From nickel to Electric cars? Indonesia’s resource cum automotive industry policy

Abstract

This paper elucidates Indonesia’s resource-cum-industrial policy to leverage domestic nickel resources for building a localised value chain from mining to electric vehicles. The value chain is first mapped in order to facilitate the policy analysis. While Indonesia is successful in attracting investment projects which aim to build the value chain from mining to electric vehicle batteries within her borders, our analysis nevertheless finds that this process must be rather attributed to value chain lead firm strategy than Indonesian resource policy. Further, the final stage of electric vehicle assembly is only sparsely developed, suggesting that the attempted integration of forward linkage creation from mining and simultaneous backward linkage creation from vehicle assembly is not systematically deployed.

Keywords:

• Indonesia
• automotive industry
• industrial policy
• resource policy
• backward forward linkages
• global value chain (GVC)

Acknowledgements

An earlier version of this paper was presented at the 30^th International Colloquium of Gerpisa. We are grateful to the editor, two anonymous reviewers, Lorenza Monaco and John Thoburn for helpful comments on this paper. The authors remain solely responsible for all errors.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 For a detailed discussion on the provisions of the Mining Law, refer to Warburton (2017, 2018).

2 As will be discussed below, both industries have backward and forward linkages. Nevertheless, it will be maintained that both industrial activities are conceptualised as creating one particular kind of linkage in the context of development: Natural resource industry development is understood as overcoming entry barriers associated with beneficiation processes which tend to be capital-, skill-, and technology-intensive but allow to capture more value-added and whose outputs are less subject to price fluctuation than unprocessed natural resources (Ramos 1998, 109; Morris and Fessehaie 2014, 26; Altenburg and Lütkenhorst 2015, 166). Conversely, automotive industry development in countries such as Malaysia (Tham 2021), South Africa (Barnes et al. 2021; Bell et al. 2021), or Vietnam (Schröder 2021a, 2021b) is understood as a problem of creating a domestic supplier industry, not one of creating distribution, dealership, and repair shop networks.

3 Among the factors analysed, high capital requirements for processing, developed countries’ import tariffs on processed materials, and technical and managerial dependence on developed country know-how stand out as they are still relevant in the renewed discussion of the question if and how natural resources can be utilised for industrial development discussed below.

4 This argument is static in nature and hence may be countered by arguments focussing of dynamic processes such as learning by doing and spillover effects related to endogenous growth theory.

5 It should be emphasised that this view is compatible with the resource curse view, since this perspective is based on “evidence accumulated on the poor growth experience of resource-rich countries in the post-world-war II period” (Sachs and Warner 2001, 827–828). Further, acknowledging the finding that early resource-abundant industrialisers often outperformed resource-poor ones led Auty (2000) to propose that different development outcomes of early and late industrialising countries as well as between more and less successful late developers was rooted in policy. Finally, while the Dutch disease effect will affect all resource exporting countries, the resource curse view expresses that these effects could be mitigated, e.g. if countries do not solely use resource revenues for consumption but investment (van Wijnberg 1984, 53).

6 Recently, the argument that phased development models are increasingly difficult to employ because developing countries are undergoing ‘compressed development’ has been convincingly elaborated (Whittaker et al. 2020, 31–39).

7 As will be discussed below, the resource cum industrial policy is an important exception.

8 Naudé’s conceptualisation of GVCs is apparently one of VSVCs, which overlooks the existence of AVCs.

9 The 2009 Mining Law inspired the less intrusive 2014 Plantation Law, marking an extension of resource-based industrialisation strategy from minerals to agricultural cash crops, especially palm oil, but also cocoa and rubber.

10 Successful implementation of this prescription would result in a historic singularity, i.e. none of todays major vehicle producing countries followed this development path. The only historic case that somewhat resembles this prescription is Hungary which ended car production after the Second World War under the COMECON which confined Hungary’s role to producing components and the famous Ikarus buses (Havas 2000, 236–237).

11 Flex fuel technology allows the engine to utilise any blend of gasoline and ethanol or methanol. The technology was refined by Brazil which sought to utilise domestically produced bio-ethanol to replace fuel imports after the first Oil Shock (Zapata and Nieuwenhuis 2009).

12 The automotive industry is one of 18 so-called pioneer sectors which are eligible for investment incentives. The sectors are (1) upstream basic metal; (2) oil and gas refinery; (3) petrochemicals from oil, gas, or coal; (4) organic basic chemicals from agriculture, plantation, or forestry products; (5) inorganic basic chemicals; (6) pharmaceutical raw materials; (7) irradiation, electromedical, or electrotherapy equipment; (8) main components of electronics or telematics equipment, such as semiconductor wafer, backlight for LCD, electrical driver, or display; (9) machinery and components of machinery; (10) robotics components that support the creation of manufacturing machinery; (11) robotics components that support creation of manufacturing machinery; (12) motor vehicles and main components; (13) main components of vessels; (14) main components of trains; (15) main components of aircraft and activities supporting the aerospace industry; (16) agricultural, plantation, or forestry-based processing that produce pulp; (17) economic infrastructure; and (18) digital economy.

13 These materials are either combined to lithium nickel manganese cobalt oxides (NMC) or lithium nickel cobalt aluminium oxides (NCA). Wangda, Erickson, and Manthiram (2020, 27) document that whereas NMC batteries are used in the majority of EV models of carmakers such as BMW, BYD, General Motors, Hyundai, Renault-Nissan, and Volkswagen Group, NCA batteries basically are only used by Tesla.

14 Differences in nickel content also suggest that the purification process should not be understood as a linear increase in nickel content before nickel is used in battery cathodes.

15 It should be pointed out that the EU regards Indonesia’s export restrictions as a violation of WTO rules. In 2019, the EU filed a complaint against the restrictions and escalated by asking the WTO to adjudicate the case in 2021. However, resource-rich countries may regard OPEC as an example that de facto export restrictions can be used.

16 PT Aneka Tambang, known as Antam, is Indonesia’s largest nickel producer. Besides nickel, the company produces bauxite, ferronickel, gold, and silver.

17 The company used to be known as PT Indonesia Asahan Aluminium (colloquially Inalum), an aluminium smelting SOE. Recently, it is transformed into a state-owned holding company named MIND ID (Mining Industry Indonesia), which should oversee all mining SOEs to realise synergies. As part of the transformation, Antam became a subsidiary of MIND ID in 2017.

18 PT Perusahaan Pertambangan Minyak dan Gas Bumi Negara, known as Pertamina, is an SOE active in the oil and gas industry.

19 PT Perusahaan Listrik Negara is Indonesia’s principal electricity generator which holds the monopoly on electricity distribution.

20 This should not be interpreted as a critique of the idea to utilise disruptive technology to overcome current positioning in GVCs. Arguably, technologic disruptions such as EVs are rare windows of opportunity to reshape existing value chains. In the case of EVs, Chinese policy clearly targeted EVs to challenge incumbent carmakers as the dominant actors in the automotive GVC (Wang and Kimble 2011).

21 In 2020, Tesla invested into a mining firm that owns the concession to mine nickel in New Caledonia (Rodway 2022), another major known reserve. Hence, while Tesla may not be directly involved in resource mining and smelting, it nevertheless takes steps to secure supply for important raw materials.

Additional information

Notes on contributors

Martin Schröder

Martin Schröder is Associate Professor at the College of Policy Science, Ritsumeikan University, Japan and Visiting Researcher at the Research Institute of Automobile and Parts Industries, Waseda University, Japan. His research interests are (a.) regional economic integration in ASEAN; (b.) the political economy of the automotive industry; and recently (c.) digitalisation in the automotive industry.

Fusanori Iwasaki

Fusanori Iwasaki is a Director for Policy Research, Senior Research Associate and Executive Assistant to the President of the Economic Research Institute for ASEAN and East Asia (ERIA). His research interests are in the fields of International Relations and International Business studies. He is currently involved in several ERIA research projects, such as the study on regional economic integration of ASEAN and East Asia, automotive and parts industry, marine plastic issues in Asia, as well as small and medium enterprises in Asia. Prior to joining ERIA, he was a research fellow in the Japan Society for the Promotion of Science (DC1). He holds a master’s degree from the Legal and Political Studies Program at the Graduate School of Law in Kyoto University, Japan, where he specialised in International Relations. He is also an Adjunct Researcher of the Research Institute of Auto and Parts Industries in Waseda University, Japan, Visiting Research Fellow of the East Asia Trade Research Board (EATRB), Tokyo, Japan.