I. Introduction
Indonesia is actively positioning itself as a significant player in the global Battery Electric Vehicle (herein after referred to as “BEV”) industry. Leveraging its abundant nickel reserves—a critical material for EV batteries—and strategic policies, the country is attracting significant investment in the BEV sector. Central to this effort are the Domestic Component Level (Tingkat Komponen Dalam Negeri, hereinafter referred to as “TKDN”) requirements, which mandate specific minimum levels of domestic content in BEV manufacturing. These regulations aim to strengthen local industries, generate employment, and reduce reliance on imported components.
While the intent behind TKDN is clear, its implementation presents notable challenges for BEV manufacturers. Indonesia’s rich nickel resources provide a solid foundation for battery production, but other essential components, such as semiconductors and electric motors, lack robust domestic production capabilities. Additionally, foreign investors and joint ventures must navigate a complex regulatory framework, including compliance with TKDN requirements and obtaining the necessary licenses and permits to operate in Indonesia.
The balance between fostering local industry growth and creating an attractive environment for foreign investment is a delicate one. This article explores whether Indonesia’s local content rules will accelerate or hinder its BEV revolution, focusing on the readiness of local supply chains, the impact on foreign stakeholders, and the associated regulatory challenges.
II. The Role of TKDN in Indonesia’s EV Ambitions
The TKDN requirements are a cornerstone of Indonesia’s efforts to establish a self-reliant and competitive BEV ecosystem. By enforcing minimum thresholds for local content, the government aims to stimulate the domestic manufacturing sector and reduce reliance on imported components. For example, battery production which are a critical aspect of BEVs has been targeted as a priority, with incentives provided for companies that source materials locally. This policy aligns with Indonesia’s broader goals of becoming a global hub for EV production and ensuring the economic benefits of the transition are distributed domestically.
Back in December 2023, President Joko Widodo issued Presidential Regulation Number 79 of 2023, revising earlier targets for TKDN in BEVs. The updated regulation adjusts the timeline for achieving higher local content levels, providing manufacturers with extended periods to meet these requirements. For instance, the mandate for a 40% TKDN in electric cars, initially set for 2022-2023, has been postponed to 2026, which can be seen bellow:
For BEVs with two or three wheels:
- From 2019 to 2026, the minimum TKDN is 40%.
- From 2027 to 2029, the minimum TKDN increases to 60%.
- From 2030 and beyond, the minimum TKDN reaches 80%.
For BEVs with four wheels or more:
- From 2019 to 2021, the minimum TKDN is 35%.
- From 2022 to 2026, the minimum TKDN rises to 40%.
- From 2027 to 2029, the minimum TKDN becomes 60%.
- From 2030 and beyond, the minimum TKDN is 80%.
These thresholds demonstrate the government’s long-term vision for increasing local content in BEV manufacturing while providing a structured timeline for manufacturers to comply. The emphasis on localization aims to reduce reliance on imports, particularly for components like batteries, which account for a significant portion of an BEV’s cost and value. However, these requirements also raises questions about the readiness of local industries to support the rapid expansion of the EV sector. While the extension provides breathing room, it underscores the necessity for substantial investment in developing domestic capabilities to meet future TKDN targets.
On the other hand, the government has introduced incentives to attract foreign investment and accelerate market growth. These incentives include exemptions from import duties and luxury taxes for completely built-up (CBU) electric vehicles. Such measures aim to stimulate market demand and encourage international manufacturers to establish a presence in Indonesia. However, they also present a paradox. While promoting local content through TKDN, the government simultaneously allows increased importation of fully assembled vehicles, which may undermine the development of domestic manufacturing capabilities.
The dual approach of relaxing TKDN requirements and providing import incentives reflects a strategic effort to balance immediate market growth with long-term industrial development. Nonetheless, it poses challenges for local manufacturers striving to compete with imported vehicles that benefit from tax exemptions. Ensuring that the incentives for imports do not disincentivize local production is crucial for the sustainable growth of Indonesia’s EV industry.
III. Challenges for BEV Manufacturers
Despite its objectives, the TKDN policy presents significant hurdles for BEV manufacturers. According to the Jakarta Post, Mineral Resources Minister suggested reconsidering the local content requirement for EV batteries due to limited domestic supply of key components, which adversely affects the adoption of subsidized EVs in the country. This gap forces manufacturers to either invest heavily in developing local suppliers or face delays and increased production costs.
However, in recognition of these challenges, Article 12 of Presidential Regulation Number 79 of 2023 provides some flexibility to BEV industrial companies under specific conditions. Manufacturers that meet one of the following criteria may procure BEVs through the importation of Completely Built-Up (CBU) units in limited quantities until the end of 2025, which are:
- Companies that will establish domestic BEV manufacturing facilities;
- Companies that have invested in domestic BEV facilities to introduce new products;
- Companies that aim to increase BEV production capacity to support the introduction of new products.
To benefit from this provision, manufacturers must obtain facility approval from the minister administering government affairs in the field of investment, ensuring compliance with regulatory oversight. While this flexibility helps alleviate short-term supply chain bottlenecks, it introduces additional legal complexities. Companies must navigate intricate permitting processes and demonstrate tangible progress in domestic investment or production to qualify for such exemptions.
Moreover, the policy underscores the importance of balancing short-term market demands with long-term localization goals. Manufacturers that rely on CBU imports must simultaneously invest in domestic facilities to align with TKDN targets by 2026 and beyond. Failure to do so could result in non-compliance penalties and lost opportunities for further government support.
Conclusion
The TKDN requirements reflect Indonesia’s ambition to establish itself as a global leader in the EV industry while ensuring that the economic benefits of the transition are retained domestically. However, the challenges faced by manufacturers, investors, and local supply chains underscore the complexities of implementing such a policy.
Striking the right balance between fostering local industry growth and maintaining an investment-friendly environment is critical to Indonesia’s success. By addressing supply chain gaps, investing in infrastructure and training, and aligning incentives with long-term goals, Indonesia can create a thriving EV ecosystem that benefits both domestic and international stakeholders.
Kartika & Rouly Law Firm provides expert legal support for navigating Indonesia’s BEV regulations, including TKDN compliance, licensing, import permits, and joint venture agreements. We assist manufacturers and investors in establishing a strong presence in the sector. For further information or to schedule a consultation, please contact us at services@kartikaroulylawfirm.com.
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The Financial Analyst. (2024, August 16). Indonesia’s bold plan for semiconductor industry faces major hurdles. Retrieved from https://thefinancialanalyst.net/2024/08/16/indonesias-bold-plan-for-semiconductor-industry-faces-major-hurdles/
The Jakarta Post. (2023, November 22). RI needs to relax local content rule for EV batteries, Energy Minister says. Retrieved from http://www.thejakartapost.com/business/2023/11/22/ri-needs-to-relax-local-content-rule-for-ev-batteries-energy-minister-says.html
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