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Contents : PEFINDO CREDIT RATING INDONESIA Cigarette Industry Contact Person: Vonny Widjaja Phone/Fax/E-mail: (62-21) 5210077 / 5210078 / vonny.widjaja@pefindo.co.id INDUSTRY OVERVIEW PEFINDO views that the cigarette industry is facing a number of challenges. There are some issues that could potentially constrain the industry s growth such as the increasing excise tax amidst the weakening people purchasing power rule (fatwa) from MUI (Indonesia s Moslem Leader Association) saying that smoking-for certain people-is prohibited regional regulations that restrict smoking in public areas the pressure from some organizations to Government to sign the Framework Convention on Tobacco Control intensifying campaigns against smoking reminding consumers of health hazard caused by nicotine and tar as well as the advertising restrictions for cigarettes. The increasing trend of price has forced consumers shift their consumption pattern from premium-priced brand-name products to lower-priced brands. This condition has opened an opportunity for illegal cigarettes to grow which further lowered formal figures of national cigarette production and sales. In general most of the cigarette players have recorded lowering margin as they could not entirely pass on the increases in excise tax and other production expenses to consumers due to weak demand and tightening competition. Some players even prefer scarifying margin in order to maintain their market shares. Consequently small players with less strong brand equities have definitely suffered more and some should even stop their productions. The classification of cigarette products In general the Indonesian cigarette products are classified into several segments as follows: Machine-made clove cigarette (sigaret kretek mesin-SKM) Hand-rolled clove cigarette (sigaret kretek tangan-SKT) White cigarette (sigaret putih mesin-SPM) Aloes wood mixed with benzene gum incense cigarette (sigaret kelembak menyan-KLM) Dried corn husk cigarette (rokok klobot-KLB) Cigar (cerutu-CRT) Sliced tobacco (tembakau iris-TIS) Other processed tobacco (hasil pengolahan tembakau lain-HPTL) Based on AC Nielsen survey in 2007 SKM contributed 54.8% of Indonesia cigarette production followed by SKT (37.1%) and SPM (8.1%). Meanwhile for the year to date (YTD) June 2008 SKM segment still dominated the industry with 55.0% shares followed by SKT and SPM with respective shares of 36.5% and 8.4%. The higher contribution of SKM segment was mainly induced by the growing health consciousness which made consumers choose to smoke low tar and low nicotine cigarettes. Limited industry s growth despite large potential demand Despite large potential growth supported by large population size and lower consumption per capita as compared to that in other countries (based on World Health Organization s data as stated in Table 1) the domestic cigarette industry has been facing limited growths and even contractions during the past few years. As presented in Table 2 total cigarette production volumes recorded a minor 5.16% CAGR during 2003-2007. After suffering from a slight contraction in 2006 due to high inflation lower purchasing power after two times fuel price adjustments in 2005 and 10% banderole tax increase in April 2006 the cigarette production then increased by 5.4% y-y to 237.6 billion sticks in 2007. The cigarette production slightly decreased by 1.63% in 1H08 to 120.6 billion sticks from 122.6 billion sticks in 1H07 partly due to the recent fuel cost increase in May 2008. Nevertheless based on Ministry of Industry data total cigarette production in the full year of 2008 still showed a minor growth of 3.4% to 240 billion sticks. The Government expected that cigarette production in 2009 could increase by 5% despite excise tax increase. Last year Majelis Ulama Indonesia (MUI) issued a new rule (fatwa) saying that smoking for children pregnant women and MUI s executives as well as smoking in public areas is prohibited by Islam. As a country with large moslem population such rule could affect the consumption growth. Moreover GOI has been pushed to sign World Health Organization (WHO) on Framework Convention on Tobacco Control (FCTC) stated in 2003. Supported by its large population base consumption of cigarettes in Indonesia is the fifth largest in the world. According to the WHO data China came as a largest cigarette consumer with 1 643 billion sticks consumption in 2007 followed by USA (460 billion) Rusia (330 billion) Japan (260 billion) and Indonesia (215 billion). Over 63 percent of Indonesian men over the age of 15 are smokers. Currently tobacco use by males and females has been converging for decades even though tobacco use rate for adult females remain relatively low it slowly rises among teenage females. Among youth 13.5% uses tobacco and the percentage of smokers who initiated smoking before the age of 19 increased from 69% in 2001 to 78% in 200

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