By Josh Doyle
Tucked between two volcanoes, high on a green plateau in central Java, the smell of newly-picked tobacco floats like dandelion seeds across the fields and narrows paths. Tobacco leaves lay out to dry in the courtyards of homes, or stacked on shelves in the open highlands air. This is “kretek country,” where the world’s second largest tobacco market produces its homegrown cigarettes with a formula not found anywhere else in the world, complete with its own secret “sauces” like a coveted chicken recipe from Kentucky.
Kretek cigarettes, made with a blend of tobacco, cloves, and other spices mixed together in what’s known as a “sauce,” are as closely linked to Indonesian culture as wine is to Italy or cheese is to Switzerland. They’re deeply entrenched in the Indonesian story, a favorite pastime, and a massive source of income for the country. Tobacco contributes almost 10% of Indonesia’s tax revenue, while employing millions of workers.
And the tobacco industry has benefitted handsomely from this relationship.
Indonesia’s largest producers – HM Sampoerna, Gudang Garam, Djarum, and British American Tobacco – control over three quarters of the market in the country.
“That provides them significant political and financial influence when it comes to smoking legislations,” said Ayman Falak from the Jakarta office of Dezan Shira & Associates, an Asia-based business advisory firm.
But, the Indonesian tobacco market is in many ways still a story of the underdog, where small scale producers still compete with corporate giants. The kretek landscape is well ornamented with mom-and-pop-style producers, many of them still hand rolling their flavored cigarettes. Small producers account for over half of the total factories in Indonesia’s tobacco industry, according to a report from the World Bank. In the same way craft beer now owns so much shelf space in North America, small, hand-rolled producers add variety and local touch to Indonesia’s tobacco market. And they employ a majority of the more than six million workers, many of them women, who make Indonesia’s tobacco factories run.
This intimate link to kreteks and tobacco production is part of what led to the smoking toddler phenomenon that caused a media storm in 2010, and again in 2018, after videos of a chubby two-year-old chain-smoking happily were released online.
Indonesia’s government quickly moved to help the toddler kick his smoking habit in 2010, but the event revealed how closely Indonesians were tied to tobacco production and cigarette use. Families in Indonesia have farmed tobacco for generations. With every meal, there is tea, coffee, and the familiar crackle of cloves popping as someone lights up a kretek.
When you consider the size and history of tobacco in Indonesia, it gets easier to see why it’s the only country in Asia that has not signed and ratified the World Health Organization’s Framework Convention of Tobacco Control (FCTC). Even China, the world’s largest tobacco market, is on board.
Indonesia is home to 73.6 million smokers estimated as of 2015, with one of the highest rates of cigarette consumption in the world. It was estimated in 2013 that some 66% of Indonesian males smoked, while for females that numbers was much lower — around 6.7%. To tobacco producers, that represents a market for massive growth as the cultural norms that held women back from smoking begin to loosen.
Cigarettes in Indonesia are also some of the cheapest in the world, with the most expensive price for a packet selling for US$2.
Tobacco firms outside Indonesia have taken notice of the lax laws and potential for growth. In 2017, Japan Tobacco bought an Indonesian kretek producer, together with its distributor, for US$677 million, increasing the size of its footprint as it sought to expand across Asia and acquire smaller, local producers.
Indonesia’s cigarette tax laws are unique, complicated, and designed with the small-time producer in mind. That benefits small producers in more ways than one. Because of the tax advantage for smaller operations, brands like PMI’s HM Sampoerna contract all of their hand rolled production to small third-party operators, employing some 62,000 workers.
That creates a closer link between big brands and small producers, with tax breaks for large producers, and employment opportunities for smaller ones.
There’s also benefits to clove producers, who contribute 72% of their production to the kretek industry.
But, recent tax hikes within Indonesia and rulings against clove cigarettes abroad may be a sign that Indonesia may he headed for the kind of tobacco control measures the rest of the world is already accustomed to.
Much of the tobacco grown in Indonesia ends up abroad. Indonesia exports more tobacco than it imports, bringing in some US$21 billion in sales and contributing to approximately 10% to the nation’s tax revenue, according to figures shared by Dezan Shira, a consultancy with offices in Jakarta, among other Asian metropolises.
But Indonesia’s locally-loved kretek cigarettes have met barriers abroad, where laws against cigarette flavoring have grown stricter in the era of e-cigarettes and fruit flavored pods. Indonesia’s tobacco industry took a hit in 2010 when Washington banned clove cigarettes for health reasons.
“It’s baffling how the US, which is always demanding other countries to abide by WTO Disciplines and Regulations, is now unable to correct its policy, which is clearly in violation of WTO Provisions,” Indonesian trade official, Iman Pambagyo, said in a statement.
In more recent months, Indonesia’s tobacco industry took another hit when outbreaks of the Covid-19 virus forced closures of many factories.
“The tobacco industry has been impacted by the virus as many factories were forced to decrease production or closed due to government lockdown measures,” Falak said.
Before that, sales in the industry dropped sharply when the government increased the excise tax on cigarettes by 23% and retail prices by 35%.
“The government expected to collect some US$12 billion in tax revenue from the industry prior to the pandemic,” said Falak.
Indonesia’s tobacco industry is deeply engrained in the local culture and economy, providing benefits to every level of industry from the factory employed hand roller to government agencies collection on tax revenue. Health officials hope a ratification of FCTC will help to curb the influence of tobacco companies, but with so many competing interests, change in the system may be a long way off.