The EU and Indonesia are pushing to complete a free trade agreement by the end of the year, as the South Asian country prepares to boost its electric vehicles (EV) industry.

The South Asian country of over 280 million boasts a vast wealth of nickel and other raw materials crucial for producing modern cars. But Jakarta has imposed a ban on exporting nickel and is preparing another ban on bauxite, the ore used to produce aluminum. Instead of shipping its mineral wealth to China and other foreign countries, Indonesia now intends to build an end-to-end EV supply chain on its own shores and ratchet its economy up the supply chain.

In doing so, the country is also positioning itself as an alternative for international brands against China.

The strategy seems to be already wielding results — last month, Indonesia's Investment Minister Bahlil Lahadalia revealed that German carmaker Volkswagen intends to build an EV battery ecosystem in Indonesia.

The announcement was made at the Hanover trade fair, where German Chancellor Olaf Scholz met with Indonesia's President Joko Widodo. At the time, Scholz told Widodo that he was "working to finally get this agreement [between the EU and Indonesia] across the finish line."

"At the moment, we import many [crucial minerals] from China," Scholz said after meeting Widodo. "And that's despite the fact that rare earth, copper or nickel are often not extracted there but in countries such as Indonesia," he added.

Ford and Tesla seek footholds in Indonesia

Despite being Southeast Asia's most populous country and the region's largest economy, the EU's trade relations with Indonesia are relatively small. Bilateral trade in goods worth just €24.8 billion ($27.3 billion) in 2021. This is less than half of the trade volume between the EU and Vietnam, which has a population of less than 100 million.

And as Germany seeks to deepen ties, rivals from the US are already on the move. Ford, the US-based car making giant, has already partnered with several active firms in Indonesia, while Tesla, the world's leader in EVs, is in talks with the Indonesian government.

Germany-headquartered BASF SE, one of the largest chemical producers in the world, is also reportedly looking to invest in a nickel-cobalt refinery with French-multinational Eramet SA.

"I suspect we will see more such investment announcements going forward," said Chris Humphrey, executive director of the EU-ASEAN Business Council, which represents European businesses in Southeast Asia. 

Deal worth billions yet to be confirmed

One of the main products used for EV battery production is mixed hydroxide precipitate (MHP), an intermediate nickel material. For Kevin O'Rourke, a Jakarta-based analyst and principal at consultancy Reformasi Information Services, MHP is "the crude oil of the future."

"There is desire on both sides for Germany to source MHP from Indonesia. For both parties, doing so would reduce their respective dependencies on China, whose companies currently account for the entirety of Indonesian MHP production," O'Rourke added. 

Earlier this year, Indonesian officials said BASF and Eramet are planning a $2.6 billion partnership deal to produce MHP, although the agreement hasn't been officially confirmed by the companies. Eramet had said the plant, if approved, would likely start operations in 2026.

Indonesia's current MHP production, controlled by Chinese-owned companies, uses High Pressure Acid Leach (HPAL) process used to extract the nickel and cobalt from laterite ore bodies. The companies do not disclose how much potential toxic waste flows ends up in Indonesia's already buffeted environment.

"The EU has rightly voiced reservations about the merits of supplying EVs with battery material that is environmentally unfriendly, in terms of toxic waste as well as high greenhouse gas emissions," O'Rourke said. 

But the purported BASF and Eramet factory would also use HPAL processes, according to the Reuters news agency.

Volkswagen could team up with Chinese firm in Indonesia

There are alternative ways to produce MHP, and a carbon-negative production chain has already been started in Australia. However, analysts say it is still questionable whether foreign companies would put up the money to invest in similar processes in Indonesia

They also question the Indonesian government's commitment to this cleaner alternative.

"Indonesian policymakers may prefer the ease of continuing to supply dirty MHP to China," O'Rourke alleged.

And Western companies may also need to cooperate with Chinese businesses already in the region. According to statements from Indonesia's investment minister this month, German carmaker Volkswagen could partner with Chinese battery minerals producer Zhejiang Huayou Cobalt, a joint venture that was the first to ship MHP to China last year.

Pressure mounting on Brussels and Jakarta

A spokesperson for the German Association of the Automotive Industry, or VDA, told DW it was very important for the EU and Indonesia to quickly finalize the free trade agreement.

"This could make an important contribution to the necessary expansion and diversification of the global raw material supply chains, which is elementary for the promotion of electromobility, and also improve market access for vehicles and parts for both sides," according to the representative.

Numerous politicians from Europe and Indonesia have asserted that they intend to finalize the talks by the end of this year. Time is of the essence, as elections in 2024 will see the departure of President Widodo as well as European Commission President Ursula von der Leyen, a strong proponent of free trade deal in Southeast Asia.

Edited by: Darko Janjevic