In Indonesia, smoker warnings help a tobacco giant

Senior tobacco executives aren't often seen warning consumers of the dangers of their products, yet in Indonesia, creating dialogue about tar and nicotine is the strategy one firm is deploying to gain local smokers.

The world's second-largest tobacco company, British American Tobacco (BAT) has launched a massive campaign involving free overseas trips for top politicians, lobbyists placing articles in leading newspapers, and the ever-present free samples and ads.

Motivating the campaign is a tax change that is likely to cut market share for BAT. But the bigger picture is the struggle for control of one of the industry's last great unregulated markets. "There are very few restrictions, expansion is wide open, and the demographics are favorable: If you're a tobacco company, this is where you want to be," says Tajinder Sandhu, a tobacco analyst at HSBC Securities in Jakarta.

BAT's campaign in Indonesia has an ingenious twist: It makes the case that its products are "healthier" than the local favorite, the clove-scented cigarette called kretek.

Cigarettes are "a controversial product," says Mark Antony Jennings, the president of BAT Indonesia, who says he's fighting to have larger health warnings printed on Indonesian cigarettes. ""Most smokers here aren't educated about tar and nicotine."

From the American point of view, where the public has been hearing warnings about smoking for years, the depth of ignorance about tobacco here is hard to understand. An anecdote tells the story best: Recently, a non-Indonesian rebuffed two vendors, saying cigarettes were bad for his health. One of the vendors was baffled, but the other nodded sagely: "Yes, it's true. If foreigners smoke they can get sick."

Mr. Jennings says he wants the government to require all companies to prominently list their tar and nicotine levels on every pack, and impose taxes that penalize companies for high nicotine levels. Last year, former President B.J. Habibie signed a law backed by BAT that would have phased in tar and nicotine restrictions over 10 years.

So has BAT become an anti-nicotine campaigner? Not exactly. "It may be ironic, but this is just business," says HSBC's Mr. Sandhu. "BAT Indonesia is looking to protect its gains and extend its market share."

The vast majority - 85 percent or so - of Indonesian smokers prefer the kretek, which has higher tar and nicotine content than regular cigarettes. Indonesia's kretek barons racked up $5.5 billion in sales last year.

"Their cigarettes have twice as much tobacco and nicotine as ours," says Jennings, referring to the kretek. "Does Indonesia want to reduce its tar and nicotine levels or not?" Jennings also says BAT Indonesia can't compete if it is taxed at the same rates as kretek manufacturers.

"They can not possibly make the case that they do not have the financial capacity to compete," shoots back Jonathon Zax, a senior executive at HM Sampoerna, Indonesia's second largest kretek maker. "The implication that lower tar and lower nicotine would result in less of a health risk is something that BAT themselves do not acknowledge," says Mr. Zax.

A growing body of evidence has shown there's very little difference in cancer rates between smokers of regular cigarettes and so-called light cigarettes. It seems that light-cigarette smokers inhale more deeply and hold the smoke in their lungs longer, absorbing about as much nicotine as regular cigarette smokers. As BAT's own Web site points out: "There is no such thing as a safe cigarette."

The struggle for the Indonesian market has heated up since the middle of last year, when Mr. Habibie signed a decree in his last week in office limiting nicotine and tar that would have given BAT and Philip Morris, the other international company that sells cigarettes here, a huge advantage over the kretek manufacturers. The local companies charge that BAT was the key mover behind the new law, and have since struck back.

"That decree looked like it was a totally BAT sponsored issue, so the gloves came off," explains HSBC's Sandhu. New President Abdurrahman Wahid, under pressure from the kretek industry, is considering rewriting the law.

Excise tax for the industry is dizzyingly complex. The government encourages hand-rolling over machine-manufacturing and protects smaller producers against the market clout of their larger cousins. BAT has long been able to sell its products at a steep discount to kretek, because its local production is low relative to theirs.

So, the price per stick of BAT's leading brand has been about 45 percent lower than comparable kretek. On May 1, that gap was cut to 35 percent and the government, encouraged by the International Monetary Fund, intends to eventually harmonize the tax structure.

"If the tax system is supposed to provide some protection for small manufacturers, by what measure does BAT qualify?" asks Sampoerna's Zax. BAT holds roughly 15 percent of the world cigarette market.

BAT's Jennings says the increase will force him to cut hundreds of jobs and could put foreign investment in Indonesia at risk: "Our competitors are content to see us struck down at the stroke of pen."

Lost in all this is the human toll of the industry in a country where most smokers can't afford even basic healthcare, let alone expensive treatments. Nevertheless, the health ministry predicts the cost of treating smoking-related illnesses will be five times greater than the taxes the industry generates within a decade.

But the problem remains: Taxes on the industry are the government's largest source of revenue after oil and gas, and provides tens of thousands of jobs. At a time when Indonesia's finances remain fragile and the country is only just beginning to emerge from recession, the likelihood of legislation to limit all sides is virtually zero.

(c) Copyright 2000. The Christian Science Publishing Society