Rahul Gupta and Thomas Hansmann
Fri, May 28, 2021
Globally, the rise of electric vehicles (EVs) represents a massive disruption to the road transportation sector. Already commonplace in many parts of the world, EVs are expected to represent more than 50 percent of new vehicle sales globally by 2035—though demand varies dramatically from country to country. In Indonesia, this game-changing, environmentally friendlier technology is just starting to emerge as a significant force.
Our research suggests that electrification in passenger cars, and corresponding growth in EV sales, could be accelerated by three key market drivers.
First, regulation: supportive national regulations and local laws have been major drivers of electric- vehicle adoption globally, often combined with incentives – such as subsidies for EV purchases or penalties for internal combustion engine (ICE) vehicles. In Norway, for example, consumers are exempt from value-added tax (VAT) on a new EV, pay no annual road tax or import taxes, and can use bus lanes to avoid congestion
Second, technology and cost: further reduction in technology costs will reduce the price difference between EVs and ICE vehicles. For now, however, batteries remain a dauntingly expensive component; while their price has decreased significantly in the last few years, further innovation is needed to make EVs more affordable and attractive to the consumer. Current research and development is focused on tweaking battery chemistry to increase range and reduce capital costs.
Third, consumer demand is shifting towards sustainable mobility, and purchase consideration of EVs is growing. Availability of vehicle models and infrastructure such as fast-charging and battery-swap stations have helped to alleviate customers’ concerns about flexibility and reliability.
In Indonesia, the EV sector is in its infancy. About 15,000 EVs, nearly all bikes, were sold in 2019, representing less than 0.2 percent of annual vehicle sales, according to research firm Research and Markets. However, new analysis by McKinsey finds that sales will likely increase significantly over the coming years. When we studied a number of scenarios for the sector’s growth, our “reference scenario” found demand for passenger cars reaching 250,000 units per year by 2030 – or 16 percent of all new passenger car sales. Demand for electric two-wheelers could reach 1.9 million units per year in that time frame, or 30 percent of new two-wheeler sales. In assessing the electrification potential of the country, we considered two alternative scenarios beyond our “reference scenario”.
Our “accelerated scenario” envisions local production and other conditions supporting EV take-up. Our “lagging scenario” is based on the current trajectory, in which Indonesia is challenged to attract manufacturers to develop EVs locally and the current 50-percent import tax applies.
In the accelerated scenario, we believe about 40 percent of both two-wheelers and cars sold could be electric by 2030, compared with 12 percent of two-wheelers and five percent of cars in the lagging scenario.
In the accelerated scenario, electric two-wheelers achieve cost parity with locally produced ICE vehicles within two years, for both commercial-fleet and personal vehicles. In the lagging scenario, cost parity is only achieved post 2025.
For four-wheelers, commercial fleets could achieve cost parity today with current EV models and technology if locally produced (accelerated scenario) or in four years if imported (lagging scenario). These projections have significant implications for Indonesia’s economic growth. Electrifying the transport sector could boost gross domestic product by Rp 400-500 trillion (US$28-35 billion) by 2030 in the accelerated scenario, with the driving force being a localized manufacturing and supply chain.
This would require the coordinated support of Indonesia’s regulators and state-owned enterprises all along the value chain. By encouraging consumer adoption and developing the industry, Indonesia’s leaders can grow the economy—all while advancing critical climate goals. Even in the lagging scenario, increased EV penetration by 2030 could abate 20 million metric tons of carbon emissions annually, rising to 40 million in the accelerated scenario.
We have identified three enablers for this desirable trajectory: increased long-term nickel production for batteries; local manufacturing; and supportive infrastructure.
Even if all announced production projects go ahead, by 2030 the global supply of battery-grade nickel will fall short of the projected demand of two million metric tons. This presents an opportunity for Indonesia, which holds nearly a quarter of the world’s nickel reserves. Indeed, in 2020, Indonesia introduced a ban on nickel-ore exports to encourage the development of local processing plants. At the same time, partnerships between international nickel refiners and local companies could help expand much-needed refining capacity.
Indonesia also has the potential to attract manufacturers, meeting local and some regional demand. There is an opportunity to set up 10 to 15 large vehicle-manufacturing facilities, the first four or five operational before 2025, with an average facility capacity of 150,000 two-wheeler units per annum.
Access to nickel-production facilities, competitive energy and labor prices, and a large domestic market make Indonesia an excellent location for battery manufacture, particularly for passenger cars and commercial vehicles. The country could develop two or three facilities by 2030, large enough to compete at scale with regional battery manufacturers. Partnerships with international producers, together with investment incentives and export tax subsidies, would grow the local industry.
Alongside these initiatives, infrastructural support, such as a network of public charging stations and after-sale service centers, must be established. Simultaneously, measures could be implemented to ensure that all these processes – the extraction of raw materials, as well as battery production and other manufacturing cycles – minimize their environmental footprint.
It’s still early days for the adoption of electric vehicles in Indonesia, but the potential for positive impact on the economy and environment is huge. Collaboration between Government stakeholders, state-owned enterprises, and the private sector will be needed to build a local EV ecosystem—one with the potential to transform environments and economies.
Rahul Gupta is a senior expert based in McKinsey & Company’s Singapore office and Thomas Hansmann is a partner in McKinsey & Company’s Jakarta office.