As Indonesia prepares to commence electric vehicle production, new analysis examines possible steps to overcome challenges related to price, manufacturing and infrastructure.

Indonesia has joined the electric vehicle (EV) revolution with the launch of an automotive plant to produce the country’s first fully electric cars, which will boost the manufacturing sector and reduce air pollution, traffic noise and dependence on imported petrol.

President Joko Widodo launched the Hyundai plant on 16 March – a step towards the goal of developing of a fully Indonesian EV supply chain.

He indicated that by 2024 all locally produced EVs will use Indonesian made batteries in addition to other key components, leveraging the country’s vast mineral resources.

This is aimed at positioning Indonesia to be an international player in the EV supply chain as global demand continues to gain momentum.

In 2021, EVs represented nearly 9% of the global car market with sales reaching 6.6 million units – more than double the previous year.

Over 50% of EV sales were in China, which leads the way in their manufacture and use, and the US and EU have also seen increased commitment from consumers and car makers.

In Europe, 2.3 million electric cars were sold in 2021 and major brands like Volvo, Volkswagen and Ford have pledged to transition fully to EVs by the end of the decade.

While EVs are available in Indonesia – some imported fully built, others assembled locally from imported parts – in 2021 they accounted for just 0.4% of new car sales with 3,200 sold.

Green machines
Aside from securing the future of domestic automotive manufacturing, the Indonesian government is keen to ramp up EV production and sales to reduce air pollution, traffic noise and petroleum imports, and especially to help meet Indonesia’s CO2 reduction targets.

Fully electric, battery-powered vehicles produce no tailpipe emissions and, even accounting for fossil fuel generated electricity, EVs emit less CO2 than regular vehicles.

The government has suggested that all new motorcycles will be EVs by 2040 and all new cars will be electric powered by 2050.

Prospera and the Finance Ministry’s Fiscal Policy Agency recently collaborated on a comprehensive analysis of the Indonesian EV ecosystem, examining steps that could accelerate the uptake of EVs in the country.

Price was among the obstacles identified. Indonesians can currently expect to pay almost twice as much for an EV than an equivalent conventional petrol vehicle.

Even factoring in the total cost of ownership – including purchase, maintenance and fuelling/charging for 10 years – an electric car is still 1.4 times as expensive.

In the absence of a price on carbon emissions, other economic measures are needed to bring the cost of an EV down to parity.

Policy options include incentivising EV ownership through cash subsidies for new electric vehicles or tax exemptions (e.g. VAT and import duties).

The government could also look to make conventional car ownership less attractive by reducing petrol subsidies which would increase their running costs relative to EVs.

Infrastructure and industry investment
The widespread use of EVs will also require significant investments in infrastructure. There are only a few hundred public charging stations, mostly on Java island, and thousands more are needed across the country.

Unlike petrol stations, which are typically located on busy roads and intersections, charging stations are best located in places cars remain for longer periods, such as parking lots and garages in shopping malls, apartments and office towers.

Policies are therefore needed to incentivise commercial and residential property developers and managers to install charging facilities.

Charging EVs at home is possible but comes with its own challenges. Prospera estimated that only 7.4% of Indonesian homes currently have a power rating high enough to accommodate the added load of EV charging.

Most middle-class homes would consume 60% more electricity to charge their EVs, straining utility budgets as well as their power supply.

Finally, increasing the uptake of EVs requires strategic changes and heavy investment in the automotive sector.

“Manufacturing EVs in Indonesia is crucial to affordability and availability at scale,” explained Salman Fajari Alamsyah, an analyst in Prospera’s macroeconomic team.

Local component requirements demanding 60% of vehicle parts be Indonesian made will come into effect in 2024.

Domestic production of key components – such as the battery, engine and transmission – will require substantial investments and transfer of knowledge by foreign manufacturers.

EV batteries require rare elements like lithium, cobalt and nickel. In this regard Indonesia has an advantage: it holds the world’s largest nickel reserves and accounts for 30% of global production.

Nickel-manganese-cobalt batteries – the most common lithium-ion battery type for EVs – can be viably manufactured in Indonesia. Hyundai and LG have invested USD 1.1 billion in a new plant in West Java which is expected to commence production in 2024.

Prospera will continue to work with the Fiscal Policy Agency to delve further into the supply side of the EV value chain.

“We seek to integrate the government’s goals of environmental sustainability, industry development and consumer welfare to shape policy,” said senior economist and macroeconomic lead Adhi Saputro.

The aim is to include policy guidance on EVs in the macro-fiscal annual statement (KEM PPKF) for the next national budget, so that fiscal measures in support of EVs are backed by evidence of policy impact.

For more information, please contact Adhi Saputro, Senior Economist, Macro Lead, at Adhi.Saputro@prospera.or.id.