Jakarta. South Korea intends to make Indonesia a production base in ASEAN, now that both countries are eliminating most of their tariffs, including on auto parts and steel, according to its government official on Thursday.

The Indonesia-Korea Comprehensive Partnership Agreement (IK-CEPA) came into force early this year. The IK-CEPA eliminates 95.5 percent of South Korean tariffs. Indonesia has agreed to remove 92 percent of its tariff posts. 

With the agreement in effect, both countries are expected to enjoy broader market access, among other things, according to Oh Hyun, the deputy director for free trade agreement at South Korea’s Trade Ministry.

"South Korea is interested in making Indonesia a new production base in ASEAN, and a production hub to enter the region's market and the world. The elimination of tariffs on steel, auto parts, and petrochemical products through the CEPA are vital means,” Oh Hyun told a conference commemorating the golden jubilee of Indonesia-South Korea ties in Jakarta on Thursday.

Oh Hyun added that IK-CEPA’s tariff eliminations would pave the way for a more robust bilateral value chain, particularly on nickel, through greater trade and investment. 

Nickel is a mainstay for batteries, and Indonesia’s production of the mineral is the largest globally. “Indonesia has become one of the vital chain suppliers to Korea, considering that it is the largest producer of nickel in the world,” Oh Hyun said.

Automaker Hyundai is one of the most noteworthy South Korean investors in Indonesia. Hyundai invested a whopping $1.5 billion to build its first manufacturing hub in ASEAN in Kota Deltamas, Cikarang.

The Cikarang plant produces petrol-fuelled cars, as well as electric vehicles (EVs) such as the Ioniq 5. A Hyundai-LG Energy Solution consortium, in collaboration with the Indonesia Battery Corporation (IBC), is also building a $1.1 billion EV battery cell plant in Karawang, West Java. The factory is expected to produce a total of 10 GWh worth of battery cells, enough for more than 150,000 battery EVs.

Ferry A Pasaribu, the deputy assistant for investment acceleration at the Coordinating Ministry for Investment, said that South Korean investors like Hyundai have made a smart move by focusing on EVs. 

“I think Korea has been very strategic with its investment by going directly for EVs. And Hyundai’s investment in Indonesia is not only about investing in the automotive industry itself, but they are also bringing in their R&D center,” Ferry told the same conference.

Investment Coordinating Board (BKPM) data showed that South Korea invested about $2.29 billion in 2,907 projects nationwide throughout 2022. 

According to Ferry, South Korean investment in Indonesia will grow by an average of 15.59 percent in the fifth year of IK-CEPA’s implementation. Automotive and chemicals are among the sectors that will benefit the most from the agreement.

“[IK-CEPA] is a game changer. It will bolster investment because of the two-way trade. That is why we should also push for imports, provided that the imported [goods] are for production in Indonesia,” Ferry said.

The government reported that South Korea-Indonesia trade volume stood at $20.57 billion in 2022, the highest in five years. 

Japanese cars represent the lion’s share of Indonesia’s automotive market, with Toyota and Daihatsu alone controlling around 50 percent of the Indonesian vehicle market share last year. 

But South Korean cars are also gaining popularity among Indonesians. Hyundai recently announced that its sales had grown by almost a thousand percent from 3,000 units in 2021 to 30,000 units last year.

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