From nickel to electric cars? Indonesia's resource cum industrial policy

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Abstract:

Purpose: Globally, resource-rich developing countries seek to utilise natural resources for economic development. Indonesia is an example of a developing country which seeks to utilise domestic natural resources for economic development. In 2009, Indonesia passed the so-called Mining Law which inter alia allows the government to restrict export of mineral ores. While the initial goal of the export restriction policy was to encourage domestic production of stainless steel (Suherman and Saleh 2018), an alternative value chain was recently targeted, namely electric vehicle (EV) batteries. Even going beyond this challenging task, Indonesia seeks to take advantage of local nickel deposits not just for entering the EV battery supply chain but also to create a local EV (assembly) industry (Negara and Hidayat 2021: 176-177). In other words, she attempts to build an integrated EV and EV battery value chain which encompasses all production stages from the extraction of nickel deposits to the production of finished EVs. This study will analyse the policies deployed and assess the success (or lack thereof) in building a fully integrated value chain from nickel to EVs.

Design: This study first elaborates what constitutes the main production stages from nickel beneficiation towards EV batteries. It then reviews available trade and investment data to illustrate the current state of the nickel-based part of the EV supply chain in Indonesia.

Findings: Indonesia is mainly successful in attracting investment into mining and initial beneficiation processes. While some investment projects aim to move towards more sophisticated downstream beneficiation, these projects are so far only in the planning phase. Regarding EV assembly, only Hyundai plans to produce BEVs from 2022, but they will be produced by CKD assembly. However, Hyundai and its battery supplier LG formed a joint venture with four major Indonesia state-owned enterprises that aims at realising an integrated value chain from nickel towards EV batteries in the medium-term.

Practical and theoretical implications: Regarding policy which seeks to use local resources to build an integrated EV battery value chain, the case Indonesia illustrates two points. First, policy can be successfully deployed to create some forward linkages beyond extraction. However, it should be emphasised that Indonesia has rather favourable conditions to attract investment into local beneficiation: It has significant nickel reserves, but nickel ore export only was a minor export good, i.e. the national economy is not strongly dependent on export of this particular good. Resource-rich countries which are strongly dependent on export of a single good are arguably much less able to implement an export ban. Second, there are clear limitations towards building a fully integrated value chain, foreign lead firms seem rather reluctant toward the idea of making Indonesia a major production hub for EV batteries or EVs. There are at least two concerns for producing EVs in Indonesia, local demand and local supplier capabilities. The latter issue suggests that there is no complementary policy that seeks to create backward linkages in a way similar to the resource policy which encourages forward linkage creation.