Indonesia EV Battery Dream Hits Wall On Lithium Supply, Dragging EV-Related Incentives

Indonesia’s ambition to use its vast nickel wealth to build an electric vehicle battery industry is hitting major obstacles, with the government failing to secure adequate lithium supplies and negotiations with Washington over EV-related incentives dragging out.

That comes as Indonesia’s first battery cell plant, developed jointly by South Korean carmaker Hyundai Motor and battery producer LG Energy Solution, nears completion. President Joko Widodo said this month it is slated to start production early next year.

“[The plant] will produce 30 million battery cells, which can be used to manufacture approximately 180,000 cars — the first and the biggest in Southeast Asia,” Widodo said during a visit to the facility in Karawang, West Java province.

The Karawang project is part of $9.8 billion joint investment plans in Indonesia’s battery supply chain led by LG. Major Chinese battery producer Contemporary Amperex Technology (CATL) announced separate $5.97 billion joint investment plans in Indonesia in April last year.

Indonesia is the world’s largest producer of nickel, a key component in lithium-ion batteries, the most popular type of EV batteries. That wealth has fueled its ambition to develop a battery industry and a regional EV manufacturing hub.

A Hyundai Ioniq 5 in Indonesia. The country aims to become a manufacturing hub by leveraging its status as the world’s biggest producer of nickel — a key ingredient in EV batteries.   © Getty Images

The sprawling archipelago also produces cobalt, copper and manganese — other critical minerals commonly used in batteries. But it lacks lithium, which has prompted a search for deals led by Luhut Pandjaitan, Indonesia’s coordinating minister for maritime affairs and investment, who has visited Australia and some African countries in recent months.

Pandjaitan in July said Indonesia had secured a contract for the shipment of 60,000 tonnes from Australia. But it needs far more. Pandjaitan’s trips were followed by visits by Widodo to Australia and Africa in July and August, but no other known lithium deal has been struck.

Septian Hario Seto, a Pandjaitan deputy, summed up the problem at a conference hosted by CNBC Indonesia in late July. “The closest [place for] supply is actually Australia,” he said, but added that little of the production is available to Indonesia. “Our estimate [is] more than 90% of the lithium concentrate in Australia is to be sent to China.”

Seto said some Chinese companies investing in Indonesia have acquired lithium mines in the Democratic Republic of the Congo and Zimbabwe, suggesting that for the time being Indonesia could meet its lithium needs from those entities.

Chinese companies have also been investing heavily in Indonesia’s nickel-processing sector since Jakarta imposed a permanent ban on nickel ore exports in January 2020, part of an overall push to develop the country’s mining downstreaming industry.

Another hurdle for Indonesia’s plans comes from the U.S. Inflation Reduction Act, which offers incentives to EV-related industries running their facilities in the U.S. or other countries with which it has a free trade agreement. Indonesia does not hold such an FTA. The IRA also restricts from the incentives “foreign entities of concern”, which includes China, providing a further obstacle for Indonesia given the big Chinese investments in its battery-related projects.

“It would likely be harder for EV battery manufacturers that have some sort of connection with a Chinese company … to sign long-term supply agreements with EV manufacturers if the vehicles will not comply with the U.S. IRA requirements,” Santiago Arieu, automobile analyst at BMI, a research unit under Fitch Group, told Nikkei Asia.

Indonesia has for months been lobbying for a limited FTA with Washington. Pandjaitan recently told the Bloomberg CEO Forum in Jakarta that “a solution” might be achieved in November. U.S. Vice President Kamala Harris, meanwhile, in her bilateral meeting with Widodo at the ASEAN Summit in Jakarta earlier this month said Washington would “continue to work with Indonesia to build a resilient supply chain, including for the critical minerals required to expand our clean energy economies.”

Seto said both governments understand Indonesia’s importance as a nickel and cobalt supplier. “[But] apparently U.S. bureaucracy is far more complicated than [ours],” he added.

And over the longer term, a new battery law issued in July by the EU under its Green Deal could pose another major obstacle. The EU Battery Regulation will restrict batteries produced through high-emission processes from entering the bloc. It will implement a so-called battery passport in 2026, which requires an independently-verified disclosure of the entire lifecycle of a battery and its carbon footprint, before setting a carbon intensity benchmark in 2028.

Nick Merritt, Singapore-based partner and co-head of sustainability at global law firm Norton Rose Fulbright said that spells bad news for Indonesia, noting the country’s high dependence on coal, including to provide electricity to power-hungry nickel smelters that produce battery materials.

“The European Union knows that these targets are causing headaches in China and Indonesia from a compliance perspective and it is the price of entering their market,” Merritt told Nikkei. “The regulation… could potentially close out one of the major markets in the world to Indonesian nickel down the road. And the expectation is that where the European Union goes, others will typically follow.” – NikkeiAsia

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