Global consumers and businesses are increasingly aware of the environmental damage from economic activities. This has pushed the auto sector particularly towards a structural transformation to electric vehicles (EV) from traditional internal combustion engine (ICE) autos.
Indonesia is a key player in several mineral markets including nickel, which is one of the most widely used minerals in the production of EV batteries (Exhibit 1). This allows the Indonesian government to leverage its rich mineral resources to entice more foreign investment, which is exactly what it has been doing.
Lithium-ion batteries, typically used for EVs, use five critical minerals: lithium, nickel, cobalt, manganese and graphite. Although nickel is just one of the five, we believe Indonesia’s high share of global production is something car and battery makers cannot ignore.
Exhibit 1: Indonesia has a particularly large share of the nickel market
Indonesia’s significance in the other four minerals markets is much smaller, although it has potential in cobalt, a market currently largely dominated by the Democratic Republic of the Congo. Indonesia has recently scaled up its cobalt mining operations considerably and was responsible for 16% of annual supply growth in 2022. We think Indonesia will continue to expand in the cobalt market while it ramps up nickel production.
Tin is another mineral that Indonesia considers to be strategically important. While tin is sometimes overlooked in the EV realm, it’s considered a performance enhancing component, making it critical to expand capacity. Although Indonesia’s share of the tin market is not as big as nickel, it’s still one of the highest.
Policy actions so far
Indonesia banned nickel ore exports in 2020 to invite more foreign investment and climb up the EV supply chain ladder. During the same period, exports of base metal products surged, indicating more domestic value added (Exhibit 2).
Exhibit 2: The ban on nickel ore exports led to increased domestic processing
Since 2020, large investments were made in smelters, but most produce nickel pig iron. This is used in stainless steel and typically only contains 30%-40% nickel. The government has decided to abandon tax holidays for this type of investment, as increased production of lower-end products goes against the government’s target of more domestic value added. It’s also considering a plan to implement export taxes to further discourage production of low-quality nickel products.
Similar export bans are planned for other minerals. For instance, the government banned raw exports of bauxite in June 2023. Bauxite is used to produce aluminium, a mineral used more extensively in EVs than in ICE cars. Further trade restrictions are aimed at other minerals. Under the current plan, the government is aiming to ban raw exports of tin, copper, iron ore lead, zinc and anode mud from copper concentrates from May 2024.
However, we think the impact of export bans will be underwhelming compared to that on nickel exports, as Indonesia’s share in these minerals is much smaller, giving firms less incentive to move their production (Exhibit 1). These further export bans are likely to be much smaller catalysts, which merely adds to the effectiveness of the nickel export ban that is already in place, rather than driving a renewed wave of FDI inflows.
Indonesia as a consumer market
Any investment inflows will likely be due to supply-side factors, rather than the attractiveness of Indonesia as a market. Indonesia’s total electric car sales was more than 10,000 vehicles in 2022, but this only accounts for 1% of total domestic auto sales in 2022 (Exhibit 3).
Exhibit 3: Share of EVs remains low in non-China APAC, but is set to pick up
While the current market is small, Indonesia’s growing middle-income population means there is some potential for growth as car ownership rises (Exhibit 4). The government is aiming to raise EVs share of new sales to 10% by 2024 by introducing several incentives. It’s already slashed VAT taxes on electric cars by 10ppt and eliminated motor vehicle tax. Subsidies for electric motorbikes are also in place – these should be more affordable for the average household in the near-term. Given the growth potential in Asia, the impact of becoming a regional production hub could be huge.
Exhibit 4: Indonesia’s car ownership is relatively low compared to its regional peers and emerging markets
Investments are flowing – for now
Investment inflows into Indonesia’s smelting sector have continued. POSCO Holdings and Ningbo Richin announced they will start the construction of a nickel production plant this year, to be functioning in 2025. Likewise, BASF and Eramet have similar plans – with production set to start in early 2026. China in particular has been investing heavily into the sector, given its strategic focus on the EV sector. According to Indonesia’s Ministry of Investment, China’s share of FDIs into the metal industry increased to 25% in 2022 from 6% in 2005. If we include Hong Kong and Singapore, through which investment from China has been reported, the share is even higher, accounting for almost entire investment.
Aside from the smelting sector, battery production is also moving up in economic significance. CATL—the world’s largest EV battery maker—is planning to build a new plant. It’s also setting up a special EV fund with the Indonesia Investment Authority to ramp up investment.
Given the heavy weight of EV batteries and the safety concerns over transportation, EV manufacturers are starting production in Indonesia. Hyundai and Wuling are already operating production plants, while Tesla and BYD are showing interest in investing.
Macroeconomic implications
Indonesia’s success in its EV goals will have huge implications for the economy. First, higher investment will lead to faster economic growth. Technology spillovers are also likely to result in ripple effects on other sectors and increase productivity, although the impact may be limited given the largest manufacturing sector is food and beverages. This sector accounts for more than 30% of Indonesia’s total manufacturing.
More jobs will also be generated domestically, raising income and overall consumption levels. This will in turn raise demand for consumer goods and services, which will call for further investment in other sectors.
Auto exports will also likely be ramped up. Higher domestic value-added and exports will improve current account surplus, which will help stabilise the rupiah, leading to more stable capital flows and domestic inflation.
Indonesia’s medium-term growth prospects are bright, given its growing and young population. Success in its aim to be integrated in global EV supply chains has the potential to boost economic growth and wellbeing.
Has Indonesia secured its place as a regional hub? Not yet
Despite the advantages of its rich mineral resources, Indonesia is facing fierce competition.
The Philippines is one of the economies fighting for its position in the EV supply chain. The Philippines is similar to Indonesia in several ways, including its nickel production capacity, though it is not as big as Indonesia. Also, like Indonesia, the share of manufacturing in the Philippines economy remains relatively low (Exhibit 5). Of course, this is not necessarily a bad thing, as it’s partly due to a more developed services sector that accounts for a large share of the economy.
That said, the manufacturing sector in the Philippines largely consists of low-valued added activities, including testing and packaging semiconductors. More can be done to invite high-value-added activities into the Philippines, aiding the government’s aim to be classed as an upper-middle-income country.
Exhibit 5: The share of manufacturing in the economy is low in Indonesia and the Philippines
Thailand, an established auto hub in Asia, is also defending its position amid the EV fever. Thailand’s auto sector is deeply connected to Japanese car manufacturers, who have been slow to adjust to the transition to EVs. This is a major headwind for Thailand, as it risks falling behind in the EV boom and missing out on integration into the supply chain.
But Thailand is trying to promote EVs by introducing subsidies and attracting non-Japanese investors. BYD is constructing its first Southeast Asian plant in Thailand, and other carmakers are also investing.
Multiple challenges ahead
Amid external competition, Indonesia faces several challenges.
First, there is a concern over the country’s environmental policy. Given the whole purpose of the transition to EVs, it’s important to businesses and consumers that the production of these vehicles is environmentally sustainable.
Currently, Indonesia aims to achieve net zero only by 2060, and the share of coal in its energy mix remains high compared to its neighbours such as Thailand and Malaysia. Also, in the process of making Class 1 nickel—the kind often used for EV batteries—Indonesia’s laterite nickel ores produce more carbon emissions compared to sulphide nickel ores. This is particularly concerning as there have been moves to tax international goods trade based on carbon emissions, including the EU CBAM.
These types of issues might put off some businesses from investing in the economy. Another challenge stems from the general business environment. According to the World Bank, Indonesia’s ‘ease of doing business’ score is lower than that of its regional peers such as Malaysia, Thailand and Vietnam. While efforts to open up the economy to more foreign investments have been made, more needs to be done to reduce red tape, develop infrastructure and improve the business environment.
Policy clarity is also important, as businesses want to avoid any uncertainties over industry regulation. While there is no doubt that the Indonesian government is willing to work towards its EV target, its policies have sometimes been ambiguous. Even under the nickel ore export ban, initially adopted in 2014, some ore of low concentrations was allowed to be exported. Eventually, all ore exports were banned in 2020. The postponement of bans on exports of minerals such as tin and copper until May 2024 was also announced at the last minute, due to insufficient domestic smelting capacity. These issues need quick resolutions to invite and retain foreign capital in the sector.
What’s more, the emergence of lithium iron phosphate batteries, which don’t need cobalt or nickel, might in the future lead to manufacturers leaving the country once technology advances render nickel needless in the process of battery making. Lithium-ion batteries, which use minerals such as nickel, remain the most common and best-performing type of battery for the time-being, but technological progress might render Indonesia’s competitive edge in its mineral resources obsolete.
Consequently, while Indonesia’s high nickel production capacity appears attractive for now, there is room for further improvement to firmly establish the country in the global EV supply chain.
Makoto Tsuchiya
Makoto Tsuchiya is an Assistant Economist at Oxford Economics. He is responsible for forecasting and providing analysis on the Philippines. Makoto has a Bachelor's degree from Temple University Japan where he majored in Economics with a minor in Business Studies.
