http://www.atimes.com/atimes/Southeast_Asia/II12Ae02.html
Sep 12, 2007 Smoking US-Indonesia trade debate By Bill Guerin JAKARTA - A bill under deliberation by the US Congress has caused much concern among Indonesia's big cigarette producers and threatens to ignite a bilateral trade row if the restrictive legislation is fully implemented. It could also represent a setback for US tobacco giant Altria Group, owner of Philip Morris International, as well as Indonesia's largest clove-cigarette producer, Sampoerna, which has staked its future profits on operations in less-regulated developing countries, including Indonesia. The Family Smoking Prevention and Tobacco Act aims to give the US Food and Drug Administration (FDA) full authority over all tobacco products in the United States and would prohibit the import of cigarettes containing any artificial or natural flavor other than tobacco or menthol. The overt aim of the legislation is too ban cigarette producers from marketing candy-flavored smokes, but also extends to cover Indonesian clove cigarettes, known as kreteks. US statistics estimate that currently 3% of US high-school and 2% of middle-school students regularly smoke kreteks. Philip Morris International and Sampoerna in July launched the world's first clove-flavored Marlboro. The new, filtered "Marlboro Mix 9" is the strongest Marlboro available on the market, delivering a fix of 1.8 milligrams of nicotine and containing 30mg of tar. That is comparable to other full-strength kreteks on sale in Indonesia, but twice as strong as regular Marlboros on sale elsewhere in the world. Philip Morris USA, oddly one of the US tobacco bill's main backers, does not manufacture cigarettes in the US with any of the prohibited flavors - although it makes menthol cigarettes. Some tobacco-sector analysts claim regulation by the FDA would in effect help solidify Philip Morris's position as the leading cigarette manufacturer. US Senator Michael B Enzi told a Senate Committee in July, "We must win the war on tobacco, not sign a peace treaty with Phillip Morris." He has introduced an alternative bill, Help End Addiction to Lethal Tobacco Habits, or the HEALTH Act, which he promises would "truly prevent smoking and control tobacco". The effect of the legislation on the Indonesian market, at least at the moment, would appear to be small. Indonesia's cigarette exports totaled Rp2.6 trillion (US$282.2 million) in 2006 and represented about 8% of the world's total clove-cigarette exports, according to Imam Haryono, director of food and tobacco at the Department of Industry. Nonetheless, Indonesian officials are jumping to the money-spinning industry's defense. Trade Minister Mari Pangestu recently warned that a legislated ban would contravene World Trade Organization-mandated trade regulations. Jakarta aims to collect Rp42.03 trillion from tobacco excise duties this year, representing a 9% increase over last year's tax haul. Hazy debate Sudjadnan, Indonesia's ambassador to the US, said the proposed ban is "discriminative" and "protective" because it bans cloves but not menthol. He also claimed there is no scientific proof showing that clove-flavored cigarettes are any more dangerous than menthol cigarettes and that undisclosed research findings show that US clove cigarette smokers account for only 0.1% of the total smoking population and that only 0.8% of that number are considered to be young people. Although there have been no threats of retaliatory trade actions so far, Jakarta appears determined to claim foul play. "Foreign players can trade freely here. So we expect the same kind of fairness," Ismanu Soemiran, head of the Indonesian Clove Cigarette Producers Association, was quoted as saying. That's not how US regulators view the risks, however. According to the US Centers for Disease Control and Prevention (CDC), standardized machine-smoking analysis indicates that kreteks deliver more nicotine, carbon monoxide and tar than regular cigarettes. The CDC also notes that research in Indonesia has shown that regular kretek smokers have 13-20 times the risk for abnormal lung function as non-smokers. 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" sensation, similar, perhaps, to that felt by those who have become very rich through kretek production. The three largest Indonesia-based producers - Sampoerna, Gudang Garum, and Djarum - account for more than 72% of the national market and all are among Indonesia's top 10 companies in sales and profits. Sampoerna has a 28.2% share of the market, followed by Gudang Garam's 23.6% and Djarum's 20.4%. Gudang Garam posted a net profit of Rp710.56 billion in the first half of 2007, up about 31% from the same period last year. Sampoerna's profits in the same period were up 9.5% to Rp2.074 trillion from Rp1.894 trillion over the same period the year before. These profits were largely from domestic sales. Indonesia's own version of Forbes magazine, Globe Asia, listed the wealth of the three biggest tobacco barons in a recent issue. According to the magazine, Budi Hartono of the Djarum group has a net worth of $4.2 billion, Gudang Garam's Rachman Halim is worth $3.5 billion and Putera Sampoerna trails in third with $2.2 billion In May 2005, Sampoerna sold a controlling stake in his company, HM Sampoerna, to the US-based Altria Group Inc, the world's leading manufacturer of cigarettes and owner of Philip Morris, in a $5.2 billion transaction. The blockbuster deal represented the largest ever foreign takeover in Indonesian corporate history. After enduring a battery of expensive lawsuits and new legislation banning smoking in public places in the US, Philip Morris International has in recent years successfully diversified internationally, producing 831.4 billion cigarettes and earning $48.26 billion in sales last year. That dwarfed the 183 billion cigarettes and $18.47 billion in sales it recorded last year in the US market. Diversifying into Indonesia, the world's fourth-most-populated country and fifth-largest cigarette market, was a central part of Altria's diversification strategy. Last month, Altria announced plans to spin off its Geneva-based Philip Morris International from its US-based Philip Morris USA, in a move that would give the unit greater flexibility to eschew the tighter regulatory environments in North America and Europe, and roll out new products in developing markets, such as Indonesia and Russia. Compared with the US and some other Asian countries, Indonesia has only half-heartedly applied anti-smoking measures in recent years. While a 2005 air-pollution control bylaw in the capital, Jakarta, prohibits smoking in all public places, including health-care facilities, playgrounds, schools and public transport, there is little political will to legislate the bans nationwide. Politics of smoking According to the World Health Organization (WHO), smoking-related diseases kill 5 million people annually worldwide. By 2025, an estimated 10 million will die annually, 70% in developing countries. Studies from both the WHO and World Bank show that higher taxes on cigarettes are the best way to force smokers, especially the poor, to quit. Anti-tobacco lobbyists in Indonesia have been pushing for government-mandated higher prices, which they say would ultimately reduce rates of smoking, easing the massive burden on the health system. Consumer groups are also demanding that the government ratify the Framework Convention on Tobacco Control, which would require it to introduce tobacco-related legislation, leading to further moves to reduce consumption eventually. But with an estimated 40 million unemployed Indonesians, any further moves to cut tobacco consumption on health grounds would affect regions where the main parties have constituents. The industry provides direct or indirect employment to more than 10 million people, according to the Indonesian Cigarette Producers Association. The main island of Java accounts for more than 60% of the country's population, voters, and tobacco-industry workers. Gudang Garam, for example, employs 40,000, most of them at its production plant and headquarters in Kediri, East Java. Sampoerna employs 55,000 in its five plants around Surabaya, the East Java capital, and nearby Malang. It also operates working partnerships with 37 third-party operators that produce its cigarettes. 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 country. While a 7% rise in retail cigarette prices in March and the imposition of a specific excise tariff on each single cigarette in July may shrink the profit margins of the big three producers, demand remains solid even without exports. Almost 220 billion cigarettes were produced last year in Indonesia, where 92% of them were rolled under kretek brands. The US legislation, if passed, could eventually impact on Indonesia's tobacco industry workers. Muhammad S Hidayat, chairman of the Indonesian Chamber of Commerce and Industry, contends that if the US bans clove cigarettes, other countries will follow suit. Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. 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