Indonesia Fast-Tracks Its Electric Vehicle Ambitions

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Indonesia Fast-Tracks Its Electric Vehicle Ambitions

So far, most EV-related investment has come from Chinese and South Korean companies. Can the country succeed without Western involvement?

Indonesia Fast-Tracks Its Electric Vehicle Ambitions

Employees monitor the furnaces information displayed on computer screens in a control room at PT Vale Indonesia’s nickel processing plant in Sorowako, South Sulawesi, Indonesia, Tuesday, Sept. 12, 2023.

Credit: AP Photo/Dita Alangkara

Leaping up from his chair, Rachmat Kaimuddin begins to sketch out on a whiteboard the various stages of the complex supply chain for electric vehicles (EVs). From his office in the Coordinating Ministry of Maritime Affairs and Investment, Indonesia’s point man for its EV industrial policy lays out a vision of nickel ore flowing into refineries, purified alloys being processed into batteries, and batteries being installed in hundreds of thousands of electric cars – all without leaving Indonesia. Tens or even hundreds of thousands of Indonesians could be pulled into high-productivity jobs, exports would climb, and Indonesia would carve out a prominent position in the global green economy.

Blessed with enormous reserves of nickel that is vital for the production of EV batteries, the Indonesian government is determined to leverage these supplies to build a domestic EV supply chain. To this end, it has aggressively courted foreign car and battery makers. “We want people to view us as a production hub for EVs in the region,” says Rachmat.

However, even as Chinese and South Korean companies pile into the Indonesian market, U.S. and European companies have lagged behind. Supposedly imminent decisions by Tesla, Volkswagen, or BASF to build production facilities in Indonesia have failed to eventuate. At the same time, without Indonesia, the United States and Europe will likely struggle to fulfill their own EV ambitions – and may find themselves locked out of a market where the links shaping future supply chains are currently being forged.

At first glance Indonesian, U.S., and European goals should be reconcilable. The U.S. and the European Union are urgently searching both for critical minerals needed to fuel their green revolutions and to diversify their supply chains away from China. And while Indonesia is insistent that it will not become merely a source of raw materials for foreign industry – a goal that recently led it to ban the export of raw nickel – the government also sees foreign investment as vital if it is to develop the industry further.

Bringing these priorities together has proved challenging. Thickets of regulations, vested interests, and environmental, social, and corporate governance concerns mean that Indonesia is still viewed warily by many Western investors. U.S. and European companies also have to reckon with the fact they are laggards when it comes to developing new battery and EV technology. The Biden administration’s new Inflation Reduction Act has imposed yet another hurdle by linking generous subsidies to policies aimed at reshoring production and reducing reliance on the Chinese companies central to the EV industry.

Looking at the vast mines and smelters that are the bedrock of Indonesia’s EV aspirations, the story seems like a familiar one of Chinese dominance. Indonesia’s nickel production has exploded in recent years, rising from 345,000 metric tons in 2017 to 1.6 million metric tons in 2022, making it the world’s biggest nickel producer. It is also the world’s second biggest producer of cobalt after the Democratic Republic of the Congo, with production jumping from 2,700 tons in 2021 to 10,000 in 2022. Both metals are vital for the production of NMC (nickel, manganese, and cobalt) batteries, currently the lithium-ion battery type most commonly used in EVs.

“Chinese companies are basically wholly responsible for this boom,” says Harry Fisher, project manager at Benchmark Mineral Intelligence. Even before the EV boom began to increase demand for nickel, Chinese companies dominated the sector in Indonesia – having pioneered new refining techniques and stuck it out when regulatory travails pushed other foreign companies toward the exits.

Their ability to then translate this into dominance of the supply chain of nickel for batteries was underpinned by their pioneering of a refining method called high-pressure acid leach (HPAL). While HPAL has been in use since 1961 it was tricky to master, with plants often struggling to hit production targets, until Chinese engineers working at a plant in Papua New Guinea cracked it, slowly developing dozens of small innovations that transformed an unpredictable process into a reliable one. The technique developed by China ENFI Engineering Corporation, a subsidiary of the state-owned China Metallurgical Group Corporation, was then transferred to other Chinese companies.

The first HPAL plant in Indonesia started operations in May 2021, built under a joint venture between China’s Ningbo Lygend and Indonesia’s Harita Group. Indonesia now has three such plants, capable of producing more than 160,000 tons of mixed hydroxide precipitate (MHP) – an intermediate nickel product – per year. Roughly 40 more factories have been proposed, according to data from Benchmark, nearly all of which look set to involve Chinese companies in some capacity.

One exception is a proposed partnership between France’s Eramet, which operates a nickel mine in Indonesia, and the German chemical giant BASF. However, some sources suggest the project is now on hold over concerns about the environmental impact; HPAL produces large quantities of toxic byproducts that are difficult to store. For now, the most “Western” project underway is a joint venture involving China’s Huayou Cobalt, Ford, Volkswagen, and the Brazilian miner Vale.

Further along the supply chain, South Korea’s LG Energy Solutions is quickly establishing itself as a vital player. The company, the world’s second largest EV battery producer, is leading a consortium that is investing $9.8 billion in multiple facilities in Indonesia.

The first step after MHP is refining it further into nickel sulfate and cobalt sulfate. So far, there is only a single plant in Indonesia that is capable of doing this, but it is the world’s largest and is operated by the same Chinese company that pioneered HPAL processing in Indonesia. “However, seven more are in the pipeline. All bar one appear to involve Chinese partners in some capacity. The only apparent exception is a $3.5 billion processing plant currently being built by  South Korea’s LGES, which has partnered with Chinese companies on other projects.”

Next, comes a series of extremely complex processes that are needed to produce the battery. This involves a further round of refining to turn the sulfates into pCAM (precursor cathode active material) and then into CAM. Producing cathodes then requires lithium which Indonesia will have to import, perhaps from Australia. Batteries will also require anodes which are usually made using graphite, whose supply is nearly monopolized by China.

The process is completed by combining these into battery cells, grouping cells into modules, and then grouping modules into packs.

U.S. and European companies are absent from this stage of the production cycle as global battery production is dominated by a handful of Chinese, South Korean, and Japanese companies. Yet, Chinese battery makers’ presence in Indonesia is also currently lacking. CATL and Gotion, the world’s first and seventh largest EV battery producers, respectively, have both made noises about establishing factories in Indonesia but here, too, there has been little sign of progress.

For the moment South Korea’s LGES is the only game in town, with plans to build facilities for every one of these stages in Indonesia. In addition to the sulfate plant, it is building a $2.4 billion factory to produce pCAM and cathodes, a $3.6 billion battery cell plant, and a $1.1 billion battery pack plant. To supply these plants it has forged a partnership with a Chinese company, Huayou Cobalt.

Last comes the building of the EVs themselves. Here Indonesia has a mixed starting position. It benefits from a relatively large auto sector, as the second biggest market in the Association of Southeast Asian Nations (ASEAN) and, after Thailand, the second biggest production hub. However, the sector is dominated by Japanese companies that have been laggards in the EV transition.

“So far, progress has been quite limited in attracting EV production,” says Siwage Dharma Negara, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore. Indeed, the only two companies currently producing EVs in Indonesia are China’s Wuling and South Korea’s Hyundai. However, more may follow. Mitsubishi, VinFast, Neta, and Chery have all stated their intention to produce in Indonesia.

What is notable so far, however, is the lack of major Western automakers. Despite optimistic announcements by senior Indonesian officials, investments in factories by Volkswagen or Tesla have yet to become a reality.

Here part of the story may be the U.S. Inflation Reduction Act (IRA). The $7,500 in subsidies that it offers to consumers who purchase EVs is divided into two halves. The first, conditional on the EV being assembled in the U.S. or a country with which it has a free trade agreement, is a strong disincentive for automakers who might otherwise be interested in setting up a factory in Indonesia. Carmakers looking to cater to the American market have rushed to set up facilities in the U.S. rather than in other nations.

The second tranche of the subsidy covers “critical minerals,” which can be sourced from countries with which the U.S. has free trade agreements. The Biden administration has proved flexible on this point, striking a “critical minerals agreement” with Japan that it declared will count as equivalent to a free trade agreement. Indonesia has lobbied loudly for a similar deal. However, so far there has been no sign of movement on the U.S. side, and without such an agreement it is hard to see Western companies hoping to access the U.S. market by setting up manufacturing facilities in Indonesia.

Even if a deal is struck, a vague foreign entity of concern rules represent another potential tripwire. These rules disqualify EVs tied to any of the named “entities” – in practice, nearly all Chinese companies – from receiving subsidies. Any Western miner, refiner, or car company entering the Indonesian supply chain would almost certainly have to work with Chinese companies as suppliers and partners, potentially disqualifying any cars made in Indonesia from these lucrative subsidies.

For the moment the strictness of these rules remains unclear, with official guidance only scheduled to be issued at the end of this year. “We don’t have any idea how Chinese equity in free trade countries or places like Indonesia will be treated,” says Tim Bush, Global EV Battery Research Coordinator at UBS. According to Bush, companies are hoping anything short of a Chinese majority stake will be quietly accepted.

China’s omnipresence in the EV supply chain means that the Biden administration has occasionally signaled a degree of pragmatism on this issue. Other politicians, however, are less compromising, with a partnership between Ford and Chinese battery maker CATL on the rocks after attacks by U.S. senators.

Still, if the rules are set too tight, the U.S. might struggle to meet its own ambitions. Without access to Indonesian supplies, it will struggle to secure enough class one nickel to hit its target of 50 percent electrification by 2030, according to Bush.

Staying out of Indonesia could also mean missing the boat in a key emerging node in the global EV market, where the relationships that will shape future supply chains are currently being built. On September 25, when LGES announced it was entering into a partnership with China’s Huayou to build two battery supply chain plants in Indonesia, it announced it would also work to build two plants in Morocco. These would produce materials for LFP batteries, a cheaper lithium-ion battery technology currently being pioneered in China.

Notably, Morocco has free trade agreements with the European Union and the U.S., and LGES declared that all four plants would be IRA-compliant, with equity adjusted to comply with whatever foreign entity rules are issued. If Western companies aren’t allowed to show similar flexibility in cooperating with Chinese companies in battery and EV production, they risk finding themselves locked out, left behind, and more reliant than ever on foreign expertise.

For its part, the Indonesian government would prefer to see Western firms involved in its EV supply chains. After all, in 2022 six of the 10 biggest automakers in the world by sales were part European or American, and Tesla sold more EVs than any other company. But, as Indonesian policymakers are very aware, the EV revolution is already upending the established order in the automotive industry. This year, Tesla might see its EV sales crown stolen by the new kid on the block – China’s BYD.