Indonesia is betting big on the EV industry
Indonesian President Joko Widodo set a clear goal and political will in the electric vehicles (EV) industry for the country to emerge as a regional economic power in manufacturing while boosting global sustainability initiatives.
According to the World Economic Forum, Indonesia is home to an estimated 115 million two-wheel (2W) vehicles and 16 million four-wheel (4W) vehicles, 70 per cent of which run on fuel. The potential of conversion from combustion engines to EVs would require the support of domestic production, and this has proven to be promising. Two-wheeled EVs have seen a 262 per cent growth in 2023, or a nearly fourfold increase to 62,000 units plying Indonesia’s roads compared to a year ago.
Despite Indonesia’s shift of motorcycles to 2W EVs, the government also set an ambitious goal for the domestic production of 4W EV passenger cars. Indonesia’s Deputy Minister of Transportation and Infrastructure Rachmat Kaimuddin shared that the current automotive market contributes 4 per cent (USD 52 billion) of the country’s GDP, valued at USD 1.3 trillion. The goal is to raise the production of 4W EVs to 2 million by 2030. Although some consumers are reluctant about migrating to EVs over battery quality, particularly its durability and charging capacity, the Indonesian government is attracting foreign businesses like Singaporean companies to establish battery exchange services at certain stations and state-owned corporations to add charging stations across Indonesia. These issues are among the barriers restricting the greater adoption of EVs in the country.
The question remains if Indonesia’s EV industry can gain the favour of foreign investors as onshore demand for EV units remains low compared to the rest of the world.
Developing the local industry
Indonesia’s Minister of Industry, Agus Gumiwang Kartasasmita, said 2021 saw the country picking up steam in the manufacturing sector, surpassing countries like South Korea and Brazil in terms of growth. The government also laid out a plan called “Making Indonesia 4.0” focused on developing select sectors. Considered as one of the five priority sectors under the automotives segment, the EV industry has a goal of boosting the contribution of the manufacturing sector to over 25 per cent of GDP by 2030 from 16 per cent currently.
Available technology, together with the domestic abundance of mineral resources – particularly nickel, a key component of rechargeable batteries – and a young labour force, capture the immense potential value of the EV industry to the Indonesian economy. Per Widodo, Indonesia is currently home to 59 EV manufacturers while the country’s first EV battery factory will start operating by June 2024.
Graph 1 indicates that the manufacturing sector’s GDP value has grown consistently over the last three years and is likely to be sustained despite some seasonal declines. However, its share to GDP has been falling albeit still respectable. Overall, the percentage share of manufacturing to GDP has stabilized around 20 per cent. World Bank data showed that the share of manufacturing peaked in 2002, accounting for one-third of Indonesia’s overall output.
Given the steady expansion of the manufacturing sector, the EV industry stands on solid footing. Although Indonesia’s manufacturing Purchasing Manager’s Index (PMI) slightly fell from 52.9 points in April to 52.1 points in May, it is still considered strong within the ASEAN region compared to Malaysia (50.2), Thailand (50.3), Vietnam (50.3), Philippines (51.9), and Singapore (50.6). The strong PMI reading signals sustained growth, providing support to the EV industry and attracting greater foreign investments in Indonesia.
According to the 2023 Special ASEAN Investment Report, the influx of foreign direct investments (FDIs) in Indonesia reached USD 22 billion, over half of which went into the manufacturing sector. Foreign businesses invested heavily in EV-related companies, data centres, and digital payment systems in 2022. According to a global bank, the country can leverage its rich supply of mineral ores and mineral processing to attract more FDIs towards its developing EV value chain.
Nickel-rich
Over the last few years, the influx of FDIs into Indonesia’s EV industry has been on the right track.
In 2021, South Korea’s LG Energy Solution and Hyundai Motor Group started construction on a USD 1.1-billion plant to assemble batteries for EVs. The following year, Hyundai not only launched the first electric car assembly plant in Indonesia but also built a network of charging stations and a battery production plant. In 2023, Germany’s Volkswagen and American carmaker Ford bared plans to put up EV battery plants in Indonesia. This year, China’s Build Your Dream said it plans to invest USD 1.3 billion towards building a manufacturing plant in West Java while Vietnam’s electric car company VinFast started construction of an EV assembly plant worth USD 1.2 billion.
One crucial factor behind Indonesia’s FDI pull is the amount of nickel reserves available domestically. Graph 2 shows Indonesia was the top producer of nickel globally with 1.8 million metric tons in 2023 alone. The Philippines is a far second at 400,000 tons of nickel produced. In just two years after the Indonesian government banned nickel ore shipments, the value of Indonesia’s nickel export ballooned from USD 3 billion to USD 30 billion as mining companies were forced to process nickel products onshore. Indonesia’s rich nickel deposits combined with an ore export ban make for unique economic opportunities for the country to capitalize on to emerge as an EV battery production hub globally. Further, the EU has signalled willingness to negotiate with Indonesia regarding its nickel ore export ban, a departure from its earlier move to challenge the policy before the World Trade Organization.
The Indonesian government provides tax incentives to boost the growth of Indonesia’s domestic EV market and also encourage global industry players to invest in the sector. Such perks include exemptions from paying import duties and sales tax for the importation of electric cars in certain quantities. We believe that Indonesia will not be the only one benefiting from the EV boom as this will also penetrate the ASEAN market and the global EV batteries value chain. With tax breaks and pro-investment policies, growing domestic demand, and an abundance of natural resources, foreign investors should take advantage of Indonesia’s EV industry.
