Indonesia's ambitious electric vehicle strategy faces regulatory complexity, conflicting incentives, and sustainability concerns that threaten its position in the global EV supply chain

• Indonesia aims to transform from nickel supplier to EV manufacturing hub.
• ESG concerns and safety issues challenge Indonesia's EV industry growth.
• Complex regulations and changing incentives affect EV investment decisions.

As the global transition to electric vehicles (EVs) accelerates, Indonesia finds itself uniquely positioned in the supply chain. With the world's largest nickel reserves — crucial for EV battery production — the country has ambitious plans to transition from being a raw materials exporter to a manufacturing powerhouse. Yet despite a flurry of incentives and regulatory changes aimed at attracting investment, Indonesia’s road toward a sustainable EV ecosystem remains fraught with legal and regulatory challenges.

THE INCENTIVE PARADOX

One of the most significant challenges confronting Indonesia's EV market is the tension between short-term market stimulation and long-term industrial development. The government's approach creates what some experts describe as conflicting incentives.

“Based on our observation, both [incentives] have been implemented by EV companies to leverage benefits in their own respect,” explains Alta Mahandara, partner at ADCO Law. “Businesses have used duty-free imports to begin selling finished products to end-consumers without having to wait for manufacturing lines to operate at full capacity, while certain businesses able to achieve 40 percent local content levels have begun to use the related VAT subsidies as marketing tools and cost-reducers for end-consumers.”

This dual approach has resulted in an uneven playing field. Chinese manufacturers like BYD and Wuling can flood the market with cheaper imported vehicles, while companies investing in local manufacturing facilities — such as Hyundai — face higher costs to meet local content requirements.

According to Mahandara, “the market has favoured using duty-free imports more than VAT subsidies. Although the government has extended the VAT subsidies into 2025 under the implementing regulations of the Ministry of Finance, only two brands (i.e., Hyundai and Wuling) have been able to begin selling EV products that qualify for the relevant requirements of VAT subsidies.”

The current duty-free import incentive for completely built-up (CBU) EVs is set to expire at the end of 2025, after which local manufacturers must comply with increasingly stringent local content requirements. By 2030, EVs produced in Indonesia will need to achieve an ambitious 80 percent local content level to qualify for incentives.

THE SUSTAINABILITY CHALLENGE

Perhaps the most pressing challenge for Indonesia's EV industry lies in addressing environmental, social, and governance (ESG) concerns, particularly in nickel mining and processing operations. These concerns directly impact the sector's reputation and access to international markets.

“As Indonesia's nickel, battery and EV industries develop, the concerns that certain stakeholders hold towards Indonesia's capacity to maintain ESG standards have scaled back the appetite of some investors,” notes Mahandara. “While this will not by any means halt the overall market, the Indonesian market has passed up on some significant funding, especially from the West.”

The withdrawal of major European investors like BASF, Eramet, and hedge fund Hedonova from Indonesian nickel processing ventures underscores the seriousness of these concerns. Even tech giant Apple reportedly withdrew interest in establishing a factory in Indonesia due to traceability concerns in the domestic supply chain.

“As Indonesia’s market remains rife with relatively more lenient Asian investors (mainly from China), the government is not taking any urgent response to these ESG concerns. Especially following the recent regime transition, these signals from overseas markets in the West are not causing any significant policy or regulatory shifts,” Mahandara notes. 

Workplace safety represents a critical ESG issue. Liyanto Wijaya, senior partner at law firm UMBRA, points to a troubling pattern: “In May 2024, a fire broke out at a smelter in an industrial area in Central Sulawesi after a nickel furnace overflowed, spreading flames to the ground floor. Despite labour unions demanding accountability, another fire occurred just months later in December 2024, at a different company in the same industrial area, claiming the lives of 21 workers.”

These incidents demonstrate the inadequate enforcement of safety regulations, which,  despite their existence on paper, pose a threat to both worker welfare and industry reputation.

THE TARIFF THREAT

The prospect of increasing international tariffs—particularly from the United States—poses an additional challenge to Indonesia's EV export ambitions. While no specific tariffs currently target Indonesia’s EV products, the threat looms large over strategic planning.

“Presently, although there is a growing concern about tariffs, neither the US nor any other Western countries have imposed any tariffs against Indonesian EV batteries or EV products,” Mahandara observes. However, he recommends that contracts include “a favourable price adjustment or tariff pass-through clause to be integrated into both investment and operational agreements.”

This proactive approach allows businesses to pre-emptively agree on mechanisms to recalculate contract prices if international tariffs are imposed. Such clauses represent a more strategic solution than relying on force majeure or hardship provisions, which typically necessitate future renegotiations and increase the risk of disputes.

"EV-related M&A transactions require a more comprehensive regulatory due diligence process, specifically related to licenses and compliance of EVs and the infrastructure of EVs… many business actors or target companies fail to meet various licensing and compliance requirements due to a lack of awareness of relevant regulations.” -- Liyanto Wijaya, UMBRA 

The concern over tariffs is particularly acute given the geopolitical tensions surrounding critical mineral supply chains. As Western nations seek to reduce dependency on China for battery materials, Indonesia's close relationships with Chinese nickel processors and battery manufacturers could become a liability. Experts suggest that Indonesian EV exporters should consider diversifying their investment partners and pursuing certification under internationally recognized sustainability standards to mitigate potential tariff risks.

THE REGULATORY COMPLEXITIES

Indonesia's EV sector operates within standard M&A legal frameworks, but industry experts highlight several sector-specific challenges. Wijaya notes: “Given that the EV manufacturing industry in Indonesia is still relatively new and has experienced multiple changes from 2019 to 2024, particularly in local content requirements, one of its main challenges, unlike more established industries, is the more dynamic regulatory landscape compared to other sectors.”

This rapidly evolving regulatory environment requires investors to navigate overlapping jurisdictions among various ministries, including Industry, Energy and Mineral Resources, and Trade.

“EV-related M&A transactions require a more comprehensive regulatory due diligence process, specifically related to licenses and compliance of EV and the infrastructure of EV,” Wijaya explains. “For example, in our experience assisting the M&A transaction of EV charging station companies, many business actors or target companies fail to meet various licensing and compliance requirements due to a lack of awareness of relevant regulations.”

Mahandara from ADCO Law further highlights that EV-related investments are distinctly shaped by orientation towards maximizing government incentives, anticipation of policy changes amid political uncertainty, management of fluctuating demand projections, and integration of EV ventures with upstream nickel production. These considerations impact not only investment decisions but also affect transaction documentation, valuation models, and risk mitigation strategies.

THE NEED TO ADAPT

Despite these challenges, legal experts maintain a cautiously optimistic outlook for Indonesia's EV sector. The key lies in strategic adaptation to the regulatory landscape. With the impending end of duty-free incentives in 2025, companies should prioritize localization to capitalize on VAT subsidies and stay ahead of local content requirements. Engaging local suppliers for batteries, components, and software is crucial for enhancing local content and boosting competitiveness against imports.

Moreover, forming joint ventures with non-Chinese investors, such as those from South Korea and Europe, will allow local players to leverage international expertise and resources. The recent interest from global firms like Glencore and LG in Indonesia’s markets exemplifies the potential for fruitful collaborations.

Strengthening industry-academia partnerships, pursuing strategic collaborations with established international manufacturers, and proactively addressing ESG concerns will be crucial for Indonesia to realize its ambitions in the global EV supply chain.

“To meet the 40 percent TKDN requirement, local manufacturers and investors must focus on enhancing domestic production capabilities through targeted strategies. This includes substantial investment in local supply chains, particularly in battery materials, charging infrastructure, and essential EV components,” Wijaya of UMBRA recommends.