - with 5 percent only - few females smoke. Secondly, as raw materials and other production means are mostly sourced domestically, tobacco has low production costs (although these have grown in 2012) and has been resilient to the global economic downturn. Therefore, domestic consumption grew steadily, while the export of cigarettes has been in decline. In 2009, exports of Indonesian cigarettes were valued at USD $500 million, but this figure has been on a declining trend, particularly since the USA limited the import of kretek cigarettes. Kretek are clove cigarettes that consist of tobacco (70 percent) and ground cloves, clove oil and other additives (30 percent). Indonesia is famous for its kretek production and about 85 percent of all smokers in Indonesia prefer kretek cigarettes to white cigarettes.
The largest tobacco companies in Indonesia are Gudang Garam, HM Sampoerna and Bentoel Internasional Investama. Gudang Garam and HM Sampoerna are among the Indonesian companies with the largest market capitalization in Indonesia.