Indonesia on the go

Indonesia is this year’s guest country at the Hannover Messe. However, the country has been in the focus of German industry for years because of the many raw materials. Indonesia is the world’s largest exporter of thermal coal, palm oil and refined tin, but the country is also blessed with nickel ore, bauxite and copper.

“In the past, Indonesia was very much dominated by raw materials in the export sector,” says Jan Rönnfeld, head of the German Chamber of Commerce Abroad (AHK) in Indonesia. Although this has ensured constant economic growth over the past 20 years, structurally the emerging market has largely remained at a low level. In contrast, the industrialized countries have long benefited from buying raw materials cheaply abroad, refining them and using them to produce high-quality products, only to then export them at high cost when in doubt.

If you want raw materials, you have to invest

Meanwhile, Indonesia’s President Joko Widodo no longer wants to just supply raw materials. His goal: Indonesia should become an industrial country by 2045. For this he already banned the export of mineral ores in 2014, says Frank Malerius, who is based in Jarkarta for Germany Trade & Invest (GTAI). So it should be forced that more processing takes place in the country, by domestic smelters or foreigners who invest. But this ban was very full of holes, says Malerius.

The government is therefore tightening the requirements for raw material exports. Since the beginning of 2020, if you want nickel, you have to invest and process the raw material on site. Indonesia is not so easy to avoid, as it has the world’s largest reserves of nickel and nickel is urgently needed – for the refinement of steel, but also in electric car batteries.

In order to pave the way for potential investors, Indonesia also liberalized investment law and labor law in spring 2021, opening hundreds of economic sectors to foreign ownership.

The calculation works – dependence on China remains for the time being

“And then exactly what the government had hoped for happened,” says Frank Malerius. “Foreign companies have come to the country. In total, almost 21.6 billion US dollars in foreign direct investments were attracted in the first six months of 2022, according to the Ministry of Investment BKPM. That was almost 40 percent more than in the same period last year. The Indonesian President According to Joko Widodo, his country has investment needs of $1 trillion by 2060.

“Chinese companies in particular have built smelting plants and steel works here,” says Malerius. In the past three or four years, Indonesia has become one of the largest steel exporters – mainly stainless steel. Five or six years ago, Indonesia would have exported almost no steel, and this year it could see exports worth around 20 billion dollars, estimates Malerius.

Volkswagen, Ford and Tesla would also like to become active in Indonesia in order to get hold of the coveted nickel. “But it will be difficult for them to find supply chains in which the Chinese are not already involved in some way,” says Malerius. This is probably only possible in cooperation with Chinese companies.

At the opening of the Hanover Fair on Sunday, Indonesia’s investment minister Bahil Lahadalia said in a video message that VW would invest in Indonesian battery production together with Ford, the mining company Vale and other companies. This involves, for example, joint ventures for the extraction of raw materials. A spokesman for Europe’s largest automaker said that Indonesia is an important country in terms of raw materials. “The talks are currently being deepened.”

European companies are moving

As companies spin new threads into Indonesia, the EU has lodged a complaint with the World Trade Organization (WTO) about the nickel export ban, saying it doesn’t fit with the rules of free world trade. In November 2022 she was right, but Indonesia appealed and went one better. At the last G-20 summit in Bali, the country announced that it was considering forming a cartel with other countries for battery raw materials such as nickel – similar to that of the oil-producing countries, OPEC.

In order to secure access to nickel, the German chemical group BASF and the French mining company Eramet announced in January this year that they would build a nickel-cobalt plant in Indonesia for the electric car market. This involves an investment of around 2.4 billion euros. He hopes that an agreement is imminent, said President Widodo immediately before the start of the Hanover Fair Handelsblatt. An investor presentation by Eramet recently showed that the planned new plant is expected to start production in early 2026.

Even bauxite may no longer be exported

Widodo also invests in other raw materials. He would also like to bring the further processing of bauxite, copper and tin into the country. From June this year, the export of unprocessed bauxite will be banned. Indonesia is one of the main exporters of the ore, which is used in the production of aluminum and is therefore important in aircraft construction and automobile production.

Raw tin may no longer be exported from 2024. Currently, Indonesia is the second largest producer of tin. Around 60 percent of palm oil worldwide also comes from Indonesia, but the country has stopped exports here too.

In the future, the Indonesian government also wants to develop a domestic rare earth industry. The deposits of the critical raw materials are to be mapped and a concept drawn up for their use, reports Antara News, the government news agency. Indonesia is still importing rare earths to meet the needs of its green technology industry.

Lots of potential for German companies

“Even if Indonesia is far away – there is potential for German companies in many areas,” says Jan Rönnfeld from the AHK, – simply because of the size of the country. “With almost 300 million inhabitants, there is actually potential in every area.” Around 100 million people belong to the middle class. Indonesia is the fourth largest country in the world in terms of population. According to Rönnfeld, mechanical and plant engineering or medical technology could benefit from this, as could the manufacturing industry, which has grown relatively below average in Indonesia in the last two decades.

So far, mainly Chinese, Japanese and South Koreans have invested in Indonesia. Germany has provided technologies rather than investing. That could change. “There will certainly be more investments from Europe,” Rönnfeld believes. “Even if Indonesia is not an easy market.” Market entry is already relatively difficult, despite the easing. “But usually it’s about a relationship between risk and return when making business decisions. And that’s where Indonesia offers the chance of relatively high returns because there is little competition in many areas. In some sectors, 90 percent of the products are imported.”

In Hanover, Chancellor Olaf Scholz expressed the hope that “the next logical step” would be a free trade agreement between Indonesia and the EU. In one fell swoop, a common economic area with far more than 700 million people would emerge. Jakarta and Brussels have been negotiating this since 2016. He is committed to “finally getting this agreement across the finish line,” emphasized Scholz.

The article was published on 01/30/2023. It was updated on 04/17/2023.