2024/40 “Just Energy Transition Partnerships (JETPs) in Indonesia and Vietnam: Implications for Southeast Asia” by Melinda Martinus
EXECUTIVE SUMMARY
- JETPs emerged during COP26 as a significant multilateral climate financing initiative undertaken by the International Partners Group (IPG) to assist developing countries like South Africa, Indonesia, Vietnam, and Senegal in transitioning away from coal.
- JETP implementation in Vietnam and Indonesia faces challenges such as significant financing gaps, criticisms regarding the attractiveness of financing packages, difficulties in aligning donor and recipient countries’ expectations, the complex political-economic landscape of the coal industry, and concerns over the social impacts of energy transitions.
- Indonesia requires a staggering US$66.9 billion to fund over 400 priority projects aimed at achieving its power sector transition pathway goals by 2030. Despite receiving US$20 billion JETP funding, Indonesia still faces a substantial 70% financing gap.
- Vietnam needs US$135 billion to overhaul its electricity sector, including stopping the issuance of permits for new coal plants, building new renewable power plants, and upgrading its electricity grids. Despite the infusion of US$15.5 billion of JETP funds, Vietnam confronts a towering 89% financing gap.
- Despite challenges, JETPs offer momentum for Indonesia, Vietnam, and the region to accelerate their energy transition and unlock inclusive development. JETPs can serve as catalysts for energy transformation, allowing both countries to experiment with different financial strategies and to strengthen governance structures for effective energy transition.
* Melinda Martinus is the Lead Researcher in Socio-cultural Affairs at the ASEAN Studies Centre, ISEAS – Yusof Ishak Institute.
ISEAS Perspective 2024/40, 4 June 2024
INTRODUCTION
The annual United Nations Climate Change Conferences (COPs) have become important forums for global countries to establish common targets for reducing the impacts of climate change. However, many concrete actions extend beyond COPs. For instance, Just Energy Transition Partnerships (or JETPs) are initiatives that emerged during COP26 in Glasgow. JETPs serve as the first multilateral climate financing initiative targeting energy transition supported by the International Partners Group (IPG), primarily composed of G7 countries. To date, four developing countries, South Africa, Indonesia, Vietnam, and Senegal, have committed to JETPs, with a combined financial assistance totalling US$46.6 billion.
JETPs stand out for several key reasons. First, they prioritise assisting developing countries in transitioning away from coal, given that coal-fired electricity generation is the main contributor to carbon emissions in the power sector. Second, these partnerships facilitate the involvement of private sector funds to address gaps in climate financing. Third, while financial institutions drive the investment, JETPs emphasise that receiving countries take the lead in the implementation. This ensures that initiatives are tailored to local contexts and priorities. Finally, JETPs underscore the importance of a “just transition”, whereby green transformation should avoid negative impacts on specific groups of people.
The JETP financing mechanism is massive in scale, even compared to other more mature multilateral funds for climate change, such as the Green Climate Fund (GCF), the Global Environment Facility (GEF), or REDD+ (Table 1). For instance, the GCF, often considered the most prominent climate financing institution for mitigation with worldwide operations, has only disbursed US$13.5 billion (excluding co-financing) since its inception in 2015.[1] Meanwhile, the GEF, a biodiversity-targeted fund, has disbursed US$30 billion since the 1990s.[2] The REDD+, a voluntary climate change mitigation framework for reducing emissions from deforestation in developing countries, provided US$5.6 billion since 2008.[3] In contrast, JETPs have promised a total package of US$46.5 billion to date solely to four countries. However, JETPs alone might not be sufficient to assist recipient countries in transitioning to renewable energy sources entirely due to significant financing gaps, different expectations and implementation standards from donor and recipient countries, the complex political-economic landscape of the coal industry in recipient countries, and concerns over the social impacts of energy transition.
Table 1 Multilateral Financing for Tackling Climate Change
| Initiative | Year | Total Pledged*/Disbursed US$ | Focus |
| Just Energy Transition Partnerships (JETPs) | 2023-now | 46.5 billion* | Energy transition |
| Green Climate Fund (GCF) | 2015-now | 13.5 billion | Climate mitigation |
| Global Environment Facility (GEF) | 1990s-now | 30 billion | Biodiversity conservation |
| Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (REDD+) | 2008-now | 5.6 billion | Forest conservation |
Source: author’s compilation
OVERVIEW OF JETPS
Table 2 presents an overview of JETP roll-outs in four countries. JETPs in these countries will be implemented within a three to five-year timeframe. The composition of donor or IPG countries varies slightly among recipient countries but generally includes major powers such as the UK, the US, and the EU. Interestingly, compared to their African counterparts, the two Southeast Asian countries, Indonesia and Vietnam, have attracted a more diverse array of partners, including Japan, Norway, France, Germany, Italy, and Denmark. The wide range of partners indicates that the energy transition in these two countries is much more attractive for investment. Strategically, a wide range of partners will also bring much more diverse foreign investments to balance China’s dominance in renewable energy investment in the region.[4]
The total assistance provided to recipient countries also varies significantly, with figures ranging from US$2.5 billion for Senegal, US$8.5 billion for South Africa, US$15.5 billion for Vietnam, and US$20 billion for Indonesia – corresponding to the size of each country’s market for the energy transition.
Table 2 JETP Roll-Outs in Receiving Countries
| South Africa (2021) | Indonesia (2022) | Vietnam (2022) | Senegal (2023) | |
| Timeframe | 2023-2027 | 3-5 years | 3-5 years | 3-5 years (from 2023) |
| International Partners Group (IPG) Composition | UK, US, France, Germany, and EU | Japan, US, Canada, Denmark, EU, France, Germany, Italy, Norway, UK | EU, UK, US, Japan, Germany, France, Italy, Canada, Denmark, Norway | France, Germany, UK, Canada, EU |
| Total Assistance | US$ 8.5 billion | US$ 20 billion (10 by IPG and 10 by GFANZ ) | US$ 15.5 billion (7.75 by IPG and 7.75 by GFANZ) | US$ 2.5 billion and potentially enlarged in the future |
| Policy Design | – New quality jobs in renewable energy – Development of new sectors (EV, hydrogen) -Address energy security | – Increase energy efficiency and renewables – Value chain enhancement: downstream of critical industries for energy transition (e.g., solar cell manufacture) | – Improve transmission grid capacity and storage – Development of offshore wind power – Deployment of ‘transition’ technology such as carbon capture and co-firing with ammonia | – Resilience strategy in the energy sector – Transitioning from highly polluting fuels to clean energy (via gas) |
| Target and Regulatory Approach | – Establish a 66 GW pipeline of renewable energy project – Speed up the Electricity Regulation Act Amendment Bill | – Cap emissions from electricity generation at 250 MtCO2 by 2030, down from a previous target of 290 MtCO2 – Stop building new coal-fired power plants after 2023 (exclusion for coal-fired power plants on the pipeline and captive plants) | – Reduce peak capacity of coal-fired power plants to 30.3 GW by 2030, down from the previous 37 GW plan – Speed up the Direct Power Purchase Agreement (DPPA) regulation | – Increase the share of electricity generated by renewable energy to 40% by 2030 |
Source: Adapted from UNRISD’s Just Energy Transition Partnerships (JETPs): What Do We Need to Know to Assess Them? and various sources
Each recipient country defines their own transition policy. In the two African countries, the emphasis on energy security is stronger due to the significant challenge of supplying people with reliable electricity access. South Africa currently faces challenges from a series of rolling blackouts. Eskom, the government-owned enterprise that dominates the energy sector, operates 14 coal-fired power plants, accounting for approximately 80% of the nation’s electricity generation. Many of these facilities are outdated, inefficient, and susceptible to frequent malfunctions. The construction of two more modern coal-fired power plants, initiated in 2007, has been beset by budget overruns and design deficiencies, resulting in their failure to operate at full capacity.[5] Unlike its JETP counterparts, Senegal’s current fossil fuel fleet is dependent on imported fossil fuels instead of coal, and the coal industry is not a comparatively large employer compared to the coal industry in other JETP countries.[6] Senegal, meanwhile, has a major natural gas reserve and is poised to be a major gas producer. Therefore, the JETP plan in Senegal emphasises the importance of bypassing coal and transitioning to temporary, yet cleaner energy sources such as natural gas.
In Vietnam and Indonesia, on the other hand, much emphasis has been placed on retiring relatively young coal-fired power plants. According to the International Energy Agency (IEA), the average age of coal plants in Southeast Asia is less than 15 years old, typically having a lifetime of 30 to 40 years. Under the 7th ASEAN Energy Outlook, the region would still require coal for energy generation until 2050.[7] Both Indonesia and Vietnam emphasise the necessity of capping emissions from coal used for energy generation and reducing the peak capacity of coal-fired power plants in their respective JETP plans. [8][9]
Lastly, balancing the JETP policy design and regulatory approach is critical. After all, removing coal from energy generation requires firm political commitments from policymakers. Indonesia pledged to stop building new coal power plants after 2023, with the exclusion of coal-fired power plants in the pipeline and captive plants.[10] Meanwhile, Vietnam vowed to accelerate the Direct Power Purchase Agreement (DPPA) regulation between generators and large electricity users without going through Vietnam Electricity (EVN), incentivising the private sector to boost renewable energy take-up in the country.[11]
CHALLENGES OF JETP IMPLEMENTATION
Despite the promising funding scale of JETPs, the mechanism to address energy transition in each recipient country received much criticism. Some of the criticisms of JETP roll-outs in the two Southeast Asian countries include the following:
The financing gaps for energy transition in Indonesia and Vietnam are still big even with JETP financing.
Significant financing gaps remain in JETP countries even with JETP financing. Indonesia, for instance, requires a staggering US$66.9 billion to fund over 400 priority projects aimed at achieving its power sector transition pathway goals by 2030. Despite receiving US$20 billion in JETP funding, Indonesia still faces a substantial 70% financing gap.[12] Similarly, Vietnam needs US$135 billion to overhaul its electricity sector, including stopping the issuance of permits for new coal plants and building new renewable power plants and upgrading its electricity grids.[13] Despite the infusion of US$15.5 billion in JETP funds, Vietnam confronts a towering 89% financing gap. Both countries still need to mobilise other sources such as public funding, private investments, or commercial loans to continue with their JETP plans.
Furthermore, there is criticism that the JETP financing package lacks attractiveness. According to Indonesia’s Comprehensive Investment and Policy Plan 2023 drawn up for its JETP, 60% of the first US$11 billion funding tranche will be in the form of a concessional loan, with grants and technical assistance making up only 3% of the total funding package.[14] Similarly, according to Vietnam’s Resource Mobilization Plan, 52% of the first US$8.5 billion tranche mobilised by IPG countries will be in the form of non-concessional loans.[15] In comparison, grants and technical assistance will comprise only 4% of the first tranche.
Source: Just Energy Transition Partnership Indonesia Comprehensive Investment and Policy Plan 2023
Source: Resource Mobilization Plan: Implementing Vietnam’s Just Energy Transition Partnership
Aligning donor and recipient countries’ expectations is challenging.
The JETP financing packages for Indonesia and Vietnam reflect a commercial approach, suggesting that IPG countries prioritise the marketability of energy transition. A coalition of experts in Indonesia recognises that most IPG countries direct their funding toward renewable energy generation and transmission rather than the decommissioning of coal plants.[16] Justifying the marketability of the latter presents greater challenges. Therefore, international assistance could play a more significant role in this area, instead of solely focusing on renewable energy investments already gaining traction from the private sector.
Furthermore, there is a lack of acknowledgement of the importance of community-based renewable energy projects for the energy transition, as indicated by both JETP plans from Indonesia and Vietnam. The high marketability standard imposed by donor countries could undermine the potential of small-scale, community-based renewable energy projects that promote development in rural areas and uphold people’s rights to better economic access and a just social transition.[17]
Moreover, while the majority of funding will come in the form of concessional loans with attractive interest rates, most concessional loans, especially if disbursed through established multilateral development banks (MDBs), will still require sovereign guarantees from host governments to assure lenders that the government will take certain remedial actions, should projects face challenges.[18] In reality, during unprecedented crises, host governments are forced to accept more risks such as volatile exchange rates.
The complex political-economic landscape of the coal industry
Both Vietnam and Indonesia rely heavily on coal for electricity generation and economic development. Coal has played a significant role in their energy mix due to its affordability and availability. Transitioning away from coal would necessitate substantial investments in alternative energy sources and could potentially disrupt existing economic structures.
While the momentum for renewable energy investment is gaining traction and various tools and policies are available for deployment, phasing out coal requires more than just technical execution. This is primarily due to the complex political-economic landscapes prevalent in coal-dependent countries. For instance, Indonesia grapples with challenges posed by influential coal lobbyists; the coal and mining sectors contribute up to 6 per cent of Indonesia’s GDP in 2021. Under President Jokowi’s first-term leadership, the country experienced a major decline in export markets for coal, thus prompting the influential coal industry to lobby for the construction of coal-fired power plants to raise domestic demand.[19] According to a report by Greenpeace, the coal mining sector is generously subsidised by state funds and coal lobbyists are strongly linked to politicians and ministers.[20] The report also highlights that after decentralisation in 1999, Indonesia saw a significant increase in the number of mining permits issued, rising from 750 in 2001 to more than 10,000 in 2010, a 13-fold increase, nearly half of which were for coal mining. This increase is attributed to politicians at regional and local levels being granted greater power to manage their resources, sometimes involving corruption and bribery.
In Vietnam, there is a common perception that the country’s rising attractiveness for foreign direct investment (FDI) is closely tied to its reliance on this inexpensive and widely available energy source. The Communist Party of Vietnam utilises the strategy of maintaining energy affordability and security to legitimise its power.[21] The electricity market in Vietnam is highly regulated, with the state-owned enterprise, Vietnam Electricity (EVN) being the largest buyer of electricity and holding a monopoly on transmissions and distribution. Currently, there is no regulation regarding the decommissioning of coal power plants, discouraging EVN from pursuing the termination of power purchase agreements with private suppliers.[22] The implementation of JETP in Vietnam was also tarnished by the government’s crackdown on several prominent environmentalists who are vocal anti-coal campaigners for alleged tax evasion, betraying its own JETP commitments.[23] These factors underscore the intricate challenges associated with transitioning away from coal in such contexts.
Concerns over the social impacts of energy transition
JETPs emphasise leveraging energy transition to unlock opportunities for inclusive development, thus necessitating the mainstreaming of the ‘just’ aspect in implementation. JETPs aim to provide an additional layer of protection for workers in the coal-generated energy industry (see Picture 1).
Picture 1 Workers’ Protection Diagram
Source: Writer’s Analysis
At the basic level, recipient countries typically have legislation mandating fundamental rights such as safety, health, freedom of association, and non-discrimination. Countries can further enhance these basic rights using international frameworks provided by the Sustainable Development Goals (SDGs) and the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, for instance. In addition to these fundamental rights, countries must expand workers’ protections, such as minimum salary and retrenchment compensation. Multilateral institutions like the World Bank and the Multilateral Investment Guarantee Agency offer various programmes to enhance these expanded protections. JETPs can play a pivotal role in strengthening another layer of protection, facilitating workers’ access to upskilling, reskilling, and involvement in company restructuring processes. This multifaceted approach enhances the inclusivity and fairness of energy transition initiatives, ensuring that they benefit all stakeholders, particularly workers, in a just and equitable manner.
The endeavour to mainstream a just transition should be approached comprehensively, encompassing not only quantitative outcomes but also the qualitative aspects of the process, such as the involvement of labour unions,[24] women, and indigenous communities in shaping policy decisions. In the context of ASEAN countries, the principle of just energy transition should also incorporate distributional justice, which calls for equal and equitable distribution of benefits and burdens related to energy production and consumption; procedural justice, which emphasises the equal and meaningful participation of all stakeholders in energy decisions; and recognition justice, which involves acknowledging the distinct and diverse identities and histories of people in affected communities.[25]
JETPS IMPLICATIONS FOR SOUTHEAST ASIA
In summary, international partners exhibit confidence in Southeast Asia’s institutional capacities and market prospects for energy transition. Both Vietnam and Indonesia, as two large markets in the region, have already become recipients of JETPs. The likelihood of the Philippines soon joining the JETP mechanism is high, as evidenced by a recent study published by the Rockefeller Foundation and the Environmental Defense Fund advocating for such participation.[26]
Additionally, exploring how JETPs can facilitate trade complementarity within the ASEAN region is pertinent. With Indonesia and Vietnam committed to enhancing renewable energy infrastructure, there will likely be an increased demand for components such as solar cells, semiconductors and battery storage. Other Southeast Asian countries with capabilities in manufacturing these components, such as Malaysia and Thailand, stand to gain from this increased demand. The current ASEAN Trade in Goods Agreement (ATIGA) can facilitate more low-carbon technology trade, thus fostering an intra-regional ecosystem to foster low-carbon technology manufacturing and consumption at scale.[27] However, Indonesia’s plan to downstream critical minerals[28] and enhance its capabilities for producing components for renewable energy might affect the region’s trade complementarity potential.
Furthermore, successfully scaling up renewable energy production and improving electricity grids in Indonesia and Vietnam may bolster their confidence in exporting electricity beyond their borders. This can be a welcome development for markets with high renewable energy demand, such as Thailand and Singapore.
CONCLUSION
The emergence of JETPs represents a significant step forward in global efforts to address climate change beyond the annual United Nations Climate Change Conferences (COPs). These initiatives, established during COP26, signal a commitment by the International Partners Group (IPG) to provide multilateral climate financing targeting energy transition, with a particular focus on assisting developing countries in transitioning away from coal. However, while the JETP financing mechanism demonstrates considerable promise in addressing energy transition challenges, several critical concerns remain, such as significant financing gaps, differing expectations and implementation standards between donor and recipient countries, the complex political-economic landscape of the coal industry in recipient countries, and concerns over the social impacts of energy transition.
Despite these challenges, JETPs offer momentum for Indonesia, Vietnam, and the region to accelerate their energy transition and unlock inclusive development. JETPs can serve as catalysts for energy transformation, allowing both countries to experiment with different financial strategies and strengthen governance structures for effective energy transition. The governance structure facilitated by JETPs to transition away from coal can serve as a springboard to crowdsource financial assistance from other international financing sources in the future.
ENDNOTES
For endnotes, please refer to the original pdf document.
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2024/39 “Policies to Increase the Inclusiveness, Resilience and Sustainability of Economic Growth in Cambodia” by Jayant Menon
EXECUTIVE SUMMARY
- To realise its aspirations to become an upper middle-income country by 2030 and a high-income country by 2050, Cambodia has to pursue inclusive growth that is also sustainable and resilient. This is the type of growth that generates decent and sustainable jobs in the manufacturing and services sectors, and fair and sustainable returns for the self-employed, in the formal and informal sectors.
- A key constraint is the lack of diversification of the economy. This has not affected the rapid pace of economic growth but only the inclusiveness and sustainability of that growth.
- The early phase of diversification involving rural-urban migration from the agricultural sector into the industrial and services sectors may be reaching its limit; future increases in productivity will have to come from intra-sectoral diversification. This involves the vertical shift into higher value-added products and activities within each sector.
- Intra-sectoral diversification requires that two key constraints be addressed. First is limited human capital, calling for improvements in the quality of education at all levels, starting with primary and secondary before technical and tertiary education. Second is the high cost of doing business, which stems from limited physical and logistics infrastructure, high energy cost, and the high cost of finance.
- Addressing these constraints should increase inclusiveness in economic growth.
- To ensure that these achievements are not short-lived, another set of constraints that affect resilience and sustainability need to be addressed: (i) climate change and other environmental pressures; (ii) financial, health and other shocks or crises; and (iii) technological change, especially the acceleration towards a digital economy.
- Improving the sustainability of growth and its drivers involve diversifying trade and investment flows.
* Jayant Menon is Senior Fellow at ISEAS – Yusof Ishak Institute. He thanks Cassey Lee, Lee Poh Onn and participants at an ERDI Economics Seminar at the Economic Research Department at the ADB and the CDRI 2023 Cambodia Outlook Conference for useful comments, without implicating them in any way.
ISEAS Perspective 2024/39, 30 May 2024
INTRODUCTION
In many ways, Cambodia is Asia’s true miracle economy. It was only three decades ago when the Paris Peace Agreements were signed, ending the civil war that ensued following the ouster of the genocidal Khmer Rouge regime in 1979. In just over a generation, Cambodia has built up its economy and institutions almost from scratch, and transformed itself into a modern, thriving economy. Although many challenges remain, these achievements should be recognised and bode well for the future.
Despite its tragic history, Cambodia has great aspirations. It aims to become an upper middle- income country by 2030 and a high-income country by 2050. To realise these aspirations, Cambodia has to pursue inclusive growth that is also sustainable and resilient. This type of growth should generate decent and sustainable jobs in the manufacturing and services sectors, and fair and sustainable returns for the self-employed, either in agriculture or in the micro, small and medium enterprises (MSMEs) across sectors, formal or informal. To do this, it has to address a number of constraints.
A key constraint, which is highlighted in the Royal Government of Cambodia’s Rectangular Strategy (Phase IV) and the new Pentagon Strategy Phase I, is the lack of diversification in the economy.[1] Although highlighted in the ADB’s (2014) Country Diagnostic Study (CDS), it continues to be a major constraint. The lack of diversification may not have affected the rapid pace of economic growth, but may have hindered the quality of that growth, particularly its inclusiveness and sustainability. Cambodia has been able to grow at above an annual rate of 7% since the turn of the century, except for the years afflicted by the Global Financial Crisis (GFC) and the COVID-19 pandemic (Figure 1). This high growth was mainly driven by trade preferences, tourism centred around Angkor Wat, and large capital inflows mainly from China into infrastructure and real estate. With Least Developed Country (LDC) graduation expected this decade, Cambodia will become a victim of its own success, and trade preferences and aid flows are likely to diminish. It will need to pursue new drivers of growth, which will require new and greater diversification.
The early phase of diversification or structural transformation, involving rural-urban migration from the agricultural sector into the industrial and services sector, has been ongoing but may be reaching its limit. This inter-sectoral transfer of factors of production is the easy phase of diversification, requiring minimal government intervention or policy reform, and takes place somewhat naturally with minimal disruption to factor markets (see Kaldor, 1967; Herrendorf et. al., 2013). The horizontal shift across sectors into higher value products and activities produces a one-off increase in the level of productivity, which raises incomes and living standards; however, this increase may not be sustainable.
Future increases in productivity will have to come from intra-sectoral diversification or specialisation within sectors. This involves the vertical shift into higher value-added products and activities within the industrial, services and agricultural sectors. This type of diversification is sometimes referred to as moving up the value-chain by engaging in higher value-added activities and in manufacturing, and is associated with greater participation in global value or supply chains. Unlike the early phase of industrialisation, this process of upgrading is unlikely to happen naturally and will require government intervention and/or policy reforms.
There are two major constraints that need to be addressed through policy reforms and government support to enable greater intra-sectoral diversification. The first is limited human capital and skills mismatches. Second is the high cost of doing business, which limits development of the private sector and domestic and foreign investment. Addressing these two sets of constraints should result in economic growth that is more inclusive. To ensure that these achievements are not short-lived, another set of constraints need to be addressed. This involves measures designed to increase resilience and sustainability, which would otherwise threaten current and future growth.
To address these constraints, three accompanying sets of policy reforms and government interventions are recommended.
KEY CONSTRAINTS TO DIVERSIFICATION AND INCLUSIVE GROWTH
Human Capital
Starting with the human capital constraint, there is an urgent need to improve the quality of education at all levels, and not just Technical and Vocational Education and Training (TVET) or tertiary education. TVET and tertiary education can only succeed if students have had a strong educational foundation in primary and secondary schooling. Results from the 2022 Programme for International Student Assessment (PISA) show Cambodia lagging behind its ASEAN peers in math, science, and reading despite improvement since 2017 (Figure 2). Similarly, Cambodia lags in the share of its labour force with advanced education (Figure 3).
Quality improvements also need to be accompanied by measures to improve access and retention rates, which are currently low. For instance, Warr and Menon (2016) found that more than 30 percent of new employees in the Japanese multinational firm Denso had never attended school, could not read or write, and had limited numeracy skills. Although firms like Denso were willing to provide their own tailored and on-the-job training, these workers were effectively untrainable and could only be employed to undertake the most routine of manual tasks.[2]
Cambodia needs to invest in skills development and training in close collaboration with the private sector to avoid skills mismatches. TVET and tertiary education institutions need to align their curricula more closely with the needs of the private sector. There is also a pressing need to address the various barriers and push-and-pull factors that limit access to formal employment, and strengthen social protection systems.
Business Costs
Second is the high cost of doing business, which stems from limited physical and logistics infrastructure, high energy cost, and the high cost of finance. For a developing economy like Cambodia that is rapidly transforming, transport and related infrastructure needs are a moving target. Despite notable achievements in building infrastructure, a deficit remains which continues to add significantly to business costs. There is a need to prioritise investments both within the transport sector, as well as economy-wide. Within transport, chokepoints such as port capacity, high-cost centres such as logistics infrastructure, and inter-modal connectivity should be prioritised.
Since infrastructure development relies on foreign involvement, increasingly from China through the BRI, there is a need for better vetting of project proposals through comprehensive cost-benefit analyses conducted by an independent body. It is time for the country to consider setting-up an independent Foreign Investment Review Board, operating as a non-statutory body with inter-ministerial and multi-stakeholder representation, to assess individual proposals in a purely advisory capacity. The inter-ministerial representation would ensure that sector priorities are considered in the approval process (see Menon, 2024).
The cost of electricity in Cambodia is one of the highest in the region, with a kilowatt hour costing USD 0.14 relative to 0.11 in Thailand and 0.08 in Vietnam. The high cost is limiting vertical upgrading within electronics and automotive supply chains, from labour-intensive
assembly activities to higher value-added, energy intensive production of parts and components. Greater investment in renewable energy and energy efficiency is required to reduce costs as well as the reliance on diesel and heavy fuel oil in electricity generation. Investment in grid extension and addressing the fragmented nature of transmission and distribution will reduce the cost of electricity. There is significant potential to scale up investment in solar energy, which could significantly reduce business costs for MSMEs that are off grid.
The high cost of finance, especially to small-scale farmers and MSMEs, perpetuates poverty (Karamba et. al., 2022). Limited access to formal avenues of finance, with more than 70 percent of the population estimated to be unbanked, is closely related to its high cost. The potential for digital innovation, including fintech and blockchain, presents significant opportunities for Cambodia’s financial sector to enhance financial inclusion. Increasing digital literacy and access to digital infrastructure, which is still low in the rural sector, is required to increase access of the poor to finance at a reasonable cost.
There are also a host of long-term development challenges that need to be addressed which will affect trust in the system, and therefore both the access to and the cost of finance. These include issues relating to governance and corruption, the quality of institutions including the legal system, and the development of the finance sector and capital markets.
LONG-TERM INCLUSIVE GROWTH: INCREASING RESILIENCE AND SUSTAINABILITY
To ensure that growth is more inclusive not just in the short term but extends into the long term, there is a need to reduce the risk of disruptions while increasing the versatility in managing and responding to all kinds of shocks. Increasing resilience include addressing the impacts of: (i) climate change and other environmental pressures; (ii) financial, health and other shocks or crises; and (iii) technological change, especially the acceleration towards a digital economy. Improving the sustainability of growth and its drivers involve diversifying trade and investment flows; diversifying export products and markets and import sources, as well as sources of FDI flows, will reduce risk and increase the sustainability of economic growth. Policies and interventions to address each of these are discussed in turn, below.
Climate change and other environmental pressures
Climate change threatens the livelihoods of millions as well as long-term aspirations such as reaching high-income status by 2050. ADB (2023) estimates that Cambodia’s GDP could be up to 10% lower than otherwise in 2050.
While economic growth and environmental protection are often considered trade-offs, there can nevertheless be complementarity between them. The intersection between the two is green growth, where ecologically sustainable economic growth that fosters low carbon but socially inclusive development is the outcome. Green investments do not only unlock growth potential but also create decent and sustainable jobs for the future. There is significant potential to scale up investment in renewable energy and energy efficiency using Cambodia’s solar energy resources.[3] Significant parts of Cambodia remain without access to electricity, and solar power carries the potential of transforming remote and often poor communities by providing them with affordable clean energy and the opportunity to improve living conditions
Transitioning away from the heavy reliance on fossil fuels, reducing the rate of deforestation and adopting more sustainable agricultural and fishing practices will be critical in protecting the environment and ensuring the future prospects of these industries.
As green and sustainability aspects of production become increasingly important in business and investment decisions of international firms, reducing Cambodia’s carbon footprint would present it with new growth opportunities that arise from increasing global demand for environmentally sustainable products and services.
Financial, health, and other shocks or crises
- Financial Risks
Cambodia will need to strengthen its financial sector resilience by enhancing regulatory and supervisory frameworks, improving asset quality and risk management practices, and addressing weaknesses in the banking system. There is a need to implement regulations to deal with bank and debt restructuring, and corporate insolvency. Rising private debt following the slump in the property market has also become a concern that could threaten the stability of the economy and its future growth. The IMF (2024) notes that its share of GDP at around 160 percent is high for a country at Cambodia’s level of development.
With the growth in shadow banking and the increase in non-bank financial institutions, greater regulatory oversight and supervision will be required. Cambodia’s authorities will also need to accelerate work on a deposit protection scheme, implement measures to prevent money laundering, and clarify the framework for bank resolution.
Cambodia’s authorities will need to carefully monitor the health of banks and microfinance institutions as the forbearance measures are phased out, especially the systemically important banks that have high exposure to the construction and real-estate sector. A staged increase in minimum capital requirements could also be used to promote consolidation in the banking and microfinance sectors.
- Health crisis
Although Cambodia did remarkably well in managing the COVID-19 pandemic, it highlighted a number of vulnerabilities in the healthcare system that need to be addresses before the next health emergency occurs. Government spending on healthcare needs to be significantly increased in preparation for the next pandemic or major public health outbreak.[4] This was a major limitation in managing the COVID-19 pandemic, requiring more stringent controls than in countries with more robust healthcare systems.
There is great variation in access to quality healthcare in the urban versus rural sector. There is a pressing need to increase both the access and the quality of healthcare in remote regions, that are currently poorly served. Unless there is greater investment to increase the quality and quantity of healthcare services, any future health crisis requiring mass hospitalisation could quickly overwhelm the healthcare system, inflicting a larger than necessary human and economic toll.
- Technological change, especially the acceleration towards a digital economy
The acceleration towards a digital economy will produce many benefits, but it will also create new challenges. Many low- and medium-skilled jobs may be lost initially, although Artificial Intelligence threatens even highly skilled ones. It will not be easy to redeploy low-skilled workers, and reskilling and retraining will be required. Despite the anti-globalisation backlash elsewhere, Cambodia must remain open to importing skills and technology to help it catch up in the short run. In the long run however, the challenges posed by digitalisation and rapid technological change will require a fundamental transformation in systems of education and learning. Indeed, the digital transition reinforces the need to address the underlying problems associated with human capital and skills development discussed earlier. Augmenting cognitive skills such as math’s and sciences will be critical for the transition to a more innovative, knowledge-based economy. New and innovative approaches to public-private collaboration are also needed, particularly in areas such as research and development.
- Diversifying export markets and import sources
Cambodia’s trade patterns – both the commodity and country composition of its exports and imports – are highly concentrated, raising its vulnerability to country- or commodity-specific shocks. As the major constraints to structural diversification such as limited human capital and high business costs are addressed, trade and investment flows will also diversify. For instance, if the price of electricity could be reduced, this could attract new types of FDI from different source countries, which would result in new types of output such as electronic parts and components. This alters both the commodity and country composition of exports and imports, helping to diversify trade and investment patterns. This is one of a number of indirect channels involving policy reform that can affect trade and investment patterns. The loss of trade preferences following LDC graduation will also help diversify export products and patterns naturally.
There are specific policy changes that can be pursued to deliberately diversify trade and investment flows, and directly improve its sustainability.
Preferences are also present in the many FTAs that Cambodia is engaged in that skew the commodity and country composition of its imports. The margin of preference (MOP) — the difference between preferential and Most-Favoured-Nation (MFN) rates — is still high for many tariff lines and across different FTAs in Cambodia. When MOPs are high, trade patterns can be distorted through trade diversion. It increases concentration of trade flows by diverting them from non-FTA partners to FTA partners. Trade diversion is also welfare-reducing because imports are no longer sourced from the lowest cost producer. Pursuing open regionalism through multi-lateralisation of FTA preferences – i.e., offering preferences to all countries on an MFN basis – is in Cambodia’s national interest. It would promote domestic competitiveness and welfare, while reducing the concentration in trade patterns (see Menon, 2022).
Diversifying sources of FDI
Cambodia needs to attract FDI or incur external debt if it is to grow at a rate faster than that determined by its low domestic savings rate. There is a sustainability element associated with both FDI and debt. The need for long-term debt sustainability is widely recognised and better understood than the need to ensure that FDI inflows do not exceed absorptive capacity. The latter is associated with ensuring that external competitiveness of the tradable goods sector is not impaired by a sharp appreciation of the real exchange rate due to massive inflows of FDI, resulting in Dutch Disease-type effects.[5] The relevant point here is that an economy like Cambodia should be selective in its choice of projects, whether financed by foreign investment or borrowings, if it is to grow in a sustainable and inclusive manner. In addition, increasing the share of new investors that can help plug Cambodia into new markets and manufacturing global supply chains will support domestic structural changes by diversifying sources of growth.
CONCLUSION
Cambodia aims to become an upper middle-income country by 2030 and a high-income country by 2050. To realise these aspirations, Cambodia has to pursue inclusive growth that is also sustainable and resilient. A key constraint is the lack of diversification of the economy, which has so far not affected the rapid pace of economic growth but only the inclusiveness and sustainability of that growth. Diversification so far has involved rural-urban migration from the agricultural sector into the industrial and services sectors, but this process may be reaching its limit. The horizontal shift across sectors into higher value products and activities produces a one-off increase in the level of productivity; future increases in productivity will have to come from intra-sectoral diversification. This involves the vertical shift into higher value- added products and activities within each sector.
Two key constraints limit the extent of intra-sectoral diversification. First is inadequate human capital, requiring improvements in the quality of education at all levels, starting with primary and secondary schooling. Second is the high cost of doing business, which stems from limited physical and logistics infrastructure, high energy cost, and the high cost of finance. Addressing these constraints should increase the inclusiveness of economic growth.
To ensure that these achievements last beyond the short term, another set of constraints that affect resilience and sustainability need to be addressed. Increasing resilience includes addressing the impacts of climate and technological change, and reducing the risk of financial, health and other crises but, should they occur, also mitigating their worst impacts. Improving the sustainability of growth and its drivers involve diversifying trade and investment flows. This will reduce Cambodia’s exposure to country-specific shocks and indirectly help with diversification of the economy.
REFERENCES
ADB. 2014. Country Diagnostic Study: Cambodia, Diversifying beyond Garments and Tourism. Manila. https://www.adb.org/sites/default/files/publication/149852/cambodia-diversifying-country- diagnostic-study.pdf.
———. 2023b. Asian Development Outlook, April 2023. Manila. https://www.adb.org/publications/asian-development-outlook-april-2023.
Herrendorf, B., R. Rogerson, and Á. Valentinyi. 2013. Growth and Structural Transformation. NBER Working Paper 18996. Washington, DC: National Bureau of Economic Research. http://www.nber.org/papers/w18996
IMF. 2024. Cambodia: 2023 Article IV Consultation-Press Release; and Staff Report. 31 January. Washington, DC. https://www.imf.org/en/Publications/CR/Issues/2024/01/29/Cambodia-2023- Article-IV-Consultation-Press-Release-and-Staff-Report-544276
Kaldor, N. 1967. Strategic Factors in Economic Development, Ithaca, NY: Cornell University.
Karamba, W., K. Tong, and I. Salcher. 2022. Cambodia Poverty Assessment: Toward a More Inclusive and Resilient Cambodia. Washington, DC: World Bank. http://hdl.handle.net/10986/38344.
Menon, J. 2022. The CLMV Countries and RCEP: Will They Grasp the Opportunities? Fulcrum. 18 February. https://fulcrum.sg/the-clmv-countries-and-rcep-will-they-grasp-the-opportunities/
———. 2024. The Belt and Road Initiative in Cambodia: Costs and Benefits. Journal of Southeast Asian Economies. 41 (2), pp. 1-12. ISEAS_EWP_2023- 1_Menon.pdf.
Menon, J. and K. Naqvi. 2024. Structural Transformation and Growth Opportunities in Cambodia: A Product Space Analysis, Paper prepared for the Striving for Inclusive Economic Growth in Asia and the Pacific Conference, ADB and ADB Institute, Manila, forthcoming.
UNDP. 2019. Cambodia: Derisking Renewable Energy Investment. New York: United Nations Development Programme. https://www.undp.org/sites/g/files/zskgke326/files/2022- 09/DREI%20Cambodia%20Full%20Report%20%28English%29%20%28Jun%202019%29%20%28 FINAL%29.pdf.
Warr, P. and J. Menon. 2016. Cambodia’s Special Economic Zones. Journal of Southeast Asian Economies. 33 (3), pp. 273–90. https://www.adb.org/sites/default/files/publication/175236/ewp- 459.pdf.
ENDNOTES
For endnotes, please refer to the original pdf document.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735 Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
2024/38 “Ethnic Diversity in Kalimantan and the Implications of Indonesia’s Capital Relocation” by Evi Nurvidya Arifin
EXECUTIVE SUMMARY
- This article provides foundational statistics on the ethnic mosaic in Kalimantan and delves into the intricate dynamics of the ethnic diversity of Borneo island. This ethno-demographic exploration is conducted through a political economy lens.
- Among the diverse regions in the country, Kalimantan stands out as one of the most culturally complex societies with at least ten ethnic groups identified, with Banjarese emerging as the largest group, followed by the Dayak, Javanese, Malay, Batak, Madurese, Chinese, Kutai, Sundanese, and Buginese.
- While three provinces in Kalimantan are dominated by local ethnic groups, the Javanese make up the largest group in East Kalimantan, where the new capital, Nusantara, will be located.
- This article also offers an understanding of socio-demographic-political dimensions intertwined with the ethnic fabric of Kalimantan, thereby contributing to the broader discourse on Indonesia’s diverse landscape and its implications for governance and development initiatives.
ISEAS Perspective 2024/38, 29 May 2024
* Evi Nurvidya Arifin is Senior Assistant Professor at the Centre for Advanced Research (CARe), Universiti Brunei Darussalam. Her research areas encompass ethnicity, religion, electoral behaviour, ageing population, internal and international migration, poverty, retirement, disability, fertility and reproductive health. This paper was originally presented at the Religious Diversity in Borneo Workshop in 2023.
INTRODUCTION
The significance of understanding ethnic diversity in Kalimantan has been magnified in recent times, particularly in light of the grand plan to relocate Indonesia’s capital city. With Prabowo Subianto and Gibran Rakabuming Raka’s victory in the 2024 presidential elections and the pair’s commitment to continue this monumental project initiated by President Joko Widodo (Jokowi), the intricacies of the ethnic composition in Kalimantan take on heightened importance.
The decision to shift the capital from Jakarta to East Kalimantan underscores a practical necessity to alleviate the congestion and environmental challenges plaguing Jakarta, and represents a strategic move towards decentralization and regional development. However, this ambitious endeavour is not without its complexities, especially concerning the diverse ethnic landscape of Kalimantan.
As Prabowo and Gibran assume office and move forward with the capital city relocation plan, understanding the nuances of ethnic diversity in Kalimantan becomes imperative. This understanding is crucial for ensuring the successful implementation of policies and initiatives that respect the region’s cultural, social, and economic realities.
Kalimantan is the expansive Indonesian territory on the island of Borneo which is considered the world’s third largest.[1] It is a region abundant in cultural heritage and diversity. This diversity has long shaped its social fabric, economic activities, and political landscape. The planned relocation will begin as early as this year. Therefore, Borneo will become the centre of integrated socio-economic activities and geopolitics in the future, where three Southeast Asian countries (Indonesia, Malaysia, and Brunei) are located, along with two capital cities, namely Nusantara and Bandar Seri Begawan.
Kalimantan is known as the “Island with a Thousand Rivers”. Its rivers have historically served as important transportation arteries. Many continue as essential routes for the transportation of people, goods and services. Kalimantan’s cultural and religious landscape has been significantly transformed due to historical events such as the transmigration policy in the colonial era and post-independence,[2] as well as subsequent economic migration, religious conversions, and socio-economic influences.
Empirical studies in many different countries have provided an understanding of how ethnic diversity relates to different aspects of development, such as democratisation, economic growth, income inequality, corruption, and wellbeing. In their seminal paper, Easterly and Levine showed that a higher degree of ethnic diversity can lower the growth rate of GDP per capita.[3] Many other studies have examined the negative relationship between ethnic diversity and economic growth.[4] It is important to note that an ethnically diverse region is not automatically more prone to internal conflict.[5] The likelihood of that can increase if the region is polarised. More recent research on the varying relationships between ethnic diversity and economic growth suggests that ethnic diversity may be beneficial to economic growth, although this may depend on the level of the administrative unit under analysis.[6] Ethnic diversity plays a crucial role in mediating between internal migration and economic growth in Indonesia.[7] If ethnic diversity is a spur to innovation, productivity, and trade among districts, then migration needs to be “managed” for regions to obtain economic benefits while minimising adverse social and political effects.[8]
This article provides foundational statistics on the ethnic mosaic in Kalimantan and explores the intricate dynamics of ethnic and religious diversity through the lens of political economy and demography, contextualised within the framework of the capital city relocation project.
HISTORICAL CONTEXT
Despite Indonesia’s acknowledgment of diversity, a significant lack of information regarding ethnicity existed from 1930 to 2000. Since attaining Independence in 1945, the national motto, “Bhinneka Tunggal Ika” or “Unity in Diversity,” has served as the guiding principle for all Indonesians. The period following the fall of Suharto’s New Order regime (1967-1998) and the subsequent transition to a more democratic setting witnessed a pivotal moment, with the first population census in 2000 marking a breakthrough in quantifying ethnic groups across all Indonesian islands.[9]
Kalimantan is characterised by a rich mosaic of indigenous cultures and external influences. The region has long been inhabited by diverse Dayak communities, each nurturing its unique traditions, languages, and socio-political structures. These historically embraced animism and held deep reverence for the natural environment, shaping profound connections between land and spirituality.[10]
Islam predated colonial powers, and Muslim communities particularly resided along the riverbanks. The 16th century witnessed widespread conversion to Islam, notably in South Kalimantan, where Sultan Suriansyah became the first to embrace the faith.[11] The support of local sultanates across South, West, Central, and North Kalimantan significantly influenced this conversion trend. However, the advent of external powers, such as the Dutch and British colonial administrations, profoundly impacted the ethnic and religious fabric of Kalimantan.[12] Colonial expansion reshaped governance structures, economic systems, and cultural practices, integrating Kalimantan into broader trade and commerce networks. Moreover, the colonial era saw the propagation of Islam and Christianity, introducing new religious dynamics to Kalimantan.[13] While Islam gained prominence among coastal communities through trade and missionary endeavours, Christianity found adherents among select Dayak groups, contributing further to the region’s diverse religious landscape.
The evolution of Kalimantan’s political economy and legal frameworks has been deeply intertwined with its ethnic and religious diversity. Colonial administrations implemented policies that often favoured certain ethnic and religious groups over others, leading to social stratification and tensions within the region.[14]
Post-independence, efforts were made to foster national unity while respecting the diversity of Kalimantan’s communities. The Indonesian government implemented policies aimed at promoting cultural pluralism and religious tolerance, enshrining these principles in the nation’s constitution.
The historical legacies of colonization and cultural exchange continue to influence contemporary issues in Kalimantan. Ethnic tensions persist, exacerbated by socio-economic disparities, political marginalization, and competing claims to land and resources. Furthermore, the rapid pace of development and urbanization in Kalimantan has brought new challenges, such as environmental degradation, loss of indigenous land rights, and cultural erosion.
ETHNIC DIVERSITY IN KALIMANTAN
Kalimantan is a significant geographical and demographic entity, comprising 915 smaller islands, with a sprawling land area spanning 544,150.07 square kilometers. As of 2020, Kalimantan accommodated approximately 16.63 million inhabitants, constituting 6.0% of Indonesia’s total population and a substantial increase from its 1971 figure of 5.15 million, representing 4.3% of the nation’s population. Kalimantan harbours 72.2% of Borneo’s total population, underscoring its demographic weight within the island.
This surge in population can be attributed to a confluence of factors including natural population increase and significant migration flows. Migration, facilitated both by the government’s transmigration policy and voluntary movements, has been an influential driver of population growth and change in Kalimantan. The influx of Javanese migrants into this region accelerated changes in economy and society.[15] The region’s allure, characterised by promising economic opportunities, available land, and abundant natural resources, has attracted individuals from various parts of Indonesia seeking to capitalise on these prospects. The influx of migrants from diverse regions further enriched the cultural fabric of Kalimantan. Moreover, these population movements have played a crucial role in economic development.
Despite the overall demographic growth, disparities among Kalimantan’s provinces are evident. West Kalimantan emerges as the most populous province, boasting a population of 5.4 million in 2020. In contrast, North Kalimantan, the newest province separated from East Kalimantan, accommodated the smallest population, with only 0.7 million inhabitants in 2020. However, projections suggest that its population may experience accelerated growth in the future.
Kalimantan is home to at least 16 distinct ethnic groups (Banjar, Dayak, Javanese, Malay, Batak, Madurese, Chinese, Kutai, Buginese, Sundanese, Toraja, Pasir, Butonese, Balinese, Mandar, and Flores). However, only four—Banjarese, Dayak, Kutai, and Pasir—originated from Kalimantan, with others being migrant ethnic groups from different parts of Indonesia.[16] The Banjarese, the largest group in Kalimantan, constituted 26.2% or 3.6 million people in 2010. Banjarese identified themselves as Banjarese or as being affiliated with sub-ethnic groups like ‘Banjar Kuala,’ ‘Batang Bunyu,’or ‘Pahuluan.’ The Dayak people, approximately 3 million, represent the most culturally diverse local ethnic group consisting of 375 sub-ethnic groups.18
Kutai also emerges as a separate local ethnic group with around 276,000 individuals, constituting 2% of Kalimantan’s population in 2010. Pasir, an indigenous local ethnic group in East Kalimantan, is distinct from the Dayak Pasir. Pasir made up about 0.5 percent of the population, exclusively residing in East Kalimantan. Other significant migrant ethnic groups in Kalimantan include the Javanese (18.2 %), Malay (originating from Sumatra, 11.4 %), and Batak (from North Sumatra, 5.7 %).
Ethnic diversity among provinces in Kalimantan varies significantly (Figure 1). West Kalimantan is geographically strategic, bordered by Sarawak, Malaysia, and the South China Sea. It is home to the two largest ethnic groups: Dayak (34.9%) and Malay (33.8%), both culturally distinct.
Figure 1. Ethnic composition among provinces in Kalimantan
In Central Kalimantan, Dayak is the largest group, and it coexists with Banjarese from South Kalimantan and Javanese from Java Island. However, South Kalimantan is predominantly Banjarese. By contrast, East Kalimantan is a migrant province with the three largest ethnic groups being Javanese, Buginese and Banjarese. North Kalimantan which was separated from East Kalimantan and established in 2012, has a different ethnic composition, with Buginese as the largest group, followed by Dayak and Javanese.
Each ethnic group in Kalimantan brings unique skills, knowledge, and contributions to the region’s socio-economic fabric. The Dayak communities, for example, have traditionally relied on agriculture, fishing, and hunting for their livelihoods, while also practising crafts such as weaving and wood carving. The Malay and Javanese communities have been actively involved in trade, commerce, and government administration. Trade networks, cultural exchanges, and intermarriages have historically fostered connections and mutual understanding among different ethnic groups. Festivals, ceremonies, and religious events provide opportunities for people from diverse ethnic backgrounds to come together, celebrate their shared heritage, and forge bonds of solidarity.
Like in other such places, Kalimantan has experienced ethnic conflicts, albeit sporadically, throughout its history. After the fall of the New Order regime in 1998, several ethnic violent clashes took place in the provinces of West, Central and East Kalimantan. Some studies have endeavoured to comprehend the underlying causes of the outbreak of violent conflict. For example, conflicts have been linked to intense competition for economic opportunities, particularly concerning agricultural resources among Malays, Dayaks, and Madurese communities in West Kalimantan,[17] and illegal lodging in Central Kalimantan.[18] This competition engendered feelings of frustration and aggression.
On the other hand, during the decentralization era, there has also been increased recognition of the need for greater political participation and for empowerment of ethnic minorities in Kalimantan. For example, Singkawang is unique in Indonesia as the only district where the Chinese ethnic group is the largest, although not the predominant one. With a Muslim majority, this district was run for the first time by a Chinese lady, Singkawang-born Tjhai Chui Mie, from December 2017 to December 2022.[19] Tjhai Chui Mie’s tenure as female leader in a traditionally male-dominated field demonstrates that women can hold significant positions of power and influence in the political sphere and in local governance. This reflects a notable progress in gender empowerment and leadership diversity.
However, power dynamics within Kalimantan’s political landscape remain complex, with entrenched interests and historical inequalities shaping the distribution of resources and opportunities. Achieving greater representation and inclusivity will require ongoing dialogue, collaboration, and policy reforms that prioritise the needs and aspirations of all ethnic groups in the region.
POLITICAL ECONOMY AND ETHNIC DYNAMICS
Kalimantan is economically vital, enriched with abundant natural resources like timber, minerals, and oil and gas reserves. Industries such as mining and palm oil production have flourished, with East Kalimantan ranking second in wealth after Jakarta since the 1970s, contributing 9.2% to the total gross regional product by 2010.
The upcoming establishment of Nusantara, Indonesia’s new capital city, in East Kalimantan is set to spur further economic growth. This initiative is expected to attract significant investments, create jobs, and draw professionals and businesses to the province. However, it may also lead to demographic changes that affect the ethnic composition of local communities.
Upon closer examination of ethnic groups at the district level in East Kalimantan, it becomes apparent that the region’s economy is significantly influenced by migrant populations. This influence is reflected in the ethnic composition in various districts throughout the province. Several districts prominently feature the Javanese ethnic group as the largest, including Paser, Kutai Kartanegara, East Kutai, North Penajam Paser, Balikpapan, Samarinda, and Bontang. This suggests that the economy of East Kalimantan is largely driven by migrants, particularly those of Javanese descent.
Moreover, with the planned establishment of Nusantara in Javanese-majority districts of Kutai Kertanegara and North Penajam Paser, this influence is expected to strengthen in the future. Conversely, districts such as West Kutai, Malinau, Bulungan, and Tana Tidung have the Dayak population as the largest ethnic group. This highlights the ethnic diversity within East Kalimantan and underscores the importance of recognizing and respecting the cultural heritage and contributions of indigenous communities in the region.
While ethnic diversity offers economic opportunities such as a vibrant tourism industry and diverse skillsets, it can also create tensions, especially if newcomers seek dominance in economics and politics. Economic disparities may arise from unequal resource access, affecting marginalised communities. Efforts to address these issues require equitable policies and community empowerment initiatives.
By aligning governmental policies with principles of social justice and equality, Kalimantan can harness the economic potential of its diversity while promoting inclusive growth.
CONCLUSION
The significance of understanding ethnic diversity in Kalimantan has been underscored by recent developments, particularly the plan to relocate Indonesia’s capital city to East Kalimantan. This ambitious endeavour highlights the need to navigate the complexities of ethnic composition and dynamics in the region. The decision to shift the capital not only addresses practical concerns such as alleviating congestion and environmental challenges in Jakarta but also signifies a strategic move towards decentralization and regional development.
With its rich cultural heritage and diversity, Kalimantan stands as a unique region shaped by historical events, colonial influences, and socio-economic transformations. The planned relocation project, scheduled to begin in 2024, is expected to position Borneo as a centre of integrated socio-economic activities and geopolitics in the future, with two capital cities located within its boundaries.
Ethnic diversity in Kalimantan, characterised by at least 16 distinct ethnic groups, underscores the region’s status as a melting pot of cultures and traditions. While some groups, such as the Banjarese and Dayak, have indigenous roots in Kalimantan, others have migrated from different parts of Indonesia. Despite disparities among provinces, ethnic diversity permeates various aspects of life in Kalimantan, from socio-economic activities to political dynamics.
The economic vitality of Kalimantan, driven by industries like mining and palm oil production, is poised for further growth with the establishment of Nusantara. However, this development may bring changes that impact the ethnic composition of local communities.
Efforts to promote greater representation and inclusivity require ongoing dialogue, collaboration, and policy reforms that prioritise the needs and aspirations of all ethnic groups in Kalimantan. By aligning governmental policies with principles of social justice and equality, Kalimantan can harness the economic potential of its diversity while fostering inclusive growth and sustainable development in the region.
ENDNOTES
For endnotes, please refer to the original pdf document.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735 Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
2024/37 “Bleak Future for Islamic Parties in Indonesia after the 2024 Election” by Pradana Boy Zulian and Neni Nur Hayati
EXECUTIVE SUMMARY
- The recently concluded 2024 Indonesian legislative election raises questions about the future of Islamic political parties. Their last strong showing was in the 1955 election, after which they have been experiencing a slow decline. They are now on the periphery of the country’s political arena.
- Only the National Awakening Party (PKB) and the Prosperous Justice Party (PKS) increased their vote share in the 2024 election. Others, such as the United Development Party (PPP) and People’s Party (Partai Ummat), a new Islamic party founded by reform icon Amien Rais, failed to secure any parliamentary seats.
- Islamic political parties are thinly spread. Moreover, there is no correlation between their affiliation with Islamic organisations and choice of political party. Nahdlatul Ulama (NU) members do not automatically vote for PKB; the same is true of Muhammadiyah’s relationship with the National Mandate Party and Partai Ummat.
- Among Indonesian Islamic parties, PKS’ future is the brightest and this is due to the loyalty of its support base. PKS’ Islamist ideology—inspired by the Muslim Brotherhood in Egypt—is developed for a further goal of founding an Islamic state in Indonesia and pushing for the Islamisation of Indonesian society. These ideas and beliefs foster strong political aspirations and have successfully bound members to the party.
ISEAS Perspective 2024/37, 21 May 2024
* Pradana Boy Zulian is Visiting Fellow with the Regional Social and Cultural Studies Program at ISEAS – Yusof Ishak Institute. Neni Nur Hayati is the Director of the Democracy and Electoral Empowerment Partnership (DEEP), in Indonesia.
INTRODUCTION
In Indonesia’s political history, Islamic parties, collectively, have never been a dominant force. Their best performance was in the 1955 election, the Republic’s first. Back then, the total vote percentage gathered by them was 43.5 percent. Of the four parties with the highest voters, two were Islamic parties, Masyumi (7,903,886 votes) and Nahdlatul Ulama (NU) (6,955,141 votes), with the other two being Partai Nasional Indonesia (PNI) (8,434,653 votes), and Partai Komunis Indonesia (PKI) (6,179,914 votes).[1]
However, after 1955, Islamic parties underwent a steady decline. The trend continued during the Suharto New Order period (1966–1998). Even in the post-New Order period, after political restrictions were lifted and political space opened for all groups, Islamic parties never managed to repeat their 1955 showing.
Throughout the Reformasi era, the vote share of Islamic parties swung between 16 percent and 30 percent.[2] The Islamic parties’ vote share from year to year are as follows: 1971 election (26.0 percent), 1999 election (36.8 percent), 2004 election (38.1 percent), and 2009 election (29.0 percent). The 2024 election recorded a similar pattern. If the National Mandate Party (PAN) is considered “Islamic” and included, then all Islamic parties gained about 30 percent. But if PAN is excluded, then Islamic parties only secured about 23 percent of the popular vote. In the past, PAN was undoubtedly categorised as an Islamic party. However, in recent years, some have questioned whether it can be considered as such, since its primary motivation is national development despite it originating from Muhammadiyah, the second largest Islamic organisation in Indonesia. A split within PAN’s ranks further fuelled questions of its Islamic identity. On 29 April 2021, PAN’s key founder, Amien Rais, founded the splinter Partai Ummat to move in a more conservative Islamic direction.
Considering this historical fact and current political dynamics in the country, discussing the future of Islamic parties becomes very important. This article argues that although Islamic parties showed partial improvements in the latest election, they will nevertheless remain stagnant and will not play any significant role in the future. Their prospects will not change much as long as they do not move beyond sectarian politics. Unless they can be sensitive towards rapid changes in Indonesian society, their ability to compete for political significance will remain weak.
Be that as it may, one party that deserves scrutiny is the PKS. Although it is unlikely to make any major inroads in the country’s politics or increase Islamic parties’ overall performance in the national polls, it enjoys much stronger loyalty from its members and supporters than its Islamic counterparts are able to do.
This article will analyse several factors contributing to the Islamic parties’ abysmal performance and examine their future trajectory. It considers the following trends: Islamic parties are not the main preference for Muslims in Indonesia; although all Islamic parties strive for the upholding of Islamic teachings, their goals are fragmented; and there is a disjuncture between voters’ religious ideology and political loyalty.
ISLAMIC PARTIES NOT MUSLIMS’ GIVEN CHOICE
Muslims do not automatically vote for an Islamic party. Only in the 1955 election—the first ever held in the country—did Islamic parties demonstrate a strong showing; two of them were among the top four parties then. In 2024, the votes gained by Islamic parties are as follows: the National Awakening Party (PKB) gained 10.62 percent, followed by the Prosperous Justice Party (PKS) at 8.42 percent, the United Development Party (PPP) at 3.87 percent and Partai Ummat at 0.42 percent. The last two—PPP and Partai Ummat—were left with no seat in parliament. Based on the Indonesian parliamentary threshold, a political party must secure a minimum of four percent of the popular vote to qualify for parliamentary seats.
Despite the large number of Muslims in Indonesia, not all voted for Islamic parties.[3] To be sure, although the non-Islamic parties are mostly led by Muslims, their goals are not to pursue shariah laws or an Islamic state. In 2019, the total number of votes gained by Islamic parties was 30.0 percent, which showed a slight drop from the 2014 figure of 31.4 percent.
Taking NU supporters as a case in point, most NU members preferred to vote for non-Islamic parties. This is surprising, as NU members constitute one of Indonesia’s biggest voter groups, and political parties tend to compete for their support. One could assume that a majority of NU members would vote for PKB, as it is a political party formally and ideologically affiliated with NU. A survey, however, reveals a different situation. More importantly, under Yahya Staquf’s current chairmanship, NU is strongly endeavouring to return to Khittah 26, which underlines the neutrality of NU in practical politics. In addition, NU’s members have been divided in their support of parties and presidential candidates.
Compared to NU, Muhammadiyah members show a different political attitude and orientation. NU leaders are bolder when expressing their political interests than Muhammadiyah members. The same situation can said concerning political affiliation. The NU leadership is open about expressing the organisation’s relationship with the PKB, and stating that the PKB is a party for NU members. Muhammadiyah, on the other hand, describes its relationship with PAN not as organisational, but as cultural. However, despite these two differring stances, both failed to secure support. Interestingly, Partai Ummat could only gain less than one percent of the popular vote, even though the founder of the party was Amien Rais, a veteran and Muhammadiyah leader.
THE QUESTION OF SOLIDITY
In addition, the solidity of Islamic parties is under serious question. Although these parties adopt different orientations—broadly distinguished as traditionalist, modernist, Islamist, progressive, and humanist—they derive legitimacy through their common promotion of Islamic values and ideals. Their political posturing differs as well, as was evident in their separate preferences for presidential candidates. For example, in order to overcome the parliamentary threshold, the PPP joined Partai Demokrasi Indonesia Perjuangan (PDI-P) in promoting Ganjar Pranowo and Mahfud MD for president and vice-president. Meanwhile, PKB and PKS endorsed Anies Baswedan and Muhaimin Iskandar as their favoured candidates. Muhaimin is incidentally a popular NU member who has a solid grassroots base in Islamic boarding schools and among traditionalist clerics (kiai).
The question is whether the coalition between PKB and PKS can bring political solidity to Islamic parties. Some argue that a union between PKB and PKS would reduce division among Islamic parties. This is unlikely though. The ideological differences are too deep. Even though both parties hold to the rahmatan lil alamin (mercy for all the world) credo, their ideological inclinations are not easily reconcilable. Their constituents are at two extreme poles: PKS members are often labelled as Wahhabi-inclined, while NU is widely known for its moderation in practising Islam. NU moderation involves the loose accommodation of local culture, something that Wahhabi-inclined ideologies vehemently reject.
Other Islamic parties such as PAN and the Crescent Star Party (PBB) chose to support the Prabowo-Gibran coalition. PBB’s motto rahmatan lil alamin (a blessing for mankind) emphasises religious and humanitarian values and how these inspire Indonesian culture, language and attitudes towards life.[4]
FRAGMENTED VOTER LOYALTY ACROSS ISLAMIC PARTIES
During the 2024 election, Islamic parties in most instances saw increases in voter support, except for PPP.
For PKB and PKS, the increase was significant, due to various factors. In PKB’s case, the increase in votes was a coattail effect of Anies Baswedan’s and Muhaimin Iskandar’s candidacy in the presidential election. Cucun Ahmad Syamsurijal, one of PKB’s central board chairmen, is one who believes this to be the most important factor. However, other NU politicians such as Syaifullah Yusuf, disagree. Yusuf maintains that the increase was due to the struggle of PKB members at the grassroots level and to Kiai’s untiring support and efforts to promote PKB.[5] These two statements are correct to varying degrees. While both PKB and PKS, may have shared some coattail effect, PKS’ increase in vote share was also closely related to its members’ high level of loyalty.
A deeper analysis demonstrates that the future looks brighter for PKS compared to PKB. A survey by Denny JA from Lembaga Survey Indonesia reveals the surprising fact that PKB is not the main preference for NU members. Rather, PDI-P is, with Gerindra as second preference. This places PKB only in third place.[6] In addition, in terms of relations between NU and PKB, the fragmentation cannot be hidden. The conflict between the late Abdurrahman Wahid, the founder of PKB, and Muhaimin Iskandar, PKB’s current chairman, remains an unresolved. Yenny Wahid, Abdurrahman Wahid’s daughter, even strongly stated that she would be in opposition to PKB.[7]
Furthermore, PKS enjoys a higher level of loyalty other parties in general do, and Islamic parties in particular. Loyalty can be measured by indicators such as the tendency to vote for the same party in consecutive elections, as well as the tendency to choose the presidential and vice-presidential candidate pairs supported by their party. In other words, PKS members or sympathisers consistently vote for PKS and also for the presidential candidates promoted by PKS.
On 14 February 2024 (election day), Kompas Research and Development Institute conducted a post-voting survey or exit poll. The survey drew 7,863 respondents from the 38 provinces and demonstrates that PKS voters are more consistently loyal, when compared to supporters of other parties: As many as 70.2 percent of respondents who voted for PKS in 2024 had also voted for PKS in the 2019 election. The level of loyalty shown for PKS is relatively consistent especially among urban and educated Muslim voters; this phenomenon was corroborated by several other surveys conducted before the election.[8] PKS even outperformed the ruling party PDI-P.[9] Before the election, more than 70 percent respondents from PDI-P declared their loyalty to the party, but this figure decreased significantly to 47.2 after the polls.
Nationally, PKS gained 8.42 percent of votes, making it among the six biggest parties in the country. In some provinces, PKS showed great promise, despite being a relatively small party compared to the PDI-P, Golkar, and Gerindra. It won in Jakarta, and secured the third place in West Java.
Two plausible factors explain the relatively high loyalty among PKS members and supporters. First, PKS has developed a strong presence on campuses. To many Muslim university students, especially those involved in Muslim student missionary organizations, PKS is not just a political party but a religious group that fulfils their spiritual needs. The other Islamic parties do not evoke this sentiment. Campuses serve as the party’s vehicles of indoctrination, allowing it to recruit solid cadres from among them who will later support the party. This explains why PKS has a high following among urban Muslim youths; PKS is seen to be representing and striving for Islamic religious and moral values. The party is also often seen as bringing concrete solutions to diverse political and social issues. The young Muslims who voted for the PKS are also eager to play an active role as agents of change, and strengthen social justice and welfare for all Indonesians. They also feel that only PKS can govern Indonesia in line with Islamic principles.
Second, PKS’s agenda is a simple one: to uphold Islamic principles. It does not make any pretensions to showcase otherwise, and this resonates with conservatives and anti-pluralist segments in society. Members understand that their support for the party equates to upholding Islamic supremacy. As Imdadun Rahmat reveals,[10] for PKS, building a strong ideological foundation among its cadres is a critical goal. This strategy is similar to the Muslim Brotherhood in Egypt, which it drew inspiration from.[11]
In the same vein, PKS’ consistent messaging about upholding the shari’a in Indonesia shores up loyalty among its constituents.[12] Although its efforts have not succeeded so far— namely to realise comprehensive implementation of shari’a in Indonesia, or more specifically, to raise shari’a to be the national law—PKS has played a role in gaining more Islamic regulations at the local level, including the ratification of shari’a regulations in several regions. Its loyalists appreciate these efforts.
CONCLUSION
In post-2024 elections, Islamic parties will remain in the periphery. This is due to less support from Indonesian Muslims in general, and to fragmentation within the parties. Rather than work for a shared agenda, Islamic parties are very much engaged in disparate agendas—this leaves them vulnerable to fragmentation and friction.
Among Islamic parties, only PKB and PKS have reached beyond the four-percent support requirement. Others, such as PPP and Partai Ummat failed to meet the parliamentary threshold. Both these latter two are in a complicated situation, going forward. Thirdly, although PKB and PKS gained increased votes, both showed fragmentation in voter attitudes as well. PKS voters’ attitudes are more consistent compared to those of PKB’s. In the long run, this modality promises a relatively solid future for PKS.
ENDNOTES
For endnotes, please refer to the original pdf document.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735. Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
2024/36 “The Aftermath of the 2024 Indonesian Elections: A Season for Speculation” by Max Lane
EXECUTIVE SUMMARY
- The course of the 2024 Presidential and Parliamentary elections confirmed the absence of substantive ideological differences among all the parties, despite rhetorical positioning by candidates.
- Since the elections, there has been constant speculation about how the political parties and figures would relate to each other after the elections, especially about which parties would join the governing parties and when.
- One focus of speculation has been about how the relationship between incumbent President Joko Widodo and incoming President-elect Prabowo Subianto will evolve after Prabowo is sworn in in October.
- The second focus has been around the relationship between Prabowo and the Indonesian Democratic Party of Struggle (PDIP) and whether the PDIP would join the Prabowo government.
- Apart from the relationships among these parties, the criticisms from a spectrum of elements in civil society of manoeuvres by President Widodo to build a political dynasty and of Prabowo’s campaign will be a factor in how parties, especially the PDIP, relate to the new government. Tensions between the mainstream parties and civil society may sharpen.
*Max Lane is Visiting Senior Fellow at ISEAS – Yusof Ishak Institute. He is the author of “An Introduction to the Politics of the Indonesian Union Movement” (ISEAS 2019) and the editor of “Continuity and Change after Indonesia’s Reforms: Contributions to an Ongoing Assessment” (ISEAS 2019). His newest book is “Indonesia Out of Exile: How Pramoedya’s Buru Quartet Killed a Dictatorship”, (Penguin Random House, 2022).
ISEAS Perspective 2024/36, 20 May 2024
INTRODUCTION
There are two major ways in which the 2024 elections can be assessed. First are the relations between factions of the political elite, including the prospects for stability among that elite. Second are the relations between that elite as a whole, represented by all the parliamentary parties, and that section of politically active Indonesia outside the parties, referred to as “Masyarakat sipil” (“Civil Society”). At the moment, it can be noted that the most widespread political activity is speculation, even as more and more political actors firm up their decisions.
The contestation that took place in the 2024 elections was among rival factions within the broad Indonesian elite. Every coalition of parties nominating Presidential candidates included parties participating in the current Joko Widodo government. The two parties outside the Widodo government, Democrat Party (PD) and the Party of Justice and Welfare (PKS), had voted with the government on most occasions. Now they found themselves in coalitions alongside parties of the government. There were no outsiders among any of the parties supporting Presidential candidates.
Among the presidential candidates themselves, Anies Baswedan was not a party member. In the past he had sought collaboration with the PD, the Democratic Party of Struggle (PDIP), and was supported for the Governorship of Jakarta by the Great Indonesia Movement Party (Gerindra) and the PKS.
The election, including the process that will stretch to include the election of regional executives in November this year, is about settling any new arrangements among the various factions of the elite, represented by the different parties. While there was the rhetorical positioning of continuity versus “change” among the contending coalitions, there were no substantive ideological, programmatic or policy disputes affecting the basic direction of future government policy during the elections. Two of the three parties whose candidate positioned himself to be for “change”, have now joined Prabowo’s coalition for “continuity”. It was the relationship between the factions that is of major concern to the participants. However, significant tension has emerged around how this internal rivalry should be conducted. There were criticisms, from within the elite as well as from without, over the political manoeuvres of the incumbent, Joko Widodo, to ensure that his son, Gibran Rakabuming Raka could stand as Prabowo’s Vice-Presidential candidate, and also over Widodo’s use of social welfare funding for last minute pork-barrelling. These tensions, which are ongoing, may have an impact on how negotiations to manage the internal rivalries will be conducted. However, a few things are already clear.
PRABOWO AND PRESIDENT JOKO WIDODO
First of all, Prabowo Subianto as head of state and head of government will have the prerogative to appoint cabinet ministers and a host of other positions in the state apparatus, including those relating to state owned enterprises. Prabowo has repeatedly declared his support for Widodo’s policies in government, including since the election.[1] There have been no statements by Prabowo or his party, Gerindra, that suggest any divergence from the policies pursued for 10 years by President Widodo. This is not to say we will not see attempts by Prabowo to stamp his government with his own imprint as his installation as President nears.[2]
The most speculated rivalry in the Indonesian media is that between Prabowo and President Widodo himself. Some ask: will there be ‘dua matahari (two suns)’?[3] Speculation over whether there is rivalry or accord between Prabowo and Widodo is rampant in the media. How many times they meet, what their associates say on any one day – all these and other minor incidents are reported widely, with multiple interpretations.[4]
In the meantime, Prabowo remains President Widodo’s Minister for Defence, while also operating as the President-elect. In effect combining these roles, Prabowo visited Beijing and met Xi Jinping, then the Prime Minister of Japan, Fumio Kishida, and then the Prime Minister of Malaysia, Anwar Ibrahim.[5] This has been interpreted both as a possible reassertion of his closeness with President Widodo[6] — and Prabowo has claimed that his visit was arranged by Widodo — as well as something connected to a possible Beijing attempt to pre-empt US moves to get close to Prabowo.[7] It can also be read as an initial assertion of Prabowo’s own international profile.
There has also been speculation on what Widodo’s role might be after Prabowo is sworn in as president. The most common relates to Widodo’s role in selecting Ministers for Prabowo’s cabinet. Widodo’s spokesperson continually affirms that the appointment of cabinet Ministers will be fully Prabowo’s prerogative, despite the media speculation,[8] which continues non-stop.[9] Spokespersons from Prabowo’s party, Gerindra, have themselves said that Prabowo would seek Widodo’s suggestions on cabinet membership.[10] Commentary on the existence of “two suns” shining in the current Widodo cabinet is bound to continue,[11] right up till October.
There has also been other public commentary on Widodo’s position. There was a flurry of statements regarding how the Golkar leadership had encouraged Widodo to join Golkar and make it part of his base.[12] His son, future vice-president Gibran, has also been encouraged to join Golkar.[13] Others, such as the former PDIP figure turned Prabowo supporter, Budiman Sujatmiko, have suggested that Widodo could be Advisor to President Prabowo.[14]
Perhaps more substantially, there is also discussion of whether, or to what degree, Widodo will be able to place his supporters in key positions during the election of Province and District heads scheduled for November. Many current incumbents are his direct appointees, leading to more speculation that these appointments are a manoeuvre to place Widodo dynasty supporters, including family members, in important positions after his departure.[15]
PRABOWO AND MEGAWATI SUKARNOPUTRI
The largest party in the parliament will remain the Indonesian Democratic Party of Struggle (PDIP), although its vote, at 16%, is down on its voter support in 2019. Megawati remains the unchallenged Chairman of PDIP. Speculation over what relationship may or may not be possible between Prabowo and Megawati (and the PDIP), is also rife. The central question is whether the PDIP will join the Prabowo government or remain outside it. It looks likely now, although as yet nothing is completely clear, that Prabowo will be supported by a majority in parliament even without PDIP support. Prabowo is definitely supported by Gerindra, Golkar, National Mandate Party (PAN) and the Democrat party. The National Democrat Party has joined the Prabowo coalition. There is ongoing debate in the National Awakening Party (PKB) over whether it should join the Prabowo government but a final decision has not yet been made by the highest party bodies.[16] If both these parties do join, it gives Prabowo a clear majority in the DPR. These parties, currently outside the Prabowo coalition, have been delaying their final decision until after their challenges to the election results in the Constitutional Court are decided.[17] Even under these circumstances, the attitude of the PDIP will still be important to general political stability and the smooth functioning of the parliament. The relationship between Prabowo and Megawati is still considered important.
Prabowo and Megawati have collaborated politically in the past. In 2009, Prabowo was Megawati’s Vice-Presidential running mate. In 2010, when the PDIP nominated Joko Widodo for the Governorship of Jakarta, Prabowo’s party also supported Widodo, and Prabowo campaigned for Widodo. Of course, in 2014 and 2019, Prabowo stood against the PDIP’s nominee, Joko Widodo. In 2019, however, Prabowo joined Widodo’s government after Widodo won the election. At that time, the PDIP welcomed him into the government.[18] There is no history of ideological or programmatic conflict between the two.
The reason for the intense speculation is that it is assumed by most people that the relationship between Joko Widodo, whom the PDIP twice nominated for President, and Megawati has soured. Widodo is considered to have betrayed the PDIP by strongly supporting Prabowo against the PDIP’s nominee, Ganjar Pranowo, in these last elections.
The last time Megawati was betrayed by somebody – her Defence Minister before 2009, Susilo Bambang Yudhoyono – no collaboration between the two of them has been possible. This latest betrayal resulted in both Ganjar Pranowo’s serious defeat and a loss of votes for the PDIP in its heartland.[19] Joko Widodo and Megawati have not met since before the election campaign started in late 2023. While speculation about the PDIP’s position once Prabowo has been sworn in as president is common, current speculation centres on when Megawati will meet Prabowo. Now, this seems unlikely before the PDIP’s legal challenge to the election results is over.[20] Such a meeting would, perhaps, indicate Megawati’s intentions.
Any tension between Prabowo and Megawati is clearly not because of ideological or policy disagreements, or because of known personal clashes. The tension arises from Prabowo’s alliance with Widodo. Possible future collaboration between Megawati and Prabowo may depend on how the relationship between Prabowo and Jokowi develops.[21] Rumours circulate that Megawati is insisting that Prabowo ditch Widodo before any such collaboration is possible.[22] The possibility of Widodo being abandoned by those around him after Prabowo becomes president has also been publicly aired by figures from the PDIP.[23]
There have also been very heated exchanges between Vice-President elect Gibran, and Hasto Kristiyanto, PDIP Secretary-General. Most recently Hasto accused Gibran, who was nominated to stand for Mayor of Solo as a PDIP member, of having often lied to the PDIP. Gibran responded that Hasto’s always negative tone “meresahkan” (created restlessness and disruption).[24] This exchange was very widely reported in the press on TV.[25] Most recently the rift was confirmed more clearly when the PDIP announced on April 25 that Jokowi Widodo and his son Gibran were no longer members of the PDIP.[26]
Prabowo himself, urging general unity,[27] has made it clear he is open to any and all of the parties in parliament joining his government.[28] There are indications that he would welcome all the parties, including the PKS, PPP and PKB into the government, as well as the PDIP. With no serious differences in programme or ideology, tensions had been primarily created by changes in tactical alliances as intra-elite rivalry intensified during the election period. In this, Prabowo’s tactical allegiance to Joko Widodo is now the key factor.
THE POLITICAL ELITE AND CIVIL SOCIETY
There is a potential additional dynamic that may operate after this election. The change in alliance by Widodo, from an alliance with his nominating party (PDIP), to an alliance with Prabowo against the PDIP took a form that also attracted intense and broad criticism from civil society – the social opposition.[29] The criticisms relate to Widodo’s use of his incumbency, and of his family connections at the top of the Constitutional Court, to change rules that allowed Gibran to stand as Prabowo’s candidate for Vice-President. The criticism also extends to the huge allocation of social welfare payouts in the final weeks of the campaign, and of intimidation during the distribution of these payouts, in money and in rice.
A range of human rights and social justice non-government organisations has criticised the government. Additionally, in a very unusual process, groups of university professors have also issued highly condemnatory statements.[30] These have continued after the elections, with academics, students and lawyer groups also filing statements with the Constitutional Court regarding election irregularities.[31] A documentary produced by an NGO, called Dirty Vote, was watched by over one million people.[32] As a social opposition – that is a critical sector of society which is not presenting itself as an alternative political force – it had no serious impact during the campaign, just as it had no impact in other campaigns during the Widodo period. However, these issues have become entangled with that of the Widodo betrayal of the PDIP. The PDIP has taken a strong stand against the use of the welfare payments and associated intimidation and is presenting their complaints to the Constitutional Court. A key legal spokesperson for the PDIP is Todung Mulya Lubis. Mulya Lubis has been a central figure in the history of Indonesian civil society since the 1980s when he was Director of the Legal Aid Institute. In 2014, he was a supporter of Joko Widodo. He was later appointed as Indonesian Ambassador to Norway. His switch to support the PDIP and in particular to play a leading role in disputing the election results is reflective of the alienation certain sections of civil society feel towards Widodo.
For the PDIP to join the Prabowo government and not face a total collapse in credibility among the whole critical sector of civil society will be very difficult. For many sections of the social opposition, Megawati’s history of collaboration with Prabowo, who is accused of human rights violations in Timor Leste, of the kidnapping and disappearance of activists who opposed Suharto in his last year in power, and involvement in stirring up anti-Chinese rioting in May, 1998, is already negative. To join a Prabowo cabinet while he is still in alliance with Widodo and without Widodo being punished for dynasty building and excessive use of his powers of incumbency in the elections, would surely lead to a total collapse in credibility across the social opposition spectrum. At the same time, it is difficult to assess how important a positive relationship with civil society is to Megawati and the PDIP.
The high level of criticism of Widodo’s tactics in the elections and around dynasty building poses a dilemma not only for the PDIP but also for Anies Baswedan. Baswedan and the three parties backing him – Nasdem, PKB, PKS – never made Widodo’s dynasty building or incumbency tactics a major theme in their campaigning. Baswedan did, however, attempt to position himself to be for “Change”, even if this was vaguely articulated. Baswedan’s meet-the-people events also seemed to host discussions that more often focused on these issues. Baswedan is not part of any political party so his situation after the elections is quite fragile. If the parties that supported him in the election campaign join Prabowo’s government in October, he will be left floating. If one or more of those parties decides to stay outside the government, as with the PDIP, they will be faced with a decision as to how to relate the social opposition, to civil society.
In contemplating what, if any, relationship they may wish to pursue, they will also face the reality that while there is an overlap in criticism with civil society on the tactics Widodo has pursued, there are stark differences on many of the other issues that have been raised by the social opposition, not least Prabowo’s human rights record. Further, the social opposition – including the student sector – were the opponents which all the parties supported during Widodo’s two terms – the weakening of the KPK and the new Job Creation (Omnibus) and KUHAP laws. In fact, the issues raised across the civil society and activist spectrum stand in direct contrast to those that all the parties supported during the Widodo years.
A scenario where all of the parliamentary parties join with Prabowo will exacerbate the tension between the political establishment and the social opposition. In another where one or two parties such as the PDIP and PKS stay out of the government but remain in sync with Prabowo government’s general “continue the Jokowi programme” line, in order to just concentrate their criticism on Jokowi’s dynasty building, will probably also see tensions intensify.
The ideological gap between the parties and the social opposition has been sharpening for some time but the social opposition remaining rather impotent. The pressure on the social opposition to ‘go politik’ has been increasing since before the 2019 elections.[33] The sector of the social opposition with resources to start such a process are the trade unions. In 2019, sections of the trade unions implanted candidates in a range of parties, but with just a few winning seats in local parliaments and one in the national parliament, standing for Prabowo’s Gerindra party. In 2024, a new Labor Party (PB – Partai Buruh) stood in the elections for parliament. The PB presented itself as a vehicle for sections of society beyond union – “farmers, the urban poor, and workers in the informal sector” – to obtain representation in the electoral process.[34] It did not present itself as simply a part of the unions, but of the broader critical social sectors. It presented a standard social welfare redistributionist programme, and with a central policy plank of rejection of the Widodo Job Creation Law.[35] Its candidates came not just from the unions but from a range of grassroots-based campaign organisations as well as from social democratic-minded intellectuals.[36] Its lack of resources and experience meant that it was unable to make a serious impact. It elected no members to the national parliament and only 14 to local parliaments, the majority in Papua.[37]
While recruiting grassroots activists and intellectuals from the social opposition as candidates, it consciously abstainedfrom campaigning on the most high profile issues taken up by civil society: Prabowo’s past violations of human rights and Widodo’s dynasty building and misuse of incumbency powers.[38] It was basically silent on these issues. This abstention no doubt primarily reflected the balance of forces within the PB between those who oriented towards potential alliances with elements from within the political establishment, and those who dominate the party and trade union bureaucracies. It also reflected strong views among some activists that opposition to the Job Creation Law would be a more successful campaign than attacks on Prabowo or Jokowi.[39]
The PB won just under one million votes nationally, under 1%.[40] With that number gathered in its first try, there is little doubt that the party will continue to have a presence. Ilhamsyah, a trade union leader and the head of the PB’s Election Victory Division, stated his optimism that the PB will win members in the national parliament in 2029.[41] There may be other attempts at similar projects. Campaign coalitions of different wings of civil society, such as the Civil Society Coalition (KMS) and also Labor Movement for the People (Gebrak) among others, have also been very active since the elections.[42]
At the same time, how mainstream political actors – such as the PDIP and PKB or figures such as Anies Baswedan – decide to relate to the Prabowo government and to the social opposition, will also play a role. But until Prabowo begins his government, speculation will remain rampant.
ENDNOTES
For endnotes, please refer to the original pdf document.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735. Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
“Party of Hardship: The Evolution of Malaysia’s Parti Keadilan Rakyat” by James Chai
EXECUTIVE SUMMARY
• The People’s Justice Party (PKR) may in many ways be synonymous with its larger-than-life leader, Anwar Ibrahim, who, although only president for six of the party’s twenty-five years, has always been its de facto leader and adviser. However, PKR is much more than only about Anwar, and this paper traces the evolution of the party independently of Anwar as a person.
• PKR’s evolution can be broken down into four main periods: 1998–2004 (formative), 2005–13 (golden era), 2014–18 (all-in for power), and 2019–22 (lessons on restraints). From 1998 to 2022, PKR tended to adopt a big-tent approach (internally and externally), ideological synthesis to find a middle ground, and a loose organization led by a charismatic personality at the top and self-organization at the grassroots.
• PKR was born out of a major crisis when Anwar, then deputy prime minister, was sacked in 1998 and subsequently jailed twice in the following two decades. For the most part, the party operated with its figurehead in jail, thus learning how to rely on coalition strengths, working with civil society, mass movements, and political parties to survive and win power.
• The party’s loose organization became beneficial when it partnered with parties that are ideological opposites such as DAP and PAS (as part of Pakatan Rakyat in 2008), and expanded party enfranchisement via a one-person-one-vote system. This also allowed PKR to adopt a middle-ground approach in policies such as hudud and the New Economic Policy (NEP).
• However, openness and loose organization led to factionalism within the party, resulting in large-scale defections during the 2009 Perak crisis, the 2014 Selangor menteri besar crisis, and the 2020 Sheraton Move. Without pushing its big-tent approach to the limit and without working with arch-enemy Mahathir Mohamad, PKR would not have emerged victorious in the first-ever change in government in 2018 and Anwar Ibrahim would not have been pardoned and freed. Notwithstanding that, it also led to a fractious coalition and a loss of trust in the leadership during Pakatan Harapan’s term in government (2018–20).
• The post-election Unity Government with Anwar Ibrahim as the tenth prime minister marks PKR’s first “real” governing experience, and this would not have been possible without PKR’s core identity operating in full gear.
Trends in Southeast Asia 2024/15, May 2024
2024/35 “The Impacts of Supply Chain Reconfiguration on ASEAN Economies” by Aufa Doarest and Maria Monica Wihardja
EXECUTIVE SUMMARY
- At the centre of the US-China trade war are the semiconductor chip and green industries.
- ASEAN is clearly benefiting from the resultant reconfiguration of the global supply chains in these two industries in terms of trade, value addition and foreign direct investment, at least in the short run. However, these benefits can be more than offset by the greater disruption to the global supply chains should US-China tensions continue to escalate.
- Its high trade reliance on China while having the US as its largest investor (by far) and key source of technology transfers puts ASEAN in an increasingly precarious situation should the US-China supply chain decoupling intensifies.
- Forcing ASEAN to choose sides – whether to be in the US or China supply chain system – will be impossible and disruptive, and ASEAN should continue to take the pragmatic approach and reject choosing sides.
* Aufa Doarest is Private Sector Specialist at the World Bank Group’s Finance, Competitiveness and Innovation and Maria Monica Wihardja is Economist and Visiting Fellow at ISEAS – Yusof Ishak Institute and Adjunct Assistant Professor at the National University of Singapore.
ISEAS Perspective 2024/35, 17 May 2024
INTRODUCTION
Interdependence within the global supply chain has been exacerbated by the growing dependence for intermediate inputs on only a few firms and a few countries (Pangestu, 2023). The semiconductor industry and the green technology industry are two examples of highly concentrated supply chains where firms from East Asia (e.g., China, Taiwan and South Korea) are now the dominant suppliers (Miller, 2022; Nguyen-Quoc, 2023).
The heightened dependence of the US on China has raised geopolitical rivalry between the two countries and driven the reconfiguration of supply chains. Countries and companies now seek to ‘decouple’, ‘diversify’ and ‘de-risk’ their supply chain configuration away from their adversaries. Consequently, supply chains in Asia are undergoing major changes.
At the country level, a number of strategies are being adopted, including re-routing trade flows through intermediary countries; home-shoring investment through investment subsidies and tax credits; and increasing self-reliance through import substitution and research and development (R&D). At the corporate level, multinational companies (MNCs) in Asia and worldwide are adapting by adopting the ‘China Plus One’ or ‘China Plus Two or Three’ model to broaden their supply base outside China while maintaining a presence in China (Nguyen-Quoc, 2023).
This essay reviews and analyses how ASEAN economies have been impacted by the changing dynamics in the global supply chain. We focus on two industries, namely the semiconductor industry and the electric vehicle (EV) industry,[1] and look at the impacts from three angles: trade, investment and R&D.
THE US INDUSTRIAL POLICY IN CHIP AND GREEN TECHNOLOGY
Since 2018, during the Trump administration, the US has been restricting the exports of “emerging and foundational technologies” to entities abroad whenever those technologies are “essential to the national security of the US” (Bradford, 2023). This started with the Export Control Reform Act of 2018 enforced through the maintenance of a Commerce Control List and a licensing system as well as a narrower export control instrument known as the Entity List. Although the idea was to restrict exports exclusively for advanced technologies that could endanger national strategic interest – dubbed as the ‘small yard, high fence’ strategy – these export restrictions were later expanded in terms of both technologies and entities. For example, in 2020, the 2018 export restrictions to ban Huawei’s access to semiconductors were extended to cover all foreign technology companies (instead of only US firms) that use US chipmaking equipment and software tools.
In August 2022, the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act allocated USD280 billion to catalyse investments in domestic semiconductor R&D and manufacturing capacity. In October 2022, a set of export restrictions were issued to cut off China’s access to advanced AI chips and choke point technologies[2] (Ing and Markus, 2023). Later, these export restrictions were expanded into restrictions on direct investment (Shalal and Freifeld, 2023) and financial investment (private equity and venture capitals) (Siqi, 2024), as well as restrictions on individuals who hold US passports from working for Chinese chip companies (Lin and Hao, 2022).
In a spirit similar to the CHIPS and Science Act, in August 2022, the US also signed into law the Inflation Reduction Act (IRA) to catalyse investment in R&D and domestic manufacturing capacity in leading-edge green technologies, including carbon capture and storage as well as EV (Badlam et al, 2022b).[3] The law will direct USD400 billion into a mix of tax incentives, grants, and loan guarantees.
The concentration of green technology production and the critical minerals associated with it in China—and in a few Chinese firms—has sounded an alarm bell for the US. For example, China dominates 75 percent of Solar Photovoltaic technology and battery manufacturing compared to the small share the US has of only 5 percent in the production of both technologies (Li and Zhao, 2023). Similarly, China commands 55 percent of wind technology manufacturing.
The IRA is the US’ biggest and most significant national policy to combat climate change. However, it is unclear whether the IRA will leave any room for collaboration in low-carbon technologies where China is a major player, or lead to race-to-the-bottom protectionist industrial policies and strategic competition similar to that now found in the chip industry (Li and Zhao, 2023). Given the high concentration of green technology in China, diversification of trade sources is commendable. However, focusing on where the green technologies are built could risk slowing down the low-carbon transition in the US and globally.
THE CHALLENGES OF SUPPLY CHAIN RECONFIGURATION
At the centre of the US-China trade war and supply chain reconfiguration are chip and green technologies. Chip production-related activities, including assembling, packaging and testing, account for a significant share of the GDP and/or exports of ASEAN countries such as Malaysia, Singapore, Thailand and the Philippines (EDB, 2022a; EDB, 2022b).[4]
Supply chain reconfiguration in this context refers to aspects of production being shifted to countries or firms which are not necessarily the most competitive and efficient, due to geopolitical and national security factors. The new countries and firms may even have siloed technologies and production processes that are disconnected from others in the supply chain.
The impacts of supply chain reconfiguration on ASEAN economies can be strongly noted in three areas, namely (1) trade diversion through several intermediary countries to avoid goods flowing directly from China to the US, (2) relocation of FDI, (3) Research and Development (R&D) activities. The following sections discuss these separately.
TRADE [5]
China’s dominance as the world’s manufacturing superpower (Baldwin, 2024) is partly reflected in a significant increase in China’s export of EV (including Completely Built-Up and Completely Knocked Down cars but not parts such as batteries) and chips between 2017 and 2022. Within that period, China’s export of chips almost doubled, from USD 72 billion to USD129 billion, while China’s export of EV increased by almost 13 times, from USD2 billion to USD25 billion (Figure 1 and Figure 2).
Figure 1: China’s export and import of chips (in million USD)
Source: World Integrated Trade Solution (WITS, accessed February 2024), authors’ calculations
Figure 2: China’s export and import of EVs (in million USD)
Source: World Integrated Trade Solution (WITS, accessed February 2024), authors’ calculations
The US-China tech war, especially the escalating restrictions on China’s access to US technologies that started in 2018, are reflected in the trade in chips between the two countries in 2022. After an increasing trend since 2017, China’s import value of chip from the US declined from USD15.1 billion in 2021 accounting for 10.2 percent share of China’s total import of chips, to USD11.6 billion in 2022 accounting for 8.0 percent share (Table 1). Mirroring China’s import value decline is US’ export value decline of chips to China.
Table 1: US’ export of chips to China and China’s import of chips from the US
Source: World Integrated Trade Solution (WITS, accessed February 2024), authors’ calculations.
Note: There are multiple reasons for discrepancies in exports and imports data so that they don’t always mirror each other. See: https://wits.worldbank.org/wits/wits/witshelp/content/data_retrieval/T/Intro/B2.Imports_Exports_and_Mirror.htm
The US decision to diversify its trading partners and move away from China affects international trade in chips. First, China’s chips export destination pattern has slightly shifted. The share of China’s chips export to the US dropped from 19 percent in 2018 to 11 percent in 2022. At the same time, the share of China’s chips export to ASEAN countries increased slightly from 18 percent in 2018 to 20 percent in 2022 (Table 2). While the changes in the destination pattern may be due to lack of domestic demand in the US, the positive trend of US import of chips, increasing from USD79.7 billion in 2018 to USD87.2 billion in 2022, reveals that US domestic demand has actually gotten stronger. It is predicted that the demand for chips will continue to increase as AI, robots and EV become the new normal in people’s everyday lives.
Table 2: Chips export shares of China, ASEAN and Mexico (%)
| China’s Chips Export Share (%) | ASEAN’s Chips Export Share (%) | Mexico’s Chips Export Share (%) | |||
| China to ASEAN | China to Mexico | China to USA | ASEAN to USA | Mexico to USA | |
| 2017 | 17.4 | 1.3 | 17.9 | 12.0 | 69 |
| 2018 | 18.4 | 1.4 | 19.2 | 9.0 | 65 |
| 2019 | 19.5 | 1.3 | 16.6 | 9.8 | 58 |
| 2020 | 21.5 | 1.3 | 12.7 | 11.9 | 60 |
| 2021 | 20.2 | 1.4 | 10.4 | 11.5 | 65 |
| 2022 | 20.1 | 1.6 | 11.1 | 14.0 | 67 |
Source: World Integrated Trade Solution (WITS, accessed February 2024), authors’ calculations
Second, this export diversion is reflected in the import pattern of chips. The US import share of chips has shown an increasing reliance on ASEAN and a decreasing reliance on China (Figure 3). Both ASEAN and China accounted for 34 percent of US chips import in 2017; but while ASEAN’s share increased to 48 percent in 2022, China’s share was halved to 17 percent. Meanwhile the share of Mexico in US chips imports has barely changed while the share held by other countries has increased by 4 percentage points in the same period. This shows that ASEAN is clearly benefiting from US’ import diversion away from China.
Figure 3: US import of chips
Source: World Integrated Trade Solution (WITS, accessed February 2024), authors’ calculations
Unlike the chips trade, the trend of EV trade between the US and China continued to be robust in terms of value until 2022 but declined in terms of reliance (or share) (Table 3). The US used to account for 28.1 percent of China’s export in EVs but this fell to only 7.9 percent in 2022. At the same time, China had accounted for 52.5 percent of US’ import in EV but this declined to 12.8 percent in 2022.; ASEAN’s export of EVs has been increasingly going to the US (Table 4) while ASEAN’s import of EVs has been increasingly coming from China (Figure 4). The two-wheeler EV has been driving the increase in ASEAN’s export of EVs to the US. The main exporter before the COVID-19 pandemic was Vietnam.
Table 3: US’ import from China and China’s export to the US of EVs
| China’s export of EVs to the US | US’ import from China of EVs | |||
| Value (in USD billion) | Share (%) | Value (in USD billion) | Share (%) | |
| 2017 | 0.3 | 16.6 | 0.1 | 23.9 |
| 2018 | 0.7 | 28.1 | 0.4 | 52.5 |
| 2019 | 0.7 | 21.4 | 0.4 | 20.7 |
| 2020 | 1.0 | 20.4 | 0.9 | 33.4 |
| 2021 | 1.8 | 12.6 | 1.0 | 15.3 |
| 2022 | 2.0 | 7.9 | 1.6 | 12.8 |
Source: World Integrated Trade Solution (WITS, accessed February 2024), authors’ calculations.
Note: There are multiple reasons for discrepancies in exports and imports data so that they don’t always mirror each other. See: https://wits.worldbank.org/wits/wits/witshelp/content/data_retrieval/T/Intro/B2.Imports_Exports_and_Mirror.htm
Table 4: EV export value (in USD million) and share (%)
| China to ASEAN | China to Mexico | China to USA | ASEAN to USA | Mexico to USA | ||||||
| Value | Share | Value | Share | Value | Share | Value | Share | Value | Share | |
| 2017 | 136.7 | 7.0 | 7.8 | 0.4 | 326.0 | 16.6 | 0.1 | 1.1 | 182.4 | 98.3 |
| 2018 | 119.9 | 4.5 | 12.1 | 0.5 | 746.3 | 28.1 | 4.7 | 9.1 | 43.3 | 64.5 |
| 2019 | 202.3 | 6.3 | 21.7 | 0.7 | 685.5 | 21.4 | 31.6 | 24.5 | 20.8 | 65.2 |
| 2020 | 200.0 | 3.9 | 13.8 | 0.3 | 1,033.9 | 20.4 | 43.8 | 28.1 | 24.9 | 36.7 |
| 2021 | 409.5 | 3.0 | 32.0 | 0.2 | 1,750.5 | 12.6 | 74.6 | 33.2 | 1,734.2 | 43.7 |
| 2022 | 1,073.6 | 4.2 | 80.1 | 0.3 | 2,017.4 | 7.9 | 243.9 | 51.2 | 2,341.5 | 54.8 |
| Note: Value in USD million. Share in %. | ||||||||||
Source: World Integrated Trade Solution (WITS, accessed February 2024), authors’ calculations
Figure 4: Source countries for ASEAN’s import of EVs (%)
Source: World Integrated Trade Solution (WITS, accessed February 2024), authors’ calculations
In short, while the US-China trade in chips shows signs of ‘decoupling’ (reduced trade values), the US-China trade in EVs shows signs of ‘diversifying’ (reduced trade shares) but not ‘decoupling’.
VALUE ADDITION
Looking at trade in total value or volume may not give the complete picture of trade diversion. China might divert its trade to the US through intermediary countries to avoid sanctions or higher tariffs placed on goods coming directly out of China and exports coming out these intermediary countries to the US may actually be high in Chinese content.
It is therefore important to also look at trade in value-added (TiVA) data of goods and services, which measure the value added by each country in the production of goods and services that are consumed worldwide (gross production minus the purchased intermediates). We use the OECD TiVA data used in Baldwin (2024) to analyse the changes in ASEAN participation in the global value added:
- ‘Foreign Production Exposure: iMport side (FPEM)’: Share of imported input from a source country out of all industrial inputs (including domestically source inputs) used by a country on a scale of 0 to 100. Industrial inputs extend beyond the manufacturing sector and includes the agriculture and service sectors as well. The higher the index, the more reliant (and exposed) a country is to the source country on the production side.
- ‘Foreign Production Exposure: eXport side (FPEX)’: Share of a country’s manufactured production from the manufacturing sector that is exported to a particular partner on a scale of 0 to 100. The higher the index, the more reliant (and exposed) a country is to the destination country on the sales side.
Data for ASEAN are taken as the average of all ASEAN countries. Instead of looking at reliance of trade in value-added in the chips and EV industries, we look at reliance of trade in value-added in the whole economy. With a lag in the OECD TiVA data (the latest TiVA data is for 2020),[6] we may not be able to see the impacts of the more current policies such as the CHIPS and Science Act and the Inflation Reduction Act. However, we can observe a longer-term trend of trade in value-added, including China’s increasing dominance and ASEAN’s increasing participation in global value added.
The US reliance on China’s industrial inputs skyrocketed since the mid-1990s to decline since 2015, albeit with a slight up-tick in 2022 (Figure 5a). Despite this decline, in 2020, US’ reliance on China’s industrial inputs was still three times higher than China’s reliance on US industrial inputs. On the sales side, China’s reliance on the US was more than 17 times higher than US reliance on China in 1995, but the ratio declined since the early 2000s to two times in 2020 (Figure 5b).
Figure 5a and 5b: US-China reliance on the production side, and US-China reliance on the sales side
Source: OECD TiVA (updated 2023, accessed February 2024), authors’ calculations
How has the participation of ASEAN economies in global value added changed?
China replaced the US as the dominant industrial input source for ASEAN countries in 2003 (Figure 6a). In 1995, ASEAN’s reliance on US industrial inputs was three times ASEAN’s reliance on China inputs. In 2020, ASEAN’s reliance on China’s industrial input was more than five times ASEAN’s reliance on that of the US. Similarly, China replaced the US as the dominant industrial output destination for ASEAN countries in 2011 (Figure 6c). In 1995, ASEAN’s reliance on the US market was more than eight times ASEAN’s reliance on that of China. In 2020, this flipped, with ASEAN’s reliance on China’s market coming close to 1.5 times ASEAN’s reliance on that of the US. Conversely, China’s reliance on ASEAN’s industrial inputs and market is increasing and is higher compared to US reliance on those of ASEAN (Figure 6b and Figure 6d).
Intensification of ASEAN’s reliance on both China’s industrial inputs (production side) and the US market (sales side) since 2016 indicates ASEAN’s growing role as an intermediary region for Chinese goods to the US. This is supported by evidence at the country level with the correlation between Vietnam’s exports to the US and Vietnam’s imports from China doubling from 0.4 in 2020 to more than 0.8 in 2024, where 1 shows perfect correlation (The Economist, 2024).
Source: OECD TiVA (updated 2023, accessed February 2024), authors’ calculations
FOREIGN DIRECT INVESTMENT
General FDI trends
Export-oriented FDI inflow positively correlates with the trade pattern. As the trade war intensifies, trade through intermediary countries and the investment inflow going to these intermediary countries surge, including investment to build new manufacturing factories. International investors have relocated or diversified their production locations away from China and sought other Asian economies as destination for FDI to de-risk their businesses from uncertainties arising from geopolitical tensions, pandemic-induced supply chain disruptions, and rising production costs in some countries while seeking potential gains from the new global value chain and emerging sectors such as chips and EVs.
The ASEAN region is a major beneficiary of this FDI relocation (ASEAN and UNCTAD, 2023). FDI inflow to ASEAN-6 (Malaysia, Singapore, Indonesia, Thailand, Vietnam, and the Philippines) reached an all-time high of USD227 billion in 2022 and surpassed the FDI inflow to China (Figure 7). Meanwhile, FDI into China fell to its 30-year low in 2023.
Figure 7: FDI (in USD mn) in China and ASEAN-6
Source: CEIC (accessed February 2024); authors’ calculations.
Note: ASEAN-6 is used instead of ASEAN since other ASEAN countries’ investment data is not up to date.
Reconfiguration of supply chain-related FDI in ASEAN can be categorized into two groups:
- Existing investors expanding their production capacities in the region.
- New investors with/without plant/business presence in China establishing in the region while keeping their presence in China, including Chinese and Taiwanese firms (e.g., the ‘China Plus One’ strategy), or moving their plant and businesses out of China because of the intense US-China conflict.
EVs, EV batteries, electronics and chips, data centres, and the digital economy received robust new and expanded investment in 2022 (ASEAN and UNCTAD, 2023). Manufacturing investment notably scored much stronger growth than in previous years with its share in total FDI in ASEAN rising more than three folds from just nine percent in 2020 to 28 percent in 2022.
FDI by Industry
The electronics and electrical industry accounted for more than 70 percent of new manufacturing investments at USD37 billion, with chips and electronic components alone making up 27 percent of the 70 percent (ASEAN and UNCTAD, 2023), reaching close to USD9.5 billion in 2022, six times the annual average between 2010 and 2019.
Besides chips and electronic components, the ASEAN region also attracted strong investment in EVs and EV battery production as well as charging stations. New investment in batteries rose by 656 percent in 2022 compared to 2021 to USD8.4 billion, accounting for 23 percent of new manufacturing investment (ASEAN and UNCTAD, 2023). Chips, electronic components and battery production combined accounted for half of new manufacturing investment in 2022. FDI in EV-related sectors shot up from USD2.1 billion in 2019 to USD18.1 billion in 2022 (ASEAN and UNCTAD, 2023).
FDI by source and host countries
It is predicted that FDI flows are being increasingly concentrated to countries that are geopolitically aligned with the investor (Ahn et al, 2023). The US, which recently upgraded its bilateral economic relationship with Singapore, Vietnam and Indonesia, was the largest investor in ASEAN with investment reaching USD37 billion in 2022.[7] It was also the largest investor by far in the manufacturing and financial sector. Japan was the third largest investor after intra-ASEAN investment. Japanese FDI in ASEAN was concentrated in the transportation and storage industry, accounted for 88 percent of investment in the industry, reflecting its interest in the automotive industry, including EVs. FDI from China fell by USD1 billion to USD16 billion in 2022, with investment predominantly being in infrastructure projects, EV-related activities and the digital economy.
How ASEAN countries benefit from the reconfiguration of the global supply chain depends on their specialized capabilities (Varas et al, 2021). For example, outsourced chip, assembly and testing (OSAT) firms have been diversifying their global footprints in Southeast Asia such as in Malaysia, Vietnam and the Philippines. Meanwhile, Singapore captured new investment in new chips factories and hosted one of the world’s leading global semiconductor research institutions, A*STAR, whose research goes beyond chip technology.
RESEARCH & DEVELOPMENT
The recent trade and technology war between the US and China has spurred R&D subsidies. The CHIPS and Science Act of 2022 directs USD200 billion of its total USD280 billion spending for scientific R&D and commercialization into chips (Badlam et al, 2022a). Similarly, the Inflation Reduction Act of 2022 increased and expanded tax credits for R&D activities including to jump-start R&D and commercialization of cutting-edge green technology such as EV (Badlam et al, 2022b). In the same year, China upgraded the country’s tax credits for investment in semiconductor R&D from existing chips subsidies worth at least USD150 billion. The R&D subsidies in chips and green technology spill over to other countries including the European Union and Japan. Although most R&D investment is made to unlock financial constraints in the upstream and midstream industries, it usually has a chain synergy effect that catalyses R&D in the downstream industry and the overall innovation ecosystem.
How does the R&D subsidy race affect ASEAN economies? First and foremost, most ASEAN countries do not have the capability (e.g., human capital, physical capital, and regulatory ecosystem) to do cutting-edge R&D. Second, not all ASEAN countries can afford to engage in a subsidy race. Third, technology has become synonymous with geopolitical alignment and trust is a prerequisite to technology transfers. The US as the largest investor in ASEAN is key to bringing new technology to ASEAN as investment often times comes with technology transfers. At the same time, countries with a good reputation in patent and copyright law have an additional advantage in getting R&D investment.
ASEAN economies will not and should not rush into the R&D subsidy race and could instead promote an ASEAN R&D hub, perhaps located in Singapore, as a way to create a production ecosystem in the region.
CONCLUSION
ASEAN’s high trade reliance on China while having the US (by far) as its largest investor and key source of technology transfers puts it in an increasingly precarious situation if US-China supply chain decoupling intensifies. Forcing ASEAN to choose sides – to be in the US or China supply chain system – will be impossible and disruptive, and ASEAN should continue to take the pragmatic approach and reject that option. In the short run, some ASEAN countries are benefiting from the relocation of global supply chains as shown by trade, value addition and FDI data, but the high level of interdependence of global supply chains and the manufacturing hubs in China suggests that these benefits could be more than offset in the long term by the greater disruption to the global supply chains if the US-China tensions continue to escalate.
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ENDNOTES
For endnotes, please refer to the original pdf document.
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“Delivering Development, Enforcing Shariah: PAS’s Dilemma in Terengganu“ by Azmil Tayeb
EXECUTIVE SUMMARY
• Whenever the Islamist party PAS comes to power in Terengganu, its political agenda has been to combine populist-type development programmes with the wish to turn Terengganu into a shariah-compliant state.
• Terengganu’s state budget is however heavily dependent on the federal government, to the tune of 80–90 per cent. This hinders the state government’s policymaking and implementation, especially when the federal government is controlled by its political opponents.
• This article argues that the politics of development play a more central role in determining the durability of the PAS state government in Terengganu than it does in neighbouring Kelantan. In other words, PAS cannot simply carry out its Islamic agenda without being complemented by tangible economic progress if it aspires to govern beyond a single term; PAS’s loss in the 2004 election after being in power for one term is a prime example of this dynamic.
• One reason that the current PAS state government managed to get re-elected in 2022 was the unimpeded flow of oil royalty payments into state coffers since 2018, which allowed the state government to fulfil its campaign promises; PAS’s inclusion in the Perikatan Nasional federal government in 2020 further improved the state government’s financial standing.
• When the reins of the federal government changed hands to PAS’s political opponents in 2022, the oil royalty payment to Terengganu again became an acrimonious issue, in many ways reprising the post-1999 situation.
Trends in Southeast Asia 2024/14, May 2024
2024/34 “Malaysia’s Out-of-Sync Federal and State Elections: The Good, the Bad, and the Untimely” by Francis E. Hutchinson
EXECUTIVE SUMMARY
- Elections in Malaysia are held at the national and state levels, and in holding these concurrently, disruptions and costs have been reduced.
- As with the federal government, state governments can decide when to hold their elections. In the past, when Barisan Nasional (BN) was in power at the centre and in most states at the same time, this discretion was largely discounted.
- Following BN’s fall from power in 2018 and the country’s political context becoming more fluid, state government elections have been increasingly held out of sync with federal elections. In the last four years, state polls have been held on six separate occasions.
- Concerned about rising costs, prolonged campaigning as well as implications for the country’s political stability, some have proposed clustering state elections or ensuring that they are held alongside national polls.
- There are pros and cons to such arrangements. Concurrent polls can be cheaper, encourage higher turnout rates, and reduce the length of campaign seasons. Conversely, state leaders would be forced to hold elections at times not of their choosing, and state-level issues could be overshadowed by national ones.
- The challenges inherent in pursuing such a reform in Malaysia are considerable and would involve amending the federal constitution, as well as the various state constitutions.
- Consequently, it is likely that the Unity Government will head into the next electoral season under the current arrangement. The Sabah and Sarawak state elections are due in 2025 and 2026 and can be held without much concern for the current coalition arrangements.
- In contrast, the Melaka and Johor elections will be crucial barometers for the Unity Government. Due by late 2026 and mid-2027 respectively, they may expose internal weaknesses in the run-up to the general election due some 9-12 months later.
* Francis E. Hutchinson is Senior Fellow and Coordinator of the Malaysia Studies Programme at ISEAS – Yusof Ishak Institute. The author would like to thank Lee Hwok Aun, Ong Kian Ming and Sara Loo for their comments, feedback, and inputs.
ISEAS Perspective 2024/34, 15 May 2024
INTRODUCTION
Malaysia has a multi-levelled political system, which is comprised of a federal government and 13 state counterparts – all of which hold their own elections.[1] Influenced by the British Westminster system, the federal government holds elections for parliament – and the state governments for their assemblies – at least once every five years. With the exception of Sarawak, which has run on its own electoral cycle since 1963, elections for the federal and state governments have traditionally been held simultaneously.[2]
This arrangement has been a tradition, rather than a result of any specific legislation. According to the Constitution, elections at the federal and state levels are called by the King or Sultans and Governors on the advice of the elected leadership in parliament or respective state assembly. Given this, state leaders have the prerogative to call for elections at any time, independently of the federal government.[3] Elections at both the national and state levels are organized and overseen by the Election Commission, whose establishment is stipulated by the Federal Constitution.[4]
What minimized dispersion in election dates in the past was the fact that, up until 2018, the Barisan Nasional (BN) coalition was in power at the federal level and also in most states. Consequently, elections were held at the behest of the BN leadership and taken with national interests at the forefront. While BN state leaders may or may not have been in agreement with the timing, internal party mechanisms served to ensure compliance. BN state leaders often aspired to subsequent national cabinet positions and were reluctant to defy orders from national leaders which could compromise their career trajectories. Furthermore, recalcitrant menteri besar or chief ministers could be toppled by votes of no confidence passed by BN assemblypersons.[5]
In recent years, this homogenizing influence has lost force. In 2008, Barisan Nasional was beaten unprecedentedly in five state governments. In 2018, BN was defeated at the national level and in most states for the first time. Following a two-year interlude, BN returned to federal power – but in a subordinate position in the Perikatan Nasional and then the Unity Government groupings. The relative decline in BN’s power at both federal and state levels allows more autonomy for state leaders to prioritize local considerations when calling for elections.
Out-of-cycle elections can occur for several reasons. First, state governments can rise and fall due to local-level machinations. Motions of confidence and no-confidence can be passed in state assemblies, and – similar to the Sheraton Move in February 2020 that led to the fall of the Pakatan Harapan administration – local coalitions can come undone. Thus, the precipitous Sabah election in 2020 arose due to a faction of the ruling coalition crossing the floor to join the opposition. Deprived of his majority, then-chief minister Shafie Apdal opted to call an election.[6] In a similar move, the 2021 Melaka election was held because a group of UMNO representatives withdrew their support for the sitting administration, thereby denying it a majority in the state assembly.[7] The Johor election in early 2022 was ostensibly called because the death of an assemblyperson meant the sitting coalition commanded only the slimmest of majorities.[8]
Second, elections can be held out-of-cycle when the federal government decides to hold its own polls early. National-level leaders often seek to hold elections in circumstances that are favourable to them, such as following budget launches or when economic tailwinds are particularly favourable. Of course, national-level political dynamics may also push for earlier polls. While the fifteenth general election could have been held as late as in September 2023, in October 2022 the Ismail Sabri-led administration ceded to pressure from the United Malays National Organisation (UMNO) to ride on the momentum generated by the Melaka and Johor state elections, maximize the political bounty from the October budget release, and avoid the worst of the monsoon season.[9]
However, the November 2022 date meant that state governments also holding their polls then would have effectively lost almost a full year of their terms. Despite the recommendation by the Prime Minister Ismail Sabri that all eligible state governments hold their elections along with the national government, only the BN-led state governments of Perlis, Pahang, and Perak opted to do so.[10]
Conversely, states led by the opposition grouping Pakatan Harapan (PH) and the Islamist party, Parti Islam Se-Malaysia (PAS) opted to go to their full terms.[11] Among other reasons, party leaders argued that they needed to prepare for the year-end flooding season.[12] Despite being led by different coalitions, the leaders of these six states were able to arrive upon a mutually-agreed schedule to dissolve their assemblies.[13] Following this, the Electoral Commission established 12 August as the common date for elections in Negri Sembilan, Selangor, Penang, Kedah, Kelantan and Terengganu.[14]
Faced with the cost of holding elections more frequently, as well as the potential for instability, there have been calls for measures to make the political system more structured.[15] There are arguments in favour of, and against simultaneous elections. While relatively few countries have mandated simultaneous polls and some actively discourage them, this reform is currently being debated in India, for example. This country’s constitutional similarities to Malaysia and the related discussions illustrate the complexities inherent in pursuing such a reform.
As Malaysia transitions towards a more dynamic and fluid political context, this issue will continue to simmer. This Perspective examines this issue in four sections. Following this introduction, the second will look at the costs and benefits of synchronous and asynchronous elections. The third section will look at the experience of other countries. The final section will look at how such a reform could work for Malaysia going forward.
COSTS AND BENEFITS
There are theoretical arguments for and against holding simultaneous elections.
The first argument in favour of simultaneous elections is cost. Holding national and state elections on the same day means that the election workers, physical infrastructure, and associated logistics are only used once. For example, the August 2023 state elections cost an estimated RM 420 million.[16] Had they been held alongside their national equivalent in November 2022, they would have added little to the RM 1.1 billion budget earmarked for those polls.[17] It is also important to note that the costs involved in organizing the elections are borne by the federal government. This means that state governments actually wield the discretion of when to hold elections but do not incur the associated costs.[18]
The second argument concerns political participation. National polls usually have higher rates of voter turnout than their state-level equivalents. Thus, holding elections simultaneously would increase the proportion of people voting for their respective state leaders.[19] This issue is of particular importance to outstation or overseas residents, who need to travel back to their constituencies to vote. Holding simultaneous elections would increase the probability of them voting for both levels of government, rather than requiring them to return more than once over a five-year cycle.
Analysts also argue that holding national and state elections simultaneously would concentrate political activity to one specific period, allowing life to return to normal soon after. Despite the Unity Government’s large parliamentary majority, many argued that the August 2023 state polls constituted a de facto referendum on the new administration. Consequently, much bandwidth and political capital were consumed in preparing for these polls, held a mere nine months after the November 2022 election. Furthermore, frequent elections, persistent campaigning, and prolonged periods of political uncertainty can undermine public trust in polls altogether.
Nonetheless, there are valid counterarguments to such an arrangement. First, it can be argued that forcing state governments to align their electoral cycles with national ones goes against the spirit of federalism, which seeks to incorporate different political, cultural, and social aspirations within one framework. Additionally, such a measure would deny autonomy and agency to state leaders. As with their national equivalents, states have their own political rhythms and dynamics, and a specific state administration may have valid reasons for holding polls at another time. Furthermore, holding elections simultaneously would reduce the salience of state-level political issues, as attention to national-level issues and debates would be prioritized.[20] Last, making politicians face more frequent electoral tests increases their accountability to voters.[21]
There is an additional argument that holding smaller subsets of elections makes the logistics more manageable. This is because the election machinery is not overly stretched and can focus on specific polls in different parts of the country.[22] This argument has more traction for demographically and geographically large polities, as large numbers of officials need to be mobilized and immense logistical challenges addressed all at once.[23]
Asynchronous elections can also provide crucial information for national leaders. Thus, state or provincial elections held in the run-up to national polls can yield crucial information for party leaders and strategists. Results can be used as a barometer for prevailing opinions and support for flagship policies. In addition, electoral weaknesses and swing voters can be identified to allow more focussed messaging during national campaigns. However, these elections can also create instability should support levels in key states drop or exacerbate existing electoral vulnerabilities.
INTERNATIONAL EXPERIENCES
Despite the theoretical advantages to holding concurrent elections, there are relatively few countries that currently have this electoral arrangement. South Africa and Sweden are two notable cases where national and subnational elections are held at the same time.
In South Africa, the electoral arrangements were the result of protracted negotiations between different ethnically-based parties that were concerned about issues such as voter turnout and representativity. The end result was an agreement that national and provincial elections would be held simultaneously in order to enable out-station voters to return to vote, but that voters would use different voting forms for each election in order to underline their different purpose.[24]
In Sweden, simultaneous elections have been credited with the country’s high turnout rates, particularly for subnational elections. That said, there have been calls to separate the elections in order for more media coverage of local issues. This is due to the perception that national-level issues tend to dominate elections.[25]
Most federal countries prefer to hold national and subnational elections on different dates and, in some cases, follow distinct electoral cycles. Australia and India are useful comparators for Malaysia, as they are both federal systems with a central government and state counterparts. Indeed, these two countries’ federal systems influenced the eventual structure adopted in Malaysia upon its independence. The Reid Commission, charged with designing Malaysia’s federal system, had constitutional experts from the United Kingdom, Australia, India, and Pakistan.[26]
Turning to Australia, its electoral system is specifically designed to ensure that federal and state elections do not coincide. Federal elections for the lower house are on a three-year cycle although, following the Westminster tradition, parliament can be dissolved and elections held earlier than this.[27] In contrast, most state elections have a fixed four-year cycle, with stipulated dates and days of the week when these elections must take place.[28]
While some states have held elections on the same day, federal elections have never been held concurrent with a state election.[29] There is, at present, no discussion about moving towards simultaneous elections in Australia, although extending federal government terms to four years is being debated.[30] Constitutional amendments are onerous to organize and require the bill to be passed in parliament and then decided via a national referendum.[31]
India offers another instructive comparator. Being a federal system like Malaysia, the Indian constitution provides state governments the authority to hold their own elections. During the first two decades following independence, the Congress party was in power at the centre and in most states and all shared the same electoral cycle. However, after 1967, elections began to be held out of sync, as first several state governments and then the central government dissolved early.[32] Today, with the federal government and 30 state and territory governments holding their elections, polls are a frequent event.
In a bid to promote national unity, reduce time and resources spent on campaigning, as well as lessen administrative costs, the Modi administration has been promoting ‘One Nation, One Election’. The arguments have focussed on cost efficiency, reducing the time spent on elections and campaigns, lessening demands on the armed forces who are mobilized to ensure safety and security, and reducing the salience of polarising discourse during campaigns.[33] The biggest pushback has come from state- or regionally-based political parties who argue that this measure would lessen the time and importance spent on local issues, and voters would be encouraged to vote the same way for national and state leaders. Others such as Congress leader Rahul Gandhi have argued that it goes against the country’s formation as a ‘Union of States’.[34]
Beyond the theoretical reasons for or against this reform, the practical challenges inherent in this reform are formidable. Homogenizing national and state elections would require curtailing the tenures of more recently elected state administrations and lengthening the terms of other administrations that had been elected earlier. However, while this could be done as a one-off exercise, unless the legislation bestowing autonomy to the state governments to call for their elections is amended, there is nothing to prevent them from reverting to their own cycles if they so wished.
Ensuring a more permanent arrangement would involve adding an elaborate framework of rules. These would govern how state administrations can be dissolved, as well as provide for the frequent use of President’s Rule or Emergency powers by the central government to run states for the intervening periods between when their assemblies are dissolved and when the next scheduled elections take place.[35]
OPTIONS FOR MALAYSIA
How, then, does the scenario look for Malaysia?
In the short term, it is unlikely that the Unity Government administration will be able to persuade the leaders of the different states to adopt timings for elections that are against their interests. Internal party hierarchy can influence state administrations run by Pakatan Harapan, given that this coalition is at the core of the sitting government. However, given that it is not yet clear whether BN will remain a coalition partner with PH going into the next national election,[36] it is likely that BN will decide election dates for the states it controls based on its interests alone. This is even more likely for states run by the opposition coalition, Perikatan Nasional.
Consequently, the Unity Government has two options for addressing this issue. The first would be an ambitious structural reform along the lines being debated in India. This would require some amendment to the timing of a national election, perhaps along the lines of a fixed term. Such a reform would require a constitutional amendment. The Unity Government ostensibly has more than a two-thirds majority in parliament which could be used to pass this measure. However, this would only apply to the federal government. Amendments to provisions surrounding the dissolution of legislative assemblies are stipulated in the various states’ constitutions and changes would also require amendments to these foundational documents.[37] For any reform of this nature, it is likely that extensive preparation would be necessary, including studying electoral processes elsewhere.
In addition, discussion of political reform is currently more focussed on separating the offices of the attorney general and public prosecutor, as well as the extension of citizenship to children born overseas to Malaysian mothers.[38] Consequently, it is highly unlikely that substantial changes to the electoral system will be implemented ahead of the next round of elections.
This then leaves the more organic approach of having the state elections follow their current cycle. The table below has the dates of the most recent election for Malaysia and for the thirteen states, along with the latest date on which parliament or the respective state assemblies can dissolve. This date is five years from the day of the first parliamentary or assembly sitting. Following dissolution, elections need to be held within the subsequent 60 days.
| State/national | Date of last election | Latest date for dissolution |
| Sabah | 26 September 2020 | 8 October 2025 |
| Melaka | 20 November 2021 | 27 December 2026 |
| Sarawak | 18 December 2021 | 14 February 2027 |
| Johor | 12 March 2022 | 21 April 2027 |
| Malaysia | 19 November 2022 | 19 December 2027 |
| Perlis | 19 November 2022 | 19 December 2027 |
| Perak | 19 November 2022 | 19 December 2027 |
| Pahang | 19 November 2022 | 19 December 2027 |
| Negri Sembilan | 12 August 2023 | 26 September 2028 |
| Selangor | 12 August 2023 | 19 September 2028 |
| Penang | 12 August 2023 | 29 August 2028 |
| Kedah | 12 August 2023 | 25 September 2028 |
| Kelantan | 12 August 2023 | 5 September 2028 |
| Terengganu | 12 August 2023 | 24 September 2028 |
Looking ahead, Sabah and Sarawak are among the earliest state elections to be held. The political configuration of these two states is quite different from the peninsula and the results of the elections are likely to be relatively self-contained. For Sabah, it is quite likely that the eventual ruling coalition at the state level will seek to align itself with the ruling coalition at the federal level. For Sarawak, past trends indicate that the coalition in power at the state level, Gabungan Parti Sarawak (GPS), is likely to remain in power. GPS is also a current member of the Unity Government and it is unlikely that there would be a reconfiguration of this relationship so far ahead of national polls.
This is not the case for Melaka and Johor, whose elections are due roughly one year and eight months ahead of the next general election. These two states are particularly important for UMNO, lying in the southern part of the peninsula, which is one of the last redoubts of Malaysia’s grand old party. Of the two, Johor is the most important, given the party’s founding in the state and traditional strong reputation of people from the state at the party’s apex.[39]
There will be several dynamics at the forefront when UMNO party strategists plot the ideal date for the various state elections. The first will be the popularity of UMNO party president Zahid Hamidi particularly among UMNO grassroots members. In Melaka and Johor, the party is exceptionally disciplined and able to mobilize contingents of supporters to turn up to vote. However, should Zahid’s leadership be contested or should there be signs of unrest within the party, the turnout levels could be affected. Indeed, party members could even use these polls as a way of signalling their discontent. An upset in one of these states would affect UMNO’s momentum in the run-up to the national election.
Conversely, should the UMNO leadership feel confident, it could contemplate holding the Melaka, Johor, and even the Perak and Pahang state elections together. This would cost the latter states almost a year of their terms and would represent a huge gamble for the party. That said, solid wins across these states would put UMNO in a very solid position ahead, both of national polls and of inter-coalition bargaining in preparation for national polls.
Another option would be to delay elections in some of these states to cluster them. The way to do this would be to declare an Emergency in the states running on an earlier electoral cycle. This was done most recently in 2021, when the Sarawak state election was delayed from June to December 2021, due to the COVID pandemic.[40] That said, a plausible reason would need to be given, and consent obtained from both the King and the Prime Minister. This, in turn, would require delicate inter-coalition negotiation between PH and BN.
Relatedly, the other determining factor would be the relationship between PH and BN as they plan their electoral strategies for the next general election. Will they contest jointly or separately? From PH’s point of view, the Melaka and Johor elections would be held uncomfortably close to national polls if they were to run their full terms. However, any move to bring the national election forward to coincide with the elections in these states would entail sacrificing almost a year of the current term. This is unlikely.
Another option would be for the current schedule to run its course, with the Sabah, Melaka, Sarawak and Johor elections taking place in that order. Then, if the Unity Government and particularly Pakatan Harapan is feeling confident, they can bring the Penang, Selangor, and Negri Sembilan elections forward and hold them alongside the federal election. This would allow them to accumulate political capital and begin the second term on the front foot. Given that Perikatan Nasional is solidly in power in Kedah, Kelantan, and Terengganu, there will be little that the Unity Government can do to influence the timing of their state elections. However, in reducing the number of states holding their elections just after national polls, the ‘mid-term’ effect on the sitting administration (should it be elected) would be reduced. Conversely, should Pakatan Harapan feel unsure about its chances at the federal level, it may seek to allow the elections in the states it currently controls to proceed to their full term, thus spreading the risk across two sets of polls. It is also possible that different PH component parties have different preferences regarding the timing of the polls in the states they control.[41]
The end of BN’s dominance in 2018 has had multiple effects on Malaysia’s political system. The reduction of the coalition’s influence at both the federal and state levels has uncovered the underlying autonomy of state governments. Given the challenges inherent in adding more structure and predictability to the timing of elections, the most likely scenario is that out-of-cycle polls will remain a characteristic of Malaysia’s political system for the foreseeable future. Political leaders will continue to cross the river by feeling the stones and seeking to determine the direction of the wind. Now, however, the wind blows from different directions.
ENDNOTES
For endnotes, please refer to the original pdf document.
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2024/33 “A Study of the Emerging Electric Vehicle (EV) Supply Chain in Malaysia” by Tham Siew Yean and Neo Hui Yun Rebecca
EXECUTIVE SUMMARY
- Hybrids and Battery Electric Vehicles (BEVs) comprised a mere 4.9% of total four-wheeled vehicles sold in Malaysia in 2023. The government is, however, targeting to achieve at least 15% of Electric Vehicles (EVs) penetration in the country by 2030. This is in line with the Low Carbon Mobility Blueprint (LCMB 2021-2030), whose figures include hybrids and electric motorcycles. The basis for the target is unknown and therefore it is also unclear whether the target has been set at too high or too low a level.
- The Malaysian Investment Development Authority (MIDA) has been tasked to promote and facilitate the investments needed to create the EV supply chain for the country.
- EV investments in Malaysia over the last few years show a diverse and diffused pattern, covering different segments of the supply chain, and distributed across various states in the country.
- While the emerging supply chain sees the entry of new automotive players spread across different states, the main foreign brands assembling in Malaysia, namely Toyota, Honda, and Mitsubishi, have yet to introduce battery electric vehicles (BEVs). These are instead still assembling at the Energy Efficient Vehicle (EEV) segments, which include hybrids.
- The demand for EVs continues to be deterred by the unavailability of affordable BEVs and the slower than expected installation of charging infrastructure. The capital costs for the latter are relatively high, while EV adoption rates remain low.
- This chicken-and-egg problem requires the government to intervene in the development of public charging infrastructure and to provide a clear roadmap for the transition from internal combustion engines (ICE) to BEVs, rather than just set aspirational targets alone.
ISEAS Perspective 2024/33, 9 May 2024
* Tham Siew Yean is Visiting Senior Fellow at ISEAS – Yusof Ishak Institute and Emeritus Professor at Universiti Kebangsaan Malaysia. Neo Hui Yun Rebecca is Research Officer at ISEAS – Yusof Ishak Institute. Both authors would like to thank Manggi Habir, Siwage Dharma and Cassey Lee for their comments on an earlier draft.
INTRODUCTION
Malaysia has announced an ambitious plan to boost Electric Vehicles (EVs) development within the country, proposing to achieve at least 15 percent EV usage of the country’s total industry volume (ITV)[1] by 2023, and 38 percent by 2040.[2] To facilitate this ambitious plan, the government formulated the National Automotive Policy (NAP) and the New Industrial Master Plan 2030 (NIMP 2030). The NIMP 2030 is an industrial policy document formulated to provide national strategic directions for industrial development. It mainly oversees all manufacturing and manufacturing-related service sectors, and facilitates collaboration between the government and the private sector.[3] The NAP, on the other hand, focuses more on the development of energy-efficient vehicles (EEVs) through specific strategies.[4] These include establishing a framework, roadmaps and blueprints for developing next-generation vehicles (NxGVs) or EEVs with some degree of automation, designed to make Malaysia a regional hub for NxGVs.[5] In that sense, the NAP’s primary aim is to develop various types of EEVs, while the NIMP specifically highlights the development of EVs as part of Malaysia’s industrial policy mission to push to net zero.
New investments are needed to create an EV ecosystem. This includes having multiple stakeholders who effectively cover the end-to-end value chain for EVs, such as power utilities providers, infrastructure developers, manufacturers (for example, original equipment manufacturers (OEMs), component suppliers etc), battery providers, policymakers, regulators, EV-related business associations, and researchers for research & development (R&D) purposes.[6] To facilitate investments in this new sector, the Malaysian Investment Development Authority (MIDA), which is the main government agency tasked to promote and facilitate investments in manufacturing and services in the country, has provided incentives such as Pioneer Status or Investment Tax Allowance for a list of promoted products in the EEV and NxGV supply chain. The products promoted include the critical components needed in the assembly of EEVs and NxGVs, such as electric motors, batteries, and battery management systems.[7]
According to MIDA, 58 projects worth RM26.2 billion were approved for EV and its related ecosystems from 2018 to March 2023.[8] This includes foreign marques establishing a presence to sell and distribute cars in Malaysia as in the case of Tesla, which has just established an office as well as an experience and service centre for the import of Tesla EVs that are assembled in Shanghai.[9] Tesla is also building a network of Supercharger fast-charging stations, with its latest installation in Pavilion Bukit Jalil, the sixth Supercharger deployment within six months of its debut in Malaysia.[10] These charging stations differ from the government’s network of charging stations, given that they are designed only for Tesla vehicles. That being said, the Malaysian government has stepped in to ensure that foreign investors like Tesla can contribute to the expansion of the EV ecosystem in the country. As part of the approval process for Tesla’s establishment, the company is required to set up at least 50 Superchargers within three years, with 30% of these being accessible to other EV brands.[11]
This article attempts to shed light on various little-known investments that are being made to support the entire EV supply chain, focusing on what and where these investments are located, as well as which parts of the supply chain these involve. This article will also elaborate on the key challenges faced in establishing an EV ecosystem in Malaysia.
EV SALES IN MALAYSIA
Four-wheel vehicle sales fell in 2019-2021 due to the Covid-19 pandemic, but recovered from 2021 onwards to grow to 774,600 units for passenger and commercial vehicles in 2023 (Figure 1). Sales of hybrids grew by 3.5 times while battery EVs (BEVs) grew from a low base of 278 to 10,159 from 2021 to 2023 (Figure 1). Demand picked up after the government provided various incentives, facilitated by the post pandemic economic recovery and the market entry of EV versions of popular premium cars like the BMW and Mercedes Benz as well as new and well-known EV marques like Tesla, BYD and GMW.[12] Be that as it may, in 2023, hybrids and EVs comprised a mere 4.9% of total vehicles sold in 2023. The government is targeting to achieve at least 15% by 2030, based on the Low Carbon Mobility Blueprint (LCMB 2021-2030), whose calculations include electric motorcycles. Although electric motorcycles were also provided purchase rebates[13] by the government, the uptake has been slow; these bikes have reportedly a market share of only 1.7%.[14]
The government has targeted to have 100,000 electric cars on the road, including 2,000 electric buses and 125,000 charging stations in the country by 2030. Achieving this depends on several factors including how fast the EV ecosystem evolves to meet the aspired demand.[15] Overcoming challenges such as EV’s affordability, and accessibility to charging infrastructure is important if the EV ecosystem is to advance.
Figure 1. Sales of Total Vehicles, Hybrids and BEVs, 2021-2023
Source: MAA and Chan 2024[16]
EMERGING EV SUPPLY CHAIN
The EV supply chain comprises several key components, starting with the sourcing and transportation of raw materials, followed by battery manufacturing, vehicle design and assembly, EV sales and dealership, and lastly EVs’ end-of-life management, such as battery recycling.[17] This differs from the supply chain of ICE, in having fewer mechanical parts, with the EV battery being the key component and representing over 40% of the total cost.[18] However, as the technology develops, the cost of EV batteries is also expected to fall over time.
Investments in Malaysia over the last few years show a diverse and diffused pattern. These cut across all segments of the supply chain, and are distributed across various states in the country (Figure 2). The following sections illustrate the various components of the EV supply chain, and the companies involved.
Figure 2. Manufacturing Plants for EVs in Peninsula Malaysia
| No. | Technology Partner(s) | Local partner/company | Name of company | Products/Service |
| Kedah | ||||
| 1 | Stellantis (US) | None | Stellantis (US) | ICE, hybrids and EV Assembly plant |
| 2 | Infineon and Siemens (Germany) | None | Infineon Technologies AG | EV electronic chips |
| 3 | Eve Energy (China) *Unconfirmed site | None | Eve Energy Malaysia Sdn Bhd | Battery assembly |
| Penang | ||||
| 4 | Shenzhen Serious Technology Material Co. (China) | n.a. | INV New Material Technology (M) Sdn. Bhd | Battery separators |
| Enovix (US) | None | Enovix | Battery for four-wheelers | |
| 5 | United E-motor (Indonesia) | Antroniq (Malaysia) | Antroniq Bhd. | E-motorbikes |
| Selangor | ||||
| 6 | Volvo (Germany) | Federal Auto | Volvo Malaysia | Assembly of EVs |
| 7 | China’s Sharkgulf Technologies Group Ltd, Blueshark (China) | EP Manufactuing Berhad | EP Manufactuing Berhad | Electric motorcycles |
| 8 | Tron Bradbury Energy (Taiwan) | None | Tron Bradbury Energy (Malaysia) Sdn Bhd | Commercial EVs and energy storage systems (including Battery R&D) |
| 9 | Thamlev (USA-based) | None | Kulim Thamlev Mobility Sdn. Bhd (Malaysia) | Electric motorbikes |
| 10 | Graphene Synergy (Malaysia) | Graphene Synergy R&D Berhad (Malaysia) | Graphene Synergy R&D Berhad | Graphene-based raw materials |
| Negeri Sembilan | ||||
| 11 | Samsung SDI Co Ltd (Korea) | None | Samsung SDI Energy Malaysia Sdn Bhd (SDIEM) | Lithium-ion battery by 2025 |
| 12 | Chinese companies like Higer and Yu Tong and Hozon Auto | Joint venture between Careplus Group Bhd and GoAuto Group Sdn Bhd with Chinese companies like Higer and Yu Tong and Hozon Auto | NexV Manufacturing Sdn Bhd (NMSB) | Assembly of Neta brand and other completely-knocked-down (CKD) operations |
| Melaka | ||||
| 13 | BAIC and Great Wall (China) | EP Manufacturing Bhd (EPMB) | EP Manufacturing Bhd (EPMB) | Manufacture and assembly of four-wheel EEVs, EVs, and electric commercial vehicles |
| Johor | ||||
| 14 | United E-motor (Indonesia) *Unconfirmed site | Antroniq (Malaysia) | Antroniq Bhd. | E-motorbikes |
| Pahang | ||||
| 15 | Mercedes Benz (Germany) | DRB Hicom | Mercedes Benz Malaysia | Assembly of EVs |
| 16 | Graphjet Technology Sdn Bhd (Malaysia) | Graphjet Technology Sdn Bhd(Malaysia) | Graphjet Technology Sdn Bhd(Malaysia) | Transform palm industry waste materials, palm kernels, into graphite and single-layer graphene. |
Notes: n.a.: Not available
Source: Compiled by authors
COMPONENTS OF EV SUPPLY CHAIN
Minerals
Critical minerals like nickel, lithium, cobalt, manganese, rare earth, and graphite are needed for battery Electric Vehicles (BEVs). Indonesia, for example, has used its nickel reserves to develop an EV battery supply chain as well as the manufacture and assembly of EVs.[19]
Although Malaysia has some critical minerals such as rare earth elements (REE),[20] policies regarding its extraction, processing and usage are still being formulated. A Parliamentary Caucus for Critical Minerals was established in March 2024 to strengthen understanding of matters relating to critical minerals as well as advocate for a legal and regulatory framework to manage Malaysia’s critical mineral sectors.[21] Malaysia currently has domestic sources of nickel, cobalt, manganese, and graphite, which should ease the country’s efforts to develop its own EV supply chain.
Nevertheless, foreign investments in minerals have begun to emerge in Malaysia. From Figure 3, Sarawak in East Malaysia is venturing into graphite manufacturing, including synthetic graphite, in Bintulu, under a Memorandum of Understanding (MOU) between Sarawak Economic Development Corporation (SEDC), and Gallois New Energy Materials (M) Sdn Bhd.[22] The latter is a subsidiary company of the established Madagascar graphite miner, Gallios.[23] Although graphite is used for EV batteries, Sarawak has announced that it also intends to use it for the development of hydrogen fuel cells. The state is championing the use of such cells in public transportation.[24]
Figure 3. Manufacturing Plants for Mineral and Batteries in Sabah and Sarawak
| No. | Technology Partner(s) | Local company | Products/Service |
| 1 | SK Nexilis (South Korea) | KKIP (Kota Kinaablu Industrial Park) Sdn Bhd (Malaysia) | Copper foil manufacturing for EV batteries |
| 2 | Gallois New Energy (HK) | SEDC Energy (Sarawak), Gallois New Energy Materials (M) Sd Bhd | Graphite plant |
Source: Compiled by authors
Peninsular Malaysia is also pursuing the development of alternative mineral resources, namely graphene. In fact, a National Graphene Action Plan was launched in 2014, which focuses on the commercialisation of graphene, including for the use of lithium-ion battery anodes.[25] The most important development on this front is the emergence of an initially private local company, Graphjet Sdn. Bhd, in 2019. Graphjet has patented technology to produce graphene from recycled palm kernel shells, which can then be used for EV batteries, medical devices and home appliances.[26] The company was also identified as one of NIMP’s national mission-based projects or catalytic projects, at the launch of the plan in 2023.[27] It is building a factory at Malaysia-Kuantan Industrial Park (MCKIP) in Pahang, where it is expected to produce 10,000 tonnes of graphite and 60 tonnes of single-layer graphene annually.[28] In March 2024, the company went public on Nasdaq Global Market.[29] It also aims to be the leading source of graphite and graphene in the US market, thereby offering itself as an alternative source to China, which is the largest synthetic graphite manufacturer in the world.
Another local R&D company, Graphene Synergy R&D Sdn. Bhd, is also producing graphene and graphene-based materials at Teknologi Park Malaysia, in Selangor. It is exploring partnerships with producers and manufacturers.
EV Batteries
Malaysia also has investments in EV battery assembly for two and four wheelers as well as the manufacture of key components for EV batteries. The government has initiated various incentives to attract investors, including having tax break extensions for the production of various components in battery assembly.[30] For battery assembly, investments come from different countries such as China, the US, Taiwan, and South Korea. Their new manufacturing plants are primarily concentrated within Kedah, Negeri Sembilan, Penang and Sabah. Table 1 illustrates the investors involved in the development of EV battery components.
Table 1: List of Investors for EV batteries and its components
| State | Name of Investor(s) | Details of investment |
| Kedah | Eve Energy | Manufacture lithium-ion batteries at a new factory in Kulim.[31] |
| Penang | Joint-venture between Enovix Corporation (lithium-ion manufacturer listed in Nasdaq), and YBS International of Malaysia | Manufacture silicon battery at Penang Science Park.[32] |
| INV New Material Technology (M) Sdn Bhd, which is a subsidiary of Shenzhen Senior Technology Material Co. Ltd | Manufacture wet process and coated separators for lithium batteries, key components in ensuring battery safety | |
| Negeri Sembilan | Tron Energy Technology Corporation, in partnership with Bradbury Asset Management (Hong Kong) Ltd | Planning to build a battery research and development facility at Malaysia Vision Valley |
| Samsung SDI | Building a battery factory | |
| Sabah | South Korea with SK Nexilis | Producing copper foil for EV battery materials manufacturer SKC |
EV ELECTRONICS
Germany’s Infineon Technologies and Siemens will expand their facility in Kulim Hi-Tech Park to manufacture chips for different uses, including in EVs. These are crucial components in EVs and can affect their optimal and efficient performance.
Vehicle Assembly
Luxury cars with plants in Malaysia have already started assembling EV models locally. For example, Mercedes Benz in Pahang launched locally assembled CKDs in early 2023.[33] Volvo is also assembling EVs at its plant in Shah Alam and plans to export locally assembled EVs to other countries in ASEAN.[34]
There are also new vehicle players coming from new source countries. Stellantis from the US has acquired Naza Automotive Manufacturing Sdn. Bhd. and the latter’s manufacturing plant in Gurun, Kedah.[35] This company assembles various marques such as Peugeot, Alpha Romeo, and Citroen, and is reportedly planning to assemble ICEs, hybrids and BEVs for Malaysia and the regional market, using Malaysia as its ASEAN hub.[36] The targeted plan is to assemble the first EV in Malaysia by the second half of 2024, followed by the production of its BEV series (STLA medium vehicle) in 2025.[37] Tron Bradbury Energy (Taiwan) and Bradbury Asset Management (Hong Kong) Ltd, are also planning to assemble commercial vehicles at Port Klang.[38]
Locally assembled electric motorcycles are also emerging. The first is a partnership between Malaysia’s Antroniq, an investment holding company, and Indonesia’s United E-motor in Batu Kawan, Penang and Johor.[39] US-based Thamlev, which was started by a Malaysian, is assembling at Balakong in Kuala Lumpur.[40] A local parts and components manufacturer, EP Manufacturing Berhad is partnering with China’s Sharkgulf Technologies Group Ltd, to assemble, manufacture and distribute the latter’s Blueshark two-wheeler at Glenmarie in Shah Alam, Selangor.[41]
Two local companies have been given the license to assemble EVs with technology partners from China, in Melaka and Negeri Sembilan. While new players make an entry into the automotive market in different states, main foreign brands assembling in Malaysia, namely Toyota, Honda, and Mitsubishi,[42] have yet to introduce BEVs and are in fact still assembling at the EEV segments, including hybrids. According to Toyota, their stand remains at providing a broad range of engine options for their consumers, which includes petrol, diesel, hybrid, plug-in hybrid, and hydrogen. As much as electric cars can be a solution to carbon neutrality, Toyota believes that there is still value in investing in other fuel types such as hydrogen fuel cell, synthetic fuel etc.[43] This could account for their slow entry into the BEV markets, including in Malaysia.
CHALLENGES TO THE EMERGING SUPPLY CHAIN
Slow take-off of affordable EVs
EVs continue to remain out of reach for most Malaysians, primarily due to their high prices. According to MITI’s Franchise AP policy, the import of completely built-up (CBU) EVs is capped at the road price tag (OTR)[44] of RM100,000 to prevent dumping and to provide time for local car manufacturers, primarily Proton and Perodua, to develop their EVs for the local market. As much as the restriction aims to protect the interest of local players, it has nevertheless led to a slow introduction of affordable EVs in the market. This effectively means that the majority of EVs are priced much higher than petrol-powered vehicles (the cheapest EV in the market still costs around RM140,000[45]), a price unaffordable for most Malaysians. While Proton and Perodua have announced intentions to produce their own EVs by 2025,[46] no concrete plans have been released.
Difficulty in developing an EV supply chain that can support local assembly could be the reason for slowness in pushing out affordable EVs. Both Proton and Perodua will have to deal with the need to upgrade the capabilities of existing vendors or facilitate their exit since EVs use a smaller number of moving parts compared to ICE engines. Proton has reportedly 116 vendors[47] while Perodua has 120.[48] Handling the transition therefore requires careful planning to phase out existing suppliers and concurrently introduce new suppliers with the right capabilities. This is not such a simple matter in Malaysia since national car producers have to nurture localization, especially Bumiputera auto parts suppliers.[49] Moreover, there are also implications on the company’s approved permits (AP) if such localisation is not properly managed within their supply chain. A potential relaxation of Bumiputera equity requirement for AP qualification could hasten the development of a local EV supply chain.[50]
Apart from that, foreign suppliers for Proton will also have to shift their current capabilities to support EV assembly. To illustrate, Camel Power Battery (CPB) from China entered Malaysia and built a factory at Malaysia-Kuantan Industrial Park (MCKIP) in 2018. It is a key supplier of batteries for Proton.[51] To stay relevant in the transition and beyond, CPB will have to shift from traditional ICE batteries to EV batteries. The same goes for other suppliers. This could be difficult if the company is not equipped to manage the transition, given that moving into EV production means shifting from developing an electromechanical intensive vehicle (such as ICE) to an information intensive vehicle (such as EV).[52] This also entails demands such as software designing and supporting electronics, all of which require higher capital and technological advancement. High costs could deter companies from moving into this field, especially when the demand in Malaysia is still relatively low.
Nonetheless, both Proton and Perodua may be able to produce their own EVs in the coming years. Proton has been distributing the SMART EV for Malaysia and Thailand since 2023 and will be exploring the local assembly of this vehicle at its Tanjung Malim plant. Apart from that, Proton is planning to shift progressively to hybrid engines for existing models, while developing Range-Extender EVs (primarily driven by an electric motor but using a small combustion engine functioning as a battery generator) as a bridging technology before migrating to full BEVs from 2028 onwards (Figure 4).[53] Perodua is also reportedly planning to launch a new energy vehicle by end 2025, which may possibly be a hybrid rather than a full BEV.
Interestingly, two other local companies have also been given the license to manufacture EVs. Listed auto parts producer and distributor, EPMB, has ventured into EV assembly operations with technology from China’s BAIC and Great Wall. Another company, NexV has also announced local assembly of Neta cars produced by China’s Hozon Auto. While pricing is still not known at this juncture, the cars assembled by these two new EV assemblers with Chinese technology can pose serious competition to Proton and Perodua’s planned hybrid/EV cars.
Figure 4. Local companies planning to assemble BEVs, March 2024
Need for policy coordination
While Malaysia manoeuvres the shift in the supply chain, policy coordination is needed to shift the demand. Demand is largely affected by the slow uptake of charging infrastructure needed to reduce range anxiety, especially for intra-state travel. The government’s aim of having 10,000 EV charging infrastructure by 2025 may be quite challenging; by January 2024, only 1,500 have been installed.[54] Private investors are slow to invest as the capital costs are high; it is estimated that installing 10 rapid charging stations costs RM1.5-RM2 million. At the same time, demand is held back by the lack of affordable EVs.
Furthermore, the removal of general fuel subsidies which is to take place in 2024, is facing challenges due to lower than expected registration at the Central Database Hub (PADU), which is to provide information on who will be receiving subsequent targeted subsidies.[55] If the subsidies are given back as cash transfers to the targeted groups, as planned, it may not facilitate any shift towards the use of electric vehicles since these groups can still choose to use ICE, especially in view of the slow development of charging infrastructure and affordable EVs.[56]
There is essentially a chicken-and-egg situation; both supply and demand must move forward at the same time to accelerate EV adoption. Hence the government has to review the incentives for the private sector to participate in EV adoption, and increase public provision especially along the highways for inter-state travel.
The government should also reveal its EV policy for 2026 onwards. At present, it is not known what will happen to the import cap of RM100,000 after 2025. It appears likely that Proton and Perodua will be introducing hybrids as a transition to BEVs.[57] Should the government further extend the import cap, then the availability of affordable BEVs will be further delayed, and it will be difficult to overcome the chicken-and-egg problem.
CONCLUSION
Malaysia has planned to draw in foreign and domestic investments to build an EV supply chain in the country. The investment pattern that has emerged is diverse and diffused across different segments of the EV supply chain, stretching from minerals to the assembly of batteries and vehicles in the two-wheeler and four-wheeler markets.
Be that as it may, Malaysia still faces outstanding challenges for the EV market to take off. This can be attributed to the slow emergence of affordable EVs; the number of BEVs still remains small, though growing. The demand for EVs is also deterred by the slower than expected installation of charging infrastructure. This chicken-and-egg problem requires the government to intervene in developing public charging infrastructure and providing a clear roadmap for the transition from ICE to BEVs. Setting aspirational targets alone is not enough.
ENDNOTES
For endnotes, please refer to the original pdf document.
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