Was your company actively involved in the development of the regulation? If so, in what way? If not, why not? 6

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Appendices

Appendix 1.

Interview Questions

1. Do you know about the new tobacco regulation? What do you know about this regulation?

2. What will be the effect of this regulation on the company’s overall strategy? Why does your company choose to pursue that strategy?

3. What will be the effect of this regulation on the company’s performance?

4. What will be the effect of this regulation on the company’s marketing campaign?

5. Was your company actively involved in the development of the regulation? If so, in what way? If not, why not?

6. Will there be in the near future any differences for the marketing campaign before and after the Government’s statement about this regulation? Why?

7. Was your company actively performed acquisition with other companies? Why did your company decide to do so? Is this decision related with the government regulations?

8. Was your company actively performed merger with other companies? Why did your company decide to do so? Is this decision related with the government regulations?

9. Was your company actively performed strategic alliance with other companies? Why did your company decide to do so? Is this decision related with the government regulations?

10. (In the case that the last three questions they answer with “yes”). Are these partners in the same industry with your company (cigarette industry)? If so, why? If not, why not?

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Appendix 2.

The Making Process of Clove Cigarettes

Smoking is an integral part of Indonesian culture. One can smell the scent of clove cigarettes from the most rural places in the country to a big metropolitan city like Jakarta (Hanusz, 2000).

Picture 1.

Indonesian Smoking Culture: Smoking Klobot Cigarettes as a Part of Daily Lives

Source: www.indonesianclovecigarettes.com

This section will explain the making process of the clove cigarettes, which is divided into two stages: first is the process in the field and the latter is the process in the factory (Hanusz, 2000).

1. Stage One: In the Field

Picture 2.

The Cigarette Making – In the Field

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The initial process of making clove cigarettes begins in the field, far before one enters the cigarette factory’s gates (www.indonesianclovecigarettes.com). In the background of Picture 2 from left to right were the tobacco fields, corn fields and clove plantations with the farm workers reaping the tobacco leaves, selecting the corn cobs (based on the most qualified cornhusks to be the cigarettes’ paper wraps), and plucking the unopened flowers buds from the clove trees.

Picture 3.

Tobacco Plantations

In the foreground of Picture 2, in front of the building with the traditional Javanese roof called Joglo, a man is cutting the tobacco leaves into strips. These strips of tobacco leaves then are being laid out on the mats, just before being placed in the ground to be sun-dried. In the process, the man will add some secret sauces, saccharine and others. This process resulted in a unique taste of the Indonesian cigarettes (described in section 3.1).

Picture 4.

The Ingredients: Tobacco, Clove, Special Sauces and Cigarette Papers

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In the middle foreground on the right of Picture 2, the man is shucking the husks from the corn. Then the husks are being bundled and stacked into piles. These piles will be put in the storages and can stand for months there.

In the right center of the middle ground of Picture 2, clove farmers with rakes are spreading out their harvested crop of cloves to dry in the sun. Dry cloves then are put into sacks which will be taken away by the horse cart called dokar (standing on the far right).

These processes are still used currently by Indonesian farmers. Although the big cigarette companies no longer use the cornhusks to wrap their ordinary cigarettes (SKT & SKM), some of them also still produce cigarettes with cornhusks wraps, known as klobot (see section 3.4 in Chapter 3 for detail classifications). Normally, an Indonesian tobacco farmer plants corns (all season crops) or other kinds of crops after the tobacco season ends, since the tobacco seasons takes place only from May until August/Mid September. Cloves, on the other hand, need a long time to grow. Normally, it needs a minimum 5 years period for a clove tree to reach a mature age to be harvested. Indonesia is the largest cloves user in the world (Spice Trade International, 2004) with a production of around 70.000-75.000 tons in 2003-2004. To meet the domestic consumptions, Indonesia still has to import around 35.000 tons to fulfill the demand of 110.000 tons annually (Spice Trade International, 2004). Indonesia is also known to be an exporter country for raw tobacco worldwide with an annual volume of 34.88 tons being exported worldwide (www.kompas.com).

2. Stage Two: In the Factory

Picture 5.

The Cigarette Making – In the Factory (Early days/Small Cigarette Factory)

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The latter part of the making process of clove cigarettes takes place inside the factory (see Picture 5). On the left section of the picture, the women roll klobot cigarettes manually on the floor. One of these women is flattening the dried cornhusks and outside the window the workers are spraying saccharine (one of the additional sauce for clove cigarettes) on the finished products.

In the middle section of the picture, the long line of women sitting at work benches are rolling paper-wrapped clove cigarettes. Behind these women, there are various tobacco- processing machines, which are used in the preparation of the mixture for the filling of the clove cigarettes. These machines include tobacco-shredding machines, clove cutting machines, and mixing machine for the sauce.

At the table in the foreground of the picture, a hand-roller’s assistant submits a bundle of clove cigarettes to quality control, while at the table behind the clove cigarettes which have passed these inspections being put into packs. These packs then placed in cartons and are taken away by trucks to the retailers and other distribution outlets.

Until now, Indonesian cigarette companies still rely on manpower for their cigarettes production (since the Indonesian government has enforced regulations which regulate big man power involvement in the production process), especially for hand-rolled clove cigarettes (SKT).

According to Sumarno & Kuncoro (2003), one big national cigarette company employed 10.000- 15.000 employees per factory (mostly woman with low level of education). A big national cigarette company owned more than 5 factories for their cigarette production (see Picture 6).

Picture 6.

The Cigarette Making – In the Factory (Now/Big Indonesian Cigarette Company)

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Appendix 3.

4 Biggest National Clove Cigarette Companies in Indonesia

Discussing the Indonesian cigarette industry cannot be separated with the existences of these four most influential national cigarette companies. In order to know the Indonesian cigarette industry better, the next section will be dedicated to explain the importance of these 4 major players in the Indonesian cigarette industry.

1. Gudang Garam Cigarette Company

Gudang Garam Company or literally translated as salt warehouse was established on 26 June 1958 by Tjoa Ing Hwie (Hanusz, 2000; Sumarno & Kuncoro, 2003; Kurniawati, 2003). The story began when young Tjoa Ing Hwie was working with his uncle in his clove cigarette company called Tjap 93, which was one of the most famous clove cigarette brands in East Java at that time. He was soon becoming the Head of Tobacco and Sauce and then shortly become the company’s director (Hanusz, 2000). Not satisfied with only working for his uncle, Tjoa Ing Hwie left Tjap 93 in 1956 with fifty other employees of the company and establishing his own company with the brand called Inghwie. Two years later, he renamed and registered his company under the name of Pabrik Rokok Tjap Gudang Garam (Gudang Garam Cigarette Company) and became a living legend for the Indonesian cigarette industry (Hanusz, 2000).

Gudang Garam Cigarette Company grew very rapidly and by the end of 1958, it already had five hundred employees producing over fifty million sticks of clove cigarettes annually (Hanusz, 2000; Sumarno & Kuncoro, 2003). In 1966, after only six years in production, Gudang Garam Cigarette Company had become the largest clove cigarettes company in Indonesia with 472 million sticks of clove cigarettes per year (Hanusz, 2000; Sumarno & Kuncoro, 2003). By 1969, the production reached 864 million sticks a year. Ten years later, the production system of the company was renovated completely and a new formula was developed for the machine made clove cigarettes (Hanusz, 2000; Sumarno & Kuncoro, 2003). The proportion of hand-rolled clove cigarettes of the company is continuously dropping (Sumaro & Kuncoro, 2003). In 1998, with total production of 74.4 billion cigarette sticks, 61.2 (82.1%) billion cigarette sticks came from machine-rolled clove cigarettes (SKM) and only 13.1 billion cigarette sticks left for hand-rolled clove cigarettes and klobot.

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Although Gudang Garam Cigarette Company was a latecomer in the early days of Indonesian clove cigarette industry, Gudang Garam is now indisputably the largest national cigarette company in the Indonesian cigarette industry (Kompas, 2005; Hanusz, 2000; Sumarno &

Kuncoro, 2003; Kurniawati, 2003). With its most famous brand, Gudang Garam Filter International, Gudang Garam Cigarette Company captured around 40% market share of the Indonesian cigarette industry (Sumarno & Kuncoro, 2003). Other famous brands of the machine- rolled clove cigarettes (SKM) of the company are Gudang Garam Surya 12, Gudang Garam Surya 16, Gudang Garam Filter International Merah 12, and Gudang Garam Filter International Merah 16 (Sumarno & Kuncoro, 2003). While for hand-rolled clove cigarette brands are Gudang Garam King Size 12, Gudang Garam King Size 16 and Gudang Garam Surya Pro (Sumarno &

Kuncoro). Gudang Garam is one of the national cigarette companies that choose to grow through increasing the production volume with 10%-12% growth in 2003 (Sofjan, 2003). The company increased its price too slow to catch the increasing operational expenses and excise taxes in 2003, which made the company suffered a decline of profit from 17.8% in the early 2002 to only 13.4%in the early 2003 (Sofjan, 2003). The greatest strength of this company lies on its distribution network that reaches even to the remotest area in Indonesia (Chew, 2001). On the other hand, the company’s lack of innovation, especially its refusal to produce any mild kreteks, which currently is the growing segment of the Indonesian cigarette market, has threatened the company of loosing some parts of its profits and market share (Chew, 2001).

Gudang Garam remains a strong company, diversified into hotels, banks, cold storage and ice factories (Chew, 2001). Taxes paid by the corporation and the company’s primary shareholders, as well as by the smokers of its cigarettes, contribute more than 2% of the national tax revenue (Chew, 2001). Currently, the company employs 40.000 people, most of them at the company’s production plant and headquarters in Kediri, East Java (Chew, 2001).

2. HM. Sampoerna Cigarette Company

In early 1912, young Seng Tee began mixing and rolling cigarettes for a small clove cigarette manufacturer located outside Surabaya city of East Java (Hanusz, 2000; Sumarno &

Kuncoro, 2003). Soon after he had enough experience, he left the company to start his own company selling tobacco and condiments. In the early years he sold his tobacco without any additional additives. After a while, he started selling a variety of natural flavorings to go with the tobaccos such as chocolate, vanilla, nutmeg, or cloves. Some combinations of these ingredients became very popular and he came up with the idea of making already rolled cigarettes (before

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then he only sold them unprocessed) a blend of tobaccos and condiments that reflected the preferences of most of his customers (Hanusz, 2000). This was the day when clove cigarettes were widely known and he marketed these products under the brand name ‘Djie Sam Soe,’

(Hanusz, 2000) which in Chinese language means two, three and four.

After three generations, today, HM Sampoerna (which can be translated as perfection) is best known for its hand-rolled Djie Sam Soe and its successful ‘A’ brand for machine made clove cigarettes. A-Mild brand was launched in 1989 and was the first low tar and low nicotine clove cigarettes in the world (Hanusz, 2000; www.indonesianclovecigarettes.com). The introduction of these products has been a great success, made a new category for kretek products which is called mild kretek (Chew, 2001). The success of mild clove cigarettes for HM Sampoerna, which have been growing in popularity by about 30% each year since 1995 and now account for about 11%

of the clove cigarette market, is the result of successful positioning of the product as ‘urban and more trendy than regular clove cigarettes’ (Chew, 2001).

This company has been widely known for its most advanced research and development facilities for cigarettes in the world (Hanusz, 2000, www.indonesianclovecigarettes.com). The company introduced the twin-wrap system for its machine-rolled kretek cigarettes in 1995 including Djie Sam Soe Filter, A King Merah, A King Hijau and A International (Sumarno &

Kuncoro, 2003). Machine-rolled clove cigarettes only contribute 37.6% of the overall cigarette production of the company annually (Sumarno & Kuncoro, 2003). The company has captured 19% market share of the Indonesian cigarette industry before it was acquisitioned by Phillip Morris (Sinar Harapan, 2005).

HM Sampoerna pursues its growth strategy through increasing its profitability by allocating most of the increasing excise taxes to its customers (Sofjan, 2003; Suara Merdeka, 2005).

3. Djarum Cigarette Company

While other large Indonesian cigarette companies are either wholly or partially owned by direct successors of the original founders’ families, the present owners of Djarum have no connection with the people who first established the business (Hanusz, 2000; Sumarno &

Kuncoro, 2003). This company was located in Kudus city; the famous city which has the legend behind the making of Indonesian clove cigarettes (see section 3.1 for further details). The company was originally called Djarum Gramophon, which can be translated as gramophone

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needle. When Oei Wie Gwan (father of the present owners) acquired the company in 1951, he simplified the brand name to just “Djarum” (Hanusz, 2000; Sumarno & Kuncoro, 2003).

In 1970, Djarum Cigarette Company established a Research and Development Department in order to serve the customers more innovative products and lead the Indonesian market (Hanusz, 2000). During mid 1970s, the company decided to mechanize some of its products to follow the lead of Bentoel Cigarette Company (Sumarno & Kuncoro, 2003). The first machine-made clove cigarette of this company was Djarum Filter, which was launched in 1976, followed by Djarum Super in 1978, which for some time was Indonesia’s best selling brand for clove cigarettes (Hanusz, 2000; Sumarno & Kuncoro, 2003). The company was the first one that realized the prospect of exporting its clove cigarettes abroad (Hanusz, 2000). In 1972, Djarum Cigarette Company began exporting its products to Japan and the Netherlands and is still the most familiar brand outside Indonesia (Hanusz, 2000; Sumarno & Kuncoro, 2003). For example, in the U.S. Djarum is the key market player with 70% of the overall U.S. kretek market and currently, this company also has a very strong market position in Malaysia and Brunei Darussalam (www.djarum.co.id/main.html). Its most innovative product was the Djarum Kretek Cigarillo, the world’s first cigarillo spiced with cloves that was launched in 1993 (Sumarno & Kuncoro, 2003).

In 1985 and 1986, Djarum was the number one in the Indonesian cigarette industry, left Gudang Garam Cigarette Company behind (Sumarno & Kuncoro, 2003). In 2002, Djarum produced 20.9 billion cigarette sticks with 44.5% contribution of the machine-rolled clove cigarettes (9.3 billion cigarette sticks) (Sumarno & Kuncoro, 2003). This company is the third biggest cigarette company in Indonesia after HM Sampoerna with around 10% market share of the Indonesian cigarette industry (Sinar Harapan, 2005).

4. Bentoel Cigarette Company

Ong Hok Liong, the founder of Bentoel (which can be translated as the roots of cassava plants) Cigarette Company first entered the Indonesian cigarette industry as an assistant of his father’s tobacco trading company located in East Java (Hanusz, 2000; Sumarno & Kucoro, 2003).

He had launched several brands for his own company, after he left his father’s business, but all of them failed (Sumarno & Kuncoro). He was the first one who introduced a novel system of selling and distributing cigarettes by employing salesmen to go from door to door to introduce his cigarette products (Hanusz, 2000). In 1950, Ong Hok Liong took over a cigarette factory in Blitar City (Hanusz, 2000; Sumarno & Kuncoro, 2003). With this new factory, he decided to mechanize some parts of the production process and bought machines to grid cloves and blend tobaccos

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(Sumarno & Kuncoro, 2003). In 1968, the company was the first one that purchased the first fully automated rolling machines for clove cigarettes in Indonesia (Sumarno & Kuncoro). This somehow changed the climate of the Indonesian cigarette industry with the introduction of filtered clove cigarettes (Sumarno & Kuncoro, 2003). In the late 1970s, the company has attracted many investors, both from Indonesia and abroad, to provide financial assistances (Sumarno &

Kuncoro, 2003).

In the late 1980s, the company was the third rank of all cigarette companies in Indonesia, but due to mismanagement, the company almost fell to bankruptcy in 1991 with its enormous debt (around US$45 million) to some international banks (Sumarno & Kuncoro, 2003).

According to the latest president director of the company, Darjoto Setyawan, in an interview with Devi & Soesetiyo (2003), there were two big mistakes that have been made by the company during early 1990s: the significant decline in sales and big debt. Currently, the company almost recovers from its financial difficulties and positions itself in the fourth rank of the Indonesian cigarette industry (Kompas, 2005). Bentoel Cigarette Company has been targeting the mild- kretek clove cigarettes segment although the company was known as a latecomer in this segment following the step of HM Sampoerna as the innovator of this segment (Devi & Soesetiyo, 2005;

Hidayat & Suhariyanto, 2004). There are three brands launched by the company in the mild- kretek cigarettes segment: Star Mild, Bentoel Mild and X-Mild, a very ambitious step compared to the innovator, HM Sampoerna which only has one brand for this category: A Mild (Hidayat &

Suhariyanto, 2004). Star Mild is targeting on the middle-income segment, while Bentoel Mild is targeting on the upper-income segment and X-Mild is targeting on the lower-income segment (Hidayat & Suhariyanto, 2004).

Bentoel seems very successful with the launches of its mild kretek brands since 40%- 50% of the total revenue of the company is contributed only by Star Mild brand, 10%-15% is contributed by X-Mild and 2%-3% is contributed by the Bentoel Mild (Devi & Soesetiyo, 2005;

Hidayat & Suhariyanto, 2004). Star Mild’s production rate is growing significantly in the past few years since its launching in 1996 (around 754 million cigarette sticks) to 1,872 billion cigarette sticks in 1998 (148% growth) in 1998 and 56% growth in 1999 (Hidayat & Suhariyanto, 2004). The company captures around 7% market share of the Indonesian cigarette industry (Sumarno & Kuncoro, 2003).