In 1996 Tommy Suharto, the youngest son of Indonesia’s dictator, set out to build the Timor, a national car. The plan was to import models manufactured by Kia Motors, a South Korean carmaker, and rebrand them. Kia would teach Indonesians carmaking; strict local-content requirements would ensure the economy benefited. But as a financial crisis in 1997 battered Indonesia’s car market, 15,000 Timors sat idle in a car park. By 1998, as riots in Java brought down the Suharto regime, embarrassed Indonesians who owned the national car tore off their “T” logos. Under pressure from furious trade partners, the Timor was withdrawn.

Yet the economic-nationalist spirit that infused the Timor has never quite gone away. Today, it animates Indonesia’s programme of “downstreaming”, or moving towards higher value-added activity. The policy is being championed afresh by Prabowo Subianto, the new president.

One mineral is the linchpin of this policy: nickel, a crucial material for electric vehicle (EV) batteries. A nickel-ore export ban came into force in 2020. Now, Indonesia dominates global nickel-mining and smelting. It produces nearly half the world’s refined nickel and two-thirds of its mined nickel. Both shares have doubled since 2020. In 2023 Indonesian exports of processed nickel amounted to $22bn, or 9% of total exports, up from 2% in 2019.

As Indonesia’s market share has multiplied, so too has the grandeur of its politicians’ ambitions. With local content requirements as a stick and lavish tax incentives as a carrot, the idea is to create a complete EV supply chain on Indonesian soil. So far, only China has managed to do this. Even so, politicians are bullish. Luhut Pandjaitan, the architect of downstreaming, thinks Indonesia could be a top-three producer of both batteries and EVs by 2027.

Such estimates are not mere hyperbole. The country has reserves of nearly all the necessary raw materials to build EVs, from copper to cobalt. Moreover, virtually no one foresaw Indonesia’s abrupt takeover of the nickel market, powered by new smelting technology and investment from Chinese mining firms. At a conference in Jakarta, the capital, on November 26th, the mood was defiant. “For us, this is a matter of survival,” Mr Luhut told investors.

Electric dreams

What are downstreaming’s aims? First is Mr Prabowo’s ambitious target for Indonesia’s GDP to grow by 8% each year, which officials hope to achieve by supercharging export-oriented foreign direct investment (FDI). (The average growth rate has been around 5% over the past two decades.) Another goal is to boost growth beyond Java.

An additional motive is that Indonesia’s policy wonks, haunted by the rupiah’s plunge during the Asian financial crisis of 1997, want to bolster the currency by exporting more. They also want to reverse premature deindustrialisation. Since 2002 Indonesia’s manufacturing value-added share of GDP has nearly halved. Finally, as part of Mr Prabowo’s drive for energy security, he wants to foster a domestic EV market. Once a member of OPEC, an oil cartel, Indonesia became a net oil importer in 2004 after a decade of declining production. (It is still declining.)

So far, downstreaming has had some successes. Since the nickel-ore export ban, FDI has surged, largely into industrial sites away from Java (see map). In Central Sulawesi, home to a nickel-smelting complex, exports have risen from $5.9bn in 2019 to around $21bn in 2024. The province, just a third as rich as Java in per-person terms, has become Indonesia’s second-most favoured FDI destination. In the poorer province of South-East Sulawesi, which hosts several smelting operations, manufacturing has grown at twice the rate of regional GDP in recent years. (FDI boomed in 2020-21 but has since slowed.) Nickel exports helped Indonesia’s trade surplus reach a record high in 2022.

But efforts to boost reindustrialisation have been less impressive. Indonesia’s realised foothold in the EV supply chain is tiny. It is on track to have produced 10GWh of battery capacity in 2024, with another 25-45GWh in the pipeline through 2027, reckons Putra Adhiguna of the Energy Shift Institute, a think-tank. By contrast global capacity was 2,600GWh in 2023. Indonesia hosts just two of the world’s over 400 planned or operational battery giga-factories, according to Benchmark Mineral Intelligence, a research service. This pattern holds for “midstream” investments in battery ingredients, too. Indonesia’s FDI boom has created “shallow industrialisation”, says Mr Adhiguna. Vast sums are flowing into building one stage of the EV supply chain (nickel processing), with a small sprinkling of investment everywhere else.

Danger! High voltage

Officials counter that deployment takes time. “If you build upstream [ie, minerals processing] and downstream first, midstream investments will come,” says Septian Hario Seto, Indonesia’s deputy minister of investment co-ordination. In the meantime, hundreds of thousands of good-paying jobs are being created in nickel smelting.

However, even this job creation is less impressive than it seems. Patchy data makes the aggregate effect hard to measure. But smelting is a capital-intensive investment. The FDI surge has created temporary construction jobs that will last only as long as the industrial sites are expanding. A typical smelting plant initially employing 30,000 people only generates a few thousand long-term jobs, says a mining bigwig in Jakarta.

Regions that have experienced runaway export growth are not seeing accompanying reductions in unemployment or poverty. In Konawe, a rural area of 250,000 in South-East Sulawesi that hosts an industrial park owned by Tsingshan, a Chinese steel and nickel company, unemployment is above pre-export ban levels, find Hilman Palaon and Robert Walker of the Lowy Institute, an Australian think-tank. Workers’ associations report that mid-skill roles are being filled by workers brought in from Java, while locals fill lower-level jobs such as janitors, says Mr Palaon, who visited the area earlier last year.

Indonesia is also failing to cultivate a demand base for electric cars. It has rolled out a bewildering array of tax nudges to lower the cost of electric two- and four-wheelers. A recent paper by Siwage Dharma Negara, an Indonesia expert, counts 12 distinct incentives or exemptions. A charging-station network is being built; over 1,500 are in operation. Even so, a low-cost gas guzzler remains 40% cheaper than the equivalent EV. As a result, just 12,000 electric cars were sold in 2023, compared with overall car sales of 1m.

Even among the EVs that have been sold, the vast majority use non-nickel batteries. Nickel’s energy density gives batteries superior range, but it is more expensive and less durable than the main alternative, lithium-iron-phosphate (LFP) batteries. Indonesia is better suited to cheap, lightweight electric vehicles powered by the LFP type. Moreover, the global EV battery market is already oversupplied. The amount of batteries made in 2023 in China alone could fully satisfy global demand, according to BloombergNEF, a research service. And other countries in South-East Asia are competing hard for investment, such as Thailand and Vietnam.

Finally, there are negative consequences of downstreaming. Much nickel ore is situated under rainforests; extracting it has led to huge deforestation. Smelting is a dirty business. A drumbeat of harrowing industrial accidents has sullied the industry’s reputation. America has put Indonesian nickel on its “forced labour” list. Fishermen in islands off North Maluku complain that heavy metal pollution is poisoning their catch. The government has begun a clean-up effort. In October, North Maluku-based Harita Nickel said it would undergo an audit by IRMA, a Western mining-standards body. But the chief environmental concern remains untackled: lethal air pollution from burning coal (which powers two-thirds of Indonesia’s electricity generation). The nickel-smelting boom has led to even more burning; many of the new industrial parks have dedicated coal plants on-site.

Indonesia will probably develop some sort of EV supply chain thanks to downstreaming. But what is missing is a judicious weighing of costs and benefits. The risk is that Indonesia is spending vast state resources to grab a tiny share of an oversaturated industry, creating a modest number of factory jobs at a serious cost to the environment. Tommy Suharto’s efforts were not totally in vain; tens of thousands of Timor cars were sold. But, in the end, Indonesians were no richer for it.