Indonesian Electric Vehicle Boom: A temporary trend or a long-term vision?

The Indonesian government has set an ambitious target of deploying 2 million electric cars and 12 million electric two-wheelers by 2030. The primary goal is said to reduce carbon emissions, as the transportation sector remains one of the country’s largest CO2 contributors. According to data from the Ministry of Energy and Mineral Resources, approximately 11 million cars currently on Indonesian roads generate over 35 million tons of carbon emissions annually, which accounts for 70%–80% of emissions in the cities. The ambition is not only to create a market for EVs—the country has the largest nickel reserves in the world and aims to become a leading producer of EV batteries. The strategy for developing the EV industry in Indonesia includes three key components: establishing a robust battery manufacturing industry, ensuring the readiness of infrastructure, and making EVs affordable for customers.

To achieve this ambition, over the past 2 years, the Indonesian government has introduced policies to promote EV adoption and foster industry growth, benefiting both domestic and foreign manufacturers. But what exactly has been implemented, and will these policies lead to sustainable growth or merely a temporary boom of EVs in the country?

EV Incentives in Indonesia

Value-Added Tax Reduction for Domestic Manufacturers

One of the key incentives introduced is a value-added tax (VAT) discount on EV purchases from April 2023 and continued in 2024. This policy reduces the VAT rate from 11% to 1% for EVs with local manufacturing facilities that meet the 40% local content requirement. This means buyers of EVs are required to pay only 1% of the standard 11% VAT rate, significantly lowering the cost to consumers. Major beneficiaries of this policy include Hyundai and Wuling, both of which have substantial local assembly operations that meet the domestic content requirement. This incentive has contributed to a notable increase in EV interest, with a remarkable 104.13% growth in the second quarter of 2024 compared to the same period in the previous year.  However, this growth still accounts for only a small fraction (2.92%) of the national automotive market. 

Zero Import Duty for Foreign Manufacturers

The most recent incentive to attract foreign EV manufacturers is the 0% import duty on completely built up (CBU) and completely knocked down (CKD) EVs for manufacturers committing to establish domestic factories by 2026. To access this incentive, importers must provide a bank guarantee equivalent to what would have been paid in import duties and luxury taxes (50% and 15%, respectively). BYD, a prominent Chinese EV producer, is a notable participant in this program.
To illustrate the government’s subsidy expenditure, we compare the Hyundai Ioniq 5 and BYD Atto 3 cost structures. Estimates indicate that for every USD 10 in sales, the Indonesian government foregoes approximately USD 2.6 in tax revenue for BYD and USD 1 for Hyundai. This disparity reflects the differing levels of support provided under each policy.

Source: PT Hyundai Mobil Indonesia price list.

The larger subsidy provided to foreign manufacturers reflects the higher risk faced by new market entrants, as they must invest in unfamiliar territory and make substantial upfront investments in local manufacturing. The import duty exemption allows foreign companies to test the market at lower costs before committing to full-scale manufacturing investments. This approach addresses the "chicken-and-egg" problem: offering market access before the required factory setup. If the market proves promising, these entrants may proceed with establishing local factories. Otherwise, if they withdraw, the government retains the bank guarantee to cover potential revenue losses.

Market Reactions to Incentives

Before 2023, the EV market was dominated solely by Hyundai and Wuling. Shortly after the VAT reduction policy was introduced in April 2023, EV unit   market shares (in comparison with total passenger car sales) doubled. The tax relaxation spurred four additional EV brands—Chery, Neta, MG, and Seres—to establish factories qualifying for the VAT reduction, entering the market in early 2024, though some of them had recorded importing EVs before. The boost in market volume and converting importers to manufacturers showcase the policy's success. 

About 2 and a half months after the import policy was introduced in May 2024, there was a surge in EV sales of foreign brands, including BYD, Citroen, and Vinfast. Despite data being available for only two imported EV brands compared to six domestic brands, it is already evident that imported EVs quickly seized a significant market share, with BYD alone accounting for half of total EV sales. This heightened competition resulted in a steep decline in Hyundai’s average monthly sales, which dropped from 600 units in the second half of 2023 to only 180 units from February to September 2024. Wuling also saw a contraction in sales but began regaining momentum in September. While the import policy has proven effective in boosting EV sales in the short term, it appears to disproportionately benefit CBU importers.

Indonesia's incentives demonstrate a strong commitment to EV adoption by making the market more competitive and attractive to a broader range of manufacturers. This is evident in the rising market share of EVs compared to internal combustion engine vehicles. However, an increase in EV adoption and market share doesn’t automatically translate into a growing EV ecosystem. The policy, while indeed increasing EV sales, poses several risks that could be counterproductive.

Response From Domestic EV Manufacturers

Creating a robust EV ecosystem in Indonesia requires more than just assembly plants; it demands comprehensive investments in upstream components, such as battery manufacturing and public charging infrastructure. Hyundai has played a significant role in this regard, owning 18% of SPKLU (Stasiun Pengisian Kendaraan Listrik Umum, public EV charging station) charging units as of September 2023, second only to the state-owned electricity provider, which holds a 73% share. Hyundai's SPKLU network extends beyond Java and metropolitan areas, and the company is also heavily invested in local battery manufacturing through its joint venture, HLI Green Power, with LG Energy Solution and PT Indonesia Battery Corporation. This initiative has enabled Hyundai to produce EVs with up to 80% domestic battery content, marking meaningful progress toward local value addition.

However, following the government’s import subsidy policy, Hyundai restricted its charging stations to Hyundai EVs only, effective August 2024—5 months after the policy’s introduction. Hyundai’s response reflects potential frustrations from established players who have invested heavily in local infrastructure and supply chains but now face increased competition from imports. For Hyundai, which has led investments in upstream supply chains and charging stations, declining sales due to competition from manufacturers without local production facilities undermines the incentives for further investment. This decision highlights an unintended consequence of the policy: reduced public access to charging infrastructure at a time when EV numbers are surging due to the influx of cheaper imported EVs. 

Risks and Concerns

Short Timeframe for Market Entry and Investment Decisions

The government developed the import policy to solve the “chicken-and-egg” investment dilemma by allowing foreign manufacturers to test the market before committing to local production. However, the narrow 2-year window to navigate the market, assess demand, and commence local operations may deter potential entrants who need more time for market evaluation and capacity building. While there is a possibility of extension, it is not guaranteed and only adds a risk of exclusivity for early entrants like BYD. Such exclusivity could undermine the objective of fostering a competitive EV market.

Minimal Local Content, Tingkat Komponen Dalam Negeri (TKDN)

Sustainable EV ecosystem growth requires substantial local content in manufacturing. The domestic content threshold (40%) is currently met mainly by the final assembly of imported components. Presidential Regulation No 79/2023 also extended the threshold increase to 60% from 2024 to 2026.  Hyundai’s Kona EV is the only exception with higher local content. The limited effort from manufacturers investing in domestic component producers to achieve more than 40% local content could indicate whether the bar is set too low. Similar concerns are expected to apply to BYD and other newcomers. If entrants primarily assemble imported components, the policy may only temporarily boost EV sales without a meaningful increase in local production. 

Furthermore, while the TKDN policy encourages investment in local production, the concurrent policy of allowing duty-free imports for CBU EVs creates conflicting incentives. This import policy offers a less costly alternative that delays local manufacturing commitments. The dual approach risks prioritizing short-term imports over building a robust domestic EV industry with a strong local content and supply chain. Such disparities may hinder Indonesia’s long-term progress toward building a self-sustaining EV industry with strong local content and a robust supply chain, counteracting the intended goals of fostering investment and local job creation. 

Over Subsidization

Generous subsidies for foreign entrants could place domestic manufacturers at a disadvantage. The estimated subsidy in ratio to retail price for BYD’s Atto 3 is more than double that for Hyundai’s Ioniq 5, potentially skewing the market. This imbalance has already contributed to a decline in Hyundai’s EV sales and a surge in BYD sales. Additionally, since BYD’s vehicles are manufactured in China, they may already benefit from subsidies provided by the Chinese government before being exported. This dual subsidy arrangement may create even more challenging conditions for local manufacturers. Such dynamics could create unfair competition for domestic EV producers.

What’s Next for EVs in Indonesia?

While Indonesia’s EV incentive policies reflect a strong commitment to increase market adoption, there remain several risks to achieving the long-term goals of fostering investment, local job creation, and industrial development. The simultaneous application of potentially conflicting incentives—duty-free imports for CBU EVs and subsidies tied to local content—may create an uneven playing field.

With policy shifts favouring short-term imports over local production, stakeholders may be deterred from further investing in EVs or transitioning from internal combustion engine manufacturing. In its current form, the policy risks destabilizing the EV ecosystem and undercutting the goals of the subsidies. The lack of policy stability and long-term focus may discourage investors who seek consistent and predictable incentives for building local infrastructure and upstream manufacturing. 

Given the substantial costs associated with these incentives, the government needs to ensure that foreign manufacturers contribute significantly to the local economy beyond short-term sales gains. Providing incentives to foreign EV producers will be justifiable if their investments exceed those of existing players. Without robust local production and integration into the domestic supply chain, the long-term benefits of these subsidies may not justify their costs. Only time will tell if the subsidies are worth the cost.