Nearly 5,000 workers will be laid off when Indonesia’s largest cigarette maker Hanjaya Mandala Sampoerna shuts down two of its hand-rolled cigarette plants in Jember and Lumajang in East Java today.
Of the workers who will be affected by the closures, 2,300 are from the Jember plant and another 2,600 from the plant in Lumajang.
H.M. Sampoerna, which is owned by Philip Morris International, announced the closures on May 16.
Poempida Hidayatulloh, a member of the House of Representatives Commission IX, which oversees labor affairs, meanwhile described the layoffs as a “staggering labor tragedy.”
The market volatility behind the action is equally staggering when one takes into account that Sampoerna’s Jember plant only started operating one year ago.
At first, the market for kretek — cigarettes made with a blend of tobacco, cloves and other flavors — seemed promising. This was the reason Sampoerna established the plant.
“Our management read the data… In 2010, as many as 74 billion sticks of kretek were sold. The next year, it rose to 79 billion sticks and finally to 80 billion sticks in 2012,” Sampoerna corporate affairs director Yos Adiguna Ginting said, recalling the apparent boom in the kretek market.
The honeymoon period did not last for long. To the company management’s surprise, the number of kretek sold nationally plummeted to 74 billion sticks in 2013, back to the same level as in 2010.
Underlying the closure of Sampoerna’s hand-rolled cigarette plants is Indonesian smokers’ shifting preference for machine-rolled cigarettes instead of the traditional hand-rolled cigarettes.
Sampoerna’s move to close two of its hand-rolled cigarette plants marks a major change in Indonesia’s cigarette industry.
“There is an ongoing evolution, now the public prefers machine-rolled cigarettes. If the government does not take steps to anticipate further changes, it is very likely that the whole hand-rolled clove cigarette industry will go down,” said Suharjo, the secretary general of the Cigarette Industry Public Forum of Indonesia (Formasi).
In a press statement released on May 9, H.M. Sampoerna stated that it has undergone “heavy pressures throughout 2013” due to “adult consumers changing their preferences.”
The company cited that whereas it had 11.2 percent market share in the Indonesian kretek market in 2012, its market share shrank to just 8.3 percent in 2013. The trend continued in the first quarter of this year.
The overall decrease in market share for hand-rolled clove cigarettes in the country only made matters worse for Sampoerna and other cigarette companies involved in the manufacturing of kretek.
Maharani Subandhi, corporate secretary at Sampoerna, said the market share for hand-rolled clove cigarettes stood at 23.1 percent in 2013, down by 7.3 percent from 30.4 percent in 2009.
She said the development brought about “an unprecedented plunge” in the financial performance of Sampoerna’s kretek business.
“This is ironic given HM Sampoerna’s convincing statements about its financial performance in its annual report,” said Abdul Kadir Karding, central executive board chairman of the National Awakening Party (PKB), whose support base is located in East Java, where Sampoerna operates.
In all likelihood, the worst is yet to come for Sampoerna, should kretek’s declining trend continues. Besides the two affected plants, the company has five other hand-rolled cigarette plants in East Java located in Malang, Probolinggo and Surabaya.
“We do not see foresee any change in the trend of the kretek segment any time soon,” corporate secretary Maharani said.
Fortunately for affected workers, there will be generous severance packages. Those in Jember will receive six month’s salaries as well as free entrepreneurship and financial management training.
The severance packages were decided after drawn-out negotiations between Sampoerna and officials from the national manpower ministry.
Akhmad Hariyadi, head of Jember’s manpower and transmigration agency, said that while the local government accepted Sampoerna’s promises, new job fields will be prepared.
“We will provide new jobs for early June,” he said.
While Sampoerna’s closure of the two plants reflects decreased demand for hand-rolled clove cigarettes, it does not translate into a decrease in the overall consumption of cigarettes in the country, as the industry is still bustling.
Indonesia has both the highest number and the highest proportion of smokers by population in all of Southeast Asia.
Last year, at least 302 billion cigarettes were consumed in the country.
University of Indonesia’s Demographic Institute reported that households that are categorized as poor, on average spent more on cigarettes than on food, health care or education.
A survey by the Ministry of Health last year found that 37.3 percent of Indonesian boys aged 15 to 19 years, and 3.1 percent of girls in the same age group were active smokers.
A previous survey in 2010 found that the number of young smokers aged between 10 and 12 years had almost doubled from 9.5 percent in 2000 to 17.5 percent a decade later.
Another survey — the Global Youth Tobacco Survey (GYTS) released in 2009 — suggested that 20.3 percent of Indonesian schoolchildren aged 13 to 15, were active smokers.
Experts say that while smoking is a leading cause of preventable death, the fight against tobacco addiction is difficult because the price of cigarettes in the country is so low that even children can afford them.
Authorities estimate that almost 200,000 Indonesians die every year from tobacco-related diseases.