Rubber is the Pathway to Indonesia’s EV Future
Commentary by Wayne Forrest
I am a little tired of all the attention EV’s are getting. Their emergence in the world’s marketplace has energized countries, no pun intended, all over the world including Indonesia. Everyone wants to make them or their batteries, creating new jobs in a new “greener” industry. Yes, they are important new shiny objects, but they shouldn’t cause a zero sum trade war.
In Indonesia, this imperative is particularly pronounced, considering that it has struggled to grow new manufacturing (especially for export) and needs to find formal employment for most of its population. But Indonesia’s path to its EV future has been simultaneously logical and confounding. Logical in the sense that if you have an abundance of raw materials for something that billions of people need, you ought to be a manufacturer; but confounding, if you can’t do it at affordable market prices and if your policies distort international markets. This writer has been concerned for several years that Indonesia has been acting with too heavy a hand on down-streaming its minerals. I’ve argued not that Indonesia shouldn’t develop higher value products based on them, it should, but traditional business calculations should drive developments. I’ve often recalled the case of rubber as a good example of a strategic commodity akin to what are now called “critical minerals”. For generations Indonesia, as a top 3 rubber producer, supplied the world’s non-electric vehicles, especially those made outside the tropics where the tree can’t grow. First it sold natural rubber, processed into sheets for tires and components, and later, when manufacturing was economically and technically feasible, it began exporting these items and replaced imports. Today, Indonesia still ships rubber in semi-raw forms but also tons of auto parts (fan belts, wiper blades, grommets).
An export ban has never been put in place yet rubber has been as fundamental to the gas-powered automobile as nickel and other minerals are to electric vehicles. Besides its central role in the vehicles, rubber plays a key role in the healthcare industry, where its impermeable nature protects nurses and doctors daily and helped stem the tide of AIDS. A form of rubber, latex, replaced toxic substances such as lead in paint, saving the lives of countless children. These newer uses of rubber would probably not have become widespread had an export ban been in place. Export bans can have unintended consequences.
But, for some reason, Indonesia concluded a decade ago that it had enough of market economics and began legislating local mineral processing instead of letting economic forces such as comparative advantage run their course. Lately, the West’s own policies no longer provide a constructive example as many aren’t based on fundamental economics either. But, two wrongs don’t make a right. The EU will require 40% of raw materials for batteries to be processed in its zone and the US Inflation Reduction Act, similarly mandates on-shoring by creating huge subsidies for local battery and EV production with exceptions for countries with which the US has an FTA. Investment Minister, Bahlil Lahadalia recently responded by saying Indonesia plans to require 60 to 70% of all minerals to be processed in-country.
Indonesia has dug its heals in on EV’s but nobody’s crystal ball is perfect. Nickel’s future as a battery component is unclear; cheaper and more environmental safe alternatives are already arriving. Indonesia still needs to trade its way into an EV future; its soils are rich in nickel but not lithium. Its doing well converting its laterite nickel into stainless steel (Class 2), but lost a WTO case brought by the EU. The decision is probably unenforceable, and Indonesia has appealed it; meanwhile a comprehensive EU trade deal is on hold. A higher form (class 1) is used in EV batteries and to date production of this material has been by Chinese firms using environmentally questionable acid leaching technology (HPAL) Why Indonesia has issued permits for these factories while courting western automakers (such as Tesla) and asking the US for carve out for its battery materials under the Inflation Reduction Act, escapes me. It seems like a nonstarter, given the IRA’s environmental stipulations. Its petition to relax the EU’s new deforestation standards will likely fall on deaf ears.
With governments tipping the scales left and right do international supply chain accords such as WTO and IPEF mean anything? Bahlil recently said: “If the sky were to fall, the downstream industry would remain our top priority. Should you wish to file a lawsuit against us at the WTO, go ahead. We are now a sovereign nation.” Coordinating Economics Minister Hartarto similarly reacted, calling the EU new rules for forest products as well as the WTO nickel decision “environmental and regulatory imperialism”. Meanwhile, it doubles down on its own protections when it doesn’t really have to. When a product you have in abundance(nickel) is selling outside your country at twice the price, you invite smuggling and leave huge amounts of money on the table. There are not yet enough smelters and follow-on facilities locally to absorb the nickel, bauxite and other minerals. Chinese companies built the new HPAL nickel smelters that are certainly a good deal for them. They came with cushy tax holidays, utilize under-priced nickel, and the exports are exempt from duties and value-added tax. Had Indonesian companies been allowed to export raw nickel they could have earned the funds needed to invest in their own facilities. Employment data is imprecise, but smelters are capital intensive. How much value will they ultimately add? How long can the government avoid the revenue and when the subsidies come off, how competitive will the products be?
Its not too late for Indonesia’s policy makers to reverse course, lift the export ban, and allow economics and business calculations to evolve the EV industry naturally. It can still attract investors and avoid trade disputes. Its eggs-in-one-basket approach to this new industry comes with risks it need not take.
Its past experience with rubber provides the pathway.
(The view representing are the writer’s own and are not necessarily shared by members of the American Indonesian Chamber of Commerce)