Small, medium cigarette factories on the brink of bankruptcy

By Ahmad Solikhan, Tedy Novan and Abu Ibrahim

YOGYAKARTA (JP): Ponirah, a 65-year-old cigarette roller obviously got deep satisfaction every time she puffed on her klobot (tobacco wrapped in a corn leaf) cigarette during her lunch break recently.

Once in a while, she gulped down some tea from her old, dirty bottle.

Rising prices of daily necessities have forced Ponirah to take a packed lunch to work and to save more money, she now walks the two kilometers between her house and work.

"I make only Rp 2,000 (25 U.S. cents) a day, hardly enough to buy something at a food stall and pay the transportation fare," said Ponirah, who works in the Gunung Klapa cigarette factory in Kudus, Central Java.

Ponirah, a mother of six, can hand roll 1,000 klobot cigarettes a day.

Like Ponirah, workers at small or medium factories are also suffering the same fate: their welfare level is lower now than ever.

Take Sumarni, who works in Jambu Bol cigarette factory in the same town. The 36-year-old mother of four, for example, makes Rp 3,600 a day and gets Rp 1,300 an hour for overtime work. She has free medical treatment at the company's polyclinic.

In addition, she receives an annual festivity allowance amounting to a month's basic salary and two weeks paid leave. The economic crisis has made her life more difficult and her income is no longer enough to support her family.

"We have to postpone sending our youngest child to school," added Sumarni, who can hand roll 7,500 cigarettes a day.

Workers in a number of small-and-medium-sized cigarette factories in Tulungagung and Kediri, East Java, are pretty much in the same boat. Moreover several cigarette factories have reduced working hours and meal allowances.

The fate of the workers, however, is not much different from that of the factories where they work.

Gunung Klapa, for example, is at present threatened with bankruptcy. The factory was established in 1918 and employs 40 people. According to Aulil Maula, the owner, the raw materials for cigarettes have sharply increased in price. The flavoring essence, for example, has risen in price by 400 percent, cloves by 100 percent, klobot (the corn leaves to wrap the tobacco) by 100 percent, tobacco by 100 percent, cigarette wrapping paper by 300 percent and cigarette labels by 300 percent.

Although there have been no layoffs yet, the company is now forced to pay its workers lower than the regional minimum wages.

"We can survive only from day to day," said Maula, the fourth generation of his family to run the cigarette factory.

In the meantime, medium-sized cigarette companies like Jambu Bol, for example, have laid off 200 older workers and cut down by 50 percent the working hours of its 4,400 employees.

Confused

The small and medium cigarette factories are as confused about the present situation as the government itself.

In just one month the government, through Director General of Customs and Excise Soehardjo, issued three decrees aiming at boosting the state's receipts. Last year receipts from cigarette excise stamps totaled Rp 4.55 trillion and this year the target is Rp 7.7 trillion.

The Directorate General of Customs and Excise issued decree No. 16/BC/1998 on March 5, stipulating that the retail selling price of cigarettes will be increased 100 percent. The increase was deemed necessary to boost the state's receipts and also to help cigarette factories make more money to offset the rising prices of raw materials, especially imported goods.

However, before this decision was enacted, another decree, No. 21/BC/1998 was issued on March 9 as a result of the objections raised by a number of cigarette factories. They argued the rise would only make cigarette factories lose buyers because of people's lower purchasing power.

Then a number of medium and small cigarette factories lodged a protest against the increase in the excise stamp cost, saying it was too high.

Therefore this decree was also replaced. In decree No. 27/BC/1998 dated March 30, the government decided to lower the retail prices of cigarettes, especially those made by medium and small factories. This price cut, however, is still burdensome on most small cigarette factories.

"Many cigarette factories are bound to close down," said a member of the governing board of the Association of Indonesian Cigarette Factories (GAPRI), who asked to be quoted anonymously.

He said that of the 550 cigarette factories which are members of GAPRI, 10 are established. Of these 10, only three control the market, namely Sampoerna, Gudang Garam and Djarum.

In Kudus, of the 25 middle and large cigarette factories operating last year, only 18 are operational now, while of the 61 small cigarette companies, only 10 still make cigarettes, and those only do so with lots of difficulty. In Kediri, meanwhile, of 23 registered cigarette factories, only 11 are still operational. The rest have gone bankrupt.

A big cigarette factory produces more than five billion cigarettes a day, a medium one produces between one and five billion cigarettes and a small one produces fewer than one billion cigarettes.

Revenue

It is true that the state's revenue from cigarette excise stamps is huge. From Kudus alone the state pockets more than Rp 2 billion a day.

However, the increase in the excise stamp rate, according to a source at Kapulogo cigarette factory, is not on a par with the profit reaped.

As for a Kapulogo packet of 12 cigarettes sold at Rp 800, for example, the company must allocate 10 percent to the agent, 20 percent for the excise stamp, 6.2 percent for the value-added tax, 57.8 percent for production costs, 12 percent for the workers and 20 percent for incidental expenditure. The market demand for cigarettes in the meantime has dropped 10 percent.

"The profit made is only 4 percent, very small indeed, while the company has tried to operate as efficiently as possible," the GAPRI source said.

Despite the big trouble hitting small and medium cigarette factories, large ones like Djarum in Kudus and Gudang Garam in Kediri have not been that badly affected. Despite the rise in the prices of raw materials and in excise stamps, Djarum's annual production level remains at 25.9 billion cigarettes. None of its 38,000 workers have been laid off.

Thomas Budi Santoso, deputy director of Djarum in Kudus, welcomed the government's decision to raise the cost of excise stamps. Last year, he said, Djarum contributed Rp 528 billion to the government in excise stamps.

"The rise in the excise duty is still tolerable because buyers also understand the unavoidable rise in the price of cigarettes," he said.

In the meantime, Gudang Garam spokesman HR Mochamad Djamal said that his company had not lowered its production despite the economic crisis. Also, he added, none of its 442,750 workers have been laid off.

Will the economic crisis drive out of business all the medium and small cigarette factories? Only time will tell. However, if some manage to survive, they will do so, perhaps, not because the management can get out of the grip of the economic crisis but rather because their workers are loyal to them.

In Kudus, for example, according to cigarette analyst Kahfan Noor, the workers consider hand-rolling cigarettes a tradition they need to preserve. They care little about the low regional minimum wages. They don't panic when they are laid off. To them hand-rolling cigarettes is a noble tradition identified with the nurturing of patience and carefulness. This is as noble as efforts to conserve a traditional house in Kudus, which are now a rarity.

However, what Noor has said is not completely true.

"Indeed we preserve the cigarette-rolling tradition. Yet, this economic difficulty is hard to bear," said Ponirah, who has been hand rolling cigarettes for 15 years.