International Business : Islands Are Smokin’: Indonesian Cigarette Maker’s Stock Is Red Hot : Asia: H.M. Sampoerna, the country’s most profitable maker of <i> kretek</i> , is worth about $2.2 billion.
Tropical dampness hangs heavily in the morning air. The spicy-sweet aroma of clove permeates the factory floor. Fingers fly in a blur as women--women are preferred throughout Asia for factory work involving fine motor skills--produce 300 to 400 cigarettes filled with cloves and strong tobacco an hour.
Even in Asia, few companies are at once as exotic and as dynamic as H.M. Sampoerna, the most profitable maker of kretek , Indonesia’s unique cigarettes. It’s a huge business, as evidenced by the smoky fragrance that pervades the streets of the world’s fourth-most populous country.
Sampoerna ranks as one of the most sophisticated and fastest-growing companies in this booming region, an example of the tough local competition that U.S., European and Japanese multinational firms are finding as they invade Asia’s lucrative markets.
It’s a flourishing company that must occasionally summon priests to its factories because cigarette rollers sometimes become seized by a fear of ghosts--a burst light bulb once sent thousands of workers fleeing. And workers are organized into villages and sub-villages headed by “village chiefs.”
Yet the company raises money on the Eurobond market and employs Madison Avenue-style advertising and market research. And its stock is red-hot: based on the recent price on the Jakarta stock exchange, the company is worth about $2.2 billion, only slightly less than General Dynamics Corp.
Sampoerna’s sales have risen at a compound rate of 50% a year since 1990, propelled by clever marketing and fast-rising consumer incomes. It is only slightly slowed by a government-backed clove monopoly organized by Tommy Suharto, President Suharto’s youngest son, that charges about four times the world price for clove.
“Let’s put it this way,” 47-year-old company President Putera Sampoerna, said with a shrug, referring to the clove monopoly. “My five-year plan became a seven-year plan.”
Putera’s grandfather, Liem Seeng Tee, established the country’s first brand-name product, a kretek called 2-3-4, or Dji Sam Soe (pronounced “jee-sum-soo”), which is Hokkien Chinese for the three numbers.
The founder gave 2-3-4 a prestige image that has proven a gold mine. With its high-quality ingredients, the brand is widely viewed as a smoke to be savored like a fine cigar. It commands twice the price of an average kretek --about $1.05 a pack, a hefty sum in a country where per-capita annual income is around $700. Poor Indonesians who can only afford to buy 2-3-4 by the stick sometimes pay extra for an empty 2-3-4 pack, so they can look and feel more prosperous.
The product is extraordinarily unhealthy. A unfiltered stick of 2-3-4--which is still made today with the same tobacco-clove blend that Liem used eight decades ago --contains about 60 milligrams of tar, compared with 26 milligrams for a regular unfiltered Lucky Strike and 16 milligrams for a king-size, filtered Marlboro.
But, as the brokerage firm Jardine Fleming observed in a recent report, “there is no goal to deter smoking” in Indonesia. That’s partly because the government has more urgent health problems, such as malaria and typhoid, and partly because “the kretek industry is simply too important for the overall Indonesian economy.” Kretek makers employ more Indonesians than anyone except the government, and pay more tax revenue than any industry other than oil and gas. (Sampoerna has made one bow in the direction of public health by introducing the first low-tar, low-nicotine kretek , called A-Mild.)
Putera took over from his late father in 1980. Highly westernized--he spent much of his youth in Australia and the United States--he inherited a company steeped in traditional Indonesian ways of doing business. He radically revamped Sampoerna’s business strategy away from its historical orientation as a pure manufacturer that left marketing up to independent distributors. As Indonesia’s economy began to take flight in the late 1980s, Putera recognized the need to make the company much more market-driven.
The company--which had never advertised until 1990--developed a campaign three years ago aimed at capitalizing on 2-3-4’s premium image by asking smokers the question: “Do you remember the first 2-3-4 you ever smoked?”
One man featured in glossy magazine advertisements recalled being rewarded with a 2-3-4 the day he shot his first boar. “My father patted me on the back and said, ‘Today you are a man--you deserve a 2-3-4.’ ” Another ad featured a man who climbed a famous Javanese mountain at 16, and rewarded himself at the summit by lighting up the stick of 2-3-4 he had brought with him.
Sampoerna’s share of Indonesian cigarette sales shot up from around 4% in early 1992 to just under 10% at the start of 1993, and rose even further this year to nearly 15% in June, according to Survey Research Indonesia. Profits from sales of the high-margin 2-3-4 have grown so fast that Sampoerna’s earnings this year are projected to reach $100 million.
“There’s quite a window of opportunity for any consumer product company in this market,” said Putera, adding quickly, “except cigarettes.”
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