Djarum PT

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Djarum PT

Jl Aipda K S Tubun 2C/57
Jakarta
Indonesia
Telephone: +62 21 534 6901
Fax: +62 21 534 6892
Web site: http://www.djarum.com

Private Company
Incorporated: 1951
Employees: 30,000
Sales: $4.3 billion (2002)
NAIC: 312221 Cigarette Manufacturing

Djarum PT is one of Indonesia's top three producers of "kretek" cigarettes, the dominant form of tobacco in a country which ranks in the top ten among countries with the highest rates of smokers. Kretek cigarettes contain locally grown tobaccos blended with cloves—which typically represent about one-third of a cigarette, but can range as high as 50 percent of a kretek cigarette's content—and mixed with a special "saus" (sauce) specific to each brand. A sauce can contain up to 100 different ingredients, including flavorings, spices, fruits, coffee, and other seasonings. There are said to be more than 2,000 kretek brands, produced by as many as 500 different companies, in Indonesia, yet only a small handful approach the size of Djarum. The company produces a variety of kretek brands for the domestic market, including flagship Djarum Super, its bestselling brand, Djarum Coklat, Inspiro, LA Lights, and others. If Djarum continues to duke it out at home with chief rivals Gudang Garam and Sampoerna, it will have claimed the leading share of the international market for kretek cigarettes. The company's export brands, which include Djarum Original, Djarum Black, Djarum Bali Hai, LA Lights, and LA Lights Menthol, and fruit-flavored cigarettes such as Djarum Cherry, help it maintain market share positions as high as 70 percent, such as in the United States. At the beginning of the 21st century, Djarum has begun a diversification drive, fueled by the strong cash flow provided by its cigarette sales. In 2001, the company became a majority shareholder in the failing Suharto-controlled Bank Central Asia (BCA), then, in 2003, entered the property development sector with the construction of a $100 million shopping complex. The company also has entered electronic appliance production, and in 2004 began a 30-year contract to upgrade and manage two prominent Jakarta hotels, the Hotel Indonesia and the Hotel Wisata. The company is wholly owned by the secretive Hartono family, and has been led by brothers Budi and Bambang Hartono since the beginning of the 21st century.

Birth of a Cultural Icon in the 19th Century

Perhaps more than any other product, kretek cigarettes represented the meeting of Western and Eastern cultures. The colonization of what later became known as Indonesia had introduced tobacco culture into the spice-rich region. Cultivation of higher-quality, higher-yield tobacco began in the 1860s under the influence of the Dutch colonial government. By the end of the century, tobacco had grown into a major crop—with many small farmers producing a wide range of tobacco varieties, which were in turn influenced by soil and climatic conditions. Yet cultivation of spices, and especially cloves, remained a vital part of the region.

The origin of kretek cigarettes traced to the late 19th century. At the beginning of the 1880s, Haji Jamahri, a native of the Kudus, had been suffering from chest pains brought on by asthma. Clove oil (also known as eugenol) had been used traditionally as a mild analgesic, and Jamahri initially had attempted to reduce the pain by rubbing the oil on his chest. While this provided some relief from the pain, Jamahri sought a means of bringing the clove oil in more direct contact with his lungs.

Smoking tobacco had by then increasingly become a central facet of Indonesian life, where tobacco was often rolled up as cigarettes using corn husks—which provided the additional benefit of waterproof protection during the rainy season. Jamahri wondered what would happen if he were to mix a bit of cloves with tobacco and smoked that blend.

The results surpassed Jamahri's hopes—the effect of the clove oil was immediate, and Jamahri's chest pains vanished. Word of Jamahri's clove cigarettes spread in the Kudus region. Jamahri began rolling his cigarettes for others, and made the first attempts to market the new cigarette commercially. Before long, the clove cigarettes—which became known as "kretek" cigarettes for the "kretek-kretek" popping sound made by the burning cloves—were available in pharmacies as a medicinal product.

Jamahri died in 1890 before he could fully commercialize his invention. Instead, a number of small, hand-rolling workshops sprang up, centered on the Kudus region—which later became synonymous with kretek. The 1890s saw the first effort to market kretek cigarettes, when Noto Semito (also spelled as Nitisemito; to whom a number of accounts ascribe the invention of kretek) developed his own blend of tobacco—itself blended from among the many varieties and qualities available—and clove, and began selling them under a brand name, Bal Tiga (Three Balls).

Bal Tiga grew into Indonesia's leading kretek brand, and Noto Semito became the islands' first tobacco millionaire, inspiring many others to begin preparing their own clove blends. Kretek cigarette makers—and smokers—had quickly discovered that a pure blend of clove and tobacco was too harsh to smoke. Instead, cigarette makers began experimenting with different ingredients—spices, fruits and other substances—to smooth out the tobacco-clove blend. These ingredients formed the basis of the third major part of a kretek cigarette—the "saus" (from the Dutch word for sauce), the recipes for which were jealously guarded in secret.

Hand-rolling remained the sole means of producing cigarettes, in part because the clove and other ingredients were too heavy for the cigarette-making machinery that was revolutionizing the tobacco industry elsewhere. The growing popularity of kretek cigarettes led to the development of an entire industry, and later became the nation's fourth largest industry and a primary source of tax revenues for the government. While the kretek industry remained centralized around Kudus, vast portions of the Indonesian economy came to depend on kretek. The industry employed millions of Indonesians, from the many small tobacco farmers, to the army of hand-rollers, typically women, capable of rolling thousands of cigarettes each day.

Modern Kretek Maker in the 1950s

New names began to appear in the years leading up to World War I, including Sampoerna, formed by Chinese immigrant Liem Seeng Tee, who was one of the first to begin marketing his own kretek blends. Yet for much of the 20th century, kretek cigarettes represented only a small part of the larger tobacco market, which came to be dominated by so-called "white" cigarettes, the standard tobacco cigarettes so named for the paper in which they were rolled.

A new generation of kretek cigarette makers appeared in the years following World War II. Many of the former businesses, including Noto Semito and his Bal Tiga brand, had not survived the turmoil of the war years and its immediate aftermath. Competition for the kretek market became more and more fierce into the 1950s, as the numbers of kretek makers, and their brands, swelled.

Among the many smaller brands active in the Kudus region was one called Djarum Gramophon, which literally meant "gramophone needle." The needle remained the main symbol of the company as it developed over the following decades. Impetus for the company's growth came in 1951, when Oei Wie Gwan, another Chinese native, acquired the small business. Oei changed the company's name to Djarum and began developing his own kretek blend.

Starting with just 70 hand-rollers, Djarum began marketing its first brand, Djarum, during the 1950s. The company's spice blend proved quickly popular, and the company began adding new employees and new equipment. Djarum soon released a second, popular brand, Kotak Adjaib.

The Djarum company nearly ceased to be, after being destroyed by fire in 1963. The company rebuilt, however, and took the opportunity to modernize and upgrade its equipment. Djarum also continued adding new kretek blends and brands. In the late 1960s and early 1970s, Djarum recognized the need to modernize its management as well, and began hiring professional management. The company hired experts from overseas to train its personnel, and also began adopting modern marketing techniques.

In 1970, the company established its own research and development center to produce new kretek blends, but also to begin adapting the machinery used to produce white cigarettes for use with kretek blends. By 1976, Djarum had successfully launched its first machine-made brand, Djarum Filter. By then, the company had become among the first in Indonesia to recognize the potential of the international market—not only among the Indonesian expatriate community, but also among consumers in other markets receptive to the blend of spices used in kretek cigarettes. Djarum began exporting its brands—and creating blends and brands specifically for its export markets—in 1972.

By then, the domestic market had undergone a dramatic shift. Where previously tobacco sales had been dominated by white cigarettes, Indonesians now turned to kretek—in part because of protectionist policies adopted by the Suharto regime after it came to power in the 1960s. Another factor in kretek's growing popularity was the higher levels of nicotine present in a typical cigarette, which could deliver a nicotine charge as much as twice as high as a standard white cigarette. By the end of that decade, sales of kretek surpassed white cigarettes for the first time. By the 1990s, kretek accounted for more than 90 percent of all cigarette sales and had become nearly synonymous with Indonesian culture.

Company Perspectives:

Our Mission: To satisfy the global smoker's needs.

While the domestic market continued to support a large number of smaller cigarette makers, the era now gave rise to a handful of dominant groups. In the early 1980s, Djarum secured a place for itself among the country's top three kretek groups, in part due to the overwhelming success of its latest brand, Djarum Super, launched in 1981. By the end of the decade, that brand had become the strongest selling brand in the country, raising Djarum to the number one spot ahead of chief rivals Sampoerna, Bentoel, and Gudang Garam.

Diversifying in the 2000s

Oei, joined by sons Budi and Bambang Hartono, continued to seek out new product opportunities. In 1984, the company began developing a new tobacco product, a kretek cigarillo. The company also continued to shift production to machinery. In 1988 the company launched a new machine-made brand, Exclusive, featuring a lighter flavor with a lower tar content (typical kretek cigarettes contained up to four times the tar levels of a standard tobacco cigarette). While that brand targeted especially the export market, Djarum launched another new brand in 1989, Filasta. Produced with a combination of hand-rolling and machine production, the new brand was added especially to appease workers' concerns over the company's rising reliance on machinery.

Despite its position as one of the top three kretek groups in Indonesia, the company—and the Hartono family that owned it—kept out of the spotlight, in part because of the family's distance from the Suharto regime. In the late 1990s, however, it became apparent that leadership of the company had passed to Budi and Bambang Hartono, who now faced into the severe economic climate of the period. The collapse of much of Indonesia's economy during the economic crisis that swept through much of Asia in the late 1990s toppled a number of great Indonesian fortunes. The kretek makers, including Djarum, managed to weather the worst of the crisis, in part because of the strong cash flows from cigarette sales. Indeed, kretek purchases continued to grow at a steady pace into the beginning of the 21st century—earning Indonesia the dubious honor of a place among the countries with the fastest-growing proportion of smokers.

The fall of Suharto in 1998 represented a new era of opportunity for the company, as many of the corporations, run by the circle of Suharto family, friends, and other "cronies," that had previously dominated much of the Indonesian economy were now shut down or sold off. Djarum's strong cash flow gave the company the resources to begin a new diversification drive—a rarity in the industry, where most of its competitors, like Djarum previously, had focused exclusively on the kretek market.

In 1998, the Hartonos joined a partnership to acquire majority control of Bank Central Asia (BCA), the largest private bank in Indonesia, previously owned by the Suharto and allied Salim families. The Hartonos, through Djarum, were said to have put up most of the $539 million for the 51 percent stake in BCA, giving the family effective control of the banking group and a place among the country's new generation of business "titans."

Djarum's interest in diversifying continued to grow into the 2000s—fueled in part by Indonesia's growing health concerns surrounding tobacco, particularly the high-tar and high-nicotine content of kretek cigarettes. In 2001, the company took part in the consortium, including Wings Group, that bought the Salim Oleochemicals in Surubaya, a producer of palm and coconut oils for shampoos.

Djarum also acquired interests in electronic appliances, then turned toward the real estate market. In 2002, the company launched construction of a $100 million shopping complex in Jakarta. The success of that venture encouraged the company to begin planning a second development project in North Jakarta. The following year, the company joined the bidding to acquire the management contract of two landmark Indonesian hotels, Hotel Indonesia and Hotel Wisata, both in downtown Jakarta. Djarum won the contract in 2004, after promising to spend more than $200 million renovating the two hotels. From a small kretek workshop just 50 years earlier, Djarum planned to build itself into one of Indonesia's most powerful 21st century conglomerates.

Principal Competitors

Sampoerna PT; Perusahaan Rokok Tjap Bentoel PT; Sumatra Tobacco Trading Company, N.V.; Gudang Garam Tbk PT; Hanjaya Mandala Sampoerna Tbk PT; BAT Indonesia Tbk, PT; KT&G Corporation.

Key Dates:

1880:: Clove cigarettes, later called kretek, are invented by Haji Jamahri.
1890:: Noto Semito launches the first kretek brand, Bal Tiga.
1951:: Oei Wie Gwan acquires a small kretek market in Kudus, Djarum Gramophon, which becomes Djarum.
1970:: Djarum launches a research and development center.
1972:: Djarum begins exporting kretek cigarettes.
1976:: The first machine-made kretek brand, Djarum Filter, is launched.
1981:: Djarum Super is introduced; Oei Wie Gwan's sons, Budi and Bambang Hartono, join the company.
1998:: Djarum, now led by the Hartono brothers, acquires majority control of BCA, the largest bank in Indonesia.
2001:: Djarum acquires a stake in Salim Oleochemicals.
2004:: Djarum begins a 30-year contract to renovate and manage two Jakarta hotels.