“By 2027, we may be one of the top three countries in the world producing EV batteries as well as electric cars.” So said Luhut Binsar Pandjaitan, Indonesia’s coordinating minister for maritime affairs and investment, at a government meeting on January 17.
Luhut’s optimistic declaration followed the recent announcement that Germany’s BASF and French mining conglomerate Eramet will sign a $2.6 billion partnership deal to invest in a facility in Indonesia’s Weda Bay to process nickel for use in electric vehicle (EV) batteries. It also came on the heels of reports that both Chinese automaker BYD Group and U.S. EV maker Tesla are finalizing agreements to invest in domestic EV production facilities in Indonesia.
As Indonesia looks to transform itself into a global EV hub, it must strike a delicate balance between promoting domestic development and attracting foreign investment, while improving the affordability of EVs and aligning its green industrial policies with global trading rules.
If Indonesia falls short of its EV dreams, it will not be for want of natural resources or determination. On the former count, the Southeast Asian nation is well-positioned to transform itself into a comprehensive EV battery ecosystem. It boasts an abundance of the raw materials that comprise the lithium-ion batteries used in electric vehicles. These include nearly one-quarter of the world’s known reserves of nickel, as well as plentiful quantities of copper, bauxite, and tin. Indonesia lacks only lithium, and the government is currently in talks to source the mineral from mines in Australia.
In addition, Jakarta has passed a raft of regulations to signal its ambitions and readiness to “usher in the age of EV.” By 2025, Indonesia is aiming to have 2.5 million total EVs on the road – including 400,000 fully electric cars – and is hoping for EVs to make up 20 percent of all car sales. It also plans to build charging stations in 2,400 locations, up from the 267 EV charging stations in 195 locations as of March 2022. All state-owned companies must use only electric vehicles by 2025 as well. By 2030, the Ministry of Energy and Mineral Resources wants 2 million electric cars and 13 million electric motorcycles on the streets, and for EVs to comprise 25 percent of all vehicle sales.
One challenge for Jakarta is balancing its desire to promote Indonesian state-owned companies while also attracting the foreign investment to make its EV dreams a reality. Indonesia’s Perpres Mobil Listrik (“Presidential Rule Concerning Electric Cars”) obligates a minimum usage of local components for different types of vehicles that reaches up to 80 percent for four-wheeled electric vehicles by 2030, a requirement that could deter foreign investment in the country’s EV sector. Meanwhile, despite the government’s recent “business-friendly” regulations, the World Bank’s Ease of Doing Business Index ranks Indonesia 73rd out of 190 countries.
For instance, Tesla seems hesitant to invest in production facilities in Indonesia, in part due to governmental requirements that foreign firms partner with state-owned enterprises. After a report stated that Tesla was nearing a deal to build a factory in Indonesia, chief executive Elon Musk tweeted: “Please be cautious about writing articles citing ‘unnamed sources’, as they are frequently false.” Right now, Jakarta’s negotiations with Tesla remain ongoing and uncertain.
That said, the Indonesian government has already successfully enticed many foreign carmakers and investors to the country. In March of last year, Hyundai opened an EV plant outside Jakarta that will start using locally-produced batteries in 2024. In April, top Chinese battery producer Contemporary Amperex Technology (CATL) partnered with Indonesian state-owned groups to construct a $6 billion mining-to-batteries complex in the province of North Maluku. Mitsubishi likewise plans to invest 10 trillion rupiah ($667 million) between 2022 and 2025 and expand its local production facilities in Indonesia. Then, in August, Tesla inked $5 billion worth of deals to purchase nickel from companies operating at Indonesia’s Morawali Industrial Park, a deal that was followed in September by Toyota’s announcement that it would open hybrid vehicle plants in Indonesia and soon initiate local production.
Increasing the affordability of EVs and boosting consumer adoption presents another, perhaps thornier, challenge. So far, the government has unveiled some fiscal enticements: It has exempted many electric vehicles, battery EVs, and plug-in hybrid EVs from sales and luxury sales taxes. It is also considering earmarking 5 trillion rupiah ($320 million) from this year’s budget to incentivize EV purchases, enabling buyers to receive discounts of up to 80 million rupiah ($5,310) for a locally-produced electric car. For a new electric motorbike, the subsidy will be 7 million rupiah ($466.62), with further details to be announced in February. The central government is also preparing to offer subsidies for electric bus passengers in major cities like Surabaya and Bandung, as well as lower parking rates for EVs in Jakarta.
But such inducements might not be enough. Gaikindo, the national car industry association, projects that domestic EV sales will reach just 25,000 by 2030. And of the 152 million vehicles currently in Indonesia, just over 15,000 – less than 1 percent – are electric.
Electric cars remain unaffordable for much of the population. The lowest-priced electric cars are twice as expensive as most internal combustion engine vehicles. Last March, President Joko “Jokowi” Widodo inaugurated Indonesia’s first domestic-made battery electric vehicle, the IONIQ 5, of which the cheapest model costs 748 million rupiah ($49,657). Conversely, fossil fuel-powered alternatives like the Toyota Calya start at just 149 million rupiah ($9,892), while the more luxurious Toyota Avanza costs 291.5 million rupiah ($19,352).
The limited enthusiasm of Indonesians for electric motorcycles relates more to anxieties about their performance and the insufficient number of charging stations. While the prices of such motorcycles are relatively close to their standard combustion counterparts, consumers are unsure about their endurance. Electric motorbikes can cover a distance of between 80-100 kilometers on each charge, but motorists worry about running out of electricity in a location without nearby charging stations. And although the state-owned electricity corporation PLN has installed 57 charging stations, these are primarily limited to population centers in Java and Bali.
A third hurdle for Jakarta to overcome relates to global trading rules. In November, the World Trade Organization (WTO) ruled against Indonesia’s ban on nickel ore exports and domestic processing requirements for the raw material, rejecting Jakarta’s argument that such restrictions were crucial to economic development and building green supply chains. For now, Jokowi is undeterred, and his government has appealed the decision. Furthermore, his government will forge ahead with a plan to ban the export of bauxite ore starting in June, and has signaled potential future restrictions on exporting tin and copper. “We want to be a developed country, we want to create jobs,” Jokowi said. “If we are scared of being sued, and we step back, we will not be a developed country.”
Still, the ruling could threaten Indonesia’s overall EV strategy, particularly if it encounters retaliation from its trading partners. A more viable long-term solution that aligns with both Jakarta’s downstream development goals and WTO rules would be to impose a tax on exports of nickel pig iron and ferronickel to encourage domestic nickel processing. The Ministry of Energy and Mineral Resources is actively reviewing this policy alternative.
Whether Indonesia can overcome all these obstacles remains to be seen. Already, however, the Southeast Asian nation has experienced some successes: Domestic electric car sales have more than quadrupled from 3,192 units in 2021 to 15,437 units in 2022. A February 2022 survey revealed that over half of Indonesians are considering purchasing an electric vehicle, and one-third plan to buy one within the next five years. Moreover, EV prices should only decrease for consumers as Indonesia augments its domestic EV and battery production. While Indonesia’s road to achieving its electric vehicle revolution remains long and strewn with obstacles, it might be too early to write off the government’s ambitions just yet.