Deepening China-Indonesia Military Cooperation Based on the Nickel Supply Chain: An Analysis of Fractures in ASEAN's Non-Alignment

Executive Summary

Indonesia's deepening military cooperation with China is not the result of an ideological shift, but rather stems from the capital and technology procurement structure of its nickel downstreaming policy. Western capital to replace the Chinese investment entrenched in the smelting complexes of Sulawesi and Maluku has not been secured, and this industrial dependence is spilling over into the institutionalization of security ties, such as the 2+2 dialogue and the Comprehensive Strategic Dialogue mechanism. The most probable scenario is one of conditional hedging, where the Prabowo administration maintains its non-aligned rhetoric while simultaneously relying on China. ASEAN is expected to fragment, unable to mount a unified response due to diverging interests among its member states. South Korean companies should position themselves to complement rather than replace Chinese capital in the nickel supply chain. At the government level, it is necessary to clarify the principle of decoupling security issues from industrial ones. Approaching ASEAN as a single entity is no longer effective; a strategy of operating separate bilateral channels with individual member states like Indonesia, the Philippines, and Vietnam is required.

I. Situational Analysis

Situational Analysis: Deepening China-Indonesia Military Cooperation Based on the Nickel Supply Chain

1. Background and Developments

Indonesian foreign policy is constitutionally based on the principle of 'free and active' (bebas dan aktif) non-alignment [2][5]. President Prabowo Subianto has repeatedly emphasized this principle since taking office. He has publicly stated his intention to maintain friendly relations with both China and the United States [2][5][7].

This principle was put to a practical test on August 12. The Indonesian Navy frigate KRI I Gusti Ngurah Rai conducted a joint exercise with a People's Liberation Army (PLA) Navy vessel in the waters east of Taiwan [2]. The area was highly sensitive as it coincided with Taiwan's annual Han Kuang exercises [2][5]. Taiwan officially inquired with Indonesia about the reason for its participation [2]. While acknowledging awareness of the area's sensitivity, the Indonesian Ministry of Foreign Affairs characterized its ship's activity as a 'passing exercise' [2][5].

This exercise was not an isolated incident but an extension of accumulating military ties. China and Indonesia held their first '2+2' dialogue between their foreign and defense ministers in April 2025 [1]. The key variable shaping Jakarta's approach to Beijing in this context is its nickel downstreaming policy. Indonesia has been pursuing a downstreaming policy that bans the export of raw ore and mandates domestic smelting and processing. A structure has become entrenched in which Chinese capital has filled the resulting void in capital and technology [2][7]. This structural dependence is identified as the backdrop for the expansion of military cooperation.

2. Current Situation

On August 21, shortly after the naval exercise, the second China-Indonesia Foreign and Defense Ministers' Dialogue and the first meeting of the Comprehensive Strategic Dialogue Mechanism were held back-to-back in Jakarta [1][2]. The Diplomat noted that the significance of this 2+2 dialogue should not be assessed on its symbolism alone [1]. The argument is that if the first meeting in April 2025 opened a new chapter in the relationship, this latest meeting shows that the trend is entering an institutionalization phase [1].

At this meeting, co-chaired by Chinese Foreign Minister Wang Yi and Indonesian Foreign Minister Sugiono, the two countries agreed to deepen cooperation in multiple areas, including maritime issues. They also agreed on the phrase 'firmly supporting each other's core interests' [2]. Nikkei Asia highlighted that Indonesia's announcement of its policy to expand defense cooperation with China coincided with Japan, the United States, and Australia conducting one of Southeast Asia's largest-scale joint military exercises [4]. This implies that the regional security balance is moving in two different directions simultaneously.

The narrative in Chinese state media frames this situation by linking it to skepticism about the effectiveness of U.S.-led multilateral exercises. The Global Times argued that the U.S. 'joint defense' concept fails to provide the Philippines with genuine resilience [12]. It also downplayed the U.S.-Japan-Australia exercises, claiming the three countries are merely bound by divergent interests [14]. This can be read as a narrative in which Beijing seeks to use its closer ties with Indonesia as a counter-narrative to the U.S. alliance network.

3. Key Actors and Positions

Indonesia (Prabowo Administration)has staked the success of its national economic strategy of nickel downstreaming on Chinese capital and technology. Within this structural constraint, it is managing closer ties with China in the defense sphere as a means of securing practical benefits. This involves maintaining non-aligned rhetoric while pursuing a strategy of conditional hedging, rather than an ideological shift [2][7]. The Ministry of Foreign Affairs' downplaying of the exercise near Taiwan as a 'passing exercise' is part of this balancing act.

Chinahas succeeded in drawing Southeast Asia's largest economy closer to its security network by upgrading the 2+2 dialogue and launching the Comprehensive Strategic Dialogue mechanism with Indonesia [1][2]. Persuading Indonesia to agree to the phrase 'firmly supporting each other's core interests' can be seen as an attempt to gain more than just the silence of an ASEAN member on the Taiwan issue [2].

Taiwanimmediately protested the Indonesia-China naval exercise, which coincided with its Han Kuang exercises, and demanded an explanation from Jakarta [2][5]. For Taiwan, the expansion of military cooperation between an ASEAN member and China is read as a signal of its deepening international isolation.

United Statesis pursuing a policy, based on the logic of 'Pax Silicana,' to exclude countries that simultaneously join China's AI framework from its own camp [2]. This is likely to pressure Indonesia and other ASEAN members to choose a side. The G7 is also prioritizing the strengthening of multilateral supply chain cooperation as a response to China's export controls on critical minerals [3]. This trend forms the backdrop for the intensifying U.S.-China competition over nickel.

4. Key Issues

First, a key point of interpretation is whether Indonesia's deepening military cooperation with China stems from the economic substructure of its dependence on the nickel supply chain or from an independent security calculation. Considering the Indonesian government's official explanations alongside the timing of its announcement to expand defense cooperation, the former explanation appears more compelling [2][4][7].

Second, ASEAN's non-aligned stance is fracturing at the member-state level. It is uncertain whether Indonesia's hedging pattern will spread uniformly to South China Sea claimant states like the Philippines and Vietnam. It is more likely to unfold in a fragmented manner, with different paces for each country [5].

Third, if the U.S. policy of excluding countries that join China's AI framework is actually implemented, the key question will be how Indonesia and other ASEAN members respond. It is too early to tell whether Jakarta will apply the hedging lessons learned from nickel to the AI and technology sectors, or if it will adopt different strategies for different domains.

II. In-Depth Analysis

In-Depth Analysis: Deepening China-Indonesia Military Cooperation Based on the Nickel Supply Chain

1. Analysis of Root Causes

The root cause of this issue lies in the capital and technology procurement structure of Indonesia's nickel downstreaming policy. Since 2020, Indonesia has pursued a policy of banning raw nickel ore exports and mandating domestic smelting. For this policy to succeed, massive capital investment is required for smelter construction. The same applies to investments in smelting facilities linked to coal-fired power plants. A structure has already been established in which Chinese companies, not Western ones, have filled this capital and technology gap [2][7].

This dependency structure is not a one-off transaction but a cumulative industrial ecosystem. Chinese capital from firms like Tsingshan Holding Group and Huayou Cobalt is already deeply rooted in the smelting complexes of Sulawesi and Maluku. From the Indonesian government's perspective, there are no viable short-term alternatives to replace this capital. American and European capital is slow to enter due to environmental and human rights due diligence requirements. The fact that Chinese capital moves quickly without such constraints is a key variable explaining Jakarta's choices.

The deepening military cooperation should be seen as a spillover of this industrial dependence into the security domain. It is less a case of the Prabowo administration adopting an ideologically pro-China stance and more a result of stakeholders in the nickel industry exerting pressure on defense and diplomatic channels. The 2+2 dialogue mechanism, co-chaired by the defense and foreign ministries, is itself institutional evidence that the interests of these two departments are already intertwined [1][2].

2. Structural Context

Political Structure: Indonesia's 'free and active' principle of non-alignment is a foreign policy tenet with a constitutional basis [2][5]. In practice, however, this principle has also functioned as a rhetorical framework to justify tilting toward a particular great power. President Prabowo's repeated emphasis on this principle since his inauguration is, paradoxically, evidence that the principle itself is under strain [2][5][7]. Jakarta's explanation of the joint exercise near Taiwan as a 'passing exercise' should also be seen as a linguistic adjustment aimed at bridging the gap between the principle of non-alignment and its actual conduct [2][5].

Economic Structure: Nickel is the strategic resource among Indonesia's exports to which the government devotes the most effort. The success or failure of the downstreaming policy is directly linked to the performance of the Prabowo administration's industrial policy. If this policy falters, it simultaneously jeopardizes domestic employment, local government finances, and the ruling party's political legitimacy. This is why it is politically difficult to challenge the dependence on Chinese capital. Without alternative sources of capital, openly expressing security concerns about the capital provider would create a dilemma, delaying the policy's implementation.

Security Structure: Another structural factor is that Indonesia's expansion of military cooperation with China coincides with a gap in U.S. aircraft carrier presence in the Western Pacific. The prolonged conflict in Iran has created fissures in U.S. Navy deployment plans, resulting in a deterrence gap in Asia [9]. This gap stems not from a deliberate strategic choice by Washington, but from the physical constraint of being unable to manage two theaters simultaneously [7][9]. It is no coincidence that Indonesia and other ASEAN countries have widened their hedging options during this gap. Expanding one's own risk management options when the credibility of a security patron is wavering is a rational choice.

3. Historical Precedents and Comparative Cases

Indonesia's conditional hedging is best understood when compared with the individual cases of other ASEAN member states. The Philippines has maintained economic ties with China while anchoring its security in its Mutual Defense Treaty with the United States. Vietnam has long pursued a multilateral balancing strategy known as 'bamboo diplomacy.' However, the Indonesian case is different. While the hedging of the Philippines and Vietnam was triggered by the security issue of the South China Sea territorial disputes, Indonesia's hedging originated from the economic issue of industrial policy and has since spread to the security domain.

A relevant precedent in this regard is the tension between Australia's iron ore export structure with China and its security policy. In the early 2020s, even amid trade disputes with China, Australia could not easily reduce its reliance on iron ore exports. Canberra's security policy remained anchored to its U.S. alliance, while its economic dependence on China was managed on a separate track. Where the Indonesian case differs is that economic dependence has translated into concrete actions in the security domain (joint exercises, upgrading the 2+2 dialogue). While Australia succeeded in managing security and economics separately, Indonesia can be seen as being in the early stages of that dividing line collapsing.

China's changing response is also a departure from past cases. Beijing's silence and brief, dismissive comments regarding Taiwan's Han Kuang exercises differ from its past pattern of responding with large-scale counter-drills [7][9]. This suggests that Beijing may have judged that exerting indirect influence through cooperation with Indonesia is more cost-effective than direct military demonstrations. This method of conveying messages through a partner's actions rather than taking a direct role should be seen as a new type of influence operation, distinct from the gray-zone tactics used against the Philippines in the South China Sea.

4. Key Variables Shaping Future Developments

First is the actual intensity with which the United States applies its policy of excluding countries that also join China's AI framework. If Washington strictly enforces this policy, Indonesia will be forced to choose between its nickel supply chain and AI/technology cooperation. Conversely, if the policy is applied flexibly, Jakarta's room for hedging will expand.

Second is the price of nickel and the financial sustainability of the downstreaming policy. If international nickel prices fall or the profitability of Chinese-owned smelters deteriorates, the Indonesian government will have a greater incentive to seek diversification of its capital sources. In this case, the pace of military cooperation with China could also be adjusted.

Third is the timing of the normalization of U.S. aircraft carrier deployments in the Western Pacific. If the conflict in Iran concludes and the U.S. Navy restores its deployments in Asia, the hedging calculations of ASEAN countries could be recalibrated [7][9]. However, this variable is a structural constraint that is unlikely to be resolved in the short term.

Fourth is the possibility of an accidental clash in the Taiwan Strait. If an accidental clash occurs amid the normalization of gray-zone provocations [11], Indonesia would face political burdens difficult to manage with the rhetoric of 'passing exercises.' In such an event, the Prabowo administration would likely come under pressure to moderate the pace of its military cooperation with China.