Introduction

Electric vehicles (EV) from China are gaining popularity in Indonesia, with 66% of consumers viewing them positively. This is driven by their affordability, innovative features and comfort.

Wuling Motors leads as Indonesia’s most popular EV brand, winning awards and achieving high sales. Other Chinese brands like BYD, DFSK, Seres, Chery and Neta are also making significant strides in the market.

This has been facilitated by the Indonesian government that is actively supporting EV adoption through substantial subsidies and incentives, totaling US$445.6 million, and has attracted large investments, such as the US$1.3 billion from BYD. Local production initiatives – such as Chery’s in Bekasi – and partnerships like Sokonindo aim to bolster Indonesia’s position in the global EV supply chain.

The focus extends to electric motorcycles, with several manufacturers establishing factories in Indonesia. PT. Sunra Asia Pacific Hi-Tech, PT. RPM and PT. Yadea Teknologi Indonesia are leading this initiative, with Luyuan planning a significant market entry through domestic partnerships.

Agreements

The influx of Chinese EV manufacturers into Indonesia is a result of recent cooperation agreements between the two countries, which have spurred efforts to enhance investment cooperation, particularly in EV batteries, automotive manufacturing and spare parts production. This is reflected in an MoU signed during Jokowi’s visit to Beijing in 2023. However, discussions on EV cooperation had been ongoing between the two countries since before this visit.

Furthermore, B2B collaborations have been established – such as between China’s GAC Aion New Energy Automobile Co. Ltd. and Indonesia’s PT. Indomobil Energi Baru – to distribute GAC Aion EV in Indonesia. This partnership aims to provide environmentally friendly vehicles including sedans, SUVs and supercars.

Additionally, another Chinese company, Zeekr, has partnered with PT. Premium Auto Prima as the Brand Holder Agent (APM) to introduce SUV and MPV models in Indonesia.

Other renowned manufacturers like Great Wall Motor will also enter the Indonesian automotive market in the second quarter of 2024 with a specific focus on hybrid models.

The growing entry of Chinese can also be attributed to the government’s efforts to revise the incentive scheme for electric vehicle manufacturers, such as relaxing VAT taxes, adjusting the Domestic Component Level and relaxing Completely Built Up (CBU) vehicle imports, all of which aim to attract foreign investors to invest in the country.

This also causes Chinese EVs to flood the Indonesian market compared to products from Japan or South Korea. This popularity is due to the low price of Chinese EVs compared to the price set by producers from other countries. In fact, Chinese EVs are even cheaper than normal cars in circulation today. This competitive price can be attributed to low production costs and component quality.

The increasing popularity of Chinese EVs in Indonesia actually plays well into the government’s goals to reduce independency on fossil fuel and facilitate transition to greener energy sources. This does not necessarily mean that normal vehicles will stop circulating, though EVs might very well overtake total sales due to their energy efficiency and low cost. To reach that point, however, there needs to be a shift in consumers’ attitude towards EV and willingness to abandon dependency on fossil fuel, as well as a wider awareness campaign on sustainability agenda. In other words, consumers need to be convinced why they need to shift to EV.

Challenges

The use of EVs in Indonesia still faces a number of challenges. For example, 71.2% of respondents in a survey two years ago considered it difficult to find public EV charging stations. This concern proves true even today, as charging stations remain limited an unequally distributed.

As of April 2024, the number of charging station stood at 1,380 units and almost half (656) were located in Java. Interestingly, charging stations remain limited in Sulawesi and Maluku, the two places where Indonesia’s nickels are mined and processed. This seems to suggest that the local population has not really benefitted from the downstream products of nickel extracted from their areas.

Moreover, 62% of respondents expressed concerns about the high price and maintenance cost, which goes to show their unfamiliarity with the minimum cost of charging an EV. In addition, a number of respondents also acknowledged the limited range and distance that EVS can cover as well as concerns about the long charging time for EV battery.

Another challenge concerns the handling of battery waste. The government needs to be more proactive and agile in creating clear regulations regarding the processing of battery waste, whether they will be recycled or repurposed to support sustainable battery use. Without clear regulations and adequate supervision, battery waste could potentially lead to new environmental issues.

Besides, the burgeoning presence of Chinese EVs in Indonesia could have several implications on the latter’s political and economic landscape.

Firstly, it would create inconsistent policy dynamics. The competition between manufacturers from China and other countries over EV imports and production would result in the inconsistencies of Indonesia’s policy frameworks, as manufacturers from Japan and South Korea would require different conditions. This lack of coherence in policies can lead to uncertainties for investors and hinder the sector’s sustainable growth as well as competitiveness.

Another important point is concerns over the exploitation of nickel resources in Indonesia, a crucial component for EV batteries. Indonesia’s abundant nickel reserves present a double-edged sword in the context of EV production. The rush to exploit nickel reserves without standardized environmental and labor regulations raises significant concerns about sustainability and social responsibility. The lack of standardized practices combined with the prevalence of cheap nickel prices raise concerns about environmental sustainability and fair economic practices. Indonesia risks becoming merely a raw material supplier without substantial value addition if proper regulations and strategic industrial policies are not implemented.

Moreover, Indonesia’s role in the EV supply chain is predominantly assembly, with the more technologically advanced components such as batteries and core EV technologies sourced from China. This condition limits Indonesia’s ability to capture higher value-added segments of the EV market, reinforcing dependency on foreign technological expertise and potentially stifling local innovation and industrial growth.

Related to this, the intensifying entry of Chinese EVs could increase Indonesia’s reliance on China. This dependency could include crucial components like batteries, electric drivetrain technologies and charging infrastructure, all primarily sourced from China. This would deepen Indonesia’s dependency on Chinese industrial strategies and market dynamics, potentially limiting its autonomy in shaping domestic EV policies and priorities. If, for example, China’s domestic market is shaken by geopolitical tension, its impacts would reverberate across Indonesia’s EV market.

Another concern relates to the recent announcement by the Indonesian government to implement up to 200% increase in import duty on textile products from China. This might induce a modicum of anxiety on Chinese exporters from all industries and sectors, including EV producers, if not communicated and managed well. For now, however, the impact of this announcement on the EV sector remains to be seen.

Lastly, EV is in no way going to be a panacea to the urban congestion problem in Indonesia’s major cities. The emphasis on increasing private EV ownership, as opposed to developing an effective public transportation system, could exacerbate traffic jam, air pollution and economic loss in Indonesian cities. Campaign for EV adoption, therefore, must be accompanied by complementary infrastructure development and policy measures to tackle multidimensional problems in Indonesia’s transportation sector.

Conclusion

Indonesia needs coherent policies amidst the influx of Chinese EVs and lack of competition in the sector. Clear policies are vital to attract investments and foster industrial growth.

Addressing nickel resource exploitation is critical. Indonesia should adopt standardized mining practices and fair pricing mechanisms to sustainably manage its reserves, minimizing environmental impact and maximizing economic benefits.

To strengthen its EV supply chain role, Indonesia must focus on developing domestic capabilities beyond just assembly. This includes technology partnerships, R&D in EV components like batteries and incentives for local innovation to reduce reliance on foreign technologies and enhance economic gains. Rather than solely promoting private EV ownership, Indonesia should prioritize enhancing public transportation infrastructure and technologies. This approach – involving investments in mass transit, adopting EVs for its public transport fleets and promoting sustainable mobility solutions – can ease urban congestion and lower emissions.

Introduction

The interest of two United Arab Emirates’ air carriers – namely Etihad and Emirates Airways – to invest in Garuda Indonesia was announced by the Minister of State-Owned Enterprises Erick Thohir in mid-2022. According to his statement, one of the two airlines will later become the largest airline investor to the struggling Indonesian air carrier.

Before this issue emerged in the public, Erick Thohir and the Indonesian Investment Authority (INA) had held separate meetings with the chairmen of both companies to explore cooperation opportunities.

Garuda Indonesia has been incessantly seeking strategic partners to boost its air logistics ecosystem system after years of financial woes. As an effort to alleviate its troubles, the Ministry of State-Owned Enterprise plans to increase capital without pre-emptive rights, otherwise known as a private placement. The future investment by either one of the two companies would be realized through this channel.

The Etihad-Garuda Cooperation

Etihad arguably has an advantage to be Garuda’s investor owing to its past engagement with the latter.

Previously, Etihad and Garuda have fostered a codeshare since 2012, a cooperation that was further strengthened through the signing of a Memorandum of Understanding (MoU) regarding commercial agreements in the United Arab Emirates-Indonesia Business Investment and Networking B20 forum that preceded last year’s G20 meeting in Bali.

This collaboration is expected to be able to support the strengthening of the national tourism ecosystem in a sustainable manner, especially as both countries continue to boost post-pandemic tourism to support economic recovery. Through this arrangement, passengers from Etihad can enjoy seamless connectivity services provided by Garuda to access various tourist destinations in Indonesia.

Apart from that, Garuda and Etihad have also collaborated in frequent flyer program, which allows passengers from both airlines to earn or exchange their loyalty points and reward tickets when using codeshare flights. In addition, Etihad and Garuda Indonesia have a plan to develop cooperation into cargo business lines, maintenance-repair-overhaul (MRO) services and air training programs.

Why the UAE?

Etihad and Emirates’ plan to invest in Garuda cannot be separated from the flourishing diplomatic relations between Indonesia and the UAE in recent years, which is also marked by increase in trade and investments figures. The economic ties have further evolved into the Indonesia-United Arab Emirates Comprehensive Economic Partnership Agreement (IUAE-CEPA), signed in mid-2022, which is expected to triple today’s bilateral trade figures.

An investment by either Etihad or Emirates in Garuda in the future will add to the growing list of the UAE’s investment in Indonesia. For Indonesia, this can be seen as an effort to diversify its investment partners beyond the traditional players, such as Singapore and China. If such a plan is realized, it would also be another manifestation of the UAE’s “Look East Policy” which has been intensively carried out in the last decade.

Curiously, it should be noted that Etihad has been deliberately investing in airlines that are on the verge of collapse. This could be seen as Etihad’s strategy to compete against its more established rivals such as Emirates and Qatar Airways, though its success rate has been rather checkered. Etihad has purchased a portion of shares in a number of other airlines such as Air Berlin (29.2%), Niki (49.8%), Air Serbia (49%), Alitalia (49%), Jet Airways (24%), Virgin Australia (21.8%) and Air Seychelles (40%).

Whether an investment by either Etihad or Emirates gets realized, the government must take note of one critical issue. In its past investments in other companies, Etihad has restructured its partners aggressively, making significant changes to flight routes and schedules. This has been met with resistance, such as from Jet Airways, Air Berlin and Alitalia, the last two of which went bankrupt in 2017.

Nonetheless, not all investments have failed, for example, Etihad’s investments in Virgin Australia and Air Seychelles have been considered quite successful. However, this condition should be a cautionary tale to Garuda and the Indonesian government.

Garuda’s Broken Wings

Garuda might seem like one of the latest nearly-bankrupt airlines that Etihad could play a savior to, though Emirates is also in the picture.

Garuda Indonesia has been on the brink of bankruptcy since September 2021. The company’s equity is in the negative at US$2.8 billion (Rp.40 trillion) with its debt stands at US$9.8 billion, while its assets only amounts US$6.9 billion.

Garuda owes US$6.35 billion to its lessors, making up the majority of its liabilities. Furthermore, its debt to banks amounts to US$967 million in addition to the US$630 million in debt in the form of mandatory convertible bonds, sukuk and Asset Backed Securities Collective Investment Contract.

To illustrate this, Garuda owes Bank Negara Indonesia (BNI) the amount of Rp5.2 trillion. This figure consists of Rp2.3 trillion of debt by Garuda’s main company and more than Rp 2.8 trillion owed by its subsidiaries, specializing in aircraft maintenance as well as food and beverage.

Apart from BNI, Garuda also has a debt to Bank Rakyat Indonesia (BRI), which disbursed Rp3.97 trillion Garuda and Rp2 trillion to the Garuda Maintenance Facility Aero Asia.

Obviously, the Covid-19 pandemic is a factor severely impacting Garuda’s performance in the past few years, debilitating its performance and image as Indonesia’s best airlines.

This financial problem ultimately led to significant reductions in flight routes and the number of aircraft as an effort to restore the financial health of the state-owned enterprise. This has affected both domestic and international flight routes, such as Amsterdam, London and South Korea. The number of Garuda’s flight routes have declined from 237 in 2019 to 140 by 2022 to reflect this.

With reduced routes comes the cut on the aircraft numbers, with only 134 vessels were in use in 2022. This has also affected the types of aircrafts in operation, which are down to six from the initial 13.

However, despite facing financial problems, the Indonesian government is still trying to help Garuda’s declining finances. The government, for example, has injected State Equity Participation funds worth Rp7.5 trillion to Garuda, drawn from the 2022 State Budget.

There are at least two reasons why the government is keen to keep Garuda in the air. First, it is to prevent a monopoly in the domestic aviation industry. For state-owned enterprises such as Garuda, one of their duties is to contain the unhealthy market competition ecosystem in the industry. Second, Garuda remains, to this day, the pride of the country that in its heyday consistently ranked among the world’s best airlines and was often written on the same lines as Singapore Airlines and Qatar Airways.

There are thus the economic and nationalistic rationales for the government to save Garuda from its likely fall. It should be noted that the UAE is not the only players on the table as Garuda has also approached other investors to help its financial condition. Unfortunately, Garuda and the two airlines from the UAE have only had one meeting and there has been no further follow-up regarding the investment plan. According to a statement from Deputy Minister Kartika Wirjoatmodjo, currently Garuda’s cash remains sufficient to keep the company afloat, though one begins to wonder as to how long this would last.

Benefits to Both Sides

Regardless of the problems currently being faced by Garuda, the government will still strive for the sustainability of Garuda by inviting national and international investors and this was also conveyed by Erick Thohir’s optimism. If either Etihad or the Emirates gets to invest in Garuda at the end of the day, this could mean a chance of second flight for Garuda.

Either Emirates or Etihad can boost Garuda’s capital to undertake recovery action and detach its dependency on the state’s money. The recovering aviation market is also expected to support such a process, but it will also be tied to the need to increase the number of local and foreign tourists who travel with Garuda. Increased demand would stimulate an increase in supply, in both flight routes, number and types of aircrafts.

Latest number shows promise. During this year’s Idul Fitri period, Garuda saw an increase in the number of flights carrying around 14,000 people a day. This shows that Garuda remains of one of travelling options by a number of Indonesians. Positive figures such as these could convince investors that Garuda is worth their time and money.

For the UAE, an investment by either one of its native airlines could help strengthen its foothold in Indonesia and enable it to compete against Middle Eastern countries, which have been successful in strengthening their presence in Asian countries. As one of Asia’s largest markets, Indonesia is a lucrative investment potential.

Introduction

The recent trip of Indonesia’s Coordinating Minister for Maritime Affairs and Investment to China did not yield good news for Indonesia. The Minister, Luhut Binsar Pandjaitan, was seen to have failed to convince Chinese authorities to decrease loan interest rates from 3.4% to 2% for the cost overrun of Kereta Cepat Jakarta Bandung (Jakarta-Bandung Fast Train − KCJB) megaproject.

The Chinese side believes the pegged loan interest rate given to Indonesia is already cheaper compared to what it offers to countries, which reaches 6%. However, this does little to dampen a debt trap concern that is often associated with China’s investment projects in other parts of the world – such as Sri Lanka’s Hambantota port – whether rightfully or not.

Luhut has stated that KCJB project, which aims to become operational on 18 August 2023, would be Indonesia’s Independence Day gift to its people this year, which falls just a day before. 

The planned fast train is monumental to Indonesia as it connects two prominent cities, Jakarta and Bandung, which are situated 151.3 km away from each other, a trip that would usually take two and a half hours to complete. The KCJB would shorten this travel period to a mere 36-45 minutes.

The KCJB will have four stations, including Halim, Karawang, Padalarang, and Tegallurang. Though, for all intents and purposes, the KCJB itself does not reach Bandung’s city properly (hence the irony in the name), this travel option arguably still promotes travel efficiency and could increase the local economy along the four stations. Karawang, for example, is known as an industrial complex, and the KCJB could theoretically open up new economic possibilities in the area.

Yet, despite the high expectation, would KCJB live up to its name as a gift to Indonesians as they celebrate the Independence Day this year?

China’s Magnetic Pull

China’s business proposal has a greater pull among Indonesian decision-makers compared to its principal competitor in this project, Japan. This is despite some initial issues that placed a big question mark on the origin of the project.

Issues relating to KCJB were first detected before Indonesia and China signed the agreement in 2015. The then Minister of State-Owned Enterprises, Rini Soemarno, was given a mandate by President Joko “Jokowi” Widodo to look into the operation of fast trains in Indonesia. Rini’s decision to choose China as a development partner was alarmingly quick.

For example, the feasibility study by China was completed in less than a year (from May to August 2015). This is on top of the fact that the fast train project was not included in the Ministry of Transportation’s 2030 National Railway Master Plan. The Indonesian government also seems to be pushing for the project’s completion by 2019, which in hindsight proves to be unrealistic today.

China set an estimated price of US$5.5 billion, arguably a cheap bill for such a project (compared to Japan’s US$6.2 billion). Under China’s scheme, the project is also slated to benefit Indonesia, which retains 60% of the project’s ownership as opposed to China’s 40%. A quarter (25%) of the funding comes from joint capital, while the remainder comes from loans, with an annual interest of 2% for 40 years.

China’s pull also comes from its promise not to require the Indonesian government to use the state budget to finance the project, a point that was demanded by President Jokowi, who stated that the people’s coffer would not be touched at all for this project. In contrast, Japan’s proposal requires the Indonesian government to guarantee the project, as a pure business-to-business model is difficult to realize a project of such a scale.

To put a cherry on top, China also claimed that they would ensure technological transfer to Indonesian firms and workers.

Problematic Partner

Yet, these dazzling promises turn out to be problem-laden.

First is the perennial issue that comes with the “Made in China” label. Though cheap, China’s trains have a lesser quality compared to Japan’s. China is also a “newbie” in the fast train industry. China only took its first step in this industry in 2004 when the Ministry of Railways planned to build trains that could travel 200-300 km per hour, which attracted such investors as Kawasaki Heavy Industries (Japan), Bombardier (Canada), Siemens (Germany) and Alstom (France).

Japan, on the other hand, have a long history of constructing and operating fast Shinkansen bullet train since 1964. The service was initiated in preparation for the 1964 Olympic Games in Japan. It is also noteworthy Shinkansen trains have not experienced any fatal derailment accidents, though the service has had troubles from earthquakes before. In comparison, China’s D3115 express train from Hangzhou to Wenzhou lost power after being struck by a lightning and was hit by another train, which resulted in dozens of deaths.

Second is the projected long-term consequences that seem to be dismissed by the Indonesian government, as indicated by its attitude and pronouncements. The KCJB was supposed to begin operation in 2019 but has now been delayed until August 2023, suggesting a substantial cost overrun.

The agreed initial price of the project was US$6.07 billion but this has inflated to US$7.27 billion after an increase of US$1.2 billion in cost overrun. It should be noted that as of now, KCJB’s total costs have exceeded Japan’s initial proposal of US$6.2 billion and lower debt interest (at 0.1% for 40 years).

The exchange rate becomes a pain point, considering the rupiah’s weakness against US dollar. Indonesia’s dependency on importing machines, steel and iron amidst global supply chain instability could increase the project’s cost and further burden Indonesia’s economy.

Broken Promise and Projected Loss

The latest blow occurred in the broken promise by the Indonesian government not to use the state budget to finance the project’s ever-increasing cost. The government’s decision on this was first detected in 2021 when Jokowi issued Peraturan Presiden Nomor 93 Tahun 2021 (Presidential Regulation Number 93 of 2021 – Perpres), which altered the stipulation about the project’s financing.

This complete U-turn not only hurts the government’s and Jokowi’s credibility as well as capability to handle big projects but also fuels the ever-present unease that the KCJB would emerge as a debt trap to Indonesia.

Even if it eventually does not, the project has substantially increased Indonesia’s foreign debt to China, which has remained at the top of Statistics of Indonesia’s Foreign Debt ranking since 2018. According to official resources, Indonesia owes as much as Rp315.1 trillion to China today.

Indonesia is also projected to suffer financial losses from this project. The relatively close distance between Jakarta and Bandung, plus the fact that the trains would not stop within Bandung city proper, have been cited as reducing the appeal of the KCJB.

As it becomes operational, the government would also have to build a culture for people to opt for the train service and ditch their cars to travel between the two cities, something which has been the tradition for decades. After all, the project’s envisioned breakeven point of 38 years could only be realized if enough people can be encouraged to board the trains, which they will not do if they are deterred by stratospheric ticket prices, reaching Rp150.000-350.000.

There is an ongoing discourse to shut down the long-running and popular Argo Parahyangan train service (which also caters for the Jakarta-Bandung route for only Rp 80.000-120.000) to make way for the KCJB as the primary train service for the route. However, such a plan could potentially invite a backlash from regular commuters and has been opposed by at least 5,000 signatories on Change.com.

The cost overrun itself – believed to be the result of planning mistakes and errors in the feasibility study –  must also be disproportionately borne by Indonesia, which must take and pay loans plus interest. A proposed solution is to offer a debt swap with a subsidized ticket program, which hopefully could alleviate some financial burden borne by Indonesia. However, the key to ensure this option’s success is to get the people to board the train service in the first place.

Above all, however, there is a case to be made that Indonesia should conduct better due diligence and decision-making process in undertaking projects of such a scale: politics should not be the only driver behind taking up billion-dollar projects.

It should be noted that discourse on fast trains does not stop at the KCJB, as there is a mounting interest to open another route to connect Jakarta and Surabaya, the latter of which is Indonesia’s second-largest city on the other side of Java Island. Minister of Transportation Budi Karya Sumadi has stated that a feasibility study will be conducted beforehand and it is crucial for the Indonesian government to avoid the same mistakes it made when deciding on the Jakarta-Bandung route.

It would make more sense for the government to invite multiple potential development partners to the negotiating table instead of just engaging China and Japan this time around (provided the latter is still interested). The final decision should be made based on a sound financial calculation that does not incur costs to the Indonesian people and the country’s deteriorating environment.

Conclusion

The Indonesian government should have realized years ago that Chinese megaproject investment could easily descend into a colossal debt problem if the destination country fails to manage the money and the project professionally and transparently. The debt trap narrative, which has affected such countries as Sri Lanka, Laos and Uganda – whether rightfully or wrongfully – only strengthens the argument for the need of good governance in handling projects, something that has been demanded by Western creditors but disliked by destination countries. It is not in the interest of the Indonesian government to be added to that list of countries that have had difficulties handling Chinese money. The onus is actually on Jokowi, who is due to complete his presidency by next year. As a man of infrastructure, he only has a year left, if not less, to ensure that problematic megaprojects will not tarnish his legacy.