Indonesia aims to curb Chinese investment in nickel projects

Indonesia’s nickel sector faces an intensive structural transformation if it is to attract Western investment and dilute Chinese ownership

Indonesia is exploring ways to reduce Chinese investment in new nickel mining and processing projects to help its industry qualify for tax breaks in the US. Indonesia is the world’s largest supplier of nickel, home to over 40 percent of the world’s nickel reserves and accounting for 57 percent of global refined nickel production. Indonesia’s decision in 2020 to reimpose a ban on nickel exports led to an influx of Chinese investment into nickel projects for EV batteries. Over the past 10 years, China has invested over US$14.2 billion in nickel projects in Indonesia. China’s heavy involvement will almost certainly prevent Indonesian nickel from being eligible to receive US tax credits through the Inflation Reduction Act (IRA). By 2025, EVs containing batteries and critical minerals sourced from ‘foreign entities of concern’ (companies or ventures with more than 25 percent Chinese ownership) will be precluded from receiving tax credits.

Many aspects of Indonesia’s nickel sector deter Western investors. Perhaps the largest obstacle is climate and pollution concerns. By using a dry stack tailing method (drying and compacting waste into a mound) in a country prone to earthquakes and high rainfall, Indonesia’s nickel sector risks toxic waste runoff into the sea and onto coral reefs. Moreover, electricity for Indonesia’s nickel smelters is almost entirely powered by coal. In July, Germany’s BASF and France’s Eramet notably cancelled a US$2.6 billion nickel and cobalt refinery project. Environmental concerns, and the proximate presence of an indigenous tribe living in deliberate isolation, likely factored into the decision not to proceed.

To be eligible for IRA credits, Indonesia will need to sign a critical minerals agreement with the US. This will give Congress broad discretion to demand wholesale changes to Indonesia’s current operating procedures. Other than Indonesia’s aspirational pledge to limit Chinese investment, there have been little obvious signs of progress since President Jokowi and President Biden signed an action plan on critical minerals late last year.

Hanoi permits direct agreements between renewable power producers and businesses

Legislation designed to meet surging foreign manufacturers’ demand for green power

Vietnam will allow independent power producers (IPPs) to sell renewable energy directly to businesses, bringing an end to state-owned Vietnam Electricity’s (EVN’s) monopoly on power transmission. Hanoi’s Decree 80, issued last month, grants IPPs the ability to build their own power lines directly to companies or sell their electricity to those companies through EVN’s national grid. Previously, EVN was the only company permitted to build transmission infrastructure. Vietnam’s renewables buildout had a promising start but fell behind in the past few years due to significant delays in regulatory reform and insufficient investment in transmission. The first draft of Decree 80 dates back to 2019. More significantly, Vietnam’s Eighth Power Development Plan (PDP8), which underpins the country’s transition pathway to net zero emissions by 2050, was finally released in May last year after years of delays.

The reform is significant on multiple fronts. It will simultaneously encourage IPPs to invest in new renewable capacity while also providing Western companies that have large power demand in Vietnam with more options to source renewable energy. H&M and Apple’s supplier network are two such operations that have sought to purchase clean and cheap energy for their manufacturing operations in the country. In allowing manufacturers to take advantage of bespoke transmission arrangements, the legislation may also help businesses to partially sidestep grid reliability issues. Prolonged blackouts occurring in the middle of 2023 caused significant losses across Vietnam, which the World Bank estimated at around US$1.4 billion (0.3 percent of GDP).

Still, there are concerns over whether the national grid will be able to adequately manage an increase in intermittent renewable power brought online by the new legislation. Vietnam’s energy regulators occasionally order renewable generators to shut down due to excess power in the grid relative to demand. Vietnam’s ageing grid infrastructure remains one of the key obstacles facing the country’s energy transition.

Japanese automotive companies form alliances to compete in the EV market

Previously unthinkable tie-ups signal a belated recognition that Japan’s automotive sector has been flat footed in the electric vehicle race

Earlier this month, Honda and Nissan officially formed an alliance with Mitsubishi to counter Tesla and BYD’s dominance in the EV sector. In 2023, Nissan and Honda respectively sold 140,000 and 19,000 EVs globally. This is compared to the 1.8 million and 1.56 million EVs sold by Tesla and BYD, respectively. Japan has been slow to pivot towards electrification. EV sales in Japan are around five percent of new car sales, far behind figures seen elsewhere in the developed world and China. Toyota, the world’s largest carmaker, has in the past evinced scepticism regarding the feasibility of rapid EV adoption. Outside of China, Toyota’s forecasts now appear more prescient than they did twelve months ago. Toyota is cashing in on booming hybrid sales, as EV sales flounder in the EU and US. Another source of reticence in Japan’s world leading automotive industry has been the cannibalisation of existing sales and job losses throughout its supply chain. Despite the temporary decline in EV sales, there is now widespread recognition in Japan that the switch to EVs will be a matter of when, not if.

The trilateral alliance between Honda, Nissan and Mitsubishi means that there are now two major blocs in Japan’s auto sector. The much larger Toyota-led group owns all the shares of Daihatsu and a majority stake in Hino Motors, as well as a minority stake in Suzuki, Subaru and Mazda – with combined annual sales of 16 million vehicles. This is roughly double the size of the annual sales of Honda, Nissan and Mitsubishi. The three companies are expected to use the alliance as a platform for the joint development of capital-intensive software (e.g., automated driving), batteries and the procurement of materials. Mitsubishi has particular strengths in hybrids which Nissan and Honda may seek to emulate. One potentially acute challenge will be in ensuring smooth coordination and integration among companies – particularly Honda and Nissan – who were previously fierce rivals.

Fears rise in Vietnam as major investors look elsewhere

Challenges are emerging to Vietnam’s labour-intensive growth model

Vietnam is being passed over by major investors due to a combination of its new global minimum tax, industrial land availability, skilled labour shortages and unreliable utilities. In January of this year, Vietnam introduced a 15 percent global minimum tax on companies with more than US$800 million profit in two of the last four years - the OECD standard that 136 countries have signed onto. Since then, Austrian semiconductor firm AT&S abandoned plans to invest in Vietnam in favour of Malaysia, while SMC of Japan ditched a US$500 million to $1 billion medical device manufacturing project in Dong Nai Province. US chipmaker Intel, which already has major facilities in Vietnam, is understood to have asked the country for “cash support” to compensate for tax increases. After Hanoi refused to provide perceivably adequate incentives, Intel ultimately decided to move its new US$3.3 billion project to Poland. Foxconn, Compal, Quantra, IBM and Cisco are among other companies who have slowed expansion in the country. These numerous examples belie otherwise positive projections of over US$40 billion in foreign investment in Vietnam this year.

The investment decisions of these major companies compound fears that Vietnam is struggling to develop broader-based appeal to investors beyond offering opportunities for labour arbitrage. Vietnam’s often overlooked demographics are an additional reason for concern, and one which will place additional pressure on the country’s cheap labour growth model. Since 2007, Vietnam has been enjoying a demographic dividend, with a worker to dependent ratio of 2:1. This era is expected to end in 2036 or sooner with only four of Vietnam’s 63 localities reporting fertility rates above the replacement rate of 2.1 children per woman. In Ho Chi Min City, the birth rate now sits at 1.32. These will all be critical challenges for newly minted General Secretary To Lam to address. The denuding of technocratic talent from Vietnam’s Politburo over the last few years in favour of personnel from the security establishment is not a favourable portent.