Will US-China rivalry undermine Indonesia’s EV battery hub dreams amid tussle over green subsidies?

Nickel is a key component in producing EV batteries, but Chinese companies hold a dominant position in Indonesia’s nickel sector

EVs with battery components manufactured by ‘a foreign entity of concern’ are ineligible for tax credits under the US Inflation Reduction Act

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A worker operates a nickel-smelting furnace at an Indonesian mining company. Nickel is one of the main components in the making of EV batteries. Photo: AFP

Published: 10:23am, 10 Apr 2023

A landmark US climate bill risks pushing Indonesia closer to China unless electric-vehicle batteries made in Southeast Asia’s largest economy are covered by tax breaks under the legislation, analysts say.

To be eligible for a US$7,500 tax credit under US President Joe Biden’s Inflation Reduction Act (IRA), which includes a US$369 billion clean energy package, manufacturers must fulfil two criteria.

First, 40 per cent of critical battery minerals must be extracted or processed in the United States or one of its-free trade agreement (FTA) partners. Second, half of the battery components must be manufactured or assembled in North America. If manufacturers only meet one of the two requirements, they will be eligible for only half the tax credit.

Also starting next year, a clean vehicle benefiting from tax deductions cannot contain battery components manufactured by “a foreign entity of concern”, a veiled reference to Chinese and Russian companies. Clarification of this provision is expected next month.

Thus, EV batteries containing Indonesia-sourced components will be ineligible because it is not an FTA partner, and the country’s nickel sector is heavily dominated by Chinese companies. Eventually, Jakarta may be forced to review China’s wide-reaching investments if it wants a slice of America’s giant EV market, analysts say.

Jakarta has discussed the issue with Washington, according to Luhut Pandjaitan, coordinating minister of maritime and investments affairs, who is also President Joko Widodo’s right hand man in persuading Chinese firms to invest in Indonesia.

Diplomatically, IRA and recently published guidance will push Indonesia even more towards China

Kyunghoon Kim, Korea Institute for International Economic Policy

“If Indonesia wants to avoid being stuck in its current disadvantageous situation, then it will have to put in much diplomatic energy and resources in lobbying the US government,” said Kyunghoon Kim, associate research fellow focusing on industrial policies in Asia’s developing economies with the Korea Institute for International Economic Policy.

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