High price, labor strike hit cigarette earnings

Rendy A. Witular The Jakarta Post Jakarta

Excise revenue from cigarettes for this year will likely fall short of targets due to the decline in demand and the recent one- week labor strike at the country's largest cigarette producer PT Gudang Garam.

Director of excise at the Directorate General of Customs and Excise Djunaeidy Djusan told The Jakarta Post that the high retail price of cigarettes had prompted smokers to cut their cigarette consumption or stop smoking.

"The consumption power of the public has been weakening. People now tend to spend their money on basic needs other than cigarettes," said Djunaeidy.

In the first semester of this year, only Rp 9 trillion (about US$1 billion) had been collected in excise from tobacco firms, compared to the target of Rp 11 trillion.

The government budgeted collecting Rp 22.35 trillion in excise, including Rp 21.85 trillion from cigarettes.

Djunaeidy said the strike at Gudang Garam would also affect the government's excise revenue this year.

"Gudang Garam is the country's largest cigarette maker, contributing 40 percent to the total of cigarette excise. The strike has caused the loss of billions of rupiah in cigarette excise."

Gudang Garam, based in Kediri, East Java, was forced to stop operating for a week from the end of May following demands by its workers for better pay.

The strike caused production losses of about 1.2 billion cigarettes. With an annual production capacity of 105 billion cigarettes, Gudang Garam produces 183 million cigarettes per day.

Indonesian Association of Cigarette Producers (Gappri) chairman Ismanu Soemiran has said cigarette consumption in the country had dropped due to the rise in the prices of the products.

He said the government raised cigarette retail prices four times and excise tax 40 percent last year. For instance, Marlboro, which is the most popular international brand in the country, now sells for 6,250 a pack, up from Rp 5,250 in July last year; while the 12-cigarette pack of Gudang Garam, the best selling local brand, now sells for Rp 5,000 a pack, as against Rp 4,250 in July last year.

Ismanu warned that the country's cigarette output might decline by between 30 percent to 40 percent this year due to the weak demand.

"We call on the government to be flexible in setting excise targets from cigarettes. If demand and production are down, the target should be lower, or else the industry will die," Ismanu said last week.

There are currently 799 cigarette producers in the country, including three big producers, six mid-sized firms, 357 small companies and 433 very small firms. They have a combined production capacity of 206 billion cigarettes per year.