Why is getting Tesla increasingly difficult for Indonesia?

Indonesia’s long-time approach to getting Tesla arguably has faced at least three difficulties as the key hurdles of why the carmaker hasn’t made a move in the country.

Tug of war on the investment discussion between Indonesia and the world’s largest electric vehicle (EV) maker Tesla has raised doubts in the public: “Will Tesla really invest in the country?”

Indonesia has long been wooing Tesla to open its production facilities at home but the investment plan realization has yet to be fruitful. Back-and-forth negotiations have been run over the past few years and the results remain to be seen.

Indonesia’s President Joko Widodo, an ambitious leader to make his country a global electric vehicle hub, once met with Elon Musk, the world’s richest man and Chief Executive Officer of Tesla, in May last year. Jokowi, as the president is widely known, pitched Musk on the potential investment and technology cooperation with rounds of follow-up discussions that have continued to be done since then.

Last time, the Coordinating Minister of Maritime and Investment Affairs Luhut Binsar Pandjaitan met with Musk in August. It was his third meeting with Musk and yet again, Minister Luhut didn’t bring a meaningful prize from Tesla when he went back home. Speaking at the Bloomberg CEO Forum in September after he met with Musk, Luhut said Tesla will not invest in the country soon as the carmaker will halt its expansion for the next one or two years.

Next week, President Jokowi is scheduled to attend the Asia Pacific Economic Cooperation (APEC) Summit in San Francisco, California. There has been no official announcement yet regarding Jokowi’s meeting with Musk but the discussion on the electric vehicle (EV) investment will be top on the agenda – as the President’s official visit to other countries previously.

Blessed with its natural resources, Indonesia aims to move up the value chain and maximize the country’s abundant minerals in the rapidly growing global electric vehicle industry. Indonesia has mapped out its downstreaming initiative to increase value-added of the country’s commodities, including nickel – a key mineral in the EV sector. The Southeast Asian country laid out the road map to have end-to-end EV supply chain facilities in the country – from nickel processing, and battery cell manufacturing, to car assembling. However, the country’s long pathway to becoming an EV hub has faced a bumpy road, including getting a global carmaker like Tesla.

Indonesia’s long-time approach to getting Tesla arguably has faced at least three difficulties as the key hurdles of why the carmaker hasn’t made a move in the country. The three interconnected bottlenecks are Indonesia’s nickel charm has threatened, growing competition with other Asian peers, and Tesla’s internal issues in the global EV race.

Nickel’s threatened charm

Indonesia’s position as the world’s largest nickel reserves is the most promising bargaining power to entice Tesla but the country should move further beyond it. Growing scrutiny over Indonesia’s nickel industry which has been seen as environmentally destructive has put pressure on the country to upgrade its nickel mining and processing standards into more sustainable ways. Environmental groups, representing Indonesian and US civil society organizations, have urged Tesla to reconsider its plan in Indonesia’s nickel industry due to devastating impacts on the environment. A growing spotlight on Indonesia’s nickel industry and its impact on the environment is a wake-up call for the government as global carmakers set the EV supply chains to be mined and processed in an environmentally and socially responsible fashion.

After Indonesia banned its nickel ore export in 2020, both foreign and domestic investors have been flocking to open nickel processing facilities throughout the archipelago. In 2022, Indonesia produced 1.6 million tons of nickel, almost half of the global production. In the same year, the country became the world’s second-largest cobalt producer after the Democratic Republic of Congo. Both minerals are key materials for NMC (nickel, manganese, and cobalt) batteries, a type of battery that most global carmakers use today with higher energy density and longer lifespan.

Tesla has been using nickel-based NMC batteries for most of its passenger cars, such as Model 3 and Model Y. However, the company will switch the battery technology to a cheaper lithium-iron-phosphate (LFP) chemistry. Earlier this year, Tesla outlined a “Master Plan Part 3” to use more LFP batteries in some types of its cars and trucks to lower production costs. Battery is the most expensive part of the EV and Tesla wants to make its vehicles more affordable and accessible for wider consumers.

This move will impact Indonesia’s nickel demand in the future as major global carmakers, including Tesla and other Chinese firms, have seen an increasing number in LFP battery usage. The International Energy Agency reported that in 2022, the LFP battery has reached its all-time high share in the past decade of 27% use compared to 17% a year earlier. Although NMC batteries remain dominant in the market, the share keeps decreasing over time from 76% in 2021 to 66% in 2022. Tesla’s usage of LFP batteries has also increased from 20% in 2021 to 30% in 2022 and is expected to increase more in the coming years.

Nickel, Indonesia’s top bargaining power to lure Tesla, is also facing another barrier from the United States Inflation Reduction Act (IRA). The US has issued a regulation that requires certain parts of EV battery components to be produced or assembled in North America or its free trade partner to be eligible for the tax credit. As Indonesia is unqualified yet to get it, Jakarta is currently negotiating with Washington to make its critical minerals qualify for the tax perks. Jokowi’s upcoming meeting with Joe Biden is hoped to advance the negotiation after a previous discussion with US VP Kamala Harris during a sideline of the ASEAN Summit in Jakarta.

Asian countries race to get a Tesla plant

Currently, Tesla has only one production facility called a “Gigafactory” throughout Asia, located in Shanghai, China. Not only Indonesia, some Asian countries are also in a race to woo Tesla to open its production plant within their territories, particularly India, Thailand, and South Korea. The governments of each country have paved the way for Elon Musk to look into their countries through some policy initiatives.

The Indian government is considering reducing import duty from 100% to as low as 15% to boost domestic manufacturing and increase local sourcing of parts. Thailand, Southeast Asia’s largest automobile assembly hub, will launch a new subsidy scheme to provide up to $2,760 per car for domestically made EVs and plans to decrease excise tax from 8% to 2%. South Korea is also in the line-up, the East Asian country offers to provide support including tax benefits supported by its cutting-edge industrial technology and high-skilled workers. The Indonesian government also has slated a value-added tax (VAT) for every electric car purchase from 11% to 1% and will finalize an incentives scheme for electric cars in a bid to woo Tesla and other producers.

Government support through incentives is substantial but not only the main factor. Charging facilities, supporting EV infrastructure, penetration rate, and the country’s consumer purchasing power are among the major reasons for Tesla to set up its plant. Those countries are gearing up their readiness to prepare the redcarpet for the Texas-based carmaker. Indonesia should also move faster to reinforce its traction.

Tesla’s tight competition

Tesla has set a pretentious target to sell 20 million cars by 2030. While Tesla has been in talks with some Asian countries for the next Asian “Gigafactory” outside China to realize its target, the carmaker is facing a headache with the swiftly rising global EV battle. The price war has put the US EV giant in tight competition with other producers, particularly Chinese carmakers like BYD.

Since the end of last year, Tesla has slashed prices of its cars across the world with further cuts since then in attempts to increase demand. Competition in the EV space continues to ramp up and Tesla is facing a struggle in its two biggest markets, the US and China.

This year, Tesla has a production target of 1.8 million vehicles. In the past nine months, Tesla has sold 1,323,000 while BYD sold 1,048,413 battery electric vehicles (BEV) in the same period. In the third quarter report, competition is getting tougher with narrowing margins. Tesla sold over 435,000 cars while BYD sold 431,603 electric cars. The growing competition between the two is expected to cause Tesla to lose its crown over BYD.

Amid slowing Tesla’s car demand, the oversupply problem will be one of the major obstacles for the company to rethink its strategies. Solving challenges in Tesla’s current market will be the top priority amid the current EV competition and that could have an impact on the postponement of investment and expansion plans in new markets, including setting up a factory in Indonesia.

Although Indonesia’s long-way discussion with Tesla has faced an increasingly difficult situation over time, the window of opportunities for both sides to collaborate is always widely open.

Rafi Adis Subarna
Rafi Adis Subarna
Rafi Adis Subarna is a research analyst at KRA Group, a Southeast Asia-based public affairs and political risk consultancy. The opinions expressed are his own and do not represent the institution.