December 20, 2023
JAKARTA – Indonesia, trailing its neighbors in the electric vehicle (EV) race, is stepping on the gas with a package of tax incentives aimed at revving up its domestic industry, a government official has said.
The revised presidential regulation published on Dec. 12 offers a two-year window for automakers willing to build EV plants in the archipelago.
A ministerial regulation governing the technicalities will be released by the end of December.
Through the policy changes, the government will allow any automaker planning to set up EV plants in the country to import fully built-up (CBU) or completely knocked down (CKD) EVs without paying import duties or luxury goods value-added tax (VAT).
Valid until the end of 2025, the exemptions are aimed at jump-starting the market before domestic production kicks into a higher gear.
Moreover, the government has also loosened the reins on local content requirements. It now gives EV carmakers until 2026 to achieve the minimum 40 percent of domestically sourced components.
“It’s a win-win for both Indonesia and investors,” Deputy Coordinating Maritime Affairs and Investment Minister Rachmat Kaimuddin said on Friday, expressing the hope that the new incentives would lure major EV automakers to set up shop in the country.
“Before the factories are operational, they can market their products at a more competitive price.”
Rachmat acknowledged the need to kick-start an “economy of scale” for the domestic EV market. “How can we offer incentives when there’s no market yet?” he said.
Indonesia’s current EV production is dwarfed by that of peer countries. While Thailand boasts annual output of 240,000 four-wheelers, Indonesia has a modest manufacturing capacity of 34,000 cars, 2,480 buses and 1.45 million motorbikes, according to the ministry.
However, just 10,327 battery-powered cars were sold in 2022, accounting for around 1 percent of total car sales, according to BenarNews.
The government hopes to have 400,000 electric four-wheelers and 1.8 million electric two-wheelers on the country’s roads by 2025.
A price to pay
Institute for Development of Economics and Finance (Indef) economist Andry Satrio Nugroho told The Jakarta Post on Monday that the government’s focus “had shifted” from a long-term strategy of building up the market on the foundation of the country’s ample nickel reserves, to immediate market gains.
While he agreed that the policy might push up domestic EV sales, its impact on President Joko “Jokowi” Widodo’s grand nickel aspirations remained uncertain, as the incentives apply equally to all EVs, regardless of the battery composition.
“The government seems to have lost its focus,” Andry said. “This regulation is meant to enhance the EV consumer climate rather than the investment climate, let alone nickel-based investment.”
While lower prices as a result of the incentives might entice new buyers by reducing the total cost of ownership, he cautioned that the inclusive incentives could undermine the country’s nickel industry development road map, which includes an export ban on unprocessed nickel ore.
The risk was that the abundant nickel resources were relegated to a secondary role in intermediate products, “reneging” on the initial vision of a nickel-powered EV ecosystem, he said.
The new incentives, Andry pointed out, were motivated by declining global nickel demand and the fact that neighboring countries were wooing major EV players, such as Thailand with China’s BYD and Malaysia with Tesla from the United States, both opting for lithium-based batteries over nickel-based ones.
The ideal scenario, he suggested, would prioritize nickel-based batteries, boosting consumer uptake and domestic production together. The new policy, however, failed to do that.
“With these incentives and the declining nickel-based battery demand, the only thing we can rely on now is the domestic market,” Andry lamented. “But, again, the government isn’t offering any incentives for nickel-based batteries.”
Public demand
Tenggono Chuandra Phoa, secretary-general of the Indonesian Electric Vehicle Industry Association (Periklindo) told the Post on Monday the new policy would attract new investors.
He viewed it as a low-risk entry point, allowing them to test the waters and gauge consumer preferences before entering local production.
Bebin Djuana, an automotive expert, said on Monday: “If they have the products that are suitable for our market, there’s no reason for them not to produce in our country.”
However, “with half-hearted incentives and relying on the big names to reach the local content requirements, I don’t think we are going to hit the sales target.”
While public enthusiasm for EVs had been increasing, he pointed out that price remained a major barrier to broader adoption, hindering the significant market growth the country needed.
Bebin said the policy, by facilitating the market entry of new models, could help accommodate consumer preferences for EVs priced between Rp 200 million (US$12,900) and Rp 300 million, with a focus on practical features, such as seven-seat configurations.