The Industry Ministry of Indonesia still targets to see some limited growth in Indonesia’s cigarette industry this year despite another excise tax hike per January 2018. Abdul Rochim, Director of Food & Beverages, Tobacco Products, and Refreshments at the Industry Ministry, acknowledged that Indonesia’s cigarette industry has been under pressure in recent years but remains optimistic that it will not lead to another declining performance in Indonesia’s cigarette industry in 2018.
Almost every year the Indonesian government raises the excise tax on tobacco products. Meanwhile, the government has also been eager to implement other policies that aim at curtailing consumption of tobacco products in Indonesia in an effort to improve the health of the Indonesian population. In recent years the government also narrowed room for cigarette advertisement in media, while it also ordered mandatory (graphic) warning images on cigarette packages.
Such measures have an impact on the cigarette industry. Excise tax revenue realization in the domestic cigarette industry fell in 2017 despite the implementation of an average 12.26 percent excise on retail cigarette prices at the start of that year. In other words, people consumed less cigarettes due to the higher price. Full-year 2017 data are not available yet but in 2016 production of cigarettes had fallen to 342 billion cigarettes (from 348 billion in the preceding year). This declining rate of cigarette production is expected to have continued in 2017, particularly as – at the start of 2018 – a new average 10.04 percent excise tax hike came into effect that is expected to put more pressure on Indonesia’s cigarette industry.
The table below shows that machine-rolled clove cigarettes (kretek) have become increasingly popular among the Indonesian population in recent years (despite limited stagnation in 2016). Hand-rolled clove cigarettes, on the other hand, show a declining market share. This is problematic because this type of industry is a labor-intensive one. Hence companies may layoff more workers in this industry. Although the government tries to limit the impact of the excise tax hike on hand-rolled cigarettes by setting a lower hike (compared to machine-rolled cigarettes), the impact is still felt.
Therefore, we expect Indonesian cigarette manufacturers to remain under pressure in 2018.
Most Popular Cigarettes in Indonesia:
|Type of Cigarettes||2012||2013||2014||2015||2016|
Source: Bisnis Indonesia
Meanwhile, the government is still planning to raise import duties for tobacco, one of the key raw materials for the production of cigarettes. The higher import duty aims at enhancing the welfare of Indonesian tobacco farmers as chances grow that their output will be absorbed domestically at higher prices (most notably by the domestic cigarette industry, the largest consumer of tobacco). Indonesia’s tobacco production is not enough to meet all demand across the country, hence tobacco imports are a must. Still, there are reports that local industries prefer to import tobacco from abroad – rather than purchase it on the local market – as the price difference is negligible (in fact often imports are sometimes cheaper), while the quality of imported tobacco is higher. It is now up to the Finance Ministry to give the green light before the import duty hike on tobacco can be implemented in the first quarter of 2018.