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THE ANALYSIS OF FACTORS AFFECTING INDONESIA’S TOBACCO EXPORTS TO THE UNITED STATES: A PARTIAL ADJUSTMENT MODEL

CHAPTER I
INTRODUCTION

I.I STUDY BACKGROUND
The economic growth of Indonesia is now better compared to the situation before 1970’s. The Indonesian Bureau Of Statistics (Badan Pusat Statistik) recorded that the economic growth of Indonesia was 4,08% in 2003, even though it less than before the crisis (i.e. 7%). It is a good condition, because after the crisis hit this country our per capita income is very low. With the increasing of economic growth the investment to the industrial sector and agriculture sector also increased.
After the economic crisis hit Indonesia and many other Asian countries, resulting in local currency depreciation particularly against US$ and the depreciation had a negative impact on most of national industry performances including the agricultural sector. However, Indonesia tried many things to increase the economic growth, one of them is by increasing the export goods and services.
Export is including in international trade. International trade is the exchange of goods and services between countries. It occurs because a country is able to purchase goods abroad more cheaply than it can produce them at home. The international trading could be:
1. The exchange of good and services
2. The movement of row material in each country
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3. The exchanging and expanding the goods and services can be pursue the increase on economy development.
Indonesia is one of the developing countries that follow an open economy system in economy. It means that an international economy has an important role in developing the national economy. The target of development economy in Indonesia is to develop the national society as a whole with the surplus condition in international trading. The improving of advanced technology can be a help to increase the production on goods and services for trading. In International Trade Theory a country has a comparative advantage in production if the country has goods which quality has superiority compared to the other goods in the imported country. Hence, trade between two countries can benefit both countries.
Indonesia is famous in agricultural sector (include in non oil and gas), it is known in 1980’s era Indonesia make lot of income from this sector. At that time agriculture was bigger than the oil- gas sector. The growth of agricultural sector (non oil and gas) is seen from the growth of Indonesian import and export.
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Table 1.1
Indonesian Export and Import Growth
INCLUDE OIL AND GAS
NOT INCLUDE OIL AND GAS
YEAR
EXPORT
IMPORT
EXPORT
IMPORT
1980
23950.4
10834.4
6168.8
9090.4
1981
2,164.5
13272.1
4501.3
11550.8
1982
22328.3
16858.9
3929.0
13314.1
1983
21145.9
16351.8
5005.2
12207.6
1984
21887.7
13882.1
5869.7
11185.3
1985
18586.7
10259.1
5868.9
8983.5
1986
14805.0
10718.4
6528.4
9632.0
1987
17135.6
12370.3
8579.6
11302.0
1988
19218.5
13248.5
11536.9
12339.5
1989
22158.9
16359.6
13480.1
15164.4
1990
25675.3
21837.0
14604.2
19916.6
1991
29142.4
25868.8
18247.5
23558.5
1992
33967.0
27279.0
23296.1
25164.6
1993
36823.0
28327.8
27077.2
26157.2
1994
40053.4
31983.5
30359.8
29616.1
1995
45418.0
40628.7
34953.6
37717.9
1996
49814.8
42928.5
38093.0
39333.6
1997
53443.6
41679.8
41821.1
37755.7
1998
48847.6
27336.9
40975.5
24683.2
*) Indonesian Statistical Year Book 1998
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One of the most government revenue is come from tobacco production as Indonesian tobacco industry is well developed. Indonesia is a large producer and exporter of tobacco and cigarettes, and therefore a good prospective market for The United States tobacco. Tobacco export from Indonesia has a good market in United States market, because they like the kind of tobacco from Indonesia. Indonesia has several kind of cigarettes product like the sweet- smelling kretek (clove- flavored).
Indonesian annual production of cigarettes is 245 billion pieces. During 1997 Indonesia also exported cigarettes worth US$ 127 million. The export of cigarettes reflects that Indonesia's total international trading of tobacco and cigarettes in 1997 was US$ 588 million, with a positive balance of US$ 174.6 million.
The core objective of Indonesian tobacco policy is maximum revenue collection and export of cigarettes. Indonesia has succeeded in attracting Foreign Direct Investment (FDI) in cigarette manufacturing, which has helped Indonesia’s exports. The simultaneous import and export of tobacco is explained by the need for blending various tobaccos for the desired flavor for international brands cigarettes.
Geographically, cigarette manufacturers are concentrated in two regions, which are almost 2000 Km apart. 90% of cigarette manufacturing is in Central and East Java (in a 200 Km radius). Important cities in this region are Surabaya, Bojonegoro, Kudus, Kediri, and Malang, those cities centers for tobacco manufacturing and trading. They have been marked red
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in the map, at annexure-A. 10% cigarette manufacturing is in Sumatra Island, and the city of Medan is important center for tobacco trading.
Size of Firm
As for the "Size of the Firm" is varying, the market for tobacco can be divided into three segments. The three segments are as follows:
Large Enterprises
1. PT. Gudang Garam: It is a local Indonesian company, which enjoys Indonesian market leadership. Its annual production is 85 billion pieces, with 34% market share.
2. PT. Djarum Kudus: Djarum Kudus annual production capacity is 39.6 billion pieces with market share of 16.15%.
3. British American Tobacco (BAT): It is the largest multinational tobacco in Indonesia. Its annual production capacity is 11.2 billion pieces, having 4.56% market share. 50% of their cigarette production is for export market.
4. PT. Bentoel: Its annual cigarettes production capacity is 17.1 billion pieces. Its brands are Bentley and Marlboro. Its market share is 6.96%.
Medium Size Enterprises
1. Rothmans: Its annual production capacity is 7.2 billion pieces, having 2.93 % market share. Its popular brands are Dunhill, Kansas, Blue Ribbon and Pall Mall.
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2. Philips Morris: Philips Morris imports blended tobacco from their subsidiary in Malaysia. In Indonesia they have only cigarette manufacturing factory. Tobacco blending is done in Malaysian subsidiary.
3. PT Sampoerna: Its annual cigarette production capacity is four billion pieces, having 1.63 % market share. It has also factories in Viet Nam and Myanmar. The tobacco sourcing for those factories is also done from Indonesia.
4. NV. Sumatra Tobacco Trading Company: The factory and the company head quarter are in the city of Medan, in Sumatra. Its annual production is 14.2 billion pieces, with 5.78% market share. Its famous brands are Jet, Hero, and United.
Small Enterprise
There are 135 small size cigarette manufacturers; they have a total 26.8% market share. Their main raw material is local tobacco. However, they also use some imported tobacco, primarily for blending. There are eight-tobacco importers in The United States who buy Indonesian tobacco, they are:
1. American Tobacco Company (Richmond)
2. Conwood Corporation (Memphis)
3. Culbro Tobacco (Bloomfield)
4. Fader & Son inc (Baltimore)
5. Finck Cigar Company (San Antonio)
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6. Lancaster Leaf Tobacco co (Lancaster)
7. Marine marketing of California (California)
8. Thorpe & Ricks inc (Rocky Mount)
Market Demand Forecasting
Indonesian tobacco harvesting months are August/September. In 2005 the Industry sources predict that due to non-availability of fertilizers and pesticides, the production will be lower. There is too much rain, the crop won’t be good, and production is less than average. On the other hand, the demand for cigarettes is increasing at the rate of 4.50% per annum and hence the demand for imported tobacco will increase.
Due to its strong cigarette manufacturing industry, both for local consumption as well as for export, Indonesia will be an important market for tobacco. The need for blending of various types of tobacco for good quality cigarettes makes the imported of tobacco is essential.
In the short (one year), medium (two to three years), and long term (four to seven years) Indonesia will be important market for tobacco. The export of tobacco from Indonesia has decline during crisis in 1998. Indonesian economy is now on the way to recovery. Interest rates has come down from 40% to 20%, currency has stabilized within the IMF prescribed limits, and inflation has come down from above 60% to less than 15%. The improvement in economic fundamentals and peaceful election has restored the business confidence and there are strong indications that the economy
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will come out of the crisis within a year or so.
Summarize the trends in global tobacco use and the resulting immense and growing burden of disease and premature death, in 1999, World Bank published, "Curbing the Epidemic; governments and the economic of tobacco control", and there’s an article by Joy de Beyer, he wrote:
By 1999 there were already 4 millions deaths from tobacco each year, about half of these deaths are in high- income countries. Tax increases that raise the price of tobacco products are the most powerful policy tool to reduce tobacco use, and the single most cost-effective intervention. Why? Because government hesitates to act decisively to reduce tobacco use, they are afraid of the tax increase and other tobacco control measure might harm the economy. By reducing the economic benefits, the country gains from growing, processing, manufacturing, exporting and taxing tobacco. (World Bank Journal vol. 4/ 1999)
Indonesia has several important tobacco exports destination; those countries are Japan, Singapore, Malaysia, USA, Belgium & Luxemburg, Netherlands, Germany, France and Spain, but the most tobacco are exported to USA and the table under explains it.


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