In Depth: Indonesia Confronts Foreign Investment-Green Transition Paradox

In 2017, China’s GEM Co. Ltd. established operations in Indonesia's Sulawesi industrial park to capitalize on the nation’s rich nickel reserves, a vital element for electric vehicle (EV) batteries. While China leads globally in EV production, it faces a shortage of domestic nickel. Indonesia, with its vast reserves, has mainly low-grade laterite ore, making extraction expensive. GEM's innovative technology reduced extraction costs by roughly 70%, making previously uneconomical resources viable for production. The company’s chairman, Xu Kaihua, noted that their technology steered Indonesian firms toward the new energy sector, marking a vital shift from traditional mining and steel industries to the burgeoning battery ecosystem. This pivot is significant for Indonesia, given its heavy reliance on fossil fuels—nearly 90% of its energy mix, with 60% from coal—and vulnerability to rising sea levels as the world's largest archipelagic state. [para. 1][para. 2][para. 3][para. 4]

At the November G20 summit in Brazil, President Prabowo Subianto declared plans to phase out coal-fired power by 2040 and reach net-zero emissions by 2050, a decade earlier than previously targeted. Indonesia also aims for 8% annual GDP growth by 2029 and to be a developed country by 2045. Jakarta is aggressively attracting foreign investment, especially from China. However, this approach presents a dilemma: foreign investment fosters GDP and industrial growth but has simultaneously increased coal-powered plant construction, countering Indonesia’s green transition efforts. Chinese investors in Indonesia encounter operational difficulties, from grid unreliability to land disputes and labor shortages. [para. 5][para. 6][para. 7]

The Indonesian government projects average annual investment growth of 15.67% from 2025 to 2029. China has been Indonesia’s second-largest investor with $8.1 billion in direct investment in 2024 and $55 billion by Chinese companies over the past decade. Meanwhile, new U.S. tariffs—32% duties threatened by President Donald Trump in April, though quickly paused—have created uncertainty for Indonesian exports, spotlighting the country’s $16.8 billion trade surplus with the U.S. and ongoing negotiations to avoid damaging levies, including a proposal to boost U.S. imports from Indonesia by up to $34 billion. Additionally, stricter EU regulations on the carbon footprint of battery imports loom, taking effect from February 2028. [para. 8][para. 9][para. 10][para. 11][para. 12][para. 13][para. 14]

China remains Indonesia’s largest trading partner, with bilateral trade reaching $147.8 billion in 2024. High-level visits and bilateral summits reflect deepening economic, industrial, and scientific cooperation. Indonesia's policy of restricting raw nickel ore exports has forced foreign firms, such as Tsingshan Holding, Huayou Cobalt, and CATL, to develop processing and manufacturing facilities locally. GEM aims to establish a $8 billion “green nickel industrial park.” The government is incentivizing Chinese EV firms to build local factories, with targets of 140 GWh of battery capacity and 600,000 EVs by 2030. Indonesia’s youthful population of nearly 300 million adds to its appeal as a market and labor force. [para. 15][para. 16][para. 17][para. 18][para. 19][para. 20][para. 21][para. 22][para. 23]

Investment has triggered a spike in coal use, undermining renewable energy targets. In 2024, Indonesia added 1.9 GW of new coal power (third globally), mainly from “captive” plants serving battery and nickel industries. While Indonesia pledged renewables would make up 23% of its energy mix by 2025, their share stalled at 14.1% in 2024, well below the interim target. Geographic dispersion complicates grid connectivity, and restrictions on foreign land ownership impede large-scale solar projects. Companies also face skilled-labor shortages, prompting workforce development by Chinese firms. GEM, for example, sponsors Indonesian students in metallurgy and materials science. [para. 24][para. 25][para. 26][para. 27][para. 28][para. 29][para. 30][para. 31][para. 32][para. 33][para. 34][para. 35]