By James Guild
In a recent piece for East Asia Forum, I explained how Indonesia used a series of export bans on raw nickel ore to successfully induce billions of dollars of investment in downstream refinery capacity. Refined nickel is an important input in the manufacture of lithium-ion batteries, and the ultimate end-game for the Indonesian government is to become a global hub for the production of both electric vehicles (EVs) and the batteries that power them. At the moment, the missing link in the supply chain is the domestic mass production of EV batteries. There are only a few companies in the world that make these batteries — How will Indonesia convince them to open up local production facilities that can turn out batteries at scale?
Global industry leaders like China’s CATL and South Korea’s LG Group have signed agreements indicating they intend to invest billions in battery manufacturing in Indonesia, although it is unclear from media reports exactly how binding or firm these commitments are at this point. But based on Indonesia’s past experience growing its automotive industry we do know a few things about what is likely to make locally manufactured batteries an attractive option to foreign companies.
The main thing is that even though the industry has a built-in advantage – access to locally smelted nickel, and large deposits of raw nickel ore – it still needs to be globally competitive. Over the long term, CATL is not going to want to manufacture batteries locally if they are not of high quality and if they are more expensive to make in Indonesia than a comparable production hub in another country. Therefore, the government needs to ensure a conducive regulatory environment is in place, one that creates attractive investment incentives and allows manufacturers freedom to source the most cost-effective inputs rather than insisting on the use of local content that might make the finished product inefficient or uncompetitive.
Indonesia’s experience with the car industry also suggests that foreign companies will be most willing to transfer critical skills and technology if they aren’t subjected to restrictive ownership rules. That is to say, if CATL sets up a subsidiary to make EV batteries in Indonesia it will be more willing to share the most valuable technology if it is not forced into a minority ownership role. But foreign ownership, particularly in an industry so closely tied to natural resources, can be a political minefield. There is a strong undercurrent of economic and resource nationalism in Indonesia that feels if the nickel that makes the batteries comes out of Indonesian soil, then the profits derived from those resources should be owned by the Indonesian people (meaning, in practical terms, the state).
This is the driving force behind the recently created Indonesia Battery Corporation. The IBC is a partnership of four major state-owned companies: electric utility PLN, oil and gas giant Pertamina, nickel miner Aneka Tambang, and Inalum, a holding company for the national mining industry. I want to stress that the IBC is very new so the exact role it is going to play in the manufacturing of batteries is not yet clear. But it certainly indicates that the state wants to assert itself in the industry’s ownership structure in some capacity.
The creation of the Indonesia Battery Corporation must be viewed in light of Indonesia’s increasingly assertive stance on resource nationalism. As Eve Warburton put it in her doctoral dissertation (which I very much recommend for anyone interested in this topic), for Indonesia it has lately been a case of “our resources, our rules.” And when it comes to control of the raw ore, it’s easier to use blunt instruments like export bans to get what you want. This is evident in the way the Indonesian government recently used its leverage to negotiate a 20 percent ownership stake in nickel miner PT Vale.
But as you move further up the supply chain, for instance into the manufacturing of lithium-ion batteries, the leverage from resource nationalism alone becomes less potent. Now you have to rely on outside companies, such at CATL, to share their technology and manufacturing know-how. And they may not be terribly eager to partner with a state-owned battery corporation whose exact role in the industry is unclear, and which has never made batteries before.
What all of this means is that the basic conditions are in place for Indonesia to become a hub for the production of lithium-ion batteries and electric vehicles. Whether that becomes a reality will depend in no small part on whether policymakers have internalized the lessons learned from the automotive industry over the past several decades. And the role that the IBC ultimately plays in Indonesia’s battery industry will tell us whether or not that is the case.
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