Nickel Downstreaming in Indonesia: Reinventing
Sustainable Industrial Policy and Developmental State in
Building the EV Industry in ASEAN
Bahlil Lahadalia1*, Chandra Wijaya2, Teguh Dartanto3, and Athor Subroto4
1School of Strategic and Global Studies, Universitas Indonesia, Indonesia
2Faculty of Administrative Science, Universitas Indonesia, Indonesia
3Faculty of Economics and Business, Universitas Indonesia, Indonesia
4School of Strategic and Global Studies, Universitas Indonesia, Indonesia
1bahlil.lahadalia@ui.ac.id, 2wijaya@ui.ac.id, 3teguh.dartanto@ui.ac.id, 4athor.subroto@ui.ac.id

*Corresponding author
How to Cite: Lahadalia, B., Wijaya, C., Dartanto, T., & Subroto, A. (2024). Nickel
downstreaming in Indonesia: Reinventing sustainable industrial policy and developmental
state in building the EV industry in ASEAN. Journal of ASEAN Studies, 12(1), 79−106.
https:/doi.org/10.21512/jas.v12i1.11128

Abstract
The developmental state concept, which entails proactive government support for
economic structural transformation, remains contentious today. Some scholars
vigorously argue that government intervention in the economy was indispensable
to the success of East Asian countries, whereas others are critical of the practice,
arguing that it tends to neglect sustainability dimensions and contending that
government intervention in the market is often unwarranted. In this study, the
authors analyse how Indonesia’s nickel ‘downstreaming’ strategy represents a
new developmental state model that considers the aforementioned discourse on
the merit of industrial policy. The new model aligns the classical developmental
state concept with the need to address pressing environmental and social concerns,
which are widely recognized as being of paramount importance. Through an
integrative literature review and secondary data analysis, the study reveals that
Indonesia’s downstreaming strategy does exemplify a new developmental state
model, as the government does not aim just to stimulate economic growth but also
to contribute to the energy transition with EV battery manufacturing and to
invigorate social inclusion by ameliorating inequality particularly in Eastern
Indonesia. Nevertheless, the application of the new developmental state model
through the downstreaming strategy uncovers some areas where improvement is
necessary. The policy needs to be continuously refined so that its negative
environmental and social externalities can be mitigated, and it can serve as a better
example of a new developmental state model.
Keywords: nickel downstreaming, developmental state, industrial policy, ESG,
SDGs
Journal of ASEAN Studies, Vol. 12, No. 1 (2024), pp.79−106
ISSN 2338-1361 print / ISSN 2338-1353 electronic
Received: 12th January 2024/ Revised: 25th June 2024/ Accepted: 8th July 2024

Introduction
Nations endowed with abundant natural resources often face the paradox of the
‘resource curse’, which is characterized by sluggish economic growth and social instability
despite possessing a wealth of resources such as oil, gas, and critical minerals (Smith &
Waldner, 2021). To address these challenges, industrial policy has become an essential
instrument for fostering potential growth and development (Rodrik, 2004). However, the
implementation of such policy is also increasingly shaped by considerations of sustainability,
specifically environmental, social, and governance (ESG) criteria (Ferraz et al., 2021), which
often impose a new constraint on resource-rich countries. Critiques have also highlighted that
industrial policy might not work in the contemporary world based on global value chain
(Werner et al., 2014).
Against the backdrop, Indonesia has resorted to a ‘downstreaming’ policy to add value
to the commodities owned by the country by promoting resource-based industrialization.
Once reliant on raw mineral exports to drive economic growth (Ferreira & Pinto, 2022), the
strategic shift towards downstream processing marks a pivotal move for Indonesia. This
policy aims to bolster industrialization, particularly in sectors such as electric vehicle (EV)
battery production, which aligns with global sustainability goals (Meckling, 2021). The policy
also differs from the East Asian model of industrialization, given its focus on utilizing
domestic natural resources (Hayashi, 2010; Tai et al., 2013).
Aligning with sustainability goals is critical to Indonesia’s downstreaming policy and
essential for garnering international acceptance and investor confidence. Downstreaming
enables Indonesia to better navigate the delicate balance between mitigating the threat of
deindustrialization, escaping the middle-income trap, and adhering to ESG principles.
Based on a report on global critical minerals by the International Energy Agency (IEA),
Indonesia stands poised to emerge as a significant player in the clean energy transition, given
that it owns the world’s largest nickel reserves (21% of global reserves) and largest nickel
refining capacity (over 50% of global capacity; IEA, 2024). Nickel’s pivotal role in energystorage technology, a cornerstone of the energy transition sector, adds to Indonesia’s
significance in this sector. Many EV batteries require high nickel content—as high as 80% for
the cathodes of nickel–manganese–cobalt (NMC) batteries, and Indonesia’s nickel resources
thus are poised to be critically important in this transformative global shift. Notwithstanding
the potential, several studies have highlighted the challenges in the execution of the
downstreaming policy in Indonesia, citing issues with the adequacy of infrastructure,
technology access, skill gaps, and environmental considerations (Istiqomah et al., 2020).
The efficacy of Indonesia’s downstreaming policy will be contingent upon the execution
of an approach that harmonizes economic objectives with social and environmental
sustainability. Fukuzawa (2012) highlighted the importance of adopting green industry
principles in nickel processing, incorporating environmentally friendly technologies, effective
waste management, and ethical labour standards to ensure sustainability and minimize

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negative environmental and social impacts. Achieving this vision requires a policy framework
that fosters economic growth while adhering to the Sustainable Development Goals or SDGs.
To date, a limited number of studies have examined resource-based industrial policies
or downstreaming as part of the linkage between developmental state model and
sustainability practices. This article aims to further enrich the discourse on the matter by
analysing Indonesia’s nickel-downstreaming agenda by integrating the developmental state
framework and ESG practices. Importantly, Indonesia’s circumstances significantly
differentiate the country and its policies from resource-scarce East Asian countries and their
developmental state policies. The primary contribution of this study is its development of a
downstreaming policy model aimed at fostering high-quality and inclusive economic growth
while simultaneously addressing sustainability concerns.

Research Method
The authors employed an integrative literature review to elucidate the relationship
between developmental state theory and sustainability in the nickel downstreaming policy
(Snyder, 2019). Heeding Knopf’s (2006) assertion that relevant reports may come from a
variety of sources beyond academia, this study incorporated books, academic journals,
Indonesian regulations, and several development indicators on these topics. The review
synthesized the findings by following Torraco’s (2016) procedure, namely summarizing the
primary conclusions, highlighting areas of consensus and disagreement, and identifying gaps
in the literature. Moreover, the authors also utilized secondary data analysis and closely
examined the data provided by international institutions (e.g. IEA) and national agencies (e.g.
Indonesian Statistical Agency).
The analysis emphasized the strategic significance of nickel commodities for the global
energy transition. By exploring the interconnections between developmental state theory and
ESG practices, this study adopted an integrated approach that merges a theoretical framework
with practical application. The focus on the nexus between these concepts is crucial for
comprehending the strategic role of nickel downstreaming policy. This study contributes to
the discourse by offering insights into the close associations between these pivotal concepts,
elucidating the critical impact of strategic downstreaming on sustainable development.
Analytical Framework: Developmental State Theory and ESG Principles
Castle (1992) argued that a developmental state can be identified by its ability to foster
and maintain development characterized by high economic growth and structural changes in
the production system. Further, Knight (2014) defined a developmental state as a state in
which the government prioritizes economic growth and adopts institutional arrangements
and incentive structures to achieve this goal. According to Johnson (1982), who first coined
the term, the developmental state model emerged during the post-World War II economic
resurgence of East Asian countries, especially Japan. Later, following the devastating Korean
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War, South Korea replicated several key Japanese policy instruments for its own economic
transformation strategy. Subsequently, in the late 1970s, China’s developmental state model
began with the implementation of economic reforms under Deng Xiaoping.
Johnson (1982) identified the key elements of Japan’s developmental state model:
extensive government intervention in development, active industrial policies for economic
growth, and the central role of the state bureaucracy. Wong (2004) argued that these elements
have been evident across East Asia, where the states have attempted to maximize national
productivity through strategic market interventions. States are equipped with robust
institutional capabilities for formulating and enforcing targeted economic policies, especially
in key industrial sectors. Wade’s (2018) analysis went further, highlighting the importance of
high investment rates, coordinated sectoral promotion, and strategies such as export
promotion and import substitution. Institutionally, limited central bank and financial sector
independence and close state–industry relations for disciplined economic management have
been vital. The East Asian states have employed policies such as directed credit, fiscal
incentives for investment, trade protection, and strategic negotiations with foreign investors.
Subtle differences have appeared in the implementation of different countries’
development models. Chang (2022) noted how South Korea resorted to vigorous government
trade protection to develop its nascent manufacturing base, including by banning all
importation of cars until the late 1980s. Korea further provided hefty financing support
through state-owned banks for national companies to diversify into strategic new sectors.
However, South Korean government’s support for its domestic industries imposed a high
price on the national companies, which were obligated to meet various targets, primarily
regarding exports. Only companies that managed to demonstrate their competitiveness by
achieving a greater footprint in the international market would continue to benefit from the
government’s largesse, and the government did not have any qualms about cutting off
companies that failed to meet their high standards. Studwell (2013) thus observed that South
Korean industrial policy was less about ‘picking winners’ than it was about ‘weeding out
losers’.
The Chinese government, on the other hand, shifted from a centrally planned economy
to a more market-oriented socialist market economy. Keping (2010) contended that China’s
developmental state model represented a new paradigm in the development of developing
countries; some Chinese policies that can be considered by other developing countries include
(1) prioritizing research and development and technological innovation, (2) providing funds
and financial support through state-owned banks, and (3) investing in infrastructure
development, including the development of transportation networks and energy,
communications, and related sectors.
Notwithstanding each country’s unique contexts, East Asian countries exhibit several
commonalities in their development strategy. The authors summarize important similarities
between the East Asian countries’ national strategies, synthesized from the literature, in Table
1.

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The East Asian developmental states also demonstrated some weaknesses. Wong (2004)
noted how they are ‘social welfare laggards’ because they have implemented too few
programmes concerned with socioeconomic redistribution. Kim (2007) also argued that even
though Korea experienced an economic miracle, the country’s social policy and outcomes are
underdeveloped, as real wage growth lags far behind productivity growth. Another problem
of the success of the developmental state model in promoting industry is the consequent
environmental degradation (MacNeil & Paterson, 2012).

Table 1 Similarities in Developmental State Models of Japan, Korea, and China
Aspect

Similarities in Policy Implementation

Research and development
(R&D) and innovation
investment

The three countries recognized the importance of R&D and
innovation in strengthening economic sectors. Governments
encouraged investment in R&D, established research institutes,
and encouraged public–private partnerships for technological
innovation.

National industrial protection
and promotion

Japan, China, and South Korea implemented national industrial
protection and promotion policies to improve the
competitiveness and sustainability of key sectors. Their
governments provided financial support, implemented
protectionist policies, and offered incentives to industries
considered strategic for economic growth.

International trade and
globalization

The three countries’ governments were active in shaping
markets, establishing trade partnerships, and participating in
global supply chains to strengthen exports and develop
economic relations with other countries.
Source: Authors’ Analysis

In the economic literature, the term ‘developmental state’ is often used interchangeably
with the term ‘industrial policy’. The notion of industrial policy entails proactive government
interventions aimed at correcting market failures and enhancing industrial capabilities to
drive sustainable economic growth and development (Otsubo & Otchia, 2021). It includes
selective interventions that steer production towards sectors with higher growth potential,
affecting both targeted industries and downstream sectors (Blonigen, 2016; Pack & Saggi,
2006). This type of policy dates back to the 18th and 19th centuries, when developed countries
used it to build their industrial sectors (Landes, 2003). The impact of industrial policy,
however, remains debated. A number of mainstream economists, such as Baldwin (1969),
Krueger (1997), and Pack and Saggi (2006), typically oppose government intervention in
industry, arguing it can harm market efficiency more than it can correct market failures. In
contrast, scholars such as Wade (1990), Amsden (1992), Rodrik (1995), Stiglitz (1996), and
Chang (2006) have highlighted the indispensable role of industrial policy in East Asia’s rapid
economic transformation.

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Despite differing views in the scholarship, the use of industrial policy has risen, with a
worldwide increase from 381 policies in 2009 to 1,140 in 2018 (Juhasz et al., 2023). Despite the
criticism it often attracts in academia, both developed and developing countries widely
implement structural interventions to foster industrialization (Di Maio, 2014). Historical
examples include active governmental support for industrialization in Great Britain, the
United States, Germany, and Japan during the 18th and 19th centuries (Landes, 2003). Today,
industrial policy is increasingly being embraced including by many developed countries who
not so long ago publicly shunned the idea.
Within Indonesian policy circles, industrial policy has experienced periods of rise and
decline. Industrialization has been viewed as central to the development process since the
1950s. However, in the early years of independence, from the 1950s until the mid-1960s,
industrial development progress was slow due to political turmoil (Gunawan et al., 2020).
After the mid-1960s, Indonesian industrial development became more successful. However,
unlike the East Asian countries, Indonesia’s success in manufacturing came with trade and
investment liberalization, which encouraged foreign investment in the manufacturing sector.
Moreover, Wie (2006) also highlighted that the government failed to foster an internationally
competitive sector that was required to develop highly competitive industries in the 1980s.
The financial crisis in the 1990s also proved to be fatal for the future of industrial policy in
Indonesia, as Hill (1999) noted that the crisis drew more doubtful views for the efficacy of the
industrial policy.
While the Indonesian government also pursued a pro-industrialization policy,
according to Studwell (2013) and Chang (2022), the Indonesian government fell short in two
areas, particularly compared to the more successful examples of the East Asian Tigers. The
shortcomings are discussed in the following.
a.

The East Asian Tigers compelled their domestic enterprises and conglomerates to enter
higher-productivity manufacturing sectors, whereas Indonesia did not.
The East Asian governments adopted various measures to encourage their domestic
enterprises and conglomerates to enter new strategic manufacturing sectors. The
measures comprised both ‘carrots’ and ‘sticks’. For instance, the South Korean
government offered various ‘carrots’, including government-backed concessional credit
for companies diversifying into new strategic sectors. However, the government also
wielded ‘sticks’, such as summoning the leaders of the large Korean conglomerates or
chaebols to government detention centres to convey the importance of diversification as
well as the government’s ability to penalize those who defied its instruction. In light of
these policies, South Korean conglomerates did not have much choice but to diversify.
For instance, Hyundai, which started as a construction contractor, was nudged to
diversify into shipbuilding and car manufacturing. The Indonesian government,
however, did not carry out a similar policy. Indonesian conglomerates were allowed to
continue to expand their business and become dominant in traditional sectors such as
mining or agriculture. The carrots and sticks that were prevalent in the East Asian push
for diversification were at best underused in the context of Indonesia.

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b.

The East Asian Tigers imposed stringent conditions for their support for national
champions, whereas the Indonesian government did not.
The policy of the East Asian governments to support domestic industries could have
easily backfired. The conglomerates could have misused the close relations they enjoyed
with the government. Instead of diversifying as the governments hoped, the
conglomerates could have persuaded, including through bribery, the government
officials to continue giving them the handouts that they enjoyed. This did not occur,
however, because the East Asian governments had very strong strings attached to the
incentives and support they provided to domestic industries. For instance, the South
Korean government’s support for domestic industries (e.g. trade protection, favourable
bank loans, and subsidies) came with robust export targets. Korean companies that
failed to meet such targets were cut loose. In this regard, the South Korean government
did not just pick the winners but also weeded out the losers. The Indonesian government
did use several policies that may appear similar to those of its East Asian counterparts,
but Jakarta did not insist on similar conditions. Without such conditions, Indonesian
companies enjoyed the benefits of government support but did not face the kind of
pressure their East Asian peers experienced to diversify.

A summary of comparison of industrial policy implementation between East Asian
Countries and Indonesia, as synthesized by the authors, can be found in table 2 below.
In the past, the East Asian countries were primarily determined to achieve economic
objectives, whereas today, ESG principles have become increasingly pertinent to their
countries’ policies. The ESG concept first came to prominence as a strategic response devised
by the UN for corporations to achieve sustainable growth. In connection with the need to
comply with the SDGs, companies need to highlight the nonfinancial aspects of their
operations that might affect their investment valuation (Park et al., 2022). The nonfinancial
aspects of ESG are an extension of the earlier idea of corporate social responsibility (Dahlsrud,
2006). Consideration of ESG compels stakeholders to consider the environmental, social, and
governance aspects of an investment. Therefore, factors that were previously omitted in
financial statements, such as carbon emissions, corporate governance, and community
engagement, must now be managed and linked to the financial statements (Amal Zadeh &
Serafem, 2018; Nelson, 2018). In addition, according to Pollman (2022), the UN Who Cares Wins
report states that ESG standards are a way of highlighting the links between the three different
areas that are increasingly important for various stakeholders. The report further elaborates
that the ESG system entails sound governance and risk management, which are crucial for the
implementation of policies and measures to address environmental and social challenges
from the perspective of financial institutions. The shift from conventional corporate principles
to ESG presents an opportunity for countries to align their concern for sustainability in their
development with the support of the private sector, which is also moving in a more
environmentally and socially responsible direction.

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Table 2 Comparison of Industrial Policy Implementation: East Asian Countries and Indonesia
Policy

Japan

South Korea

China

Indonesia

Protection of
domestic industries

Very strong; high
import tariffs

Very strong; high
import tariff

Very strong; trade
protection and
subsidies

Haphazard
application of
import tariffs and
domestic
component levels

Selecting strategic
sectors and
encouraging
domestic
companies to enter
them

Very strong

Very strong

Strong

Weak

Financing support

Vigorous,
including through
government banks

Vigorous,
including through
government banks

Vigorous,
including through
government banks
and investment
funds

Weak

Conditions

Robust, with
demanding
export targets

Robust, with
demanding
export targets

Adequate

Weak

Role of foreign
direct investment
(FDI) to support
industrialization

Hostile; FDI was
very limited to
provide room for
the diversification
of domestic
enterprises

Hostile; FDI was
very limited to
provide room for
the diversification
of domestic
enterprises

Very open to FDI,
with many
onerous
conditions,
including forming
joint ventures and
undertaking
technology
transfers

Very open to FDI,
with inadequate
requirements for
technology
transfers

Involvement
of state-owned
enterprises in
manufacturing

Not involved

Involved for some
critical industries

Involved
particularly for
upstream
industries

Limited
involvement
of SOEs in the
manufacturin
g industry

Export promotion

Very strong

Very strong

Very strong

Weak

Source: Authors’ Analysis

ESG has become a crucial element in the development of many countries, as investors
increasingly prioritize sustainable and responsible companies. Baker et al. (2022) found
through a revealed preference approach that investors are willing to pay 20 basis points more
annually for a fund with an ESG mandate compared to an identical mutual fund without one.
In addition, international trade is shaping investor behaviour as countries impose additional
costs on carbon-intensive goods. For instance, the European Union has initiated the
implementation of a carbon border adjustment mechanism (CBAM), raising the prices of
carbon-intensive goods (European Commission, 2023). Moreover, consumers are becoming
more environmentally conscious. A study by Frey et al. (2023) revealed that products with

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ESG-related claims experienced 28% cumulative growth over the past five years, compared to
20% for products without such claims.
Several countries have undertaken initiatives to align with ESG principles. The United
States enacted the Inflation Reduction Act, which aims to promote green industries, including
by providing subsidies of up to $7,500 for domestically produced EVs (Internal Revenue
Service, 2023; Vazquez & Judd, 2022). China is also advancing its green industrial policies by
offering subsidies and providing funding support (DiPippo et al., 2022; Hao et al., 2014; Jin,
2023; Wei et al., 2023). Currently, China is the world’s largest producer of solar modules and
EVs (IEA, 2024). Similarly, Japan, through its Ministry of Economy, Trade, and Industry, has
targeted 14 sectors related to carbon neutrality and implemented various policy initiatives,
including establishing a green investment fund worth two trillion yen and a performancebased interest subsidy system for energy transition initiatives.
Green Economic Transformation: Towards a New Developmental State Model
In the past, the notion of a developmental state and that of ESG were considered as two
separate subjects. Now, however, there are growing linkages between developmental states
and the sustainability imperative (Yülek, 2018). The developmental state model, which
primarily rests on economic growth alone, is ill-equipped to confront today’s global
predicaments (Aiginger, 2014), as the repercussions of climate change and social inequality
are too evident to ignore. Rapid industrialization in the present context would not only be
inadequate but might even be counterproductive if it were to come at the expense of
sustainability. Moreover, there has been protracted criticism of state intervention, with some
economists fervently arguing it to be inefficient at best and disastrous at worst. Government
interference is alleged to carry substantial risk of government failure, which would undermine
economic development with rent-seeking side effects.
On the other side of the equation, compliance with ESG standards is increasingly
popular, as there is a growing understanding that a business-as-usual government approach
to address sustainability conundrums is not enough (Peshawaria, 2024). With the rampant
market failures that have enabled the marginalization of environmental or social factors in
economic development, even a number of neoclassical economists have contended that
government intervention in this regard is warranted (Stern, 2022). Moreover, some have
argued that ESG compliance will remain limited if it exclusively focuses on environmental
sustainability while ignoring the short-term but more pressing needs of the impoverished
populations in many parts of the world. In other words, as important as the future
environmental sustainability agenda is, present basic economic needs also need to be
addressed.
In this context, there is increasing recognition of the need to augment the nexus between
the developmental state and ESG principles (Kastelli et al., 2023). A modern developmental
state needs to take into account environmental concerns because doing so helps to legitimize
government interventions. ESG practices also need to take into consideration short-term
economic needs as well as proactive government interventions to break the business-as-usual
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cycle. Table 3 summarizes these concerns by comparing the classical and new model of
developmental state.

Table 3 Matrix of Comparison Between the Conventional
and the New Model of the Developmental State
Scope of objectives
Economic
Contentious
legitimacy
Legitimacy
for
government
intervention

Widespread
legitimacy

Environmental
and social

Economic, social, &
environmental

Conventional
ESG

New Developmental
State Model: Green
Economic Transformation

Conventional
Developmental
State Model

Source: Authors’ Analysis

The rise of new developmental state models presents opportunities for developing
countries that are striving to promote structural transformation in a manner that entails more
legitimacy because their development goals are intertwined with social and environmental
sustainability.
Nickel’s Strategic Position in the Energy Transition
Advances in clean energy technologies are key to encouraging sustainable production
and consumption behaviours worldwide (Nassani et al., 2019). Nickel is required for
numerous new energy technologies. With unique properties that make it essential in a wide
range of applications, nickel is used in many clean energy technologies, such as batteries for
EVs and energy storage systems (ESSs). Material engineering of nickel can produce highperformance energy storage devices, and according to Sameti and Haghighat (2018), ESSs are
set to play a significant role in achieving the target of net zero emissions.
Nickel’s strategic importance is highlighted by its critical role in EVs and ESSs, which
are experiencing rapid demand growth (Rajaeifar et al., 2022). Lithium-ion-based batteries
(LIBs) with high nickel content are often the technology of choice for EVs because they offer
the highest energy density on the market. Energy density is a priority for original equipment
manufacturers because it determines the distance a vehicle can travel per battery charge.
Further, nickel-containing cathodes in LIBs help to make the batteries smaller and lighter,
leading to more efficient EVs capable of longer driving distances. According to data from
Wood Mackenzie (2020), the share of nickel-based batteries—lithium–NMC oxides and
lithium–nickel–cobalt–aluminum oxides—will be around 50% in 2030. This means that the
potential demand for battery-powered EVs relying on nickel could reach 84.5 million units
worldwide in 2030 (IEA, 2024b). The rapid growth of the EV industry directly affects the
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demand for batteries that use nickel as a key component. According to the IEA (2022), in a
climate-driven scenario such as the net zero emission scenario, nickel demand in 2030 is
projected to more than double from that of 2021, driven by the rapid deployment of renewable
energy technology.
Historically, nickel was primarily used for alloys, including stainless steel, but from 2020
to 2023, the clean energy sector became the main driver of a 30% increase in overall nickel
demand (IEA, 2024b). By 2023, the share of clean energy applications as a proportion of total
nickel demand crossed 15%, with EV batteries being the major source of demand (IEA, 2024b).
Looking to the future, the demand for high-quality nickel raw materials is predicted to
continue to increase, driven by the widespread adoption of EVs in various countries and the
substantial expansion of battery ESSs.
As nickel’s strategic importance in energy transition is rising so is the crucial role that
Indonesia plays. This is evident from the export of nickel-derivative products from Indonesia.
In 2021, less than 5% of Indonesia’s nickel-derivative exports were nickel for EV batteries, but
in 2023, the number jumped to more than 20% (Trademap, 2024). In recognition of this,
Indonesia aims to attract investments to boost production capacity along the EV supply chain,
leveraging its comparative advantage in nickel.
Currently, Indonesia holds the world’s largest nickel reserves, constituting
approximately 21% of the global total, estimated at 21 million metric tonnes. In 2022,
Indonesia produced 1.6 million metric tonnes of nickel, significantly outpacing other
countries. These reserves are primarily located in Eastern Indonesia, particularly in Sulawesi,
Maluku, and Papua (US Geological Survey, 2023).
Nickel in Indonesia is processed into battery-grade material primarily through highpressure acid leach (HPAL). The share of HPAL production, which is less carbon-intensive
than alternative processing methods, is set to increase from 2% in 2023 to 15% by 2030,
whereas the share of rotary kiln electric furnace production is projected to decline from 90%
to 80% (IEA, 2024a). This shift could reduce the carbon intensity of nickel production from 80
tonnes CO2 per tonne to 75 tonnes CO2 per tonne by 2030. However, the reliance on coal for
energy could keep total emissions high, despite cleaner processing methods (IEA, 2023).
Therefore, Indonesia’s efforts to scale up the use of renewable energy and improve waste
management are crucial for reducing the environmental footprint of nickel downstream
projects and aligning them with global sustainability goals.
Indonesia is determined to ensure that nickel downstreaming reaches the most strategic
products with highest added value, namely EV batteries. As the private sector was still
reticent to enter the sector, Indonesian government established a state-owned enterprise
namely the Indonesia Battery Corporation in 2021 to advance its position as a major producer
of EV batteries, with a target to manufacture 140 gigawatt-hour (GWh) battery capacity by
2030 (IBC, 2021). This initiative aims to capitalize on Indonesia’s role as the world’s largest
nickel producer and enhance its involvement in the value chain of this critical mineral, thereby
contributing significantly to global efforts in the clean energy transition.

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The EV Market in ASEAN and Indonesia
As the global economy continues to exhibit signs of volatility in recent years, the
economic landscape of Association of Southeast Asian Nations (ASEAN) has notably
diverged from this trend by demonstrating remarkable vibrancy and resilience. For instance,
while the global economic output experienced a moderate increase of 3.2% in 2023, the five
principal member countries of ASEAN (Indonesia, Malaysia, Thailand, Philippines, and
Singapore) or the so-called ASEAN-5 recorded a commendable 4.1% growth (IMF, 2024).
The positive economic outlook of the region is also reflected in the robust expansion of
the electric vehicle market. The compound annual growth rate of EV in the ASEAN EV market
is projected to reach between 16% and 39% between 2021 and 2035. Such rapid growth is set
to propel, the annual sales of EV in ASEAN from US$ 2 billion in 2021 to approximately US$
100 billion in 2035, reflecting a staggering increase of 50-fold (Utama et al, 2024).
The projected growth of EV market in ASEAN is enabled by several key factors. In the
supply side, the region, particularly Indonesia and the Philippines are endowed with
abundant reserves of nickel that is increasingly critical for EV battery manufacturing.
Thailand, Indonesia, and Malaysia also possess adequate Internal Combustion Engines (ICE)
vehicle manufacturing capacity that may support the transition to EV manufacturing. On the
demand side, while the EV cost remains more expensive, governments in ASEAN including
in Thailand, Singapore, and Indonesia have offered generous tax incentive to encourage EV
adoption by consumers. Finally, countries in the region are also improving their EV
infrastructure readiness, for instance Singapore already has 3,600 charging stations and
Thailand has 2,600 charging stations (Utama et al, 2024).
The increasingly lucrative EV market in ASEAN, the region’s natural resource
endowment and the supportive government policies also help draw immense EV investment
into the region. As can be observed in figure 1, In 2022, the EV related investment into the
region jumped 6-fold which was not just spurred by FDI into EV manufacturing in the
downstream but also EV battery material processing in the midstream, particularly in
Indonesia. This influx of investment into the region has led the world’s 10 largest EV
manufacturers to establish their presence in ASEAN.
While the overall growth of EV in the ASEAN market is vibrant, the growth trajectories
vary among the member countries. For instance, by 2035, the projected EV adoption rates are
estimated to reach 25% in the Philippines and 15% in Malaysia, whereas Indonesia and
Thailand are expected to achieve adoption rate of 50% and 45% respectively. The projection
of EV annual sales in ASEAN countries can be seen in figure 2 below. Given Indonesia’s vast
market, 50% adoption rate of EV would translate into 4.5 million units of EV sales, making
Indonesia the regional leader of EV market in terms of volume.

90

Nickel Downstreaming

Billions

$20,0
$18,0
$16,0
$14,0
$12,0
$10,0
$8,0
$6,0
$4,0
$2,0
$0,0

$18,1

$5,5
$2,7

$2,1
2019

2020

2021

2022

Figure 1 EV – Related Investment into ASEAN
Source: ASEAN Special Investment Report (ASEAN & UNCTAD, 2023)

Figure 2 Projection of Annual EV Sales in 6 ASEAN Member Countries (in thousands)
Source: EY Analysis (Utama et al, 2024)

Given its leading role in the future of ASEAN EV market and its strategic natural
resource endowment, Indonesia is poised to be an important epicenter of the regional EV
value chain development. Taking Indonesia’s importance into account, the following sections
would focus on nickel downstreaming in Indonesia which is critical for the development of
EV manufacturing in the country.
Indonesia’s Policy to Promote Nickel Downstreaming
Indonesia’s downstreaming strategy is anchored in the 1945 Constitution, specifically
Article 33 Paragraph (3), which states that the earth, water, and the wealth contained therein
shall be controlled by the state and utilized to the greatest extent for the prosperity of the
people. Nickel, as one of the major natural resources, must thus be controlled by the state and

Journal of ASEAN Studies

91

utilized for the greatest prosperity of the Indonesian people. In encouraging nickel
downstreaming in Indonesia, the government has taken various policy steps and established
regulations supporting industrial downstreaming; these are described in the following:
1.

Law No. 4/2009 as amended by Law No. 3/2020 on Mineral and Coal Mining

2.

Law No. 3/2014 on Industry

3.

This law explicitly stipulates the obligation of every business entity operating in the
mining sector to increase the added value of minerals they own. The government is
mandated to come up with minimum threshold for the mineral processing, taking into
account market demand and the need to generate higher value for the people’s welfare.

This regulation emphasizes the need for domestic industry to increase the added value
of natural resources through the development of domestic processing industries. The
government has the authority to impose restrictions or even prohibitions on the export
of natural resources in this context.
Minister of Energy and Mineral Resources Regulation No. 11 of 2019 on Mineral
and Coal Mining
This regulation explicitly set the deadline for nickel ore export permit to December 31st
2019, after which nickel ore export would be banned. The regulation marked a turning
point for Indonesia’s nickel downstreaming journey. Previously, the implementation of
the downstreaming strategy was not optimal with policy inconsistency. After the decree
was issued, the government strictly enforced the ban which laid the groundwork for the
policy’s success in attracting nickel processing investment.

The Indonesian government’s downstreaming strategy also entails a carrot and stick
approach. Indonesia is applying this carrot and stick approach to develop an end-to-end
supply chain for EV battery manufacturers and exporters. In the upstream context, Indonesia
is utilizing its nickel reserves and applying restrictive measures in the form of export bans as
the ‘stick’, and further down the value chain, namely in EV battery production and EV
adoption, Indonesia is offering incentives in the form of tax breaks for producers and
consumers as ‘carrots’.
The harnessing of natural resources for economic development can also be found in
other countries. One of the most notable benchmarks is China and its rare earth mineral (REM)
downstreaming. Shen et al. (2020) asserted that China’s pro-industrial policies have
successfully promoted downstream processing industries for REM. China’s rare earth export
restriction was found to significantly increase the domestic processing of the minerals.
During the first decade of export restrictions, China’s REM processing capacity
increased by 15% annually. From 2004 to 2014, China’s share of global REM processing
capacity rose from 43% to 70%. Since 2015, around 80% of China's REM production has been
processed domestically, with only a small portion exported in raw form. The export restriction
led to domestic REM prices being much lower than international prices, providing an indirect
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Nickel Downstreaming

subsidy to downstream REM sectors with competitively priced raw materials. For example,
in 2011, international REM prices were seven times higher than domestic REM prices in China.
Similar with China’s mineral export restriction, the most radical ‘stick’ strategy
implemented by Indonesia was the raw nickel ore export ban imposed in 2014, which was
relaxed in 2017 and eventually reimposed in early 2020. Amid fears of a global nickel shortage,
the ban convinced foreign companies to set up processing plants in Indonesia. There are
currently several nickel processing projects under development in Indonesia, and these
projects will be key to ensuring the future global nickel supply for batteries.
In the downstream segment of the supply chain, Indonesia uses a ‘carrot’ strategy to
offer incentives for EV consumers through Presidential Regulation No. 79/2023. Under the
presidential regulation, both two- and four-wheel EV consumers can receive a sizable
incentive, such as a waiver of the luxury goods tax for four-wheel EV. Furthermore, under the
new presidential regulation, the incentive applies not only to EVs that are made locally but
also to imported EVs as long as the manufacturers have a plan to produce their EVs locally in
the future.
Currently, the South Korean automaker Hyundai and battery giant LG Energy Solution
(LGES) are finishing the construction of Indonesia’s first EV battery cell factory, with a
planned annual production capacity of 10 GWh (Reuters, 2021), thus creating the opportunity
for Indonesia to capitalize on the investment and improve its own EV production capacity.
The plant is expected to start production in 2024. These battery cells will be used by Hyundai
and its affiliate Kia. LGES’ US$1.1 billion investment in this plant is part of a US$9.8 billion
overall EV battery cell investment deal (Reuters, 2020). Chinese battery giant CATL (which
supplies batteries to companies such as Tesla, BMW, and Volkswagen) has also announced
plans to invest roughly US$6 billion in Indonesia (CATL, 2022). CATL’s recycling arm, Brunp,
has invested in a nickel processing project led by Chinese battery material producer GEM.
Transforming raw natural resources into higher-value-added products has become a
heated topic of debate. Some argue that the Indonesian government should consider
intensifying current economic policies by focusing on downstream products and leveraging
comparative advantages in upstream industries to enhance competitiveness (Kim, 2023; Kim,
2024; Muhamad & Djong, 2024). For example, Kim (2024) argued that the export ban imposed
by the government of Indonesia has significantly increased investment in downstream nickel
sectors, including MHP, nickel matte, stainless steel, and EV batteries. Moreover, Kim (2024)
highlighted the importance of strengthening the industrialization process by developing
technologies, expanding financing, and improving ESG standards. On the other end of the
spectrum, others have argued that the downstreaming policy has some inadequacies. Tai
(2016) contended that state capacity in Indonesia is flawed as evident in the failed national car
program in the 1990s with collusion between the government and the private sector. Patunru
(2023) noted how the past downstreaming policy in Indonesia involving trade protection of
timber and rattan did not end well, as it led to more deforestation and failed to deliver a
substantial economic gain. Patunru also emphasized a concern that the overall added value
of the nickel downstreaming policy would only be marginal because the value would require

Journal of ASEAN Studies

93

extra capital and labour from other sectors, which would reduce the added value of those
sectors. Finally, Patunru also asserted that the capital-intensive nature of nickel processing
would mean that the added value would likely be captured as a return to foreign capital
owners instead of for Indonesians.
This debate has arisen because downstreaming of natural resources has significant
economic, social, and environmental aspects. The following is a summary of the potential
upsides and downsides of downstreaming which have been actively discussed upon.
1.

Economic: Advocates of downstreaming contend that processing natural resources
locally can increase the added value of resources and contribute to the industrial
sector's role in economic growth. Job creation, income growth, and reduced import
dependency are cited as some of its benefits (Kim, 2023; Kim, 2024; Muhamad &
Djong, 2024). Conversely, detractors express concerns about potential risks of
downstreaming, including risks associated with the capital-intensive nature of nickel
downstreaming (Patunru, 2023), trade retaliation (Aswicahyono & Rafitrandi, 2018),
and previous cases of downstreaming failures such as the case of rattan. (Patunru,
2023).

2.

Social: Proponents argue that downstreaming can create new job opportunities and
improve local economic well-being. Critics, however, contend that the burden of the
downstreaming policy is oftentimes asymmetrical to the detriment of vulnerable
communities. The CREA/CELIOS (2024), for example, reported that there is an
increasing trend of air-pollution-related health costs linked to nickel-smelting sites
including the growing number of respiratory diseases.

3.

Environmental: Advocates of downstreaming assert that efficient processing of
natural resources can reduce harmful environmental impacts and promote
sustainable practices. Moreover, if directed at EV battery production, nickel
downstreaming can play a critical role in supporting clean energy transition in
Indonesia and in the world. However, critics argue that downstreaming can cause
significant environmental damage, such as deforestation, water pollution, and
greenhouse gas emissions. According to Schandl et al. (2020), irresponsible material
processing, which may be part of downstreaming practices, can undermine
environmental sustainability.

Indonesia’s Nickel Downstreaming: New Developmental State Model in Practice
Based on the preceding discussion, Indonesia’s nickel downstreaming strategy may be
perceived as a manifestation of a new developmental state model. On the one hand, the
country sees a tremendous opportunity in harnessing the increasingly strategic nickel reserve
it has at its disposal. On the other hand, the country is looking into the paradigm of a new
developmental state model that legitimizes proactive government intervention in the
economy to add value to its nickel resources as long as the ultimate objective includes social

94

Nickel Downstreaming

inclusion and environmental sustainability. In other words, the downstreaming strategy is a
practical example of how the old developmental state model has been refined into one suited
to the current era. Figure 3 illustrates the analytical framework.

Figure 3 New Developmental State Model Source: Authors

If Indonesia were to adopt the old developmental state model, the government would
probably focus its policy on supporting the development of new sectors that do not have a
direct bearing on sustainability. In the old paradigm, the government would be content to
develop the stainless-steel industry because doing so would already mark an industrial
upgrade that is needed for the economy to grow. However, the government’s ultimate target
for downstreaming is the EV battery manufacturing industry, a sector which does not just
involve higher added value but is also critical for energy transition.
The government is not exclusively directing its efforts to help create the EV battery
manufacturing industry but is also striving to ensure that this industry grows in an
environmentally sustainable manner. For instance, the government is adamant that the
tailings from HPAL nickel-processing plants must not be disposed at sea (so-called deep-sea
tailings) but instead must be processed through the dry-stacking method, which may reduce
the negative environmental impact (Nangoy & Ungku, 2021; Silva, 2023). The government is
also encouraging the industry to reduce its carbon footprint by utilizing renewable energy
and by promoting carbon capture storage (CCS) for the nickel downstream industry.
Currently, the government already has a number of specific regulations to promote CCS,
including Presidential Regulation No. 14 of 2024 on the Implementation of Carbon Capture
and Storage.
Besides environmental protection, the government is also keen to ensure that the nickel
downstream industry also generates greater economic benefits for local communities. This is
done by, among other initiatives, strengthening the implementation of the micro, small, and
medium enterprises (MSMEs) partnership program under the regulation of the Minister of
Investment/Chairman of Coordinating Board of Investment No. 1 of 2022. The ministerial
regulation obliges large investors that receive fiscal incentives (such as tax holidays) to work
with local MSMEs. Encouraging the inclusion of local MSMEs in large investors’ supply
chains is one of the most potent ways to ensure that local communities can reap greater
benefits from downstreaming.

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The downstreaming of the nickel industry may also mark an important step in
supporting the alignment of Indonesia’s economic development with the SDGs. For instance,
the nickel downstream industry may contribute to SDG 8 (decent work and economic growth)
by creating jobs and promoting inclusive economic growth, to SDG 7 (affordable and clean
energy) by expanding access to affordable and clean energy through the increased production
of EV battery materials, to SDG 13 (climate action) insofar as downstreaming may help to
facilitate the energy transition that is critical for climate change mitigation, and to SDG 10
(reduced inequalities) insofar as downstreaming may help many local communities in Eastern
Indonesia that have been marginalized to secure a better livelihood. In short, downstreaming
opens up more opportunities for Indonesia to meet the SDG targets, particularly if the
country’s strategy is refined to better address social and environmental side effects.
By implementing the new developmental state model through the downstreaming
strategy, Indonesia has achieved several positive outcomes. At the macro level, the country
has attracted investments in manufacturing sectors and diversified its export base, increasing
the share of high-value-added goods. Notably, regions hosting nickel downstream industries,
such as Morowali in Central Sulawesi and Central Halmahera in North Maluku, have
experienced substantial improvements in their standards of living. Over the past four years,
following the ban on raw mineral exports, real GDP per capita in these regions grew by
102.49% and 22.95%, respectively, far surpassing the national average of just 3.53% (see Fig.
4). Moreover, Indonesia’s increased export share of critical minerals, as highlighted by the
IEA, has elevated its role in the global shift towards a greener economy. This structural
transformation signifies Indonesia's departure from its previous reliance on resource
extraction. If sustained, the transformation may also potentially reverse Indonesia’s
premature deindustrialization and help to position the country on a sustainable economic
trajectory.

Figure 4 Real GDP per Capita of Morowali, Central Sulawesi, and Indonesia
Source: Indonesian Statistics Agency

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Nickel Downstreaming

Unlike in old developmental state models that often overlooked social outcomes,
Indonesia has paid more attention to this aspect. According to Kim (2007), wealth distribution
in South Korea during its rapid growth era was relatively unequal, with the national Gini
coefficient rising from 0.332 in 1970 to 0.392 in 1978. Recently, Raeskyesa (2020) also posited
that manufacturing growth has statistically insignificant correlation with inequality. In
contrast, there have been significant improvement in the wealth distribution of
downstreaming regional epicenters. The Gini coefficient in Morowali decreased from 0.377 in
2015 to 0.281 in 2023, and in Central Sulawesi, it declined from 0.374 to 0.304 over the same
period. The decline in Gini coefficient can be observed in Figure 5.

Morowali

Central Sulawesi

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

0.43
0.41
0.39
0.37
0.35
0.33
0.31
0.29
0.27
0.25

2013

Despite the improvement in Gini ratio, downstreaming has brough to fore a number of
social issues that require attention, including the increasingly limited access to education and
healthcare. The extraordinary expansion of the nickel downstream industry has attracted a
significant influx of migrant workers along with their school – age children from various
regions of Indonesia to key downstreaming hubs including Morowali and Central Halmahera.
This surge in population has exacerbated the demand for social services including education
and healthcare, which the existing infrastructure is unable to adequately support. As the
result, some schools are forced to operate in three shifts per day, with some teachers managing
more classes than is pedagogically feasible.

Indonesia

Figure 5 Gini Ratio From 2013 to 2023 in Morowali, Central Sulawesi, and Indonesia
Source: Indonesian Statistics Agency, 2024

In addition to the social issues, the Indonesian government must address environmental
concerns, as local communities face increasing environmental damage. Figure 6 highlights the
significant rise in CO2 emission estimates following the increased operations of downstream
industries. Emissions in North Maluku increased from 2.4 million tonnes CO2 equivalent in
2020 to 15.7 million tonnes CO2 equivalent in 2023, while in Central Sulawesi, emissions rose
from 9.6 million tonnes CO2 equivalent in 2019 to 20.8 million tonnes CO2 equivalent in 2023.

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The increase in CO2 emission is a serious concern that the government needs to address in
order to ensure the future sustainability of nickel downstreaming. There have been efforts by
the government to encourage the use of renewable energy including through Presidential
Regulation No. 112 in 2022 on accelerating the electricity generation from renewable energy.
Nevertheless, much still needs to be done given Indonesia’s persistent high reliance of fossil
fuel in its energy mix.

Figure 6 Estimates of CO2 Emissions in Major Regional Hubs
for Nickel Downstream Industries
Source: Global Energy Monitor Tracker, 2024

Conclusion
History demonstrates that Indonesia has much to learn from the industrial policy
experience of East Asian developmental states. Among others, the Indonesian government
should be more proactive to encourage industrial upgrading of its companies through various
policy ‘carrots’ and ‘sticks’ that must come with clear conditions. However, the window for
the Indonesian government to replicate the policies of its more advanced peers in the past is
closing today. The kind of active government interventions that were used by East Asian
developmental states have now fallen out of favour amidst the pro-globalization discourse.
Moreover, the increasingly dire climate change impacts make it clear that an industrial policy
that only focuses on economic growth is no longer adequate. In this context, there is an
opportunity for Indonesia to create a strategic nexus between developmental state concept
and ESG principles. In line with the ESG imperative, the government’s proactive intervention
can be justified if it is aimed at achieving economic transformation as well as environmental
sustainability and social empowerment.
Through its downstreaming policy, the Indonesian government is attempting to seize
the advantage that comes with having the world’s largest nickel reserve by following several
hallmarks of East Asian industrial policy, including active government intervention in the
market through the nickel ore export ban. However, even though the policy has the potential
to significantly improve key economic indicators, a classical East-Asian-style developmental

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Nickel Downstreaming

state model would likely generate negative environmental and social side effects. Thus, the
Indonesian government is also adjusting its foray to industrial policy to the new global context
by targeting the EV battery sector, which is pivotal for the global energy transition as well as
ensuring that downstream industries mitigate their possible negative environmental
externalities. Furthermore, the government is also striving to improve social inclusion by
encouraging large investors to partner with local MSMEs.
The Indonesian government’s endeavour to align industrial policy with ESG
imperatives still leaves much room for improvement. For instance, despite some progress, the
carbon footprint of downstream industries remains high. Going forward, the government
should formulate a downstreaming model that optimizes the positive economic impacts and
mitigates the negative effects across social and environmental dimensions. We acknowledge
that the environmental and social impacts require further in-depth and comprehensive
exploration to provide a clearer understanding of the nickel downstreaming industry in
Indonesia.
Through this writing, the authors presented a novel perspective that integrates the
developmental state model with ESG principles. This approach addresses the ongoing
dialectics surrounding globalization and liberalization in relation to Indonesia’s nickel
downstreaming within the context of emerging economies. The findings of this study may
provide valuable insights for policymakers in developing countries and contribute to the
broader intellectual discourse concerning the new developmental state.

Acknowledgement
The authors would like to acknowledge the support of Universitas Indonesia. They
would also like to thank the Journal of ASEAN Studies reviewers, who have provided
meaningful feedback and opened up new perspectives.

About The Authors
Bahlil Lahadalia is currently pursuing a Ph.D. at the School of Strategic and Global
Studies, Universitas Indonesia. Simultaneously, he holds the position of Minister of
Investment/Chairman of the Indonesia Investment Coordinating Board from 2019 to 2024.
Chandra Wijaya is a Dean of the Faculty of Administrative Sciences, Universitas
Indonesia (FIA UI) for the period 2020 - 2024. He has several education and training
certifications as follows: Certified Investment Market & Banking Analyst (CIMBA), Certified
Securities Analyst (CSA), Certified Professional Human Resource (CPHR), Deputy
Investment Manager (WMI) and Deputy Securities Trader (WPPE).

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99

Teguh Dartanto is a Dean, Faculty of Economics and Business, Universitas Indonesia.
He was formerly Vice Dean and a Head of the Department of Economics at Universitas
Indonesia. He specializes in development, poverty and social protection, and health
economics. He is now appointed as Indonesia Representative at the Governing Board of
Economic Research Institute for ASEAN and East Asia (ERIA) & Vice President of ABEST21
(Alliance of Business Education and Scholarship for Tomorrow).
Athor Subroto is a Director at School of Strategic and Global Studies, Universitas
Indonesia at Universitas Indonesia. He is an experienced researcher in higher education,
specializing in Stata, Analytical Skills, System Dynamics, Lecturing, and Econometrics. Holds
a Ph.D. in Model-Based Public Planning, Policy Design, and Management from Università
degli Studi di Palermo. Committed to advancing knowledge and excellence in the field.

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