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Export bans boost Indonesia's onshoring policy

Insa Wrede
February 7, 2023

If you want to benefit from Indonesia's huge mineral wealth, you need to share many of the spoils with the country. But as global investors feel invited to President Widodo's party, Europe is coming late again.

A heavy truck seen working at the nickel plant in Soroako, South Sulawesi, Indonesia.
Indonesia has the world's largest reserves of nickel, making the country critical for electric-battery production worldwideImage: Hariandi Hafid/ZUMA Press/imago images

Berlin is looking to diversify its supply chains, under Germany's new strategy aimed at cutting its dependence on China and Russia, in particular, for pivotal supplies of raw materials. But with rising prices and market disruption, many resource-rich countries are reluctant to flaunt their wealth as they may have in the past. Instead, they're trying to make the best out of global developments tilting in their favor.

Germany, like many other advanced economy in the West, used to turn cheap imports from developing countries into manufactured, state-of-the-art products that sold for many times their commodities' prices on global markets.

China has already woken up to the flawed world trade pattern many years ago, gradually shedding its image as a cheap global workshop and replacing it with a thrust to higher-end products. Its Asian peer Indonesia is now following in Beijing's footsteps, as it seeks to shore up 20 years of unending growth with a manufacturing drive.

The country's exports used to be "dominated by commodities," which is one of the reasons why it hasn't fully developed as an emerging economy, Jan Rönnefeld, head of the German Chamber of Commerce in Indonesia, told DW.

Indonesian President Joko Widodo is now seeking to turn his country's economic fortunes around by making the commodities supplier a hub for manufacturing. His goal is to turn Indonesia into a fully fledged industrialized nation by 2045.

Indonesian President Joko Widodo and Indian Prime Minister Narendrah Modi sitting next to each other during closing statements at the G20 summit in Bali
Widodo (right) shares a vision with India's PM Modi (left): They want to turn their countries into advanced economiesImage: Kominfo KTT G20 - 2022

Restrictions amid liberalization

The South Asian country is blessed with huge deposits of coal, tin, nickel, bauxite and copper. It is the world's largest exporter of thermal coal, palm oil and refined tin.

Widodo already began changing Indonesia's export policy in 2014, when he introduced a ban on shipping some minerals abroad. Frank Malerius from Germany Trade & Invest (GTAI), a foreign trade promotion agency, says implementation of the ban has always been "very spotty." But the government is now tightening export rules, he told DW.

Under regulation in effect since 2020, foreign buyers of Indonesian nickel, for example, must now invest in domestic smelters and process the raw material locally. Indonesia has the world's largest nickel reserves, and the metal is in high demand due to its usage in steel making and electric-vehicle batteries.

Indonesian nickel mines expose eco-costs of electric cars

Manufacturing boom

In order to facilitate the new investment, Jakarta has relaxed the country's investment and labor laws, opening up large swaths of the economy to the possibility of foreign ownership.

Frank Malerius said Widodo's policy resulted in "exactly what the government hoped would happen," namely that more and more foreign companies have come to invest in Indonesia.

According to data provided by the German state-run Investment Coordinating Board (BKPM), a total of $21.6 billion (€20.15 billion) in foreign direct investment had flown into Indonesia in the first half of 2022 alone — 40% more than in the same period in 2021. The boom was primarily driven by Chinese steelmakers, said Malerius, who'd been building "smelters and steel mills" and turning Indonesia into a steel exporting nation.

About 5 years ago, Indonesia had no global market share in steel. Now, the country's exports are worth around $20 billion, making it one of the largest exporter in the world, said Malerius.

Assertive Indonesia with China by its side

Several overseas companies, like German carmaker Volkswagen and its American rivals Ford and Tesla, are considering entering the Indonesian manufacturing boom, which would especially secure the country's nickel wealth.

"But it will be difficult for them to find supply chains in which the Chinese are not already involved in some way," said Malerius, adding that partnerships with the Chinese may be the only way forward for overseas investors.

Despite a growing dependency on essential raw materials from Indonesia, the European Union has filed a complaint with the World Trade Organization against the country's nickel export ban and was proven right in a ruling in November last year. But Widodo is shunning the WTO decision.

As if to add insult to injury, the Indonesian president announced only one month later at the G20 summit in Bali in December that he's planning to form a cartel for battery materials such as Nickel with other countries, similar to the OPEC oil cartel.

German chemical company BASF, meanwhile, has teamed up with French mining company Eramet in January to build a nickel-cobalt plant in Indonesia to secure a steady stream of the metals. The deal worth about €2.4 billion ($2.57 billion) is said to be close to completion, with the new plant scheduled to start in 2026.

Widodo is, however, not only clamping down on exports of nickel. Metals like copper, tin and bauxite are also in his focus, with a ban on exporting unprocessed bauxite coming into force already in June this year. The metal is essential in making aluminum for the car and aerospace industry, and Indonesia is one of the world's most important exporter of it. The country has also stopped exports of palm oil. It currently makes up 60% of the world market.

An unlicensed miner takes a break while working in a tin mining area in Toboali, on the southern shores of the island of Bangka, Indonesia,
Tin mining on Bangka island — Indonesia is the second-largest producer of the metal and plans to ban exports of it from 2024Image: WILLY KURNIAWAN/REUTERS

Other onshoring projects of Widodo include a domestic rare-earths industry to meet the demand of clean tech industries he wants to settle in the country. Deposits of the raw materials are currently being mapped and a concept drawn up for their use, the government news agency Antara News reported recently.

Windows of opportunity for German industry

"Even though Indonesia is far away, there is potential for German companies in many areas," said Chamber of Commerce representative Jan Rönnfeld. The sheer magnitude of the country and its huge population of almost 300 million people — of which 100 million belong to the middle class — would "provide potential in every area."

So far, the Chinese, the Japanese and the South Koreans have a head start in Indonesia, with German firms still being reluctant to invest. He believes though, that  there will "certainly be more investment from Europe," despite Indonesia being "not an easy market."

"But normally, it's about a relationship between risk and return in entrepreneurial decisions. And Indonesia offers the opportunity for relatively high returns due to just little competition in many sectors. In some sectors, 90% of the products are imported."

This article was originally published in German.