Indonesia Market Prospects for EV Sales and Manufacturing

Indonesia is competing against countries like Thailand and India to develop its electric vehicle industry, and provide a viable alternative to China, the world’s foremost EV producer. The country hopes its access to raw materials and industrial capacity will allow it to become a competitive base for EV makers and allow it to build up a local supply chain. Supportive policies are in place to encourage production investments as well as local sales of EVs.

Domestic market outlook
Indonesia is actively working to establish a notable presence within the electric vehicle (EV) industry, with a goal of reaching 2.5 million electric vehicle users by 2025.

Yet, the market data suggests that a transformation in auto consumer habits will take a while. Electric vehicles make up less than one percent of the cars on Indonesia’s roads, per an August report from Reuters. Last year, Indonesia recorded just 15,400 electric car sales and approximately 32,000 electric motorcycle sales. Even as prominent taxi operators like Bluebird contemplate the acquisition of EV fleets from major companies such as the Chinese auto giant BYD—the Indonesian government’s projections will need more time to become a reality.

A gradual shift in attitudes, though, appears to be under way. In West Jakarta, auto dealer PT Prima Wahana Auto Mobil has observed a rising trend in its EV sales. According to a company sales representative speaking to China Daily in June this year, customers in Indonesia are purchasing and using the Wuling Air EV as a secondary vehicle, alongside their existing conventional ones.

This type of decision making may be linked to concerns around the emerging infrastructure for EV charging and after sales services as well as EV range, which refers to the battery charge needed to reach a destination. Overall, EV costs and concerns around battery power may hinder initial adoption.

However, Indonesia’s ambitions extend beyond encouraging consumer adoption of clean energy vehicles. The country is also striving to position itself as a pivotal hub within the EV supply chain. After all, Indonesia is the largest automotive market in Southeast Asia and ranks as the second-largest production center in the region, following Thailand.

In the next sections, we explore the key factors driving this EV pivot and discuss what makes Indonesia a preferential destination for foreign investment in this segment.

Government policy and support measures
The Joko Widodo’s government has incorporated EV production into the ASEAN_Indonesia_Master Plan Acceleration and Expansion of Indonesia Economic Development 2011-2025 and outlined the development of EV infrastructure in the Narasi-RPJMN-2020-2024-versi-Bahasa-Inggris (National Medium-Term Plan 2020-2024).

Under the 2020-24 Plan, industrialization in the country will primarily concentrate on two key areas: (1) the upstream production of agricultural, chemical, and metal goods, and (2) the manufacturing of products that enhance value and competitiveness. These products encompass a wide range of sectors, including electric vehicles. The execution of the plan will be supported by aligning policies across the primary, secondary, and tertiary sectors.
In August this year, Indonesia announced a two-year extension for automakers to meet eligibility requirements for electric vehicle incentives. With the newly introduced, more lenient investment regulations, automakers can pledge the production of a minimum of 40 percent EV components in Indonesia by 2026 to be eligible for incentives. Significant investment commitments have already been made by China’s Neta EV brand and Japan’s Mitsubishi Motors. Meanwhile, PT Hyundai Motors Indonesia introduced its first domestically produced EV in April 2022.

Previously, Indonesia had announced its intention to decrease import duties from 50 percent to zero for EV manufacturers contemplating investments in the country.

Back in 2019, the Indonesian government had rolled out an array of incentives targeting electric vehicle manufacturers, transport firms, and consumers. These incentives encompassed lowered import tariffs on machinery and materials used in EV production and offered tax holiday benefits for a maximum of 10 years to EV manufacturers investing at least 5 trillion rupiah (equivalent to US$346 million) in the country.

The Indonesia government has also significantly reduced the value-added tax on EVs from 11 percent to just one percent. This move has resulted in a notable drop in the starting price of the most affordable Hyundai Ioniq 5, decreasing from over US$51,000 to under US$45,000. This is still a premium range for the average Indonesian car user; the least expensive gasoline-powered car in Indonesia, the Daihatsu Ayla, starts at under US$9,000.

Growth drivers for EV manufacturing
The primary driver behind the push to electric vehicle manufacturing is Indonesia’s abundant domestic reservoir of raw materials.

The country is the world’s leading producer of nickel, a crucial ingredient in the production of lithium-ion batteries, which are the predominant choice for EV battery packs. Indonesia’s nickel reserves account for approximately 22-24 percent of the global total. Additionally, the country has access to cobalt, which extends the lifespan of EV batteries, and bauxite, used in aluminum production, a key element in EV manufacturing. This ready access to raw materials can potentially reduce production costs by a substantial margin.

In time, the development of Indonesia’s EV manufacturing capabilities could strengthen its regional exports, should neighboring economies experience a surge in the demand for EVs. The government aims to manufacture around 600,000 electric vehicles by 2030.

Besides production and sales incentives, Indonesia is seeking to reduce its reliance on raw material exports and transition towards higher value-added goods exports. In fact, Indonesia banned nickel ore exports in January 2020, concurrently building up its capacity for raw material smelting, EV battery production, and EV production.

In November 2022, Hyundai Motor Company (HMC) and PT Adaro Minerals Indonesia, Tbk (AMI) inked a Memorandum of Understanding (MoU) aimed at ensuring a consistent supply of aluminum to meet the increasing demand for automobile manufacturing. The collaboration aims to create a comprehensive cooperative system concerning the production and aluminum supply facilitated by AMI, in conjunction with its subsidiary, PT Kalimantan Aluminium Industry (KAI).

As stated in a company press release, Hyundai Motor Company has initiated operations at a manufacturing facility in Indonesia and is actively engaged in collaboration with Indonesia across several domains, with an eye on future synergies within the automotive industry. This includes exploring investments in joint ventures for battery cell manufacturing. Further, Indonesia’s green aluminum, characterized by its use of low-carbon, hydroelectric power generation, an environmentally friendly energy source, aligns with HMC’s carbon-neutral policy. This green aluminum is anticipated to cater to the surging global demand among automakers.
Another important goal is Indonesia’s sustainability objectives. The country’s EV strategy contributes to Indonesia’s pursuit of net-zero emissions targets. Indonesia recently accelerated its emission reduction goals, now aiming for a 32 percent reduction (up from 29 percent) by 2030. Passenger and commercial vehicles account for 19.2 percent of the total emissions generated by road vehicles, and an aggressive shift toward EV adoption and utilization would substantially reduce overall emissions.

Mining activities are notably absent from Indonesia’s most recent Positive Investment List, which means they are technically open to 100 percent foreign ownership.

However, it’s essential for foreign investors to be aware of Government Regulation No. 23 of 2020 and Law No. 4 of 2009 (amended). These regulations stipulate that foreign-owned mining companies must progressively divest a minimum of 51 percent of their shares to Indonesian shareholders within the first 10 years of initiating commercial production.

Foreign investment in the EV supply chain
In the past few years, Indonesia has attracted significant foreign investments in its nickel industry, primarily focused on electric battery production and related supply chain developments.

Notable highlights include:

Mitsubishi Motors has allocated approximately US$375 million for expanding production, including the Minicab-MiEV electric car, with plans to commence EV production in December.
Neta, a subsidiary of China’s Hozon New Energy Automobile, has initiated the process of accepting orders for the Neta V EV and is gearing up for local production in 2024.
Two manufacturers, Wuling Motors and Hyundai, have relocated some of their production activity to Indonesia to qualify for full incentives. Both companies maintain factories outside Jakarta and are the leading contenders in the country’s EV market in terms of sales.
Chinese investors are engaged in two major nickel mining and smelting initiatives located in Sulawesi, an island known for its vast nickel reserves. These projects are linked to the publicly traded entities Indonesia Morowali Industrial Park and Virtue Dragon Nickel Industry.
In 2020, Indonesia’s Ministry of Investment and LG signed a US$9.8 billion MoU for LG Energy Solution to invest across the EV supply chain.
In 2021, LG Energy and Hyundai Motor Group embarked on the development of Indonesia’s first battery cell plant with an investment value of US$1.1 billion, designed to have a 10 GWh capacity.
In 2022, Indonesia’s Ministry of Investment entered into an MoU with Foxconn, Gogoro Inc, IBC, and Indika Energy, encompassing battery manufacturing, e-mobility, and related industries.
Indonesian state mining company Aneka Tambang has partnered with China’s CATL Group in an agreement for EV manufacturing, battery recycling, and nickel mining.
LG Energy is constructing a US$3.5 billion smelter in Central Java province with the capacity to produce 150,000 tons of nickel sulfate annually.
Vale Indonesia and Zhejiang Huayou Cobalt have collaborated with Ford Motor to establish a hydroxide precipitate (MHP) plant in Southeast Sulawesi province, planned for a 120,000-ton capacity, along with a second MHP plant with a 60,000-ton capacity.