Why are new tobacco companies keen on Indonesia?

Why is the Indonesian e-cigarette market so hot?

There are at least four reasons why Indonesia can become a bridgehead for the new tobacco industry.

One is the potential of its new tobacco consumption market; as of September 2020, Indonesia has a population of 262 million, making it the fourth most populous country in the world. Indonesia's smoking population is 70.2 million, accounting for 34% of the total population, and the "smoker rate" ranks first in the world. In terms of electronic cigarettes, electronic atomization products entered Indonesia in 2010, and began to grow rapidly in 2014. Relevant data shows that the market value of electronic atomization in Indonesia will reach US$239 million in 2021, and it is expected to continue to achieve potential growth during 2020-26.

Indonesia levied a tax on e-cigarettes on July 1, 2018, and recognized its legal status, only needing to apply for a sales license. Among them, electronic cigarettes containing nicotine e-liquid are regarded as "other processed tobacco" or "containing tobacco extracts and flavors" products, and are subject to 57% consumption tax. E-liquid is considered a consumer product. By comparison, the average excise tax rate on local traditional tobacco products is 23%; this is not unrelated to the strong tobacco lobby in Indonesia.

Second, Indonesia has low tariffs and inclined policies; Chinese e-cigarettes are exported to Indonesia without paying export tariffs; and the Regional Comprehensive Economic Partnership Agreement, which was officially signed on November 15, 2020, and came into effect on January 1 this year ( The important content of RCEP is the "commitment to reduce to zero tariffs within ten years". According to the data on the website of the Ministry of Commerce at that time, the tariffs of the seven countries that can sell e-cigarettes are 30% in Vietnam, 24% in South Korea, 10% in Indonesia, 5% in Malaysia, 5% in Laos, 3.4% in Japan, and 3% in the Philippines.

This is also reflected in Indonesia's support for the e-cigarette industry. According to reports, Indonesia has planned a large-scale electronic cigarette industrial park and invited some Chinese companies to settle in. Some time ago, there was news that Indonesia would increase the tax rate of e-cigarettes. Relevant practitioners believe that this move is to promote new tobacco companies to build local factories and purchase local e-liquids to achieve a win-win situation.

Third, Indonesia's current e-cigarette industry is in a state of weak supervision; Indonesia is the only country in Southeast Asia that allows TV and media to publish tobacco advertisements; data shows that among all countries that share e-cigarette content on Instagram, Indonesia ranks second in number; And e-cigarettes have not yet been "powered off", and their e-commerce sales accounted for 35.3% at one point.

Therefore, even if the consumption tax rate is not low, the compound growth rate of the Indonesian e-cigarette market in 2016-19 is still as high as 34.5%. According to 2020 data from the Indonesian Ministry of Industry, Indonesia already has as many as 150 e-cigarette distributors or importers, 300 e-liquid factories, 100 equipment and accessories companies, 5,000 retail stores, and 18,677 e-liquids on sale.

Fourth, it is driven by multinational tobacco companies; British American Tobacco acquired an 85% stake in PT Bentoel Internasional Investama Tbk, the fourth largest cigarette manufacturer in Indonesia for US$494 million in June 2009, and then began to increase investment in Indonesia (such as the Indonesian staff are sent to other country offices to gain experience and play important roles); as of 2019, British American Tobacco's Indonesian business unit has about 6,000 employees, and its business scope includes tobacco growing, cigarette production, marketing and distribution, and has become British American Tobacco's The largest contributor to the Group's global driving brands (Dunhill and Lucky Draw).

In 2005, Philip Morris International acquired a majority stake in the company for $5.2 billion, and then invested a further $330 million to promote the development of the company. According to the Jakarta Post in 2006, one year after the acquisition of Sampoerna by Philip Morris International, net income increased by 19%, cigarette sales increased by 20%, and its market share in Indonesia increased by as much as 2.8%. In addition, JTI expanded its market share in Indonesia by acquiring an Indonesian kretek cigarette manufacturer and its distributors for US$677 million in 2017.

Indonesia's attraction to multinational tobacco companies is not unrelated to its complex tax laws. A report released by the World Bank earlier showed that more than half of Indonesia's tobacco industry is small-scale factories, relying heavily on hand-rolling. In order to ensure the interests of small-scale factories to a certain extent, Indonesia has formulated more advantageous tax advantages for small-scale factories, which has resulted in large multinational tobacco companies signing contracts with small factories to enjoy tax reduction and exemption, and small factories have created a large number of jobs. A win-win model for the post.

The successive entry of various multinational tobacco companies has also formed a certain driving effect and cluster effect, making Indonesia a bridgehead for more multinational tobacco companies to enter Southeast Asia and even the entire Asian market.

at last

Under the heat, the future development of Indonesia's new tobacco industry is not without worries. Indonesia also faces the real problem of the impact of tobacco and new tobacco on minors due to the brutal growth of the previous years. For example, in August this year, foreign media reported that the Indonesian government had planned to strengthen supervision and curb the increase of underage smokers.

The plan involves strict control of e-cigarette promotion (banning tobacco advertising, sponsorship) and packaging (increasing the area of health warnings on tobacco packaging) and banning the sale of single cigarettes. In addition, the Indonesian government plans to continue raising the excise tax on cigarettes next year. Earlier this year, its Ministry of Finance had raised tobacco excise tax by 12%, resulting in an average increase of 35% in cigarette prices.

According to foreign media reports, Indonesia is expected to boost the country’s economy through e-cigarette consumption tax. In Indonesia’s 2023 government budget and spending meeting (RAPBN) recently, the government’s goal is to obtain 245.45 trillion Indonesia from the tobacco consumption tax (CHT). rupiah, which is a whopping 9.5% increase from the target of IDR 224.2 trillion in 2022