Indonesia: We don't do EVs just to go green, but to escape middle income trap

At the recently concluded World Economic Forum in Davos, Switzerland, Indonesia’s trade minister Muhammad Lutfi spoke at great length about rising commodity prices and its impact on global trade, with references to Indonesia’s efforts in building an electric vehicle (EV) manufacturing ecosystem. Although his points are from Indonesia's perspective, they are still relevant to all developing countries including Malaysia.

Interestingly, Minister Lufti was candid enough to say that the motivation to invest heavily into electric vehicles is less about going green (although that’s still an important reason), but rather, it’s part of a strategic move to lift Indonesia’s economy.

The minister explained that to secure Indonesia’s future and not to get stuck in the middle income trap, Indonesia needs to create better value from its own resources, rather than exporting it at very low prices and have other countries profit from it.

“To skip the middle income trap we need to do two things – investment and transfer of technology,” he said.

“If we just rely on selling a basic commodity, the country cannot sustain, I guarantee you,” he added.

The middle income trap refers to a situation faced by mature mid-income developing countries whose labour cost is too high to compete against young low income developing countries like Vietnam, but at the same time don’t possess the technological capacity and talent pool to compete with industrialized, high income nations like Singapore (which ironically, is where Malaysian talents are located, just ask Grab).

Such countries will find themselves slowly pushed out of the trading space on both ends of the income / export value spectrum.

Currently, Indonesia’s export of industrial goods sit on the lower-end of the value chain. Its automotive exports are limited to functional, developing market traditional cars like the Toyota Avanza, Rush, Fortuner, Innova, Mitsubishi Xpander and Pajero Sport, all of which don’t have a lot of high value content.

“So EV battery, lithium battery, and EV cars, is a must for Indonesia to survive, and because of that, we will be the powerhouse for this invention, we will be the powerhouse for this innovation, we will be the powerhouse for this investment. In the next 10 years, we are going to jump up our classes from this investment, and we have to thank this volatility today,” said Lutfi.

The volatility mentioned here refers to the high price of minerals – lithium, cobalt, nickel, and others – raw materials needed to manufacture EV batteries, whose cost are now at an all-time high.

Indonesia has the world’s highest reserve of nickel, allowing it to position itself as the Arabia of the EV era.

Benedikt Sobotka, CEO of Eurasian Resources Group Sàrl and co-chairperson of the Global Battery Alliance, who was also speaking at the forum said:

“We have the biggest purchase order in history for our industry. At the same time, we’ve got the ingredients for a perfect storm. The time for cheap commodities is over, because commodities, and I am talking about mainly minerals and metals, they are more expensive because they require energy (to extract) and as energy cost increase, mining cost increase.

“At the same time, and that’s why I call it a perfect storm, ESG (environment, social, governance) requirements make it incredibly difficult to increase production, because permitting time increase. You’ve got all the ingredients for a perfect storm. The time of cheap commodity is over for the long-term,” he added.

Sobotka comments also brings into question how realistic are projections of EV sales, because prices will go up instead of coming down. Others are adamant that improved technology and greater supply of recycled materials will reduce reliance on fresh minerals, but that's another topic for another day.

Indonesia has since banned export of nickel, forcing foreign companies to invest in local manufacturing, if they want a piece of Indonesia’s resources.

Western countries however have criticised Indonesia’s move to ban exports (including palm oil), saying that Indonesia is being an irresponsible trading partner, calling it an example of inward-looking resource nationalism that is against the spirit of free trade, destabilizing the already fragile global supply chain.

Lutfi, a former diplomat to USA and Japan, was eloquent enough to elegantly shut down his Western critics, “When a developing country created something, a developed country is not happy, so right now I am having a dispute settlement with the developed countries, almost every other day. But for Indonesia, we have no choice but to fight it.”

He added, “I don’t want to hear it, do you know that the European countries at one point, hoard 3.7 (times) more (Covid) vaccines than they need, and they export it to countries like Indonesia two weeks before their expiration dates? At the end of the day, it’s about national interest. We are a democratic country, I have 270 million people hungry, and the worst part is social media, oh my god, and I need to cater to that, as much as the Europeans (governments) need to cater to the Europeans, as much as other developed countries to other developed countries. So this is a fight of democracy to sustain the very fabric of survival.”

As mentioned by Sobotka of Global Battery Alliance, ESG compliance is driving mining cost up but to Indonesia, this is exactly why it needs to move fast, not to gain more green credential to drive up its ESG scores, but because Indonesia knows that when the world is changing, they have a choice to either jump in and try to influence things to their favour, or be a passenger and have others decide on their behalf.

“Why we have to do it? Because we can. We have to do it not because we want to comply with the ESG, but we feel this is an opportunity, because of that we want to jump in first, then we will dictate in the future on how this ESG market will be run. We are looking at opportunities of carbon credit. It’s not there yet. Countries like mine is producing at USD 5, come to Europe it’s at USD 50. We see the difference. One of these days the equilibrium will come, and I need to make sure Indonesia is at the forefront of that. So environmentally, economically, and most importantly, technologically, we want to lead,” explained Lutfi.

Indonesia is a very mindful of the so-called resource curse, seeing how many resource-rich countries often squander away their god-given wealth, get bogged down by corruption over monetization of resources, before entering a slow and painful decline. Indonesia knows it didn't do the right thing with petroleum, which it also has plenty. Now it wants to make things right with nickel, because not everyone gets a second chance in life.

“Opportunities only come once or twice in our lifetime.This is Indonesia’s time. We will be disciplined in that. We will create value with that, because we don’t want to be one day we wake up in the morning, we have nothing to sell, and a lot of things to pay. This is like bad management of your cash flow, or your credit card bills every month. This is something we are trying to do, and because of that, maybe it’s difficult for others to say it, but to say it differently or otherwise, that governments should just let everybody export and create the value somewhere else, it’s just the same argument the other way around," said Lutfi.

Also read: Oil price highest since 2008, but Malaysia is not profiting from it, here’s why

Lutfi went on to explain how Indonesia is seeing opportunities in situations where others perceive as problems.

“This volatility has created a perfect spring board for innovation. Innovation is followed by investment, and investment for a country like mine is very important, because we are country in a run. We are a country in a hurry. We are trying to skip the middle income trap. We need to triple our GDP from today until 2030, from USD 4,000 to USD 12,000.”

For reference, Malaysia’s GDP per capita is at around USD 10,400.

The rapid rise in commodity prices is creating a lot of problems for the global supply chain and is forcing manufacturers to look for alternatives, which also means that they are more open than ever before to listen to what Indonesia has to say.

“If there is no volatility, if there is no price hike, there is no innovation. People don’t try to do anything.

“The price is a factor. If the price is not this high, probably the appetite is not there. That was exactly what Tesla told Indonesia. They came. If Tesla comes with 500,000 cars, I think we solved the puzzle. Why they came? Because BYD of China is there (in Indonesia, speaking from Davos), LG Chemicals of Korea is there, and there is no way for somebody like Tesla not to come,” said the minister.

Tesla has had several round of meetings with representatives of the Indonesian government, but so far nothing has been decided yet.

Earlier this week, Indonesian President Jokowi officiated the ground breaking for the second phase of construction of the Batang Industrial Estate in Central Java province, an integrated EV ecosystem manufacturing zone. The project is part of a USD 9.8 billion (~RM 43.1 billion) investment by Korea’s LG Energy Solution.

Also read: Indonesian President Jokowi rode a Genesis G80 EV to officiate LG's RM 43 billion EV battery materials plant

The industrial area will host end-to-end EV manufacturing, from processing of raw minerals to manufacturing of battery sub-components including cathodes and precursors, to production of finished battery packs, as well as battery recycling.

LG and Hyundai Motor are also building a USD 1.1 billion (~RM 4.8 billion) 10 GWh EV battery plant in Karawang. The batteries will be used in the locally-assembled Hyundai Ioniq 5, among others.

China’s CATL, the world’s largest battery manufacturer, has also committed to investing USD 6 billion (~RM 26.4 billion) into Indonesia.

Toyota has also announced that it will be putting aside USD 2 billion (~RM 8.8 billion) for EV-related investments in Indonesia.

Volkswagen Group’s EV boss Thomas Schmall has also met up with Indonesia’s Minister of Investment Bahlil Lahadalia at the same summit in Davos attended by Minister Lutfi.

Schmall posted on his Linkedin, “A great end to yesterday was the #Indonesia Night. I had the chance to exchange ideas with the country's leading politicians. The country has a clear economic plan and is also a fascinating country with all its different cultures.”

Indonesia and Malaysia have a complex love-hate relationship. We share a common culture but underneath the polite but superficial diplomatic gestures, there are a lot of animosity between the two nations, especially when it comes to football, Malaysia's treatment of Indonesian migrant workers, and most recently, Bahasa Melayu vs Bahasa Indonesia as ASEAN's second official language.

The latter annoyed Indonesia enough for their Ministry of Education and Culture to swiftly issue a strongly worded passive-aggressive statement rejecting PM Ismail's proposal, and questioned the legitimacy of putting Malaysia's national language ahead of Bahasa Indonesia.

But "A wise man can learn more from his enemies than a fool from his friends," Nikki Lauda, Rush, 2013.

So the question is, will we continue to thumb our noses at the progress made by our poorer neighbour, and make excuses for our mediocrity (some insist there's nothing great about Indonesia's ability to pull in EV investments, it's just a direct result of them having a lot of nickel) and overall lack of progress over the last 20 years?