Bulletin of Indonesian Ecnnomic Studies

Vol32 No 3, December 1996, pp. 85-107

CHANGING STRUCTURE AND COMPETITION

IN THE KRETEK CIGARETTE INDUSTRY
Lepi T. Tarmidi'

University of Indonesia

Kretekpraduction has developed from a traditional industry into an

important manufacturing sector in terms o f value added,
employment and government revenue. Kretek firms have
outcompeted the large foreign 'white' cigarette companies.
Originating in the late 19th century, the industrygrew, only after
World War 11. Production rose from 20 billion cigarettes m 1961 to
1.10 billion in 1993, and cmployment from h5.500 workers in 1929 to
137.600 In 1993 This succcss was confined mainly to the four largest
firms, the number of k w t & iirms has shrunk from 1,200 in the 1950s
to 141 in 1993 The industry 1s highlr concentrated in Central and
East Java, but consumption 1s widespread throughout the
archipelago. Government intervention is high, in employment,
taxatinn, pncmg and investment policy, in promotion of small-scale
firms and through the clove marketing monopoly Promotion of
small-scale enterprises has been uniuccessiul in this industry

INTRODUCTION
This paper gives an account of the development, the changing structure
a n d the fierce competition in the Indonesian cigarette industry,
especially since the 1950s. The kret?k cigarette is chosen as a case study
because it has three interesting features. First, the number of firms has
shrunk from around 1,200 in the 1950s to 141 in 1993, despite rising
total production (from 20 billion cigarettes in 1961 to almost 140 billion
in 1993) In the fifties there were only medium and small enterprises, but
from the early 1970s a number of companies, two in particular, managed
'I am grateful to txvo readers for helpful comments on an earlier draft. Any
remammg errors are my responsibiiity

86

I& T. Tarmidi

to break out of the cluster and surge ahead. Second, the kretek industry,
which is characteristically Indonesian, has been able to outcompete the
modern 'white' cigarette industry dominated by two foreign companies
Third, kreti,k is one of the most regulated industries, in terms of
technology, investment, excise taxes and trade in cloves.
What Is Kretek?
The kretek cigarette is an Indonesian invention that mixes tobacco with
cloves and 'sauce' (a mixture of spices) to produce a distinctive flavour.
Originally the ingredients Consisted only of tobacco and cloves. In the
old days the mixture was rolled in dried corn leaves and the resulting
cigarette was called kiobot. A variant of kiohoi, called kleinbnk menyan,
contains tobacco leaves, klembak (a kind of root) and incense
(Nuswantoro 1983, pp 17-19). The production process is manual and
simple Klobot developed as a home industry, and the cigarettes were
marketed in the surrounding (mainly rural) areas to poor older farmers.
The industry expects that the habit of smoking klobot and klembak
nieiiyaynn will die with the passing of this generation.
The first development toward the kvetek cigarette was to substitute
paper for the dried corn leaves. The resulting cigarette is the handrolled
kretek (srxuret kretek fangan, SKT). Larger firms then added 'sauce' to the
ingredients to make the kretek more 'tasty'. Machine-made kretek
cipirettes incorporate the use of filters and are known as s i p r e t krefek
mrsin (SKM). From the outside, SKM look like ordinary 'white'
cigarettes.

DEVELOPMENT AND COMPETITION IN THE INDUSTRY

Production
The earliest recorded kretek production, by a small number of
enterprises. occurred between 1870 a n d 1880 in Kudus in northern
Central Java. Kudus quickly became the centre of kretfk manufacture.'
Production grew even before World War TI, though at a rather slow
pace. in 1929,7 1 billion cigarettes were produced on Java, and in 1934
the figure was 11.5 billion. By 1961, production by member firms of the
Union of Cigarette Manufacturer Associations of Indonesia (Gabungan
Perserikatan Pabrik Rokok Indonesia, GAPPRI-the
association
covering krefek firms) had increased to 20.2 billion cigarettes. After
I F m further

(1982)

historical detail on the krrtek industry, see Castles (1982) and Scgers

Changing Structure and Competition in the Kretek Cigarette Industry

87

stagnating between 1961 and 1971, kretek production began to increase

rapidly, at a n average rate of 10.8% annually, from 19.8 billion
cigarettes in 1971 to 138.5 billion in 1990. From 1990 to 1993 it seems to
have slowed somewhat (table 1).
Klobot production by GAPPRI member firms retained its level at
around one billion cigarettes a year despite pessimistic predictions,
though there were fluctuations between 1972 and 1993. The number of
consumers 15 declining as the old generation dies away and real incomes
rise steadily. Klobot's small share of total kretek production fell from
3.7% in 1972 to 0.5% in 1993 (table 1).However, for a small number of
older consumers, habit still seems to play an important role, in addition
to brand loyalty.
Despite mechanisation of kretek manufacture, handrolled kretek
production by GAPPRI member firms increased from 21.9 billion
cigarettes in 1972 to 41.7 billion in 1984, at an average rate oi 5.5% a
year. Sincc then it has slowed: 40.9 billion cigarettes were produced in
1993. The handrolled production increases to 1984 were primarily due
to government constraints on mechanisation, designed to boost
employment. The share o i handrolled krelek in total production fell
continuously from 70.5% in 1980, when machine krpfek production had
already reached a substanbal level, to 29 3% in 1993 (table 1).
The fastest growth was in the machine-produced kretek sector.
Produchon by GAPPRI member firms jumped from 50 million dgmttes in
1976 to 3.9 billion in the following year, then remained stagnant until
1979, to make another leap to-13.6 billion cigarettes in 1980.
Thenceforth production grew relatively fast, at dn average rate of
16.4% a year, reaching 97.9 billion cigarettes by 1993~The share of
machine-rolled krefek in total kretek production rose from 26.8% in 1980
to 70.2% in 1993 (table 1).
The kretek production figures cited are those of GAPPRI members.
They are not based o n actual production, but rather on the number cf
excise b'mds bought by GAPPRl members from the Excise Office, a figure
close to actual production. Apart from GAPPRI members, other small
enterprises and cottage industries produce kretek. The number of these
firms and their production levels are not known, but their contribution
to total kretek production is relatively small. GAPPRI members' excise
band purchases are estimated to constitute around 95.5% of total hands
sold by the Excise Office for most years between 1975 and 1991.
Attempts to mechanise kretek production began in 1968, pioneered by
three compinies, one in Solo and two in Kudus. These three firms had

88

Lepi T. Tarmidi
TABLE 1 Nurnbcr ofEntcrpnses and Production of
Cigarettes in Indonesin, 1961, 1971-93
Kretek Cigarettes

GAPPRI
Firms

Productmn (mlllmns)
HandKfobot
Machine Total
rolled

1961
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993

941b

287
315
282
283
307
321
243
246
263
263
263
256
212
143
128
128
119

113
118
I22
122
141

Kfembak
Melip7
(millions)

20,222b

21,871
29,341
27.041
30,465
36,347
38,002
34,618
34,539
35,607
37,523
37,807
41,014
41,666
39,670
38,640
38,568
38,843
40,450
39,338
41,155
40,274
40,881

838
818
789
812
828
957
1,941
1,425
1,351
1,246
1,254
782
926
1,003
1,096
1.101

1,038
971
1,247
1,076
866
731

46
62
51
38
50

3,899
3,851
3,868
13351

22,901
20,081
23,415
30,842
42,738
55,207
67,445
78,390
86,118
97,924
87,431
93,454
97,858

19332
22.755
30,221
27,881
31,315
37,225
42,858
40,440
39.832
50.509
61,670
59,142
65,211
73,434
83,411
94,943
107.114
118,271
127,539
138,509
129,662
134,594
139,470

427
391
353
390
386
309
302
286

footnote 3 for an explanation of differences behvween these figures and

those in the first column of table 4.
bPrisrna (1982). p YO.
%e

Changing Structure and Competition in the Kretek Cigarette Industry

89

TABLE 1(conhnued) Number of Enterprises and Production of

Cignrcttes ??I Indonesia, 1962, 1971-93

White
CigarettesC
h

Total
Cigarettes

White
Cigarette

Production
(rmllions)

(millions)

(Yo)

18,124

37,956

47.75

1961
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991

1992
1993

21

16
16
16

17
17
16
16
16
16
16
15
15

24.368
23,805
23,439
26,958
30,981
33,467
29,735
27,125
28,065
26,917
23,231

55,704
61,030
66,297
67,398
71,240
84,367
91,774
86,673
93,678
100,677
106,961
116,519

21,274

43.75
39.01
35.35
40.W
43.49
39.67
32.40
31.30
29.96
26.74
21.72
18.26

17,246
20,369
19,095

SAPRINDO.

-Data not available.

Source: GAPPN; see also notes b and c.

155,771
150,046
153,7M

11.07
13.58
12.42

90

Lepi T. Tarmidi

been the first to produce handrolled filter kretek cigarettes, a new

product that found an appreciative market A large firm with far greater
capital power, Bentoel, began producing SKM in the same year. The
small firms were being cornered by the much bigger companies,
especially after other large and medium companies also started to
mechanise: Djarum in 1976, Gudang Garam in 1978, Sukun and
Sampoerna in 1983, Noyorono in 1984 and Jambu Bo1 in 1986 (Prismn
1982, p. 82; Suparman 1988, p. 1).
'White' cigarette production rose rapidly at first, from 18.1 billion
cigarettes in 1971 to a peak in 1980 of 33 5 billion cigarettes. After this
it declined steadily at an annual rate of 4.6%, to 19.1 billion cigarettes
in 1992.' As a result, its share of total cigarette production dropped
steadily from 47.8% in 1971 to 12 4% in 1992 (table 1).The fall in white
cigarette productmn would have been much steeper had it not been
retarded by relatively fast growth in exports during the last few years.
The white cigarette sector was under strong competitive pressure, in
particular the two foreign-owned companies. BAT, the largest cigarette
producer in 1979, dropped to 4th rank among all cigarette companies in
1987 and to 7th position in 1989. Falling sales forced BAT to close its
factories in Surabaya and Semarang, the latter being bought by the
domestic firm Sampoerna. Faroka, a foreign-owned firm in Malang, fell
steeply from 7th position in 1979 to 17th in 1987, when it was sold to
Rothmans of Pall Mall Australia. The decline of both foreign companies
was due to their management policy in Indonesia being determined by the
mother companies abroad. The Indonesian branches lacked the
flexibility to engage in mass advertising (Tempo, 15 February 1986), and
both compames underestimated the capability of the local traditional
kretek firms, especially the larger ones, and considered their own
products to he superior to kretek. After losing a large part of their
market, they came to believe that in the long run consumers in Indonesia
prefer krrtek to white cigarettes. They applied to the Department of
Industry for a permit to produce kretek, but this was not granted because
the government wished to protect local kretek producers from foreign
competlhon.
This pessimistic view of white cigarette demand was not shared by
local kretek cigarette companies. The large kretek companies went into
the production of white cigarettes and were quite successful in both
export and domestic markets. They chose the right marketing strategy,
'Production of white cigarettes I S based on GAPRINDO figures (Gabungan
Produsen Rokok Putih Indonesia, the Union of Whrte Cigarette Producers of

Indonesia).

Changing Structure and Competition in the Kretek Cigarette Industry

91

selling well known foreign brands on licence, and embarked on

aggressive advertising campaigns. Bentoel, Sampoerna and Gudang
Garam all produce white cigarettes through their daughter companies.
Consumption of Kretek
Until the 1960s, kretek cigarettes were consumed predominantly by the
poor male population, especially by farmers in rural areas of Central
and East Java and by poor city dwellers such a s heca drivers. The
cigarettes were handrolled in white paper and uneven in appearance
and their price was much lower than that of white cigarettes. Unhl the
fifties, white cigarettes were very popular among the higher income
smokers in the cities, and their distribution was widespread throughout
Indonesia. To some extent, however, kretek were also being used by
higher income smokers. During the second half of the sixties more and
more foreign cigarettes were imported or smuggled from outside. They
found acceptance among high income smokers in Indonesia, and their
prices were correspondingly high. Their packaging and external
appearance were very attractive, and because of their filters they
looked slimmer than the local cigarettes of that time. Smoking foreign
cigarettes conferred prestige, since only people on higher incomes could
afford to buy them. If these people did smoke kretek because they liked
the taste, they usually hid them in their trouser pockets.
K r e f e k cigarettes became more widely popular only after
mechanisation. Their appearance and packaging became more attractive,
like that of foreign cigarettes, and they began to use filters. In the
seventies, the smart-looking kretek packages became fashionable among
higher income smokers, who were soon followed by those of the middle
income levels. Another important development in the rapid rise of kretek
consumption was the dispersion of kretek smoking to the Outer Islands,
brought by Javanese transmigrants and miltary personnel.
Handrolled kretek cigarettes, in relatively cheap packaging, are still
used by lower income smokers Since machine rolled kretek are used
mainly by middle and higher income earners, the different types of kretek
cater to distinct market segments and are not close substitutes. There
will be quite a sizeable market for handrolled kretek and kfobot as long
a s poverty cannot be eradicated, though this market segment will
dwindle as incomes rise.
Number of Firms
In 1960 there were 1.2M) kretek firms (Subangun and Tanuwidjqo 1993,
p. E), of which most were GAPPRI members. The number of GAPPRl
member kretek firms shrank dramatically between 1961 and 1972, from

92

Lepi T. Tarmidi

941 to 287. The fall was mainly among small enterprises, and the trend
continued until 1989, though there were years of revival in between.
After 1989 the number of GAI'I'RI member kretek firms showed a slight
rise, totalling 141 units by 1993 (table l ) , 3
In the white cigarette sector there were fewer firms, and no small
firms or cottage industries. The number fluctuated from 21 in 1975 tn
15-17 from 1981 to 1992 (table 1). Besides the two relatively large
foreign companies, BAT and Faroka, there were three smaller foreign
establishments. Philip Morris, R.J. Reynolds and Industria. Their
presence was shortlived, since they could not survive the competition.
Their contribution to total white cigarette production in 1974 was less
than 10%. All three had had to sell their assets by 1976 (Manning 1979,
pp. 209-10).
Geographical Distribution
Before World War I1 about 50% of kretek production was concentrated
in the area around Jepara and Rembang, particularly in Kudus, and
about 30"h in East Java's Brantas Valley, especially in Kediri. The
geographical concentration in production remained much the same until
1961 (Castles 1982. p 165,168). Outside of Java some concentration in
Pematang Siantar, North Sumatra, can be observed. By 1961 the
geographical distribution was more widespread For example, there
were 28 firms in West Java, m e in Lampung. and some in Lombok, East
Sumatra and Madura But by 1978 all these outlying firms had
disappeared.
The centres of krrtek production in terms of number of firms are
Kudus, Kediri and Malang, where the three largest firms are located. All
the producing areas, with one exception, Bojonegoro, show a declining
number of firms between 1961 and 1993, with the largest declines in
Kudus and Kediri; in Bojonegoro the number of firms increased from
3Thesc figures correspond tn those in table 1, which are based on GAPPRI data.
The latter differ from the data on number of firms in table 4, whose source is
RPS, fur the following reasons. GAPPRI covers firms of all m e s , whereas BPS
annual statistics covrr only large and medium enterpnses. On the other hand,
not all kretek firms arc GAPPRI members. 50 BPS figures can include enterpnses
not cercred by GAPPRI data. From 1973 to 1984 the number of GAPPRI
membrr enterprises was much larger than BPSs estimate of the number of
hrrns, because numerous small firms existed that were not covered by B E .
Since 1985, many small firms h a w been forced out of business by fierce
cornpetitinn BPS estimates are now much closer to, and generally higher than,
those of GAPPRI. These differences also have a bearing on the employment
data citcd below in the text and in table 4.

Changing Structure and Competition in the Kretek Cigarette Industry

93

nine in 1978 to 22 in 1993 (table 2). Recent reports suggest a new

development is taking place, with dozens of new cottage kretek
industries emerging in Central and East Java, competing directly with
well established medium-sized firmsand imitating their packaging. They
seem to have a competitive edge in pricing because the progressive excise
tax system favours small enterprises (Kompas, 3 March 1994).

TABLE 2 Regtonal Distribution of GAPPRIMernber Enterprises, 1961-93

1961

1978

1982

1984

1985

1989

1993

Gombong
5010

60'
67b

Kudus
Magelang
Se mar ang

20F

13
11
81
11
7

13
8
82
13
6

13
7
53
12
5

11
6
32
9
5

8
7
22
4
6

8
6
28
4
6

9
16
33
29
25
5

9
19
35
33
33
5

9
19

12
23
11
19
4

15
8
12
9
15
3

22
7
22
10
22
3

263

212

143

113

141

Region

Central Java

53*

East Java
Bojonegom

Madiun
KdXl

Surabaya
Malang
Blitar
West Javaf

31
83
131
11T
134

35
25

29

North Sumatrag
Pematang Siantar 16

Total

25

941

243

%anyurnas and Kedu; bSolo and Yogyakarta, 'Jepara and Rembang; dSemarang
and Pekalongan; 'Surabaya, Besuki and Madura; 'Mostly located in Cirebon
area, one in Jakarta and one in Lampung, &astern part, hBali and Lombok.
Sources: 1978-93 GAPI'RI, 1961 Castles (1982), p. 165

94

LepiT Tamidi

In terms of production, the highest concentrationcan again be found

in Kediri, Kudus a n d Malang, because of the presence of the big
companies. This is especially true for the production of handrolled and
machine kretek. Production in the Pematang Siantar area is very small,
though there are three to four firms. For klobot, the geographical
concentration is slightly different. The iughest production concentration
is still in Kedin: in second place comes Madiun, followed by Kudus and
Bojonegoro.4 Castles points out that krrtrk producers were located
mainly in areas where tobacco was planted (Castles 1982, pp. 52-3).
This does not explain all cases, since there are tobacco planting areas
where little krrtek manufacture has occurred, whereas the kretek centre
of Kudus produces only a small amount of tobacco. But it does seem to
explain why some cottage and small kretek producers, including those in
Pematang Siantar, have survived the aggressive thrust of larger
companies, while others have been wiped out; the survivors are located
in areas where small tobacco farms (perkebunan r u k y a t ) are
concentrated. On the other hand, geographical concentration of kretek
manufacture seems to be independent of the location of clove production,
because, until the 1960s, cloves were being produced mainly in the
Minahasa area of North Sulawesi and in Maluku. Thus the kretek
industry can be categorised as a tobacco-based industry.
Castles gives a second explanation for the geographical
concentration in Central and East Java and East Sumatra. Almost all
production locations are in regions where Javanese is spoken. Kretek
smoking was introduced b y the Javanese, and production tends to be
located where Javanese consumers are found. In East Sumatra there was
a relatively large Javanese community and almost all of the firm owners
were Chinese (Castles 1982, pp. 52-3).
Firm Size a n d Concentration
Thc Central Bureau of Statistics (BPS) categorises the scale of
enterprises by number of workers as follows: home industry (up to four
workers), small (5-19), medium (20-99) and large (100 workers or
more). For tht? kretek industry, this is not a workable definition: Gudang
Garam in 1988 employed 45,082 workers and Jambu Bo1 in 1992 around
6,000 workers. A more appropriate set of categories has been offered by
the Department of Finance since 1991; it was designed especially tor the

of the geographical distribution of klobol production is based on

GAFPRI figures for the years 1980 to 1987.
4Th1s account

Changing Structure and Competition in the Kretek Cigarette Industry

95

cigarette industry, to increase the effectiveness of excise tax regulations.

It divides firms into five size categories based on volume of production?
During the fifties and early sixties there were almost no large firms
in the kretek industry, only a small number of medium-sized firms and
numerous small firms and cottage industries. The two largest kretek
companies had just begun production, Djarum in 1951 and Gudang
Garam in 1958. In terms of number of employees, q a r u m ranked only
fourth, with 1,230 workers, after Jambu Bol, Noyorono and Sukun
(Castles 19x2, pp. 125-4,180). Kebayak, a firm in the Kudus area, at its
peak in 1935 produced 300 million cigarettes and had 3,000 employees.
Many of its workers became involved in the Gestapu revolt in 1965 and
production had to be stopped. The company reopened in 1967, but
production fell sharply and has not recovered since (Prisma 1982,
p. 79).
The picture in East Java was not very different. Average production
by 220 of the larger firms was 30.5 million cigarettes in 1954; in 1956,
199 such firms produced an average of 59.6 million cigarettes. Some 429
small firms produced on average only 2.9 million krptck cigarettes in
1954; by 1956 the number of small firms had halved to 205, with an
average production of 2 0 million (Ong Dhian Lok 1959).
Cornpetition in the kretek industry since the late 1960s has been
dominated by two large companies, Djarum and Gudang Garam. In its
second year of establishment in 1959, Gudang Garam's output was
already 279 million cigarettes, and by 1963 its 1,027 employees were
producing 320 million cigarettes (PrfSmQ1982, p. 79). Up to 1970,
Djarum led by a long way, but in 1971 Gudang Garam took over for the
rest of the period until 1991, except for certain years (1978, 1979, 1985
and 1989). By 1992, y a r u m had dropped to the upper medium class,
together with Bentoel and Sampoerna, in line with its fall in production
following the regulation of the clove market in 1990. In the lower
medium class there were seven firms and in the small category 14 (five in
Malang, two each in Kudus and Pematang Siantar, and one each in
Mojokerto, Semarang, Solo, Tulungagung and Surabaya) (Subangun and
Tanuwidjojo 1993, pp. 45-6).
The two largest firms, together with Bentoel and a small number of
medium-sized companies, were able not only to boost their production
significantly during the seventies and the eighties, but also to increase
their market share. ' h e concentration ratio of the big three (Gudang
'Large (more than 30 billion krctck cigarettes a year); upper medium (4 5-30
billion), lower medium (750 million - 4.5 billion); small (50-750 million), home
industry (less than 50 million).

96

Lepi T. Tarmidi

Garam, Djarum and Bentoel) in terms of production volume increased

from 63 9% in 1979 t o 75.2% in 1984, but dropped slightly to 74.4% in
1989. If the 10 largest firms are taken together, their concentration ratio
was extremely high, 86.04'0 in 1979 and 91.3"h in 1988 (table 3).6Thus in
1988, 109 firms had a share of only 8.7% of total k r f t r k production.
However, the small and cottage industries will survive as long as there
is a market among low income consumers for inferior products.
Theoretically, an industry whose CR4 (the concentration ratio of its
four largest firms in t e r n of value added, sales, production or number of
workers) is in excess of 40% is considered to b e oligopolistic (Hill 1987,
p. 74). The k r e t r k industry from 1979 to 1989 closely fits this
description Hill argues that concentration is likely to be more
pronounced in intermediate and capital goods industries than in
consumer goods, since without government intervention the first two
industries are generally large scale and tend to build barriers to entry
(Hill 1987, p . 74) A s a producer of consumer goods, the kretck industry
seems to be an exception to this tendency, since its CR4 in 1989 was
79.9%.
The big three and a small number of medium-sized companies, such as
Noyorono and Sampoerna, have a nationwide distribution system.
Jambu Bol, for instance, has its own long-established market niches on
the northern coast of Central Java, in Sumatra and in Kalimantan,
which it can still defend against the thrust of the big companies. Small
firms sell only around their locality. Many of them have for a long time
existed in name alonc They go into production for one, two or three
weeks m a month, depending on incoming orders from their agents They
still have loyal followers, but the number is relativcly small. The reason
usually given for these firms not shutting down is a desire to provide
some employmcnt for their workers, who are called when there is work
to d o and are paid for the number of handrolled kretpk they produce. In
most instances, owners who went bankrupt have gone into other lines of
business.
The leading firms for each kind of kretek in the second half of the
1980s were as follows. For machine kretek, the first place was held
alternately by Gudang Garam and Djarum. Bentoel came in third, for
1988 followed by Panamas, Rejo Penamas and Koyorono. For
handrolled kretek, the first place was indisputably held by Gudang

%ore reccnt concentration figures were not available to the author.

Changing Structure and Competition in the Kretek Cigarette Industry

97

TABLE 3 Market Concrntratrnn Cf tht Tlirre and Ten Largest

Kretek Cigarette Companies. 1979-89
Production (millions of cigarettes)
Company

1979

1984

(% )

1988

1989

1989

Gudang Garam
Djarum

Bentoel
Total Big 3
(%oftotal)
Noyorono
Sampoerna"
Panamasa
Jambu Bo1
Sukun
R e p Penamas

Gentong Got"
Total Big 10
(%of total)

9,165
10,107
6,197
25,469
63.9

24,464
20,614
10,124
55.202
75.2

41,356
35,145
11,201
87,702
74.2

39,540
39,551
15,194
94,285

31.0
31.0
11.9
73.9

3,281
1,078
460
1,517
1,617
419
434
34,275
86.0

3,495
1,674
930
1,939

5.799
7,000

4.5
5.5

622
1,057
66,775
90.9

5,091
2,791
4,025
2,161
1,938
2,447
1,780
107,935
91.3

1,517

1.2

39,832

73,434

118,271

127,539

1w.o

1,856

1,958
1,812

1.5
1.4

Total production
(all firms)

"Sampaerna and Panamas, though separate corporations, both belong to the

Sampnema famdy
-Data not available
Soirrccs: GAPPRI (1991).PT Gudang Garam (1988).PT ojarum (1988). Jambu Bo1
(1988). and data supplied by PPRK (Persahran Perusaham Rokok Kudus, the
Union of Cigarette Firms In Kudus).

98

Lepi T. Tarmidi
TABLE 4 Number of Firms, Otrlput. Value Added nnd Employment
In the Cignrrtte Industry. 1975-91a
Kretek Industry
FImsb

Output
Value Added
(Rp million) (Rp mlllmn)

WorkemC

('000)

VA/Wnrke#
(Rp '000)

~~

1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1YX5
1986
1987
1988
1989
1990
1991

183
179
185
183
182
I 76
169
176
176
176

165

163
165
169
1M
124
138

1,265
1,253
1,466
1,575
1,810
5,360
2,548
2,704
2,872
2,823
2,900
3,494
3,808
3,620
4,235
4,882
4,345

413
443
610
750
809
2.662
1,200
1,299
1,4ffi
1,542
1,604
1,897
2,047
1,968
2,397
2,981
2,713

86 6
88 1
98 0
105 7
104 1
1152
96.6
105.1

110.1
111.7

111.9
116.3
118 7
122 1
128.4
124.9
139.4

4.8
5.0

6.2
7.1
7.8
23.1
12.4
12.4
13.3
13.8
14.3
16.3
172
16.1
18.7
23.9
19.5

'Output and value added at constant 1990 prices

bSre footnote 3 for a n explanation of differences between these figures and
those in the first ~olurnnof table I

Garam, with Djarum in second place, followed by Sampwma and Jambu

Bo1 competing closely, then Panamas, Sukun and Gentong Gotri. For
kiobot, the leading prodwcers were a large and a medium-sized firm,
respectively Gudang Garam and Sukun. The production of klobot by
Gudang Garam showed a significant rise, almost doubling between 1985
and 1988. This suggests that even the least attractive kind of kretek,
which is generally considered to have only a marginal existence, can
expand its market niche if marketing is properly handled.

99

Changing Structure and Competition in the Kretek Cigarette Industry

TABLE 4 (continued) Number of Firms, Output, V d u e Added and Employment
in the Cignrette lndirsty, 1975591

Firms

1975
1976
1977
1978
1979

m n
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991

18

18
19
17
16
16
16
16
18
18
20
17
17
15
15

12
11

White Cigarette Industry

Output
Value Added
(Rp million) (Rp million)
313
311
292
279
442
422

368
336
352
350
297
276
277
274
282
320
364

218
212
206
202
325
304
266
233
233
225
177
168
156
134

121
140
165

Workers
(000)

VAIWnrker
(RP

6.1
6.4
6.3

35.7
33.3
32.7

5.8

35.1

6.1
6.6
6.5
6.4
6.4
6.9
7.0

52.9
46.2
41 I
36 4
36.2
32.6
25.2
27.9
27.0
24.2
22 2

6.0

5.8
5.5
5.4
4.2
4.3

33.5
38 2

%e footnote 10.
dDiscrepanciesare due to rounding.

Source: BPS.

Value Added
On average, value added at constant 1990 prices in the kretek cigarette
industry increased at 12.5% per annum, from Rp 413 million in 1975 to
Rp 2,713 million in 1991.7 This is much higher than the average annual
growth rate in output (8.0%)or production (9.3%).Consequently, value
70utput and value added data should be treated cautiously: it is unlikely that
the ratio of value added to output could exceed 50%, as these data suggest for
most of the years from 1975 to 1991 m both thc kretek and the white cigarette
industry (table 4).

10

Leoi T. Tarmidi

added per worker at constant 1990 prices rose from Rp 4,771 in 1975 to
Rp 19,456 in 1991, or at a rate of 9.2% per annum (table 4). Capital
owners would be the main beneficiaries of this increase in value added,
since direct wages constitute only a small portion of retail prices,
ranging from 0 34%to 5.08% depending on the size of the firm. Profit for
the firm, selling agent and retailers together ranges from 15.05% to
2 9 . 0 1 (LPEM-FEUI
~~
1993, pp. 14-18,50-7).
In the white cigarette industry, the growth trend in output, value
added and valu? added per worker is not clear; the figures show wide
fluctuations during the observation period from 1975 to 1991. However,
value added per worker was much lugher in the white cigarette industry
than in the kretek industry: it rose from Rp 35,656 in 1975 to Rp 52,906
in 1979, falling sharply to Rp 22,210 in 1989 to increase again to Rp
38,191 in 1991 (tables 1 and 4).

Exports
The large and medium-sized firms began exporting kretek quite early, but
volume was negligible until 1988 At first handrolled kretrk were
exported, and later also machine krufrk. The value of kretek exports in
1975 was only 5259,000. increasing to $4.3 million in 1988, the
following year exports leapt to $15.75 million, and in 1991 they climbed
to $39.8 million from 523.2 million the year before. However, the next
three years sax- a s t e p drop to 516.4 million in 1994.
Exports of kretek cigarettes have been lower than those of white
cigarettes. The latter were quite negligible until the mid 1980%at less
than 50.5 million. They jumped to $10.3 million in 1987 and hit a peak of
$83.9 million in 1992. The following two years saw a sharp decline to
$54.5 million in 1994.
GOVERNMENT POLICY A N D ITS IMPACT

Investment Policy
In May 1989, the Investment Coordinating Board (BKPM) placed new
investments in the cigarette industry, 'white' as well as kretek, on its
negative list, dcnying them access to government concessions.8 This
measure to some extent protected small firms against large capital
owners, since new investments tend to inrolve substantial capital. The
RConcessions include tax holidays, tax-frce or tax-reduced imports of
machinery, materials and intermediate inputs for a certain period, and access to
bank l a m .

Changing Struchm and Competition in the Kretek Cigarette Indushy

101

negative listing for both white cigarettes and kretek was lifted in July
1992 under the following terms: new investments were to begin with the
production of handrolled kretek, after which the company would he
permitted to product. machine kretek in a ratio of 2:3 with handrolled
kretek (Kompns, 13 July 1992). However, since that time there has not to
date been a single new large investment in the kretek industry, probably
because the market is already controlled by the existing big companies.
Mechanisation
The government constrained the mechanisation of the kretek industry in
order to protect employment, since the industry is traditionally labour
intensive (Manning 1979, p. 199). Only a few large and medium
companies were allowed to mechanise their production: according to a
list of firms at the Directorate General for Customs and Excise, in 1991
there were 42 mechanised firms, six of them in Pematang Siantar and the
remainder in Java? The Directorate General also issued a regulation to
restrain mechanisation by limiting the production of machine kretek to a
certain proportion of total kretek production. The regulation, issued on
7 April 1979, stipulated a proportion of 1:2 machine to handrolled
output. As the regulation was often violated, the ratio was revised in
1983 to 2 3 . In addition, one-tenth of machine kretek production was to
be exported. These regulabons were not regularly observed except at the
beginning: in 1979 the proportion of machine to handrolled kretek was
12.93, but by 1983 it had fallen sharply to 1:1.75; in 1993 it was 133.42,
far below, the stipulated lzl.5, even though the 1983 regulation still
stands (computed from table 1).
The government took no steps to inhibit this development. The
regulation, though intended to secure large employment in the first place,
was also designed to protect the market segment of the small and mediumsized handrolled kretpk companies by inhibiting growth in machine
kretek production. But in practice the regulation constrained the growth
of small and medium-scale kretek firms, because they were not permitted
to mechanise. With the market for handrolled kretek stagnating,
mechanisation had become the main driving force behind the success of
large kretek firms, who all but ignored the regulation: Gudang Garam's
machine to handrolled ratio for 1985 was 1:0.78, and by 1989 it had
dropped to 1:0 48; the respective ratios for Djarum were 1 f . 5 3 and

9GAl'PRI figures recorded only three member kretek firms m Pematang Siantar
for the same year.

102

Lepi T. Tarmidi

M.17, but the most serious case was that of Bentoel, with 1:0.09 in 1985
and 1:0.03 in 1989.
Employment
The kretek industry is one of the largest providers of employment in
Indonesia. Its workforce rose rapidly from 65,500 workers in 1929
(Kompns, 16 November 19%) to 101,339 in 1978 when mechanisation
had just begun; it reached 148,361 workers in 1984, but declined to
137,594 in 1993, with the slowdown in production from 1990.10 Though
there are a number of kretek firms outside of Java, their employment effect
is rather small. Employment in the white cigarette industry has
dwindled, from 6,114 workers in 1975 to 4,320 in 1991 (table 4). The
majority of the workers employed in the factories are women above the
age of 15 from the surrounding rural areas. In the past the kretek
factories also employed children (Manning 1979, p. 212).
Large firms pay their employees higher wages, give them fringe
benefits and provide better working conditions than small firms. The
two biggest firms have their own hospital and medical centre, recreation
facilities, schools and other amenities.
The stipulation on new investments in principle favours the
absorption of labour, as new kretek firms may not immediately commence
production of machine kretek, but must produce handrolled kretek in the
first instance
Government Excise Tax Policy and Revenue
Differential treatment of machine (meaning, at that time, white) cigarettes
a n d handrolled k r e t e k was first introduced by the Indonesian
government in 1950, when it imposed an excise tax of 50% on white
cigarettes and shag tobacco, 40% on kretek, and 30% on other tobacco
products (GAPRINDO). In 1959 the government further differentiated
the excise rates among kinds of tobacco products: 50% for machine
produced cigarettes, 40"h for cigars, 20% for kretek, and 10% for klobot
(Castles 1982, p. 56).
Thus quite early the government introduced a tax rate differentiation
system. The difference was quite substantial between machined white
cigarettes and kretek, and between kretek and klobot, and this provided
sufficientprotection for the kretek industry. The excise tax rates changed

'WJiscrepancies between these figures and the BPS data given in table 4,
especially for 1984. are related to the data problem on number of firms explained
in footnote 3

Changing Structure and Competition in the Kretek Cigarette Industry

103

quite often, sometimes every year, and there were even occasions when
they were revised every half year. For the first time in 1970 the
government determined a rate for machine produced k r e f e k . The
specifications were as follows: white cigarettes. shag tobacco and
machine kretek 50%, handrolled kretek 35"A, klembak 30%, and other
tobacco products 20% If we compare the 1959 and 1970 stipulations,
protection for handrolled kretek had diminished significantly. The
lowest tariff rate for small-scale k r e t e k producers has been
substantially reduced since 1979: in the case of handrolled kreiek from
15% to 5"<1in 1989, to 0.506 in 1991 and to 1%in 1993. The highest rate
for large handrolled kretrk producers was 18% in 1993 (table 5).
The objectives of the government's excise tariff policy are: (1) to
protect cottage industries and small and medium-scale enterprises by
encouraging the production of handrolled kretrk, and hence to raise
employment; and (2) to secure government revenues The excise tariff
structure was simplified in 1990 and 1991, but this had a restraining
effect on production. The medium and small firms stopped producing at
the upper limit of their strata in order to avoid falling into a higher
tariff group. To solve this problem, the government constructed a finer
tariff group differentiation in 1993
Though declining in percentage terms, the tobacco excise tax makes
quite an important contribution to government non-oil revenue. In fiscal
1969/70 it amounted to 15.7% though it had dropped to 5.3% by
1994/95. In nominal terms, it rose from Rp 28 billion to Rp 2,164 billion
in this period (Republik Indonesia, ?4otfl Kriitinfflii dun RAPBN, various
years).
Government Pricing Policy
To protect small-scale kretek manufacturers, the Minister of Finance in
April 1991 fixed minimum retail prices for kretek and for white
cigarettes, with the excise tax included. A larger firm was prohibited
from selling its product at lower prices, to prevent price competition
with smaller firms. The policy had a positive impact on the growth of
small kretek firms (Basri 1995, p. 6; LPEM-FEU1 1993, p. 6).
Clove Marketing
Although Indonesia is the world's largest clove producer, cloves from
Zanzibar and Madagascar were being imported for the kretek industry
because they were considered superior in quality Imports of cloves
were banned in the early 1980s, but owing to domestic shortages the ban
was lifted for a short while in the mid 1980s. Since 1988 imports have
been banned completely.

Led T. Tarmidi

104

TABLE 5 Cigarette Excise Tax St~pulntion,1979-93

Decree No. 115

Decree No. 244

13 March 1989

27 March 1979
Type

SKT

Annual Excise
Production Tau
(Y")
(rndlL"")
>150
50-150
< 50

25
20
15

Annual
Production
(billion)
>5 b
>2-5 b
>I .2-2.0
>0.55-1.2
>0.254.55
(M.25

SKSM
SKM

SPM

KLB
KLM

Decree No.319
9 March 1990

("1")

Annual
Production
(billion)

17.5
15.0
12.5

>5b
>2-5 b
>1.2-2

17.5
15.0
12.5

cL1.2

5.0

Excise

Tax

40
37.5

7.5
5.0

>8 5-35
>2-8 5
>0.5-2

35.0
32.5

04.5

27.5

>10 b
>3.2-10
>1-3.2
>0.32-1
9l.14.32

35.0
32 5
30 0
27.5

0-0.1

225
5.0
2.5

Non K-1000
K-1000

15
~

SKT = handrolled krefek

SKSM = semi mechanised kretek
SKM = machine kretek.
SPM = white cigarettes.
KLB = kiobot.

(%)

10.0

35

>750
< 750

Excise
Tax

30.0

>8.5b
>2.5-8.5
>lJ 675-2.5
04.675

30.0
37.5
35.0
32 5
30 0

>8.5 b
>2.5-8.5

37.5
35.0

>0.3232

27.5

0-0.32
Non K-1000
K-1000

22.5
5.0
2.5

25.0

105

Changing Structure and Competition in the Kretek Cigarette Industry

TABLE 5 (continued) Cigarette Excise Tax Stipulation, 1979-93
Decree No. 324
27 Februaty 1993

Decree No 336
1April 1991

Type

SKT
KLM
KLB

SKSM
SKM

SPM

Annual
Production
(billion)

Excise
Tax

Annual
Production
(billion)

EXWS
Tax
("/.)

>30
>4.530

17.5
15.0

18.0

>0.754.5

10.0

0.054.75

5.0

>30
>4 5-30
>0.754.5
>0.054 75

0.5
30.0
37.5
35.0
30.0
20.0

>45 b
>3M5
>I530
>5-15
>I55
>0.75-1.5
>0.054 75
0 4 05

HE >Rp 65
HER04545

37.5
35.0

>45 b
>3045
>15-30
> 5-15
>1.5-5
>O 75-1.5
0 4 75
HE>Rp65
HERp4545

38.0
36.0
34.0
31.0
28.0
24.0
20.0
37.5
35.0

HE Rp 45

22.5

HE Rp 45

22.5

("/.I

16.0
14.0
12.0
8.0
6.0
2.0
1.0

KLM = klembak menyan.

K-1000 = small enterprises producing up to 50 million cigarettes annually.
HE ( h a r p ecernn) = retail price per piece; used instead of annual production for
determining white cigarette excise tariff from 1991.

106

Lepi T Tarmidi

An oversupply of cloves in the second half of the 1980s caused

prices to fall to very low levels. In December 1990 the government
established the clove trade agency, BPPC (Badan Penyangga dan
Pemasaran Cengkeh), with a monopoly right to trade in cloves. The
ohlective was to protect the incomes of clove farmers, after clove prices
had fallen to Rp 2,500 per kg, insufficient to cover production costs,
Cloves were to be purchased by the agency from the farmers at a floor
price (initially Rp 7,900 per kg), and sold to the kretek firms at around
Rp 12,000 per kg (Sondakh 1995, pp 160-1). Later the regulation was
revised, and farmers were to be paid Rp 1,000 per kg in cash, with the
balance to be retained by BPPC in a farmer cooperative fund. In practice,
farmers received only Rp 2,800 per kg in 1992, through the intervention
of intermediaries who purchased directly from the farmers (Subangun
and Tanuwidlolo 1993, p. 34; Basri 1995, p. 7). More stringent terms of
payment to BPPC caused cash flow difficulties for kretek firms (Basri
1995, p. h), which in the past had obtained loans to finance their clove
purchases.
To ensure that the kretek companies did not refrain from buying
cloves from BPPC, a Joint Decree of the Minister of Trade and the
Minister of Finance stipulated that from 1 December 1991 the purchase
of cigarette excise bands was to he linked to the purchase of cloves from
BPPC. Small kretek producers were exempted from this regulation. The
stipulation was amended in September 1994, the amount of cloves
purchased from then on being determined by the clove content of each
krctek cigarette. Small enterprises were no longer exempt from the
regulation (Basri 1995, pp. 5, 7).
The 1991 decree delivered a strong blow to small, medium and large
kretek producers alike This can he seen from machine kretek production
figures, which declined by 10 7% from 1990 to 1991, though production
recovered during the following two years (table 1). Although small
kretek firms pay somewhat lower clove prices to BPPC, all firms have
experienced a setback in sales, because clove prices are still much higher
than they would he in an open market. BPPC's monopoly position was
further strengthened in the deregulation package of May 1995, w.hen it
was appointed sole importer of cloves (Basri 1995, p. 7), and the
decision notified to the WTO in accordance with the Uruguay Round
agreement.

Chaneine Structure and Comoetltian in the Kretek Cigarette Industry

107

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