Image Credit: Photo by Shane McLendon

Indonesia holds 22% of the world’s nickel reserves and is the largest producer of nickel globally.¹ It sits at the center of the critical minerals supply chain powering electric vehicles, batteries, and semiconductors – the industries defining the coming era of strategic competition. Despite this resource wealth, China owns approximately 75% of its nickel refining.² Natural endowment has not translated into economic sovereignty, and the gap between the two is where Indonesia’s greatest strategic vulnerability lies. 

The roots of Indonesia’s dependency are not accidental: China recognized Indonesia’s strategic significance early. When Xi Jinping announced the Maritime Silk Road in a 2013 address to the Indonesian Parliament, he was signaling the centrality of Indonesia’s mineral wealth to China’s industrial ambitions.³ Indonesia’s downstream industrialization policy, hilirisasi, accelerated this dynamic. The 2014 nickel ore export ban, intended to force domestic processing and attract foreign investment, succeeded largely by compelling Chinese companies to build smelters inside Indonesia rather than lose access to their nickel supply. The result was processing on Indonesian soil, but ownership remained in China’s hands.

Hilirisasi’s achievements are multiple: it drove a shift from raw ore exports to refined products, attracted over $30 billion in foreign direct investment (FDI) between 2019 and 2023, and produced major industrial hubs such as Morowali Industrial Park.⁴ But domestic processing is not domestic control. China’s disproportionate ownership of Indonesian refining capacity has created an oligopsony, allowing Chinese buyers to suppress prices and exploit Indonesia’s lack of alternatives.⁵ Compounding this structural dependency, Indonesia’s HPAL (high pressure acid leaching) plants run entirely on coal, putting it at odds with the ESG standards of Western partners and limiting its access to non-Chinese investment. Hilirisasi built the infrastructure; it did not build the leverage. 

Indonesian President Prabowo Subianto has inherited this conflicted policy. His stated ambitions are extensive, including a domestic electric vehicle (EV) battery ecosystem, accelerated downstream development, and regional leadership in advanced manufacturing.⁶ Prabowo has moved quickly on enforcement, shutting down over 1,000 illegal mines since taking office in October 2024.⁷ But structural ambition without structural solutions risks deepening the dependency it seeks to resolve. Indonesia has not yet mastered the downstream processing it needs; human capital development and technology transfer have lagged behind the construction of physical plants. China can supply both at a cost no current partner can match. 

The diversion picture is uncertain at best. The United States-Indonesia Agreement on Reciprocal Trade framework, finalized this year, gestures at supply chain cooperation and export control alignment, but it falls short of addressing fair competition, and President Trump’s commitment to an Indonesian partnership over domestic manufacturing priorities remains unproven.⁸ ASEAN’s recently agreed-upon 5-year minerals strategy⁹ offers a regional framework, but Vietnam, the Philippines, and Malaysia are all pursuing their own critical mineral strategies, making cooperation fragile.¹⁰ Meanwhile, China retains significant retaliatory leverage: it can suppress nickel prices, restrict exports to partner countries, or simply wait out an Indonesian diversification push that lacks the financing to sustain itself. 

Three options for increased domestic market control are plausible. The most optimistic outcome results in Indonesia becoming a regional leader for nickel and critical mineral processing in Southeast Asia, but this is contingent on significant regional and global cooperation. I argue that the implementation of the United States-Indonesia Agreement on Reciprocal Trade, with provisions for fair competition to protect domestic manufacturers in both countries, is crucial. Further, Indonesia would need to diversify its financing through significant FDI from the EU, Japan, and South Korea in order to offset China’s substantial investment in Indonesia. Successful coordination on the part of ASEAN to complement Indonesia’s supply chain through either investment, knowledge sharing, or aligning ESG standards to strengthen its bargaining power will also be necessary. If Indonesia is able to demonstrate efforts to improve its ESG framework (such as shifting away from coal-reliant HPAL plants), it will be welcomed into the Western EV market and can shift away from catering to Chinese EV companies. Domestically, Prabowo will need to divert significant economic resources toward continuing hilirisasi by expanding battery and EV manufacturing and assembly. This scenario is highly dependent on foreign partnerships.

The second scenario is one in which diversification fails and Indonesia’s structural dependence on China continues. Prabowo’s planned actions to accelerate hilirisasi do not emphasize knowledge learning and developing human capital, nor is there a clear plan to develop the advanced technology necessary for EV assembly and semiconductor manufacturing. China can provide both of these, as well as the capital necessary to establish this capacity domestically, at a far lower cost than if Indonesia undertook downstreaming independently. Because Indonesia’s HPAL plants rely on coal, Prabowo may struggle to obtain Western investment. As a result, China will maintain its control over Indonesian processing at Morowali Industrial Park as well as at new plants and industrial parks that are developed, but sustained Chinese investment will allow these industrial nickel plants to flourish as they expand downstream. Though Indonesia will be inherently reliant on China, it can still become a major regional power in this scenario as it follows Prabowo’s vision for success.

The final scenario is one in which excessive pressure on potential foreign partners produces greater tension across the region. If Indonesia is too forceful in seeking foreign investment in order to displace China, China could exert economic pressure on Indonesia or ASEAN states with which Indonesia attempted to cooperate. Further, if Malaysia, the Philippines, Vietnam, or other states escalate their efforts to establish domestic critical minerals manufacturing, Indonesia’s pursuits toward regional cooperation and leadership will be obstructed. Trump deciding against prioritizing Indonesia is possible, and if the reciprocal trade agreement between the two countries does not materialize, Indonesia will fall short in its diversification efforts. U.S. manufacturing of critical minerals will invest in decarbonized fuels and technologies, which will attract investment and detract from Indonesia’s market share. The third scenario outlines the fragility of Indonesia’s strategic position – while it currently wields power because of its natural resources and processing capacity, overzealous efforts to take ownership of the supply chain could result in the loss of strategic partners and increased tensions with China, upon whom the Indonesian economy is reliant.

Though Indonesia has developed the domestic capacity to process and manufacture its abundance of critical minerals, this does not equate to ownership of the process. Indonesia’s hilirisasi downstream industrialization policy has been effective in increasing domestic control of the supply chain and export value, but without diversified financing and domestic technological capability, the nickel supply chain will remain in China’s hands. Strong regional and global foreign partnerships are necessary for diversification and the creation of alternatives to Chinese investment. Such partnerships hinge upon closely following ASEAN’s 5-year strategy for critical minerals to promote cooperation and avoid competition between members. Regional partnerships will be crucial for developing the Indonesian workforce and technology sharing. A consistent strategy from Trump is also requisite for Indonesian success, but this will require demonstrated efforts from Indonesia to reduce reliance on coal in the production of battery-grade nickel. Regardless, Prabowo will need to prioritize cultivating foreign partnerships if he is serious about accelerating hilirisasi, which cannot progress without significant non-Chinese investment. 

Indonesia is at a pivotal moment, and Prabowo’s strategic choices domestically, regionally, and globally will be consequential for its future. Indonesia could emerge from the critical minerals race as a regional leader, an advanced processing hub reliant on China, or a state with few foreign partners that, while adept at nickel processing, faces significant competition. Ultimately, Indonesia’s future hinges upon how effective Prabowo is at developing advanced downstream capacity for critical minerals, Trump’s consistency and willingness to cooperate, and China’s tolerance for diversification.

Work Cited

1. U.S. Geological Survey. “Nickel Data Sheet—Mineral Commodity Summaries 2020.” 2020. https://pubs.usgs.gov/periodicals/mcs2020/mcs2020-nickel.pdf.

2. Reuters. “Chinese firms control around 75% of Indonesian nickel capacity, report finds.” Reuters. February 5, 2025. https://www.reuters.com/markets/commodities/chinese-firms-control-around-75-indonesian-nickel-capacity-report-finds-2025-02-05/.

3. Tritto, Angela. “How Indonesia Used Chinese Industrial Investments to Turn Nickel into the New Gold.” Carnegie Endowment for International Peace. April 11, 2023. https://carnegieendowment.org/research/2023/04/how-indonesia-used-chinese-industrial-investments-to-turn-nickel-into-the-new-gold?lang=en.

4. Phoumin, Han. “Indonesia’s Strategy toward Critical Minerals and Cooperation with the United States.” The National Bureau of Asian Research. 2025. https://www.nbr.org/publication/indonesias-strategy-toward-critical-minerals-and-cooperation-with-the-united-states/.

5. Tritto, Angela.

6. Office of Assistant to Deputy Cabinet Secretary for State Documents & Translation. “President Prabowo Discusses Accelerated Downstream, Increased Oil and Gas Lifting with His Ministers.” Cabinet Secretariat of the Republic of Indonesia. May 20, 2025. https://setkab.go.id/en/president-prabowo-discusses-accelerated-downstream-increased-oil-and-gas-lifting-with-his-ministers/.

7. Spence, E., and Asmara, C. “Indonesia president signals intention to go after illegal mines.” MINING.COM. August 15, 2025. https://www.mining.com/web/prabowo-signals-intention-to-go-after-illegal-mines-in-indonesia/.

8. The White House. “Fact Sheet: Trump Administration Finalizes Trade Deal with Indonesia.” February 19, 2026. https://www.whitehouse.gov/fact-sheets/2026/02/fact-sheet-trump-administration-finalizes-trade-deal-with-indonesia/.

9. SEADS. “ASEAN Adopts Long-Term Vision for Sustainable Minerals Development.” Southeast Asia Development Solutions. October 17, 2025. https://seads.adb.org/news/asean-adopts-long-term-vision-sustainable-minerals-development.

10. Phoumin, Han.