Indonesia hopes to build on its nickel industry success and create a full electric vehicle supply chain for domestic sales, and an imminent presidential election could shape that policy.

President Joko Widodo's downstream policy has focused on limiting the export of raw materials to attract investment in the production of higher-valued finished products, and the poster child of the initiative has been the battery metal nickel.

About $30 billion in investments, with a substantial portion coming from Chinese investors, poured into Indonesia after the government banned the export of nickel ore in January 2020, according to a March 2023 report by S&P Global Ratings. The country has quickly expanded its nickel processing capabilities for producing battery-grade intermediate product, and in 2023, it is expected to produce 40.2% of the world's nickel, according to S&P Global Commodity Insights.

Now, Widodo and each of his likely successors after the Feb. 14 presidential election hope to build on that nickel foundation by attracting a complete battery and EV manufacturing industry — and companies have started to pump money into the island nation.

"The extrapolation of the trend of onshoring the battery value chain by Indonesia suggests that it is possible that the government will put forward legislation to encourage the production of Indonesian batteries made with Indonesian nickel and cobalt," Daniel Croft, precious metals analyst at consulting firm SFA (Oxford), said in an interview.

EV hub ambitions

"Indonesia has a high probability of success to attract further nickel beneficiation but beyond this may be a challenge. With the right policies, it could," Frank Nikolic, vice president of base and battery metals at commodities research firm CRU, told Commodity Insights. "Indonesia certainly has the highly educated workforce and an appetite to capture more value-add inside the country."

To boost domestic EV manufacturing, Indonesia has so far issued financial and tax incentives, such as a 0% export duty, lower import tariffs, relaxed lending rules and a tax holiday for EV-makers. It has also set a domestic component requirement on EV-makers, which will gradually increase over time, to incentivize a more complete supply chain.

Widodo's government also lowered the value-added tax on EVs to 1% from 11% in 2023 to encourage domestic EV sales, and in 2022, appointed state-owned power company Perusahaan Perseroan (Persero) PT Perusahaan Listrik Negara to establish an EV charging infrastructure.

President Widodo aims for Indonesia to produce 600,000 electric vehicles by 2030. Meeting that goal would still make Indonesia a small player in the EV market — China produced 9.6 million vehicles in the first nine months of 2023 alone — but it would be a huge leap for a country whose battery ambitions were limited to mining nickel ore as recently as 2019.

However, Indonesia's EVs and auto parts may have limited access to the US, the largest economy in the world. The Inflation Reduction Act, passed in 2021, withholds a key EV tax credit from buyers of vehicles with parts made by companies with heavy investment from companies in China, Iraq, North Korea or Iran.

Many of Indonesia's nickel facilities have greater than 25% Chinese ownership but the US has committed to advancing discussions over a potential free trade agreement with the country amid sourcing challenges for the battery metal.

"It’s not a straightforward task to encourage car makers to make the capital and operational commitments required to move upstream, particularly from the US where battery production capacity is growing rapidly," SFA Oxford's Croft said.

The next administration

Indonesia is set to elect a new president on Feb. 14 with three major candidates vying to take Widodo's place.

"Prabowo Subianto, the current the front-runner to succeed President Joko Widodo ... is in favor of continuing the current administration's downstream development policies but may not be able to obtain the majority needed to avoid a runoff in June," Commodity Insights analyst Jason Sappor said in a January research report.

Analysts told Commodity Insights that Widodo's successor would likely continue the president's "downstreaming" policy considering the boost it has given the country's economy. Prabowo's challengers, however, may put environmental and social protections as a priority.

Ganjar Pranowo, former governor of Central Java and the Indonesian Democratic Party of Struggle presidential contender, promised to suspend nickel pig iron smelting to emphasize higher value battery production. And Anies Baswedan, the third candidate and Jakarta's former governor, has criticized Widodo's nickel policies for causing environmental damage and workplace accidents.

Money pouring in

Major auto and battery companies have started to pump investment into Indonesia.

The country's first steps into the EV supply chain include an EV plant by Hyundai Motor Co., which launched in the country in 2022, and a battery plant from Hyundai and LG Energy Solution Ltd., which is set to come online this year.

BYD Co. Ltd. said in January that it will invest $1.3 billion in an EV plant with a capacity of 150,000 vehicles and construction is slated to start this year, Reuters reported.

China's Contemporary Amperex Technology Co. Ltd. said in 2022 that it partnered with two Indonesian state-owned companies to invest $5.97 billion in an integrated battery supply chain.

Volkswagen AG, Vale SA, Ford Motor Co. and China's Zhejiang Huayou Cobalt Co. Ltd. have partnered to build an EV battery ecosystem in Indonesia. Mitsubishi Motors Corp. is planning on investing about $667 million in Indonesia between 2022 and 2025 to start local EV production.

Toyota Motor Corp. will invest $1.80 billion through 2027 to produce EVs in Indonesia.

"Within 5 years, Indonesia will have all the stages of an EV battery sector in place, from mining ores and processing [and] upgrading to sulfates — which will happen this year — to making precursors [and] cathode active materials; battery cells, packs [and] modules; and EVs to put them in," Adrian Gardner, principal analyst of nickel markets at Wood Mackenzie, said in an email response.