Indonesia, Thailand, Malaysia and Vietnam have released a slew of incentives in recent years in a bid to be the next hub for electric vehicles (EVs), servicing a growing global demand from a fledgling regional market. Generous tax breaks see countries in south-east Asia trying to outbid each other to capture the growing interest of overseas investors.

“We are currently in an investment race where [Association of Southeast Asian Nations (Asean)] countries are competing to get foreign investors to come in,” says Alloysius Joko Purwanto, energy economist at the Economic Research Institute for Asean and East Asia. “That is the current situation, not only in EV manufacturing, but also in its batteries.”

The market in south-east Asia is in its early stages, with EVs accounting for just under 2% of the region’s total passenger vehicle sales in 2022, according to Counterpoint. More than half of the region’s EV demand stems from Thailand at 58.3%, followed by Indonesia at 19.5%, Vietnam at 15.8% and Singapore at 3.8%.

However, foreign investors are flocking to the region, lured by already established car manufacturing bases, vast natural resources and generous government incentives.

“Asean, with its growing economy, has a big potential for the EV market,” says Nuki Agya Utama, executive director at the Asean Centre for Energy. “This demand pull is also complemented with policy push from the government that strengthens the environment for industry investment.”

Additionally, there is consensus that south-east Asia still provides a cheap manufacturing base in comparison to advanced economies leading investors to set up a presence from which to export. 

The market leaders

Within south-east Asia, Indonesia, Thailand, Malaysia and Vietnam are already established automobile markets and manufacturing hubs. 

Indonesia is bestowed with the largest nickel deposits in the world, with several global automakers from China, Japan, Korea and the US planning investments in EV and battery value chains there, according to analysts at Maybank. 

Thailand, which already has a well-established market for internal combustion engine (ICE) cars, is witnessing foreign direct investment flows to make EVs and components for German, Japanese, Chinese and Korean automakers. 

Malaysia recently saw Tesla set up a head office in the outskirts of Kuala Lumpur, despite some intense courting by Indonesia. 

“Tesla likely went into Malaysia due to the certainty in regulations,” says Mr Purwanto. “Whereas in Indonesia foreign investors have been worried about the country’s regulatory certainty.” 

He explains that there were three or four major changes to regulations in the power generation sector between 2016 to 2023, which only added to Indonesia’s image of having shaky regulatory foundations. This is exacerbated by the uncertainty surrounding the presidential elections due to take place in 2024.

Aside from Tesla, Chinese car maker Geely is likely to invest in EV manufacturing in Malaysia through its stake in Proton, according to Maybank analysts.

In Vietnam, the EV push is led by VinFast, a home-grown EV maker which recently listed on the Nasdaq. The company has an EV manufacturing facility in Vietnam, located in an industrial park located on Cat Hai Island near the city of Hai Phong. The company is also setting up a facility in the US, notes Jigar Shah, head of sustainability research at Maybank.

“Thus, each of the south-east Asian countries has different drivers for rising investment in EV and batteries.”

Generous incentives

Tax exemptions have been the most common form of incentives, with each of the four leading countries issuing generous tax breaks to ensure they do not lose out in the EV regional race.

For example, Indonesia and Thailand grant exemptions from import duties on production-related capital goods. Certain types of EV companies are given corporate tax breaks in Indonesia, and in Vietnam battery-powered cars are exempt from registration fees for the first three years.

Both countries have managed to attract large multinationals including Great Wall Motors, Foxconn, LG Group and CAT for EV battery and car manufacturing. 

“With a strong supplier base, Thailand is a major player in the automotive manufacturing space in the region,” says Audrey Gerard, vice president for auto-mobility in Asia-Pacific at DHL. “They are now transitioning to EVs — backed by strong government incentives.”

At the other end of the supply chain, Indonesia is naturally leading the market in EV battery production due to its large nickel reserves, as well as its ban on the export of unprocessed nickel, which creates extra incentives for those in the value chain to locate within the country. 

“Indonesia has a similar globally leading nickel resource base to Australia, but favourable policies and lower cost have attracted more downstream nickel investments into Indonesia, while the Philippines lags slightly behind in the policy environment and suffers from nickel resource depletion,” says Kenneth Ong, fund manager with the Asian equities team at Lion Global Investors.

China: the game changer

In 2022, China surpassed Germany to become the world’s second-largest car exporter, but with the growing saturation in its domestic market, south-east Asia is poised to benefit from China’s automakers looking to increase their investments overseas.

“China’s headed towards a period of economic slowdown leading to lagging domestic demand, which means that there’s even more pressure for automakers to go abroad,” says Ilaria Mazzocco, senior fellow at the Center for Strategic and International Studies. “Chinese automakers are looking to open factories and expand their position.”

Chinese investors have been particularly active in Thailand, with at least five factories under construction, according to Ms Mazzocco. BYD, the battery maker that has been at the forefront of the EV transition in China, holds the largest share of the EV market in Thailand at 33.9%.

China’s EV boom in Thailand is threatening Japan’s longstanding grip on the market. 

“Japanese automakers are traditionally really strong in the Thai market — in terms of producing and selling there — but now Chinese automakers are really taking the lead in the EV segment,” says Ms Mazzocco. “You’re going to see much more competent competition between these automakers.”

First-mover mentality

While there has been an EV boom in south-east Asia, the market is still incredibly small in comparison to the use of ICE cars.

But the fledgling market means there is vast room to grow. Ms Mazzocco adds: “There’s definitely a sense that the more investment you can attract at this early stage, the more that’s going to put you in a leading position in the coming years within the EV supply chain.”

This article first appeared in the October/November 2023 print edition of fDi Intelligence