"Orang bilang tanah kita tanah surga…" (people say our land is heaven) are the lilting lyrics of an iconic Indonesian song that aptly captures the abundance of the nation’s rich natural resources. Indonesia’s natural wealth includes the world's largest reserves of nickel and other critical minerals, which are vital for batteries that are extensively used in electric vehicles (EVs).

Gauging the immense potential, this nation has set its sights high, with ambitions to become a dominant force in the global EV market. EVs are central to Indonesia's overarching goal of transitioning to cleaner, more sustainable energy sources – a mission driven by a concerted commitment to the future of our planet.

This decisive focus is not just about following global trends or boosting economic prospects, but a profound acknowledgment of Indonesia's vulnerability to climate change. As an archipelago, the country is acutely at risk and the effects are already palpable, in the form of deteriorating air quality due to the longstanding reliance on fossil fuels.

Currently, Indonesia's energy consumption is heavily skewed toward coal, which accounts for 41 percent, followed by oil at 26 percent, gas at 13 percent and liquefied petroleum gas (LPG) at 4 percent. Despite exporting a staggering 70 percent of its total coal production, Indonesia finds itself in the paradoxical position of importing 53 percent of its oil needs – which costs a hefty US$30 billion annually, in addition to $7 billion spent on fuel subsidies (HSBC Investment Forum, 2024).

These figures paint a stark portrait of a country pouring substantial financial resources into high-emission commodities. It is in this context that the transition to EVs emerges as a critical move for Indonesia, not just environmentally but economically as well.

Indonesia can look to China, where the EV market has surged from 5 to 35 percent in less than five years, as a source of inspiration and a model of what can be achieved (International Energy Agency, 2024). Armed with the world's largest reserves of key EV minerals and an array of incentive programs, Indonesia is well-equipped to replicate China’s success story.

However, setting up a full spectrum global EV ecosystem will be no small feat. There are several challenges along this path, among which making EVs affordable stands out as a formidable obstacle to overcome.

The Indonesian government has developed a suite of fiscal incentives aimed at accelerating the adoption of EVs, as a timely and ambitious response to a global crisis that demands collective action.

In the vanguard of these measures is a quartet of fiscal incentives targeted specifically at EVs. The first grants absolute relief from the motor vehicle tax (PKB), a visionary move designed to lift an economic barrier and pave the way for a surge in EV ownership. The second incentive abolishes the motor vehicle transfer fee (BBNKB), thereby incentivizing the resale market and making EVs a more attractive long-term investment.

The third benefit is a progressive modification of the luxury goods tax: EVs will be taxed at a revolutionary zero percent rate, starkly down from the standard 15 percent. The fourth and final incentive introduced last year is no less transformative – the government has implemented a subsidy slicing VAT from the usual 11 percent to a mere 1 percent, for domestic components constituting at least 40 percent of the vehicle (Energy and Mineral Resources Ministry, 2023).

These incentives are aimed at introducing more affordable EV models into the market. Between 2022 and 2023, Indonesia's EV market was limited to two models, priced at $15,000 and $50,000. In the previous year, EV sales did not surpass the 20,000-unit mark.

However, this year there is considerable optimism, with this year’s sales projected to reach 50,000 units. This milestone, which accounts for a mere 5 percent of the total market share, is seen as a tipping point for the rapid expansion of Indonesia's EV industry (HSBC Investment Forum, 2024).

This surge in EV growth is expected to foster and add momentum to a range of new industries. Nonetheless, the government proceeds with caution, mindful of the automotive sector's significance, which provides 1.5 million jobs and contributes 4 percent to the GDP. In pushing for electrified transportation and the adoption of EV, there is a strong emphasis on ensuring these products are manufactured domestically.

Beyond domestic market development, Indonesia is also setting its sights on becoming a major player in EV manufacturing. Indonesia's transition to EV capitalizes on the country's established role as an exporter of automobiles to ASEAN, the Middle East and beyond— with the automotive industry's exports currently valued at Rp 70 trillion ($4.4 billion).

The country's ambition to become an EV powerhouse is underpinned by its status as home to the world's largest nickel reserves and a leading producer of crucial minerals like aluminum, copper and tin – essentials for EV battery production.

This strategic ambition positions Indonesia as a significant global EV ecosystem center, poised to greatly impact our economy in the coming years. Whilst EV penetration stood at less than 2 percent in 2023, we believe there will be a significant increase in the adoption rate. HSBC Research indicated that EV adoption can reach 25 percent by 2030.

Indonesia is aiming for 2 million EV passenger cars and 13 million electric motorcycles on its roads by 2030. The country's EV market value is expected to escalate to $20 billion by 2030 with a phenomenal compound annual growth rate (CAGR) of 58.5 percent (AC Ventures, 2023).

The government's policies and incentives have been instrumental in cultivating and streamlining an EV ecosystem, in tandem with the active participation of the country’s financial sector. Transitioning from fossil fuels to renewable energy requires considerable investment –Indonesia will need around $67.4 billion in funding (Katadata, 2023).

Banks have the capability to offer innovative financing solutions and environmentally friendly loans to accelerate the EV market.

With abundant natural resources and cohesive policies and incentives, Indonesia is well-positioned to become a global player in the EV ecosystem. This is an opportune moment for Indonesia to convert its critical mineral wealth into the "next gold" for future generations.

The vision for Indonesia is clear: electrification is a necessity, embodying sustainability and prosperity.

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The writer is managing director and head of wholesale banking at HSBC Indonesia