Philip Morris buys a piece of Indonesian history
Philip Morris buys a piece of Indonesian history
Vincent Lingga, Jakarta
Julius Tahija surprised the financial community in mid-1997 when
he sold to the Soemitro Djojohadikusumo family his 40 percent
stake in Bank Niaga, a sound, rapidly growing bank, that was then
ranked 7th largest in the country.
The Tahijas certainly got a premium price (US$291 million) for
the deal as the banking industry was then in its heyday after
steadily robust growth spurred by the 1988 banking deregulation
package.
However, less than one year later, Indonesia's banking
industry collapsed, and the government was forced to nationalize
all the country's largest banks, including Bank Niaga.
The Djojohadikusumos lost their entire investment.
In an even bolder move that shocked the tobacco industry last
week, the Sampoerna family sold their 40 percent holding in PT
Handjaya Mandala Sampoerna, a clove-cigarette (kretek) maker, for
$2 billion to Philip Morris International Inc.
The Sampoerna founding family also gained a premium price,
this time around 20 times estimated 2005 earnings, with very good
reasons. PT HM Sampoerna is the second largest cigarette producer
in the country, and Indonesia is the world's fifth largest
cigarette market with total sales of about 215 billion cigarettes
worth about $8.5 billion last year, more than 90 percent of which
were kretek.
Both transactions demonstrated the great business acumen of
the Tahijas and Sampoernas -- getting out of their respective
businesses at the peak of their performance.
The Tahijas might not have been so politically and
economically seasoned to predict the banking collapse within such
a short time. But they accurately foresaw in July 1997 that while
the banking industry is a vital component of the economy, it is a
capital-hungry business that does not fit well with their
business-risk profile.
How accurate their projections have been.
The 2004 bank architecture launched by the central bank has
imposed such high capital standards that the country's 134 banks
will gradually be forced to consolidate into two or three international-
class banks and only three to five national anchor banks, with
the rest downgraded to specialized or rural banks.
Whatever their reason -- whether commercial or moral grounds,
given the large number of deaths blamed on smoking-related
illnesses -- the Sampoernas' decision was a brilliant business
move.
By one stroke, the Sampoernas got the equivalent of $2 billion
in cash while at the same time leaving their family trove in the
care of Philip Morris, the world's largest cigarette maker, which
says it will expand the kretek market to other Asian countries
such as China.
But the similarities between the two transactions stop here.
Philip Morris will not likely meet the tragic end that befell
the Djojohadikusumos with their bank acquisition. The cigarette
industry will not collapse, at least not within the foreseeable
future, despite the increasingly strong antismoking sentiment.
Cigarettes are an addictive product and addicts are the ideal,
most loyal consumers, especially in Indonesia where there are no
significant restrictions on smoking.
Philip Morris must have made a thorough assessment of the
kretek market, otherwise the cigarette giant would not plan on
making an offer for the remaining 60 percent of PT HM Sampoerna,
which, if accepted, will increase the value of the company to
around $5.2 billion.
Given its role as the world's largest cigarette maker, Philip
Morris must have spent a great deal on researching smoking habits
in Indonesia. As the adage within the advertising industry says
"If you want to get into people's wallets, first you have to get
into their lives."
Philip Morris should have been fully aware of Sampoerna's
massive marketing network throughout this vast archipelagic
country that could be tapped for other consumer goods.
Unlike in most developed and newly-industrialized countries,
where smokers have increasingly been treated as outcasts,
and the industry has constantly been battered by antismoking
activists, Indonesia will most likely remain a paradise for
smokers.
Philip Morris, like other cigarette companies, can operate and
market its products virtually without restrictions on nicotine,
tar content and advertising.
Even though antismoking activists have attacked the cigarette
industry as being evil, many observers here link clove cigarettes
with Indonesia's history, culture and identity
"Clove cigarettes are part of the fabric and tradition (in
Indonesia)," Philip Morris's President for Asia Pacific Matteo
Pellegrini observed in remarks to reporters early last week.
"Kreteks capture the soul of the nation," notes Mark Hanusz in
his book Kretek: The Culture and Heritage of Indonesia's Clove
Cigarettes".
This factor and the significant economic role of the industry
as the direct employer of more than 300,000 workers and millions
of others in distribution, retailing and the growing of tobacco
and cloves, and its huge excise tax contribution have prompted
the government to remain highly tolerant of smoking and
omnipresent cigarette advertising.
However, the antismoking camp has stepped up its campaign and
things may not be so rosy for smokers in the future, at least in
Jakarta for a start.
The Jakarta municipal administration has raised the momentum
of the antismoking campaign through a bylaw that will ban smoking
in public places, such as offices, buses, trains, airplanes,
airport terminals, shopping malls, restaurants and hotels,
starting next year.
Many may be skeptical about the bylaws enforcement. But by
criminalizing smoking, the new regulation will empower individual non-
smokers and antismoking organizations to initiate lawsuits
against recalcitrant smokers and cigarette companies.
The antismoking campaign in other cities will also get a boost
as the regulatory framework will gradually change the perception
that smoking is simply a matter of lifestyle choice.
If the Jakarta example is followed by other cities,
Sampoerna's top-selling brands Dji Sam Soe and A Mild, and Philip
Morris's top-selling brand, Marlboro, will be among the hardest
hit as their consumers are mostly middle and high-income people.
The writer is a senior editor of The Jakarta Post.