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Jakarta. Indonesia’s tobacco industry, it seems, has been immune to higher excise taxes, stricter smoking rules and regulations, and a growing campaign by anti-tobacco groups.

As Indonesians continue to light up, the tobacco industry simply continues to grow.

“In the future, pressure on the tobacco industry will become stronger as a result of the Health Law, which states that tobacco is an addictive substance that needs to be controlled by the government,” said Benny Wahyudi, director general of the agricultural and chemical sectors at the Ministry of Industry.

“But it will be a long time before it becomes a sunset industry, as it continues to survive and expand through innovation, increasing production and company efficiency,” he said.

Dating back to the early 19th century, Indonesia’s tobacco industry is one of its oldest and most profitable sectors despite being slapped with increasing taxes and vilified by the anti-tobacco lobby.

Today, with more than 65 million smokers — the third most in the world — Indonesia remains fertile ground for the tobacco industry.

Wahyudi said the government still saw the tobacco industry as having a key role in the national economy, given that it contributed much revenue and employed at least 824,000 workers.

From 2005 to 2009, the government’s excise tax revenue increased from Rp 33.3 trillion ($3.73 billion) to Rp 56.7 trillion, thanks to cigarettes, which account for 97.8 percent of all excise tax receipts.

The increases are largely due to the rising excise rate on cigarettes. Last year it went up from an average of 9.6 percent to 21 percent. And the government has announced it is planning to increase it again by an average of 5 percentage points in 2011.

These increases are said to be aimed at increasing collections as well as an attempt to limit tobacco consumption.

But it seems only the former objective is being met.

“Every year the government raises the tobacco excise, but tobacco firms’ profits keep increasing on the back of higher consumption,” said Cece Ridwanulloh, an analyst from Ekokapital Sekuritas.

Cigarette maker Sampoerna, the biggest player in Indonesia with a 28.8 percent market share, earned Rp 2.52 trillion in net profits in the first half of 2010, 14.8 percent more than in the same period last year.

Bentoel, whose market share has increased from 6.3 percent to 9 percent this year, recorded a hefty 386.5 percent increase in net profit in the first half of 2010, reaching Rp 112.60 billion.

Gudang Garam logged a 24.47 percent increase in first-half profit to Rp 1.78 trillion.

Cece said stricter regulations and higher taxes were simply not having an impact on major cigarette companies.

“With stricter regulations and higher tax, the tobacco industry is supposed to be heading toward becoming a sunset industry, but this is not the case in Indonesia,” he said.

“Tobacco production is increasing and it’s still attractive to foreign investors who want to tap the local market.”

While the House of Representatives has established a tobacco industry roadmap that would limit production to 260 billion cigarettes in 2015, production isn’t showing signs of slowing down.

The government is expecting cigarette production to reach 248.2 billion sticks this year, up from the 242.4 billion sticks produced the previous year, due to the improving economic conditions among consumers.

The profits made by the tobacco industry stand in contrast to resulting health costs.

The Indonesian Consumer Protection Foundation (YLKI) estimates that Rp 185 trillion is spent each year treating smoking-related diseases, or more than three times the income from cigarette excise.

The Ministry of Health estimates that 200,000 Indonesians die each year from smoking-related illnesses.

Wahyudi concedes that taxes are not enough to limit tobacco consumption.

“Increasing the tax on tobacco will not reduce the prevalence of smoking as long as there are still illegal cigarettes out there,” he said. “Smokers will find cheaper cigarettes or increase their spending on tobacco.

“The most effective method to curb the prevalence of smoking is enforcing, and adding more, tobacco-free zones.”

YLKI chairman Tulus Abadi says more than this is needed.

“The number of smokers will continue to rise rapidly without strong control,” he said. “Smoking prevalence among Indonesians aged 9 to 18 increased 14 percent last year, the highest in the world.”

The foundation has been pushing for advertising restrictions, putting images of diseases caused by smoking on cigarette packs and banning the sale of packets of cigarettes with fewer than 20 sticks to discourage low-income smokers.

The first two proposals are included in a Health Ministry draft regulation that is still being negotiated with, and objected to by, pro-tobacco sectors.

Ricky Pesik, from the Jakarta chapter of the Indonesian Association of Advertising Agencies (PPPI), said media would likely suffer from the regulation more than the tobacco industry itself.

The tobacco industry is among the top five advertisers in the media, in particular television.

Figures from Nielsen Media Indonesia show that in the first quarter of the year, Gudang Garam was the third-biggest buyer of television commercial slots, with total spending of Rp 73 billion.

“Television companies could lose a large income from tobacco advertising, but the more restrictions, the more creative advertising agencies would become,” Ricky said.

“The tobacco companies would find loopholes in tobacco regulation and exploit them. I cannot think of a new medium [in which to advertise] now, but they might surprise us.”


To read more of this special package, follow the links below:

Talks Over New Indonesian Tobacco Regulation Continue to Drag on
Big Tobacco's Big Influence Keeps Indonesia Lighting Up
Smoking and Spirituality: An Uneasy Truce