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How will Indonesia build up its closed-loop new energy industry chain?

Industrial Automation

May 2024

Yvonne Zhang

Research Associate

Yvonne joined Interact Analysis as a Research Associate to assist the research team with organizing, interpreting findings, and enhancing product outputs. She has a master's degree in Finance and has research experience in the Industrial Automation sector after her studies in the United States.

Boasting the largest GDP in ASEAN, Indonesia stands out as one of the region’s most vital and dynamic markets. According to Interact Analysis’ Manufacturing Industry Output (MIO), Indonesia’s manufacturing output reached $579 billion in 2023, ranking twelfth globally. Projections indicate that its growth rate over the next five years will exceed that of Vietnam, Malaysia, and Thailand.

Indonesia is active in the new energy sector, with a strategic focus on utilizing its abundant mineral resources and stimulating growth within its downstream new energy markets. This approach is intended to increase the added value of new energy industry projects in the country and establish a self-sustaining industry chain to make the country an important player in the global new energy industry value chain.

Benefiting from rich nickel resources

Indonesia boasts abundant mineral resources as a result of its rich geological landscape, particularly its nickel deposits – an important raw material in the production of NCM li-ion batteries. Official data indicates that Indonesia is the world’s highest ranked country for both nickel reserves and production. Its nickel reserves total an impressive 5 billion metric tons, representing around 22% of the global total. Furthermore, it harbors potential nickel deposits across around 2 million hectares of land, with only 800,000 hectares currently being mined or explored. To encourage localized production and processing, and to enhance the value of the nickel industry chain, Indonesia officially banned the export of nickel in 2020.

In recent years, the global wave of battery electric vehicles has driven a surge in demand for lithium-ion batteries, making upstream raw material resources a strategic focal point for new energy enterprises. As a result, Indonesia has attracted a large influx of overseas investments.

Chinese companies are the earliest entrants. Since 2009, materials companies such as Tsingshan Holding Group, Huayou Cobalt, GEM, and CNGR, as well as battery manufacturers, including CATL and EVE Energy, have been establishing nickel smelters or nickel mining projects.

Other global companies started to enter Indonesia around 2022: In 2022, LGES  announced the construction of a nickel processing plant, followed by additional investments in a battery precursor factory; SK On and Ecopro formed a JV with GEM to build battery precursor factories; European and American auto OEMs such as Volkswagen and Ford announced plans to collaborate with Huayou Cobalt and Brazil’s Vale to establish nickel processing plants in Indonesia.

Li-ion battery manufacturing is in its infancy

Compared with the well-established upstream nickel processing industry, Indonesia’s li-ion battery industry is still in its early stages. It wasn’t until 2021 that four local state-owned enterprises — Pertamina (the national oil company), PLN (the national electricity company), Aneka Tambang (ANTAM, the national mining company), and MIND ID (Mining Industry Indonesia, the national mining holding company)—jointly established the country’s first domestic battery company, Indonesia Battery Corporation (IBC).

As a result, in 2021 LGES announced plans to jointly construct a 12 GWh battery super factory with Hyundai Motor and IBC. The factory is scheduled to commence operation in April 2024 and will produce nickel-cobalt-manganese-aluminum (NCMA) batteries.

In 2022, CATL announced a JV with ANTAM to develop an integrated battery production project covering nickel mining to battery manufacturing, with an anticipated timeline of five years. In December 2023, an official news announcement was made that CATL plans to start construction of an electric vehicle battery factory in 2024. Additionally, in 2024 REPT announced plans to establish a battery super factory, with production starting as early as 2025.

Interact Analysis’s battery capacity tracking database indicates that battery cell production capacity announced by Indonesia ranks second only to Malaysia in Southeast Asia. Strong government support for downstream new energy industries is expected to drive the expansion of battery capacity in Indonesia.

Growing new energy vehicle and energy storage markets

New energy vehicles: Favorable policies attract manufacturers from China, Japan, and South Korea

In 2021, the Indonesian government released a roadmap for electric vehicle production, with plans to produce 400,000, 600,000, and 1 million units by 2025, 2030, and 2035 respectively. Since 2019, the government has introduced a series of incentives to promote the development of the domestic electric vehicle market, which includes reducing import tariffs on relevant production materials, providing tax exemptions for electric vehicle manufacturers, and offering subsidies to consumers.

Data from the Indonesian Automotive Industry Association (Gaikindo) suggests that in 2023, domestic sales of new energy vehicles (BEV, HEV, PHEV) exceeded 71,000 units, with a year-on-year growth rate of 362.3%. This accounted for 7.1% of total vehicle sales last year, up by 5.6 percentage points from 2022, with battery electric vehicle (BEV) sales surpassing 17,000 units and growing by 65.1%.

Currently, manufacturers from China, Japan, and South Korea dominate automotive market supply in Indonesia. Japanese companies lead the hybrid market, while South Korean and Chinese vendors are strong in the BEV sector. Japanese OEMs are responsible for over 90% of total automotive sales, but their presence in the BEV segment is not prominent – Toyota, Lexus, and Nissan collectively sold fewer than 800 BEVs in 2023. Hyundai Motor, however, led the market with nearly 7,500 BEVs, followed closely by Chinese OEMs such as Wuling, Dongfeng, and Seres, with their collective sales exceeding 7,200 units in total.

Indonesia intensified its tax exemption policies in 2023 in a bid to promote the localization of electric vehicle production. In April, the Indonesian Ministry of Finance implemented new tax reduction measures which reduced sales tax for electric vehicles with a localization rate of 40% from 11% to 1%, and the tax rate for vehicles with a localization rate between 20% and 40% to 6%. Furthermore, in December the government announced tax incentives for companies planning to establish electric vehicle factories in Indonesia or increase investments in electric vehicle-related projects. Eligible companies importing electric vehicles would be temporarily exempt from import duties and luxury goods sales tax.

Despite a target to produce 400,000 electric vehicles (BEV, HEV, PHEV) by 2025, only 82,153 units were produced in the country during 2023, falling far short of the goal. However, 85.7% of electric vehicle sales were from locally produced vehicles, demonstrating progress in localization efforts.

We anticipated that policies will encourage more companies to deploy localized production. For example, BYD, which has sold its electric buses into Indonesia, launched 3 battery electric car models in January this year. BYD also plans to commence construction on a factory capable of producing 150,000 vehicles annually, with production set to begin in 2026.

Energy Storage: Cross-border electricity transmission is worth a mention

Expanding the energy storage market is a pressing need for Indonesia as it seeks to phase out coal power and transition to clean energy. In 2020, Indonesia set a target for renewable energy generation to comprise 23% of total domestic electricity by 2025.

In a similar way to the Li-ion battery industry, the battery energy storage market is in its infancy. The government seems more conservative in terms of policies than countries like those in Eastern Europe. Indonesia does not appear to have any incentive policies specifically targeting battery energy storage deployment, such as bidding, or industry subsidies, resulting in insufficient momentum.

There are only a few ongoing battery storage projects in Indonesia, but the scale of these projects is impressive. In addition to the 5 MW pilot energy storage project announced by the government in March 2022, two large-scale projects totaling more than 20 GWh in the country are worth mentioning.

Singaporean companies lead both the aforementioned battery storage projects and both are integrated with solar projects. One was announced in 2022 by Quantum Power Asia, boasting 12 GWh of battery storage capacity, and the other is Vena Energy’s planned project, announced in 2023, which features over 8 GWh of battery storage capacity.

Cross-border energy transmission is crucial in Southeast Asia, especially in Indonesia. Given its proximity to Singapore – a country with high energy demand but a scarcity of land – Indonesia will export electricity to Singapore rather than simply fulfilling its domestic needs. For example, the electricity generated from the two large-scale projects outlined above will be transmitted directly to Singapore via underwater cables.

Final thoughts

In recent years, Indonesia has sought to move beyond its role as a supplier of raw materials to engage in the global new energy industry chain. While its abundant resources offer a significant first-mover advantage, Indonesia still faces challenges in expanding from upstream to downstream activities and establishing a closed-loop industry chain.

Upstream: Indonesia lacks mature mining and processing technologies, relying heavily on foreign companies. These companies primarily enter Indonesia to serve their overseas operations. With the domestic downstream market thriving, the effectiveness of the “resources-for-technology/market” approach in supporting its growth remains uncertain.

Midstream: LFP batteries are emerging as the mainstream technology because of their cost-effectiveness. This implies Indonesia’s advantage in the high-nickel ternary lithium battery field may diminish over time.

Downstream: Indonesia’s domestic energy storage market has great potential but lacks robust policy support.

Overall, Indonesia maintains a leading position in the new energy industry across Southeast Asia. The combination of open policies, abundant natural resources, and foreign investments will significantly propel the creation of a mature new energy industry chain.

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