Vantage Point: Indonesia's EV ecosystem buildout hinges on domestic market adoption

Vantage Point: Indonesia's EV ecosystem buildout hinges on domestic market adoption

This weekly newsletter chronicles top digital themes and trends playing out in SE Asia, especially Indonesia. We will decode policy and regulatory changes affecting digital economy sectors, crunch earnings data of top players, track developments related to gig economy workers and attempt to piece together ecosystem buildouts in some of the fastest-growing, venture-backed plays.You can access the previous 35 editions of the Vantage Point weekly posts here.

Executive Summary

  • Strong domestic market can turn Indonesia’s EV dreams into reality
  • A telling year for Indonesia’s digital banks
  • Bukalapak set to dominate warung tech as rivals pull back

Strong domestic market can turn Indonesia’s EV dreams into reality

Indonesia, with its huge automobile market and natural resources such as nickel and cobalt, is making moves to become a major player in the electric vehicle supply chain — initially as a battery supplier and eventually as a hub for both two- and four-wheeler EV manufacturing.

The country has the advantage of a large domestic automobile market, with annual sales currently numbering 1 million cars and 6 million motorbikes. This means there is a huge existing distribution ecosystem to sell and service EVs.

What is missing, however, is reliable charging infrastructure — most owners currently recharge their vehicles at home or the office. This has led to range anxiety and the number of EVs on the roads is very small.

Choice, too, is limited as only Hyundai, Lexus, and Wuling have EV models on Indonesian roads. Other models, like Tesla, are imported and few in number. Toyota is also slated to launch its bZ4x electric SUV soon in the country.

Nevertheless, Indonesia’s ministry of industry has stated on its website that the country aims to produce 400,000 electric cars by 2025, which it seeks to ramp up to 5.7 million by 2035. This, however, maybe too steep a target given the current low levels of EV penetration — as of end-October 2022 there were only 31,000 EVs in Indonesia, significantly less than the ministry of transportation’s target of 100,000 EVs by end-2022.

In terms of EV manufacturing, only Toyota Motor Corp., Mitsubishi Motors and Hyundai Motors have announced plans for setting up their own plants. China’s Wuling Motors and General Motors have formed a joint venture for EV assembly. There are also talks of Tesla nearing a deal to set up a manufacturing plant in Indonesia.

The local conglomerate Astra International, too, is focusing on a sustainable auto offering together with partner Toyota, which has a long-term strategic plan for its own EV offering.

Toyota has plans to invest $70 billion globally in the EV space, including for its luxury division Lexus. This will involve a $13.5 billion investment in battery technologies plus a $35 billion investment to have 30 new EV models by 2030, producing a total of 3 million EV units per annum globally by then. Lexus is committed to being 100% EV by 2030 in the US, China, and Europe and globally by 2035.

Astra International plans to build a full EV ecosystem in Indonesia over time, including charging stations, and financing. It already runs a pilot scheme renting out EVs to test user behaviour and test enthusiasm. 

Two-wheeler EVs are a long way off in Indonesia given the prevalence of petrol-fueled motorbikes, but the first Honda EV two-wheeler is planned for 2024.

The momentum behind the initiative to build two-wheeler manufacturing is already beginning to gain some traction through players such as Electrum, backed by GoTo and TBS Energy. 

Two-wheelers are likely to take the lead in the transition to an EV future, given that manufacturing is already present in the country and there is already some battery-swapping infrastructure.

The EV ecosystem is still in its early stages but adoption could accelerate relatively quickly, as consumers start to see the benefits from an emissions perspective and greater choice. Greater confidence in the range and reliability will also be critical in driving confidence. Price will also be a key driving factor together with supportive government policy.

Indonesia recently revealed a move to allocate $320 million in its 2023 budget to incentivise EV purchases through subsidies and discounts for locally-made EVs. The subsidies may be applied across hybrid cars, four-wheelers, and two-wheelers.

With the largest reserves of nickel and cobalt, Indonesia is a naturally attractive place to manufacture EV batteries and even EVs themselves, with commitment for both already coming through the door. 

Chinese firm CATL has committed $6 billion to an EV battery manufacturing JV in Indonesia, with another $2 billion committed to an EV manufacturing JV during the recent G20.

LG Group and Hyundai Motor have committed to invest $1.1 billion in an EV battery plant in Indonesia, which will produce enough electric batteries for as many as 150,000 battery electric vehicles (BEVs). 

Should the country succeed in building an EV ecosystem on a global scale, it should help the nation lift itself to become a value-added export manufacturer rather than an exporter of raw commodities. 

In the short term, the domestic market is likely to be the initial driver for growth, with the speed of adoption depending on how quickly infrastructure is ramped up and how quickly relevant products become available at the right price.

A telling year for Indonesia’s digital banks

Indonesia has been focused on consolidation efforts in the country’s banking sector,  encouraging some of the smaller ones to be subsumed by the larger players.

As a part of this process, digital banking licences are being granted to acquirers of these smaller banks. And, the players who gain a licence, by way of such acquisitions, come with an existing ecosystem that acts as a source of customers both for deposits and eventually for the lending business. 

2022 saw a rapid ramp-up from a number of digital players including Bank Jago, which counts GoTo as a large shareholder, early mover Bank Neo Commerce, which already has over 20 million registered users, and SeaBank Indonesia, backed by Sea Ltd.

Others in the fray such as Allo Bank Indonesia, which is backed by Bukalapak, Traveloka, Carro, Grab, and majority-owned CT Group, enjoy a natural ecosystem given its strong backers. 

Bank Fama, owned by Emtek, Grab, and Singtel (which owns a stake in Indonesia’s Telkomsel) also has a deep ecosystem to leverage but it is unlikely to start operations until the end of the year. 

Meanwhile, Astra International entered the digital banking space with Astra Financial taking a 49.56% stake in Bank Jasa Jakarta. Hong Kong-based WeLabs, which will bring the fintech expertise, owns the remaining stake. The intention is to convert Bank Jasa Jakarta into a digital bank.

Astra International is no stranger to banking having previously held a controlling stake in Bank Permata before selling it to Bangkok Bank. From a digital banking point of view, Astra has a significant ecosystem through its core auto business.

The real threat to digital banks comes from the mainstream banks, which have rapidly grown their own internal digital and specifically mobile banking services.

Bank Central Asia, Bank Mandiri, Bank Negara Indonesia, and Bank Rakyat Indonesia have made significant progress in digital banking, to the extent that they all see more transactions through digital channels. 

Mainstream banks have the added advantage of access to low-cost funds at around or below 2%, which is significantly lower than what digital players have to pay up for deposits to onboard customers. 

Larger banks can also bridge a greater array of services through their mobile apps, which run open ecosystems.

In this environment, where it is difficult for new entrants to differentiate themselves, it is possible to see consolidation amongst digital banks but there are no distress signs yet in this space.

Digital players such as Xendit admit that they will not stay exclusively in the payments business but will move into value-added businesses from fraud prevention, back office, and sub-ledger services, as well as crucially to lending. 

2023 will be a telling year for the new entrants to digital banking and will see clear leaders emerging as new players may be forced to differentiate themselves either through value-added offerings or a strong captive customer base.

Bukalapak set to dominate warung tech as competitors pull back

The funding winter has thrown a spanner in the works of Indonesia’s warung tech sector. Most players in the space are scaling back and slashing jobs as profitability takes precedence over growth.

In recent years, the space has become quite crowded with early entrants such as Bukalapak facing larger e-commerce players such as Tokopedia, Shopee, and Blibli. Smaller players such as Warung Pintar, Lummo, Ula, BukuWarung, and B2B marketplace GudangAda are also jostling for space. 

One company that has the potential to become more dominant as others pull back is the IDX-listed Bukalapak, which already has a roughly 53% market share. 

These warung-tech players provide mom-and-pop stores, or warungs, access to physical goods such as FMCG products and virtual goods such as mobile phone vouchers. The problem for a large number of players in this segment has been a poor track record on monetisation, with services such as bookkeeping often being given away for free, with the hope of selling more value-added services further down the line.

Indonesia’s warungs account for 70% of the country’s FMCG space in terms of distribution. Warung-tech players provide them with an increasing array of products, often through an app, rather than owners having to physically travel to buy through a wholesaler or through a middle man, who will take a slice of profits.

The vast majority of the companies are outside tier 1 cities, which makes it an even more difficult space to penetrate but Bukalapak has been focused heavily on these areas. 

Bukalapak’s approach to this space is very different from its competition. Rather than providing short-term discounts and promotions to its warung customers, or mitra partners, it sources and provides a broad array of products — including virtual products such as mobile vouchers, gaming, and PLN vouchers — to help improve mitra partner sales and charge a small commission.

This approach means low absolute take rates — the commission fee charged by a marketplace for a transaction it facilitates on its platform but most of what it keeps is gross profit. In order to improve the take rate further, Bukalapak is starting to provide higher take-rate products through its own specialty stores — Allo Fresh for groceries and Itemku for gaming vouchers.

Another way that Bukalapak achieves higher take rates is by sourcing local FMCG brands, which provide better take rates due to better terms. It will also take on some inventory in certain fast-moving categories where it is confident those goods will move.

The platform is also enabling its mitra customers to become logistics operators, which means that goods can be delivered and sent from a local warung in a village rather than customers having to travel to a larger town. This service also yields a surprisingly high take rate for Bukalapak. 

The other advantage that Bukalapak has is its strategic focus outside major cities, whereas the major e-commerce players such as Tokopedia and Shopee are focused on larger cities. A pulling back on promotions and a focus on core business mean that there is less focus on tier 2 cities for major e-commerce players, meaning a more rational playing field for Bukalapak.

Another advantage is that it has significant cash on hand, which gives it an estimated runway of 15 years, according to its management.

Fintech operators such as Xendit, which services an increasing number of warungs through its payment gateway business is moving into additional services such as booking and even lending, which presents more competition for actors such as Lummo and Bukuwarung.

It is likely that there will be more consolidation to come in the warung-tech space with a few players likely to win out, including Bukalapak.

Angus Mackintosh, a consulting editor with DealStreetAsia, is responsible for the publication’s Southeast Asia digital economy weekly newsletter and its monthly research reports. Angus is also the founder of CrossASEAN Research and publishes on Smartkarma.

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