Indonesian Industrialization: Downstreaming Up the Value Chain

Tried and True — No More? 

Export-oriented industrialization is a development strategy in which countries prioritize producing specialized goods for global markets rather than focusing mainly on domestic consumption. By capitalizing on external demand, economies such as South Korea, Singapore, Japan, and Taiwan attracted foreign investment and enhanced competitiveness.

As documented in an IMF working paper by Reda Cherif and Fuad Hasanov, these economies succeeded by embedding themselves in global supply chains and progressively moving up the value chain:

“The Asian miracles were among the very few economies that managed to sustain rapid growth in their manufacturing output over 1980–2010. Manufacturing dominated world trade, and more particularly the Asian miracles' exports, over the period covered.”

Following "Liberation Day," new risks have emerged for states pursuing export-oriented industrialization. Fragmentation of supply chains — driven by geopolitical tensions and policies promoting near-shoring and re-shoring — constrains access to export markets and undermines opportunities to specialize and move up the value chain. As a result, the once-reliable link between manufacturing specialization and sustained growth is no longer guaranteed, compelling developing economies to search for alternative growth models in a fracturing global economy.

As countries look to new modes of development, Indonesia's downstreaming policy offers insights into both the potential and pitfalls of alternative industrial policy.

Indonesia’s Downstreaming Gambit  

In contrast to export-oriented industrialization, Indonesia is leveraging its resource wealth to capture domestic value. Through its downstreaming policy, the country restricts exports of unrefined commodities to secure a larger share of revenue from its natural endowments. At the same time, the policy is designed to attract investment in domestic refining, processing, and manufacturing capacity.

Downstreaming has achieved several of its intended objectives. Former Indonesian President Joko Widodo defended the policy as increasing the export value of Indonesian nickel from 17 trillion to 510 trillion Rupiah. From 2021 to 2022, Indonesia’s foreign direct investment increased 44.2% to $45.6 billion. Since the full export ban on nickel took effect in 2020, the Indonesian economy has expanded by 32.1 percent as of 2024. In that same year, Indonesia accounted for 58 percent of global nickel production.

However, downstreaming also produces vulnerabilities and irregularities. 

Indonesia depends on China in both upstream production and downstream consumption of nickel and nickel products. In upstream mining of nickel ores, Indonesia imports an overwhelming majority of inputs from China. In 2024, Indonesia consistently imported approximately 70% of heavy machinery used for mineral ores (HS-Code 8474) from China, valuing over $750 million dollars. This has more than doubled from just over $300 million in 2014.

Indonesia’s dependence on China is more pronounced in the refining stage. High Pressure Acid Leaching (HPAL), the dominant nickel-processing method, consumes vast amounts of sulfuric acid, much of which has been supplied by China since 2021 (Trade Data Monitor). China also provides 80-90 percent of Indonesia’s refining machinery imports, including metal-rolling mills (HS-Code 8455) and mineral converters, mold, and casting machines (HS-Code 8454). Chinese firms, often through affiliates in Hong Kong and Singapore, control approximately 75 percent of refining capacity and have driven stainless-steel output from 4 million to 7.5 million tons between 2020 and 2024 . Their capital advantage continues to outcompete Western investors – in September 2025, Tsingshan Holding Group took a majority stake in a new plant with South Korea’s POSCO.

Beyond production inputs, China imports a vast majority of Indonesia's nickel. In 2024, China imported 82% of Indonesia’s total nickel exports. It is important to note that refined nickel is classified into low-grade nickel versus high-grade nickel. Low-grade nickel is often used in stainless steel production while high-grade nickel is used in EV batteries. Indonesia’s refining industry currently produces low-grade nickel, which requires additional processing to become high-grade nickel. This process is highly environmentally taxing. Despite a recent push by the Indonesian government to develop high-grade nickel operations, the industry landscape is again overseen by foreign entities, many of them ultimately linked to Chinese companies. Therefore, even as Indonesia’s export control helped Indonesia climb up the value-added chain, it has not been able to capture the high value of high-grade nickel.

Managing Interdependence

Indonesia’s downstreaming policy has attracted significant foreign investment and boosted nickel production. Yet this surge in output has depressed global prices, creating a profitability crisis. Lower prices may discourage new entrants, reinforcing the dominance of Chinese investors and the monopsony power of Chinese buyers. Indonesian firms struggle to weather long-term depressed price without substantial government support, which the country lacks. On the other hand, Chinese nickel producers have enjoyed strong backing from their government, allowing them to better weather lower prices and volatile geoeconomic landscapes. Demand for nickel is dependent on Chinese EV battery manufacturers, whose overcapacity is equally reliant on the maintenance of subsidization from the Chinese government. Furthermore, as new battery technologies mature, nickel will face more demand-side pressure. 

If Indonesia can localize its mining and refining capacity, it will still be facing monopsony pressures, with China’s export market controlling the demand for its nickel output. Downstreaming aims to spread investment across multiple industries, leveraging Indonesia's position as Southeast Asia's largest market. The key question is whether this diversification will materialize or if investment will remain concentrated among a narrow set of Chinese-dominated sectors and investors.

The global trade environment adds complexity to Indonesia’s nickel industry. On July 22, a joint statement between the White House and Indonesian government indicated that Indonesia would “remove restrictions on exports to the United States of industrial commodities, including critical minerals.” Shortly thereafter, Indonesia's Coordinating Minister for Economic Affairs, Minister Airlangga Hartarto, told reporters that the agreement was not “about exporting ore, but industrial products.” These political tensions and contradictory messages could exacerbate nickel’s price volatility.

As countries pivot from export-oriented industrialization toward downstreaming as a potential ‘third way,’ they should weigh the trade-offs carefully while recognizing Indonesia’s unique advantages. Indonesia’s nickel reserves have no global peer and downstreaming coincided with China’s EV battery industrial boom. These conditions are not easily replicated, while the long-term impacts of downstreaming are yet to be seen. For other developing nations, Indonesia’s approach suggests that governing natural resources in today’s geoeconomic landscape entails difficult trade-offs. These countries should study the Indonesian case closely to understand whether their chosen strategies – whether downstreaming, export-oriented industrialization, or alternative models – can foster broad-based development, or whether they risk producing new winners and losers. 

Richard Gray is a program coordinator and research assistant with the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Duc Minh Nguyet (Moon) Nguyen is a research intern with the Economics Program and Scholl Chair in International Business at CSIS. 

For more analysis on how states interact in a transitioning global economy, check out our blog series, Charting Geoeconomics.