Explained | How geopolitics is complicating the move to clean energy

He is known as the Minister for Everything. From the government offices of Indonesia’s capital to dusty mines on remote islands, Luhut Binsar Pandjaitan commands authority as the nation’s essential power broker.

A four-star general turned business magnate turned Cabinet officer, Luhut’s paramount aspiration is transforming Indonesia into a hub for the production of electric vehicles. But as he pursues that goal, he and his country are increasingly vulnerable to geopolitical forces beyond their control. Though this archipelago nation has long sidestepped entanglements in ideological rivalries, it is increasingly caught in the conflict between the United States and China.

At stake is control over nickel, a mineral used to make batteries for electric cars and motorcycles — a central component of the mission to limit the ravages of climate change.

Indonesia boasts the Earth’s largest reserves, making it something like the Saudi Arabia of nickel. But harvesting and refining those stocks is largely dependent on investment and technology from Chinese companies. And that has limited Indonesia’s access to the United States.

In Washington, the Biden administration has proffered tens of billions of dollars in tax credits to spur electric vehicle manufacturing. To qualify, cars sold in the United States must include an increasing share of parts and materials produced either in domestic factories or in countries deemed friendly to American interests.

In recent months, Luhut — formally, Indonesia’s coordinating minister for maritime affairs and investment — has implored the Biden administration for a trade deal covering minerals in an effort to secure his country status as a friendly country. That would generate greater demand for its nickel by making it eligible for the American tax credits under the Inflation Reduction Act. Companies around the globe would presumably gain incentive to erect smelters and electric vehicle factories in Indonesia, enhancing the nation’s technological prowess, and creating jobs.

But Luhut, the government’s de facto lead official on trade matters, has been repeatedly rebuffed because of American concerns about Chinese investment in Indonesia’s nickel industry, as well as unease over working conditions and environmental standards. In Washington today, countering China’s technological ascendance is that rare objective that captures support on both sides of the political aisle.

Some within the Biden administration argue that this stance is shortsighted. Climate change is an existential threat. Nickel is a central component of the transition away from fossil fuels, making access to Indonesia’s stocks an objective of greatest urgency. But that logic has failed to win over powerful administration figures — especially on the National Security Council — who maintain that nothing should be subordinated to limiting China’s might.

All of which explained Luhut’s tone of weary indignation on a recent morning as he held court in his glass-fronted office at his residence in Jakarta, Indonesia’s teeming capital. Outside in his garden, magpies whistled emphatically in cages hung from orchid trees. Inside, the Minister for Everything lamented the pernicious misconceptions separating his nation from its destiny.

“America doesn’t understand what Indonesia is doing,” he said. “It’s frustrating.”

Money and power

At 76, Luhut remains wiry, spry and prone to nationalist pique. He vehemently rejects the notion that Indonesia — a country of nearly 280 million people — must pick a side or imperil its business with the United States.

“This country is too big to lean toward any superpower,” he said.

The animosity between the United States and China was not the only issue causing him angst. He was incensed by the stance of the European Union, which has challenged a key tenet of Indonesia’s industrial designs: a ban on the export of nickel ore.

In refusing to sell its raw nickel to the world, Indonesia has drawn more than $14 billion in investment, primarily from Chinese companies, into smelters that process it into products used to make stainless steel and EV batteries. Since the ban was introduced in 2014, Indonesia’s exports of nickel products have multiplied more than tenfold, exceeding $30 billion last year, according to government data.

The European Union asserts that its companies are being deprived of a fair chance to import nickel ore. It brought and won a case at the World Trade Organization, gaining the power to apply punitive tariffs on Indonesia’s exports even as the country appeals.

Luhut likens that position to a perpetuation of the colonial era, when the Dutch, Portuguese and British hauled spices, sugar and other lucrative commodities back to European entrepôts. The nickel export ban is a corrective, he said, the means of securing the value of extraction for Indonesians.

“It’s the arrogance of European countries,” he said. “Maybe they thought that Indonesia is still colonized. We have the right now to improve the quality of life in this country.”

His righteous words coincide with the crude interplay of money and state power that has long animated Indonesian commerce.

Luhut earned his fortune in the business of coal, still the dominant way the country generates electricity. His company, TBS Energy, which trades on the Jakarta stock exchange, is now effectively controlled by his nephew, Pandu Sjahrir, who also heads Indonesia’s leading coal industry trade association. The company is intent on placing itself at the center of the “electrical vehicle ecosystem,” according its most recent annual report.

Nearly 62 per cent of TBS Energy shares are owned by a Singapore-registered company, Highland Strategic Holdings, that is itself controlled by another holding company, which is in turn owned by a third entity, masking the real beneficiaries. Luhut does not appear in the paperwork maintained by Singapore regulators, but he still owns 8 per cent of his old company, he said, positioning him to profit from new smelters.

Allies and rivals alike accuse Luhut of sharing in the proceeds of the Chinese-invested nickel ventures.

“It’s widely known among Jakarta business and political elites that Luhut, through his proxies, has engineered side deals for himself,” said a former Indonesian senior government official, who spoke on condition of anonymity because he feared retaliation from on high.

Luhut scoffed at such talk.

“If they give me $10 million cash, where do I put this money?” he said. “I’m not going to jeopardize my reputation because of $10 million.”

He flashed a raffish grin.

“If they give me $2 billion,” he added, “maybe I’d consider it.”

A critical need

Luhut describes his plans for nickel as the centerpiece of his efforts to spread the benefits of economic development beyond Indonesia’s largest cities, where a thriving middle class throngs shopping malls, and on to impoverished communities.

Most of the nickel is on Sulawesi, a K-shaped, jungle-draped island that is roughly the size of Oklahoma. Despite its expanse, Sulawesi has long been an outlier in a nation of 17,000 islands whose political and economic spheres are dominated by the one that holds the bulk of the population: Java.

In communities near new smelters, many celebrate an infusion of new jobs, even as people decry horrific pollution. Local workers complain that they are paid far less than those from China.

Early this year, roughly 3,000 workers staged a protest at a smelter in Central Sulawesi owned by PT Gunbuster Nickel Industry, a subsidiary of a Chinese company, Jiangsu Delong Group. The workers were enraged by a series of fatal accidents, and what they described as a dearth of protective gear and disparities in pay. As they set fire to vehicles, destroyed dorms and clashed with local security, two people died, including a Chinese national.

A special military force that answers to Luhut was dispatched to the site, unleashing tear gas to disperse the crowd.

“We have to guarantee security for investors,” said Constantinus Rusmanto, then the commander of the special force and now an aide to Luhut. “We make sure that everything here is good for investment.”

But some investors are alarmed by such tensions — especially companies from North America, Europe and Australia, where the reputational consequences of unsavory business can be enormous.

Luhut’s security apparatus is calibrated to the wants of businesses from China, where labor unions are banned and environmental and workplace standards can be readily skirted. In Washington, accounts of upheaval at Chinese-invested factories strengthens those opposed to extending Indonesia a trade deal.

Yet in Jakarta, the concept that Indonesia must apologize for its dealings with Chinese companies prompts derision. Government officials say they welcome investment from any place that brings capital and know-how. Chinese firms arrived early, recognizing the importance of nickel in the emerging realm of electric vehicles.

“The US is missing in action,” said Arsjad Rasjad, chair of the Indonesian Chamber of Commerce. “It’s not about us wanting to work with the Chinese. It’s that they are here.”

Experts accuse the United States of myopia in not embracing a trade deal with Indonesia, noting that Americans are already driving cars that use nickel mined there. The only question is which factories wind up making the batteries: those in China that now purchase nearly all of Indonesia’s nickel products, or new factories in the United States.

By 2035, more than 90 per cent of all nickel products will be processed in countries that lack free-trade agreements with the United States, according to a recent study by S&P Global, a research firm. That makes it impossible for American battery factories to satisfy their demand for nickel without looking to countries beyond core US trading partners.

“One way or another, Europe and the US will need Indonesia nickel,” said Putra Adhiguna, an electric vehicle specialist at the Institute for Energy Economics and Financial Analysis in the Indonesian city of Bandung. “They should be coming to this country figuring out how they can do it better.”

The White House declined to discuss the particulars of its talks with Indonesian officials, while suggesting that deliberations continue.

“Indonesia is an important partner for fighting climate change and accelerating the clean energy transition,” said a spokesperson for the National Security Council, Eduardo Maia Silva. “We continue to consult with stakeholders and Congress on implementation of the Inflation Reduction Act, and we remain interested in coordinating with Indonesia, just as we are with other partners, to strengthen the resilience of our critical minerals supply chains.”

Without a trade deal that can extend American tax credits to Indonesian minerals, many anticipate that the advent of electric vehicles will be hampered by a crude division: producers that rely on Chinese investment, and those that don’t.

Pandu, Luhut’s nephew, oversees a startup called Electrum, which is designing an electric motorcycle geared to maneuvering through Jakarta’s legendary traffic jams. The company is a joint venture between Luhut’s old company, TBS, and GoTo, a digital business that includes Gojek, a popular ride hailing platform.

Electrum is building a factory in West Java to assemble motorcycles using parts imported from China. But Pandu envisions eventually drawing on domestic factories.

The key, he says, is holding firm on the nickel export ban and attracting foreign investment.

“The market in Indonesia is big enough,” he said.

Alternate plans

On a recent afternoon, Luhut sat at the head of a conference table at his ministry office, facing a half-dozen advisers. They tucked into lunches assembled at a buffet table — gado gado, a vegetable salad topped with peanut sauce; rendang, hunks of spicy stewed meat; fried rice.

The conversation centered on how to persuade Tesla, the electric car pioneer, to set up a factory in Indonesia. Luhut was about to visit the United States to beseech Tesla’s tempestuous CEO, Elon Musk.

His advisers fretted that Tesla would not come, given that most of the electricity in Indonesia is powered by coal. Still, they took hope from the fact that Ford recently entered a joint venture to construct a nickel processing plant in Sulawesi. That plant is to be powered by a hydroelectric dam.

A wall outside Luhut’s office displayed a photo of himself in military regalia, receiving a medal at a special forces academy in North Carolina in the late 1970s. His father attended Cornell and Columbia before working as an engineer for an American oil company, Caltex. Luhut studied public policy at George Washington University, living happily in the US capital, he said. His son lives in New York. His granddaughter is enrolled at Georgetown.

He feels comfortable in the United States, he said, describing a national affinity.

Still, in China, he is accorded extraordinary respect.

“They know how to deal with us,” he said. “They know how to treat us.”

Wang Yi — China’s top-ranking diplomat — handles his itinerary when he visits, arranging meetings with executives of companies eyeing investments in Indonesia, Luhut said. Even during the pandemic, when officials had to quarantine for 14 days after a face-to-face meeting with a foreigner, he could visit anyone he chose.

He and his advisers discussed a pending announcement: a drastic slashing of import duties on electric vehicles to give Tesla a taste of the Indonesian market.

But the following week, Tesla outlined plans to set up a Southeast Asian headquarters in Malaysia, Indonesia’s bitter rival, dealing Luhut a humiliation.

He was readying a backup plan, redoubling efforts to attract BYD, China’s largest electric vehicle manufacturer.

Luhut’s advisers quietly acknowledged that the American tax credits were not happening, not with the pushback in Congress after the Biden administration completed a minerals deals with Japan.

The Minister for Everything was absorbed with hawking nickel.

“We are aiming basically to the United States,” he said. “But if the Americans finally say, ‘We don’t want to take it,’ fine, we’ll look for some other places to go.”