[Intl-tobacco] Indonesia: Smokescreen behind Philip Morris' coup

[Robert Weissman]

Smokescreen behind Philip Morris' coup
The (Melbourne) Age

By Michael Backman
March 23, 2005
Once when I lived in Jakarta and I was dining at the Chinese restaurant
of the local Mandarin Oriental Hotel, a rush of factory-quantity grey
smoke plumed up from a large round table near the middle of the room.

Had the table caught fire? No. The expatriate management of the local
branch of American tobacco company Philip Morris had just finished their
meals. The eight or so men present had all lit up cigarettes and were
now smoking them with such brazen gusto that it seemed almost a
political statement.

Philip Morris had a presence in Indonesia but had done nothing special.
Marlboro, Philip Morris' premier brand, had high local visibility but
only a 4 per cent market share. But all that changed last week.

Philip Morris announced it would pay $US2 billion ($A2.5 billion) in
cash for a 40 per cent controlling stake in HM Sampoerna, Indonesia's
third-largest cigarette maker. It is also prepared to pay a further
$US3.2 billion for the company's remaining equity. The vendor of the
controlling stake is Putera Sampoerna and his family, descendants of the
company's founder, Liem Seng Tee, who established the company in
Indonesia's second largest city, Surabaya, in 1913.


About 70 per cent of Indonesian men smoke. A far lower proportion of
Indonesian women do. All up, Indonesia probably represents a market of
at least 100 million smokers. Most of the cigarettes sold are kreteks,
cigarettes made of tobacco mixed with cloves. HM Sampoerna's two big
kretek brands are Djie Sam Soe and A Mild. They account for most of the
company's revenue, which was about $US1 billion last year. Profit was
$US360 million.

Putera Sampoerna, 58, is well educated, professional and modern in his
ways. He built up HM Sampoerna into the cash machine that it is today.
So, why is he selling? For an Asian controlling family to sell out of
its main business, and a highly profitable one, is practically unheard of.


Keeping the kretek industry unmechanised is de facto government policy.

The world's financial media made much of the fact that Philip Morris'
planned acquisition was a rare vote of confidence for Indonesia. Maybe.
But, while Philip Morris might be buying into Indonesia, it shouldn't be
forgotten that the Sampoerna family is selling.

As it is, the ethnic Chinese family now spends much of its time in
Singapore, as have many wealthy Indonesian Chinese since Indonesia's
1997-98 economic and political meltdown and the attendant rioting, much
of which had an anti-Chinese flavour, and that included the mass raping
of ethnic Chinese women in Jakarta. The rapists were never caught, but
most believe they were linked to Indonesia's military. Accordingly,
Indonesia now has an appalling reputation among ethnic Chinese
worldwide. I know several who refuse to travel there on principle. As it
is, ethnic Chinese business people in Indonesia continue to face
harassment and constant demands for donations from government and
military officials.

Putera Sampoerna reportedly keeps his private jet in Singapore even when
he is in Indonesia. If he needs to fly anywhere in the country, the jet
is flown in from Singapore to pick him up and to drop him. It then
returns to Singapore rather than overnighting in Indonesia. The reason:
private jet owners have found that if they keep their jets in Indonesia
they face constant demands from local politicians and the military to
use them free of change.

Another implication of the sale is that it represents a huge slap in the
face to Philip Morris' arch-rival, British American Tobacco. BAT
Indonesia was established in 1917. It is listed on the Jakarta Stock
Exchange and has a former government minister, Frans Seda, on its board
of commissioners. Yet, despite its long presence in Indonesia, its
market share is negligible. Last year, it posted a net loss of almost
$US2 million, in a country that is the world's fifth-biggest market for
cigarettes (after China, Russia, the US and Japan).

Philip Morris' success with Sampoerna also comes on top of BAT's China
debacle. BAT announced last year it had negotiated a deal with the
Central Government to build an =A3=A3800 million ($A1.9 billion) plant, onl=
y
to have the powerful State Tobacco Monopoly Administration deny any such
deal had been made. BAT announced a whopping =A3=A350 million write-down
earlier this month on the money it spent trying to get a factory in
China, about the same time that Philip Morris was making its grab for
what will be a 20 per cent share of the Indonesian cigarette market.

But its unlikely to be all plain sailing for Philip Morris in Indonesia.
HM Sampoerna employs more than 20,000 people to hand-roll its kretek
cigarettes. Philip Morris will have little chance of mechanising HM
Sampoerna's factories. The Government will not let it. Keeping the
kretek industry unmechanised is de facto government policy simply to
keep thousands of poor Indonesians in jobs.

And Putera Sampoerna himself? He now has $US2 billion to invest in the
region. That makes him one of the most watchable businessmen in Asia today.

michaelbackman@yahoo.com <mailto:michaelbackman@yahoo.com>