Clove cigarettes: Sweet smell of cash

By Bill Guerin

JAKARTA - The United States Congress is likely to pass a bill banning the import of flavored cigarettes, a move that would be a blow to the export market for Indonesia's clove cigarettes. Fortunately - or unfortunately, from a public health standpoint - the domestic market for the product is huge, so the Jakarta government and cigarette producers should continue to do very nicely, thank you.

Recent reports from the US Centers for Disease Control and Prevention (CDC) have highlighted the need for drastic action. The sweet-smelling kretek (clove-flavored) weeds from Indonesia, where they are mainly a working-class indulgence, have become a trend among younger-generation Americans, frustrating official campaigns to discourage smoking. Middle- and high-school students indulge in various tobacco products, including bidis (leaf-wrapped, flavored cigarettes from India) and the Indonesian kreteks.

Jakarta could lose as much as US$30 million a year if the bill is passed, and the impact on provincial employment could be severe. But Indonesia is not one of those markets where health concerns have reduced the smoking population, so demand will remain solid even without exports. The smell of kreteks, named for the crackling sound they make as they burn, permeates buildings, trains, buses and restaurants, and it defines sensory, at least olfactory, perceptions of the country as a whole. But to others, behind the sickly though evocative clove fragrance is the even sweeter smell of money.

Every day in the US, an estimated 4,400 youths aged 12-17 years try their first cigarette, and a third of these young smokers are expected to die from a smoking-related disease.Jakarta appears not to share the US concern for its future generations. The country is the world's fifth-largest consumer of tobacco, and money takes priority over all else.

More than 45 percent of those who smoke are under the age of 20. More than half a million Indonesians are reported to be suffering from tobacco-related illnesses, and the ministry of health predicts that within a decade the cost of treating smoking-related illnesses will be five times as great as the taxes the industry generates. Most smokers can't afford even basic health care.

Cheap prices and a weak anti-smoking lobby have ensured that vast profits from the domestic market continue to make the half-dozen or so kretek barons rich. The tax revenues also prop up the cash-strapped budget every year. Taxes on the industry are the Indonesian government's biggest earner after oil and gas.

Indonesia's estimated 140 million smokers consumed 204 billion cigarettes in 2002. Last year, though consumption was down to 186 billion, excise revenues still amounted to Rp26.3 trillion ($3.1 billion), just short of the targeted Rp27 trillion.

The world's biggest kretek-cigarette maker and Indonesia's largest cigarette producer is PT Gudang Garam, controlled by Rachman Halim, who took over when his father, ethnic-Chinese tycoon Surya Wonowidjojo, died in 1985. In 2001 Forbes estimated Halim's net worth as $1.7 billion. The No 2 producer, Putera Sampoerna, who owns PT HM Sampoerna, was worth $1.3 billion, according to Forbes.

The tobacco industry is also estimated to provide direct or indirect employment to more than 10 million Indonesians. Gudang Garam, for example, employs 40,000 workers, most of them at its production plant and headquarters in Kediri in the province of East Java. Sampoerna employs 55,000 in its plants around Surabaya, the provincial capital. The producers support several hundred thousand more people who grow and dry the tobacco and cloves, supply the raw materials for packaging and retail the cigarettes across the nation. Their brands retail for between Rp5,000 and Rp6,500 (60-75 cents) for a pack of 12.

Usually about two-thirds tobacco and one-third clove, the kretek cigarettes invariably contain another additive. Chemists conjure up artificial flavors to suit the current trends. Gudang Garam, for example, has a fruity, spicy taste, and added fragrance comes from cinnamon, coriander, star anise and lovage.

The three largest producers - Gudang Garum, Sampoerna and Djarum - account for 76 percent of the cigarette market. They are among the country's top 10 companies in sales and profits. Three multinationals vie for the remaining market share: Philip Morris, BAT Indonesia and Rothmans.

There are some 2,000 brands altogether, produced by about 500 companies ranging from tiny family-owned enterprises to the big and powerful tycoon-owned operations. Almost 200 billion cigarettes were produced last year, with more than 80 percent of these the high-tar and high-nicotine kretek brands. Most upper- and middle-class Indonesians smokers prefer Western-style cigarettes and only one smoker in 10 prefers non-kretek cigarettes, known locally as whites.

For years health authorities in North America and Europe have said lung-cancer risks due to cigarette-smoke exposure are related to the presence of tar. Since the mid-1950s, manufacturers have taken initiatives to reduce tar content and, since 1955, the average tar content in cigarettes has declined from 35 milligrams to 10mg at present. Elsewhere the decline in tar content since the mid-1950s has been matched by reductions in nicotine content in roughly the same proportions. Accordingly, the average nicotine content has declined from three milligrams per cigarette in the 1950s to about 0.8mg today.

But most kretek cigarettes contain about four times as much nicotine and tar as even the strongest Marlboros. Eugenol, a phenolic compound in cloves, enhances the effect of the tar. Though tests have shown that it alone causes extensive lung damage when smoked, it has sedative properties and gives smokers a "feel good" sense.

Tests conducted in Australia show that the average nicotine yield in an Indonesian-made clove cigarette is well over two milligrams and most contain more than 30mg of tar per cigarette.

For years the Indonesian government encouraged hand-rolling over machine-manufacturing and protected smaller producers against the market clout of their larger cousins. Cigarette companies came under pressure to minimize production costs by seeking cheaper raw materials because they had been forced to contribute a greater amount of excise revenue for the cash-strapped government. In 2002, the government moved the goal posts, despite complaints from the Association of kretek Cigarette Producers (GAPPRI) that a proposed new producer classification system would mainly benefit those previously categorized as large producers.

Excise tax rates for machine-rolled brands were upped to 40 percent for large producers, 36 percent for medium and 26 percent for small. However, smaller producers were hit hard because of the simultaneous redefinition of the categories.

The new system classified large producers as those producing more than 2 billion sticks, an honor previously given to those who churned out at least 6 billion cigarettes a year. Medium producers were recategorized to include those with output of more than 500 million but not more than 2 billion sticks, rather than the previous "medium" levels of between 2 billion and 6 billion sticks. Last, but far from least, small producers were redefined as those with output of not more than 500 million sticks, a huge change from the earlier parameters of up to 2 billion sticks.

The objective, of course, was to rake in more money from the deadly weed trade. Rates for hand-rolled brands are now 20 percent for large producers, 16 percent for medium, 8 percent for small and 4 percent for very small producers (those with a capacity of not more than 6 million sticks).

The change of classification in effect forced those earlier classified as medium producers to pay tax at the rate of large producers. With the higher excise tax rates, the government's revenues from the cigarette industry doubled from Rp10.1 trillion ($1.2 billion) in 2000 to Rp21.2 trillion ($2.3 billion) in 2002.

Legislation still requires all manufacturers of tobacco products to state tar and nicotine levels on every pack of cigarettes, but Gudang Garam, the nation's biggest excise tax contributor, was one of the last to fall in line. Gudang Garam previously topped the tar list with 53.2mg for a single stick, but has reduced this to 35mg according to labeling on the packet. Nicotine content is 1.7mg.

Indonesia's oldest and most expensive clove cigarette, the hand-rolled Dji Sam Soe, is Sampoerna's flagship weed and best-selling brand, accounting for more than half of the company's total sales. Hand-rolled by chosen female employees only, each Dji Sam Soe is said to contain twice the nicotine and triple the tar of a conventional cigarette. Smokers have no way of knowing, though, as there is no reference to these levels on the packet.

The surge in smoking-related illnesses spurred the government into short-lived action four years ago. A hastily drafted regulation in 2000 gave manufacturers seven years to achieve lower levels of tar (a maximum of 20mg) and nicotine (1.5mg), with makers of hand-rolled kretek cigarettes given 10 years to comply. But the government quickly caved in to lobbying by manufacturers, who claimed that they'd have to spend vast fortunes upgrading equipment, and lifted all planned restrictions on tar and nicotine.

The lifting of the restriction meant that the tobacco giants would not need to invest in laser machines to reduce the content of the poisons in their products. It also meant they would not need to import low-tar US Virginia tobacco, which costs twice as much as the local high-nicotine tobacco. The clove and tobacco farmers carried on planting, and the government almost met its revenue target from cigarette duties.

Win win? Hardly. In the same year, a defamation action by anti-smoking campaigners against Sampoerna and the country's third-biggest producer, Djarum, was snuffed out by the infamous South Jakarta District Court, where money also talks. The plaintiffs had alleged that the tobacco giants breached television guidelines against daytime advertising, and for their audacity in making such claims were ordered to apologize to the manufacturers.

Though health warnings on cigarette packets were introduced in 1991, Indonesia is one of the world's last remaining unregulated markets. Tobacco advertising on television may not show anyone actually smoking, or an actual cigarette, but there are no restrictions at all on promoting tobacco on radio, on billboards, at point of sale or in the print media. Worse, there are no bans on sales to minors. A massive amount of sponsorship money goes into promoting cigarettes.

Anti-smoking campaigns are not on the political agenda. Excise tax on cigarettes is increased annually, and last year was an average of 31 percent of the retail price, still low compared with other countries in the region. Studies from the World Health Organization (WHO) and World Bank show that higher taxes on cigarettes are the best way to force smokers, especially the poor, to quit.

But the recent freeze on cigarette taxes by Jakarta flies in the face of this advice, and the move was widely seen as a way to boost revenues, sway voters ahead of this April's election and please the tobacco barons who give hefty donations to political parties for their election campaigns.

Anti-smoking measures that reduced consumption would hit Java hardest. Java accounts for more than 60 percent of the country's population, voters, and tobacco-industry workers. Aside from those directly employed in cigarette factories, more than 900,000 work as tobacco planters and an estimated 1.2 million are clove farmers.

Jakarta has promised the WHO that by 2005 it will restrict cigarette advertising and smoking in public spaces, but the political and legislative actions necessary to implement this may not get off the ground in the short term.

With an estimated 40 million Indonesians jobless, any moves to cut tobacco consumption on health grounds will be fought tooth and nail not only by the tobacco barons but also by the legislators themselves, whatever the political make-up of the new government later this year.