Indonesia’s quest to enter EV supply chains
- Despite the headlines, Indonesia remains at an early stage in establishing a foothold in electric vehicle (EV) supply chains.
- The country’s natural endowments have lifted it so far and mean that battery production will be the area to watch. Further downstream development will progress slowly, however, with assembly rather than production of components dominating.
- A key constraint on the development of the industry is low domestic demand, an issue that the government is now prioritising.
- Growth in the consumer demand will be rapid, but from a low base. The biggest potential on a per unit basis will be in two‑wheeler EV sales and conversion.
Indonesia’s attempts to establish itself within international supply chains for electric vehicles is now well publicised. This is in part owing to the visible efforts of the Indonesian president, Joko Widodo (Jokowi). His administration included EV production in its National Masterplan for Industry 2015‑35 and specified EV infrastructure development in its National Medium-Term Plan 2020‑24. The president’s advocacy has grown since, culminating in a meeting between Jokowi and Elon Musk, the chief executive officer of Tesla (a US‑headquartered EV firm) in 2022, in an effort to convince the company to manufacture in Indonesia.
The focus on EVs stems from Indonesia’s natural endowments. The country has large proven reserves of nickel and cobalt, which are critical for EV battery production. Domestic supply of copper and bauxite is also ample, benefiting electronics manufacturing in general. The government has used export bans in the past decade to encourage investment in downstream mineral processing. The policy has spurred investment into domestic nickel ore refining, and the authorities now aim to introduce a bauxite ore ban by mid‑2023—a plan that we expect to be downgraded to imposing export duties, but which will nonetheless generate tensions with trading partners.
EV industries themselves have been designated as a strategic sector so foreign direct investment is eligible for a range of incentives, including multi‑year tax holidays and import duty exemptions, depending on the level of investment and whether goods are earmarked for export or domestic sale. Government financial support is available for research and construction of charging facilities. Investors are also able to negotiate other incentives and ad hoc provisions related to land, labour and infrastructure with local governments.
EV production is more words than action so far
The government and media have reported numerous plans for EV‑related production facilities in the past three years, most of which are joint ventures between local companies and foreign firms. Many of these investments are by foreign mineral refinery and chemical production companies and are linked to the production of batteries.
Among the ventures furthest down the supply chain is HKML Indonesia, located in Karawang New Industrial City, West Java. The government announced the project as Indonesia’s first EV manufacturing plant, and mass production is slated to begin in the first half of 2024. The plant is a joint venture between a South Korean consortium (which includes carmaker Hyundai and electronics firm LG) and Industri Baterai Indonesia (Indonesian Battery Corporation, or IBC, which is owned by four state-controlled firms). Hyundai and LG are also invested with IBC in a similar facility in Batang, Central Java, which began construction in mid‑2022.
In terms of vehicles themselves, Hyundai opened an EV assembly line at an existing conventional vehicle factory in Cikarang, close to Jakarta (the capital), in March 2022. Wuling, a Chinese automobile manufacturer, also began assembly of an EV model in a Cikarang factory in August 2022; a key advantage of Cikarang to automakers is its dry port, which allows rapid road and rail freight access to nearby Tanjung Priok seaport. Discussions between the government and Tesla are still ongoing, with no announcements as at end‑February 2023.
The large number of new and planned factories referred to as EV facilities suggests rapid progress towards Indonesia’s goal of becoming an EV manufacturing hub. However, it should be noted that the vast majority of these projects are at present only nickel refineries and chemical processing plants. Indeed, this explains the emergence of numerous EV‑tied plants in a short period of time, as in the case of Hyundai investing in two new but similar facilities almost simultaneously—there are significant cost and logistics benefits to building refineries close to nickel mines. The Wuling and Hyundai assembly lines are producing finished models, but they rely heavily on imported components, especially those specific to EVs.
In many of these EV‑tied projects, development timelines are vague and commitments to construct other vertical linkages are made in the form of “agreement frameworks” and memorandums of understanding, which are frequently non‑binding. The first scale production of battery cells (not extending to packs or final batteries) is slated for 2024 at the Hyundai-invested West Java facility, but there are no firm plans yet for production—rather than just component assembly—further down the value chain.
As such, Indonesia should not yet be viewed as an EV battery producer, or an integrated EV vehicle manufacturer. Entry to these industries will be constrained in the medium term by the small number of component and input manufacturers that will continue to operate within highly vertically-integrated supply chains; although high levels of vertical integration are, in any case, typical of national automotive industries.
Policy support is turning towards domestic demand
Given the actual progress in Indonesia’s EV sector, the prospects of the country becoming a regionally competitive EV exporter on the basis of current supply-side policy alone are slim. China, South Korea, Japan, and—more relevant to South‑east Asia—Thailand all have long-established export-oriented automotive industries. Indonesia can implement further import-substitution policy in the form of import tariffs and export bans to encourage domestic production, but there are limits to this approach, as free-trade agreements constrain tariff application and trading partners may retaliate with similar protectionist policies.
Indonesia will also have to focus on growing its domestic market for EVs. The country’s very large consumer base represents huge market potential, but sales of four‑wheeled vehicles remain low on a per head basis, to the extent that Indonesia is rivalled by Thailand for domestic car sales despite having nearly four times the population. Motorcycles remain very popular, owing to household income levels, poor infrastructure and urban congestion that disadvantages cars.
Government policy is already turning in this direction. Non‑hybrid electric cars were exempted from the luxury goods tax in late 2021. New consumer tax incentives for electric cars and direct subsidies for bikes will be implemented from March 2023, according to the Ministry of Energy and Mineral Resources. For the latter, this will include subsidies for both new bikes and the conversion of existing combustion engine two‑wheelers to electric. With these policies in place, the government’s focus will shift towards providing the charging station infrastructure required to make EVs a feasible option throughout urban areas.
Fast growth, but from a low base
Under this combined policy approach, growth in EV sales will be rapid in 2023‑27. Nevertheless, this will be from a very low base. EVs are currently a niche: just over 10,000 electric cars were sold in 2022, accounting for about 1% of total four‑wheeler sales. The inclination to run existing cars and bikes to expiry, given the minor cost savings of switching to electric alternatives in the short term, will be a key constraint for urban residents. Meanwhile, in suburban and rural areas, incremental expansion of charging stations will limit demand for electric cars.
The potential of Indonesia’s domestic EV market is very large. However, the long path towards a significant share of households owning EVs means that the EV manufacturing industry will not become regionally competitive within our 2023‑27 forecast period. The most significant short-term opportunities are likely to lie in the two‑wheeler EV market, owing to the generosity of new incentives and preference for short-range travel that is inherent in this vehicle type.
The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations identify prospective opportunities and potential risks.