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

Indonesia

Resty Woro Yuniar

Published: 10:23am, 10 Apr 2023

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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.

“On top of lobbying, the key factor would be how Indonesia is viewed in Washington. Is Indonesia a like-minded country of the US or China?” Kim asked.

“Diplomatically, [the] IRA and the recently published guidance will push Indonesia even more towards China since Jokowi thinks of the nickel sector industrial policies as one of his major achievements,” he added, referring to Widodo by his nickname.

Arsjad Rasjid, chairman of the Indonesian Chamber of Commerce, said in a statement on March 28 that he hopes Washington will treat Jakarta as an FTA partner due to its membership of the US-led Indo-Pacific Economic Framework (IPEF).

“We are discussing IPEF, and the spirit of the agreement is cooperation. If America excludes Asean [countries], it feels very unfair,” he said.

IPEF member South Korea, which has many companies heavily invested in Indonesia’s nickel sector, has also been lobbying for bloc partners to be included in the tax scheme.

At 21 million metric tonnes, Indonesia has the world’s largest nickel reserves and is also the world’s largest producer of the commodity, according to the US Geological Survey. It was also the world’s second largest producer of cobalt last year, according to the US Geological Survey. Both metals are significant components in EV batteries.

Analysts say Indonesia’s large nickel reserves will not guarantee it a lasting place in the global EV supply chain as manufacturers continue to tweak the inner workings of EV batteries, including eliminating nickel altogether.

A worker processes nickel at a smelter near Sorowako in Indonesia. Photo: Reuters

Luhut said that he also had discussions with the US Secretary of the Treasury Janet Yellen and American carmakers Ford and Tesla to see if Indonesia-originated nickel could still be accepted under the tax scheme.

Indonesia is not the only country concerned by the IRA. European countries are worried it will undermine the continent’s EV makers’ competitiveness in North America, while Canada has also expressed concerns over “a subsidy war with the Americans”.

Japan and the US on March 28 signed a trade agreement on critical minerals for EV batteries, which will help vehicles using metals processed in Japan to qualify for IRA tax credits.

While it may take a long time to materialise, Indonesia can start to seek preferential trade agreements with Washington now in lieu of a full-fledged FTA, said Bhima Yudhistira, executive director at the Jakarta-based think tank Centre for Economic and Law Studies.

“We can, for example, exchange nickel with superior US products, such as soybeans. Indonesia has always been depending on soybeans and corn from the US,” he said.

Indonesia’s President Joko Widodo has made downstreaming the nickel industry a priority. Photo: AFP

The lobbying will only work if Jakarta can assure Washington its economic policies do not lean towards China and it will provide fair treatment to American companies seeking to invest in Indonesian nickel, he said.

The lobbying must also be accompanied by an effort to increase environmental safeguards, which have always been an obstacle in the sale of Indonesian nickel in the international market, he said.

Non-China portfolio

According to Arsjad, Jakarta is now working with multinational companies to build separate China and non-China nickel supply chains as “Indonesia is a friend to both China and the West.”

“We provide essential minerals to China, the United States, and the European Union,” said Arsjad, who is also president director of energy company Indika Energy.

Since banning nickel ore exports in 2020, President Widodo has made downstreaming the nickel industry, in which the commodity is refined domestically instead of just being exported in its raw form, the cornerstone of his economic policies. He has also envisioned Indonesia becoming a top-three global battery producer by 2027.

02:30

Nickel boom in Indonesia threatens farmers’ livelihood and natural environment

Chinese nickel miners and EV battery makers have played a huge role in helping Indonesia achieve that ambition. Contemporary Amperex Technology, a Tesla supplier and the world’s largest EV battery maker, for example, has partnered with Indonesia’s state-owned companies by investing US$6 billion in six planned battery projects.

If Washington does not give Jakarta leeway to bypass the IRA, then Indonesia is likely to lean more towards China to maintain its vision to be an EV battery manufacturing hub, said Kim of the Korea Institute for International Economic Policy.

“If certain entities, Chinese or otherwise, are designated as foreign entities of concern, all the related parties will be under the radar of the US Treasury so it will be very difficult to dodge,” Kim said.