Deepening Indonesia-China Military Cooperation and Fissures in ASEAN's Non-Alignment: Implications of the Nickel Supply Chain and Hedging Strategies

Executive Summary

Indonesia’s expanding military cooperation with China is not the result of an ideological shift, but rather a consequence of the capital and technology procurement structure of its nickel downstreaming policy. In the absence of Western capital to quickly replace the Chinese-linked capital entrenched in the smelting complexes of Sulawesi and Maluku, this industrial dependency is spilling over into the institutionalization of security ties, including 2+2 dialogues and joint military exercises. The Prabowo administration is most likely to continue its policy of conditional hedging by simultaneously participating in joint exercises with China near Taiwan and in the U.S.-led Super Garuda Shield exercises. Consequently, the interests of ASEAN member states are fragmenting between South China Sea claimant states and nickel-dependent nations, eroding the effectiveness of a unified approach to the bloc. South Korea should respond by pursuing a complementary strategy in the nickel supply chain focused on refining and processing rather than replacing Chinese capital, decoupling its security and industrial channels, and strengthening bilateral channels with individual ASEAN member states.

I. Situational Analysis

Deepening Indonesia-China Military Cooperation and Fissures in ASEAN's Non-Alignment: A Situational Analysis

1. Background and Developments

The constitutional basis of Indonesia's foreign policy is the principle of "free and active" (bebas dan aktif) non-alignment [3][9]. 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 [3][9].

This principle was put to a practical test during a visit to Jakarta this past August. China's foreign and defense ministers visited Indonesia and agreed to expand bilateral military cooperation [10]. The agreement included increasing joint military exercises and expanding officer exchanges. Discussions also took place regarding the establishment of a joint ammunition factory in Indonesia [10]. This factory proposal includes the possibility of technology transfer from China [10].

Around the same time, the Indonesian Navy frigate KRI I Gusti Ngurah Rai conducted a joint navigation exercise with a People's Liberation Army (PLA) Navy vessel in waters east of Taiwan [3][9]. The exercise was highly sensitive as it took place in an area where Taiwan was conducting its annual Han Kuang exercises [3][9]. The fundamental driver of this development is not an ideological shift. It is a consequence of the capital and technology procurement structure of Indonesia's nickel downstreaming policy [3]. Western capital has not been secured to quickly replace the Chinese-linked capital entrenched in the smelting complexes of Sulawesi and Maluku [3]. This industrial dependency is spilling over into the institutionalization of security ties, such as 2+2 dialogues and a comprehensive strategic dialogue mechanism [3][6].

2. Current Situation

While expanding military cooperation with China, Indonesia is also pursuing defense cooperation with the United States. The Super Garuda Shield exercise, which began in Bandung on August 31, involved 15 countries, including the United States [1][7]. This exercise is one of the largest multinational military drills in Southeast Asia [4]. A local diplomatic source reported that Indonesia is maintaining an attitude of "trying not to provoke Beijing" [1]. Amid the ripple effects of U.S.-Iran tensions, Indonesia has also been observed seeking a balance in its defense cooperation with China and Russia [1].

Last week, the Indonesian government announced its policy to expand defense cooperation with China [4]. The announcement to expand defense cooperation with China was made almost concurrently with the U.S.-led exercise. This is interpreted as a signal that the Prabowo administration does not intend to fully align with either side.

In the industrial sector, there have also been moves to strengthen government control. On September 1, Danantara Sumberdaya Indonesia (DSI), under the sovereign wealth fund Danantara, launched a monitoring platform for commodity exports valued at $70 billion [16]. This is a measure to strengthen government oversight of the export flows of key commodities, including nickel [16]. This can be seen as an attempt to increase state control over the nickel downstreaming policy and an expression of the state's will to directly manage the structure of dependency on Chinese capital.

Relations with Australia are also being deepened in parallel. At the 10th Australia-Indonesia 2+2 Foreign and Defence Ministers' Meeting in Melbourne last week, the bilateral relationship was described as being at its "pinnacle" [12]. The Jakarta Joint Security Treaty, signed in 2024, has not yet been ratified by the Indonesian parliament [12]. This is being explained as an issue with the speed of Indonesia's legislative process [12]. In waters adjacent to the South China Sea, such as the Natuna Sea, patrols and international partnerships are also being strengthened to counter illegal, unreported, and unregulated (IUU) fishing [14].

3. Key Actors and Positions

Indonesia (Prabowo Administration): Is pursuing a dual strategy of maximizing practical interests while maintaining non-aligned rhetoric [3][9]. It has made the structural choice to fill the capital and technology gap required for its nickel downstreaming policy with support from China [6]. At the same time, it is also expanding defense cooperation with the United States, Australia, and Japan [1][7][12]. This should be seen not as bandwagoning with one camp, but as a conditional hedging strategy that manages its tilt toward China only as long as certain conditions are met [9].

China: Is advancing the institutionalization of security ties with Indonesia by upgrading the foreign and defense ministers' dialogue to a comprehensive strategic dialogue mechanism [6]. Discussions on a joint ammunition factory and technology transfer symbolize the deepening of security relations mediated by the nickel supply chain [10]. The joint exercise near Taiwan has the character of a gray-zone provocation, while also aligning with China's strategic interest in expanding its regional influence through Indonesia [3].

United States: Is attempting to draw Indonesia into its camp by demonstrating its deterrence posture in the Asia-Pacific region through the Super Garuda Shield exercise [1][7]. However, Indonesia's simultaneous expansion of cooperation with China shows that Washington's efforts are not leading to exclusive alignment [4].

Taiwan: Reacted sensitively to the Indonesia-China joint exercise, which took place during its Han Kuang exercises [3]. It perceives Indonesia's move as an extension of gray-zone pressure on the Taiwan Strait situation.

Australia: Considers Indonesia a central pillar of its foreign policy [12]. The Albanese government seeks to institutionalize the bilateral relationship through the Jakarta Joint Security Treaty, but the delay in ratification by Indonesia reflects Jakarta's cautious balancing act [12].

ASEAN Member States: South China Sea claimant states like the Philippines and Vietnam have different interests from Indonesia [9]. It is unlikely that Indonesia's pattern of tilting toward China will spread uniformly to these countries; rather, it is more likely to spread in a fragmented manner at different paces for each nation [9].

4. Key Issues

The first issue is the degree of linkage between industrial dependency and the institutionalization of security ties. The key question is how much and at what speed the economic necessity of nickel downstreaming spills over into the security domain, such as the upgrading of defense dialogue mechanisms [3][6]. This can be seen as an instance where the competition for critical minerals in the trade and economic security domain is transitioning into a security issue.

The second issue is whether gray-zone provocations in the Taiwan Strait will become a regular occurrence. The level of military tension in the U.S.-China strategic competition will depend on whether this joint exercise was a one-off event or a signal of future regularization [3][9].

The third issue is ASEAN's response. Danantara's strengthened export monitoring [16] and the deepening of the 2+2 dialogue with Australia [12] show Indonesia's attempt to manage relationships on multiple fronts simultaneously. However, it is unlikely that this diversification will lead to a unified ASEAN-level response. The differing interests between South China Sea claimant and non-claimant states are structurally entrenching the fragmentation of ASEAN [9][14].

II. In-Depth Analysis

Deepening Indonesia-China Military Cooperation and Fissures in ASEAN's Non-Alignment: An In-Depth Analysis

1. Analysis of Root Causes

Viewing Indonesia's expanding military cooperation with China as an ideological shift is a superficial interpretation. The root cause lies in the capital and technology procurement structure created by its nickel downstreaming policy [3]. The Prabowo administration has continued the industrial policy of the Jokowi administration, which banned the export of raw nickel ore in 2020. The success of this policy depended on who would provide the funds and technology for smelter construction. Chinese-linked capital is already deeply entrenched in the smelting complexes in the Sulawesi and Maluku regions [3]. Western capital was slow to enter due to environmental standards, human rights due diligence, and profitability verification processes. The current industrial structure is the result of Chinese state-owned and private enterprises filling this void.

Industrial dependency does not automatically translate into security cooperation. The transition was mediated by China's diplomatic strategy. This past August, China's foreign and defense ministers visited Jakarta simultaneously and agreed to expand defense cooperation [10]. This is a typical package-deal approach, upgrading an economic partnership into a security channel. The inclusion of potential technology transfer in discussions about a joint ammunition factory supports this trend [10]. China is using nickel as leverage to secure greater military proximity.

Prabowo's personal political inclinations also act as a variable. Since his tenure as defense minister, he has favored diversification of the defense industry. It is highly likely that his intention to move away from a procurement structure overly reliant on the United States is reflected in this decision. However, this is a secondary factor. Without the structural pressure—that is, the material foundation of dependency on nickel capital—a high-risk decision like the joint exercise near Taiwan would have been difficult to make.

2. Structural Context

Economic Structure: The Funding Bottleneck of the Downstreaming Policy

Indonesia's nickel downstreaming policy aims to transform the country from a raw material exporter into a higher-value participant in the battery and stainless steel value chains. Achieving this goal requires initial investments of hundreds of millions of dollars for each smelter. The problem is that sufficient capital to cover these investments was not supplied by Western countries. Chinese battery and stainless steel companies filled this gap with relatively fast decision-making and lower capital costs. As a result, the share of Chinese capital in the nickel smelting sector is already structurally entrenched.

The government has recently shown signs of trying to strengthen state control over this structure. The launch of a monitoring platform for $70 billion in commodity exports by DSI, under the sovereign wealth fund Danantara, on September 1 is a prime example [16]. This should be seen not as a measure to reverse the capital dependency itself, but as an attempt to secure state administrative and supervisory authority over the existing Chinese-linked capital structure. Strengthening industrial control and mitigating dependency on Chinese capital are separate issues.

Political Structure: The Combination of Non-Alignment Principles and a Pragmatic Government

The Indonesian constitution defines the "free and active" (bebas dan aktif) principle of non-alignment as the fundamental pillar of its foreign policy [3][9]. This principle, originating from the spirit of the Bandung Conference in the Sukarno era, has been a consistent theme throughout successive administrations. The reason the Prabowo administration has not abandoned this rhetoric is that it is directly linked to its domestic political legitimacy. Being seen as aligning with one camp could be perceived by domestic public opinion as an infringement of sovereignty.

At the same time, the Prabowo administration is pursuing a pragmatic course that prioritizes maximizing practical interests [3][6]. This is why non-aligned rhetoric and a tilt toward China coexist. The dual approach of participating in the U.S.-led Super Garuda Shield exercise with 15 other nations [1][7] while simultaneously announcing an expansion of defense cooperation with China [4] is a product of this pragmatism. The assessment by a local diplomatic source that Indonesia is "trying not to provoke Beijing" also supports this sense of balance [1].

Security Structure: The Overlap of Resource Dependency and Maritime Security Dilemmas

As the world's largest archipelagic state, Indonesia must manage a vast maritime territory, including the Natuna Sea area in the South China Sea [14]. The burden on its naval forces is already significant from countering illegal, unreported, and unregulated (IUU) fishing alone [14]. In these circumstances, expanding military cooperation with China offers tangible incentives in terms of equipment and technology procurement. The problem is that this cooperation has extended into the sensitive waters near Taiwan.

The fact that an Indonesian frigate conducted a joint exercise with the PLA Navy timed with Taiwan's annual Han Kuang exercises [3][9] is difficult to see as a mere coincidence. This is a different signal from previous patterns, as it shows Indonesia, a non-claimant state in the South China Sea, getting involved in military activities near the Taiwan Strait. It can be seen as an issue that arose at the intersection of Indonesia's own maritime security needs and China's intention to expand its military proximity.

3. Historical Precedents and Comparative Cases

Indonesia's conditional hedging is not a new phenomenon within ASEAN. During the Duterte administration, the Philippines expanded infrastructure investment from China despite the South China Sea territorial disputes. The subsequent Marcos administration demonstrated a pendulum swing, re-strengthening defense cooperation with the United States. This case showed that the direction of hedging can change abruptly with a change in government. In Indonesia's case, the possibility of a course change is lower than in the Philippine case because the structural constraint of industrial dependency on China is likely to persist throughout the Prabowo administration's term.

The case of Thailand is also worth noting. While maintaining its long-standing alliance with the United States, Thailand has also pursued the acquisition of Chinese submarines and expanded joint exercises. This is also a way of decoupling security alliances from arms procurement. The difference with the Indonesian case is that Thailand's approach to China has remained primarily at the level of defense industry procurement, whereas in Indonesia, dependency on the nickel critical mineral supply chain has spilled over into the institutionalization of security ties [3][6]. The scale and strategic nature of the industrial dependency are different.

The deepening of Australia-Indonesia relations provides another axis for comparison. The two countries signed the Jakarta Joint Security Treaty in 2024, and at the recent 10th 2+2 meeting, their relationship was described as being at its "pinnacle" [12]. However, the Indonesian parliament has not yet ratified this treaty [12]. This suggests that Indonesia's legislature is also carefully pacing the institutionalization of security ties with the West. In its cooperation with both China and the West, Indonesia is repeating a pattern of deepening practical cooperation without elevating relationships to the level of formal alliances.

A comparison can also be made with the dilemmas of Non-Aligned Movement countries during the Cold War. At that time, countries like India and Egypt maintained a non-aligned course by weighing aid from both the U.S. and Soviet blocs. The hedging Indonesia faces today between the U.S. and China is structurally similar, but the crucial difference is the new variable of supply chains. Whereas Cold War hedging was primarily about securing military aid and political support, today, industrial interdependence in critical mineral processing acts as a variable constraining security choices.

4. Key Variables Shaping Future Developments

The first variable is the speed at which Western capital enters the nickel smelting sector. If South Korean, Japanese, and European companies expand their investments in the Sulawesi and Maluku smelting complexes on a significant scale, there is potential to reduce dependency on Chinese capital. Currently, there are no signs that such alternative investment will materialize in the short term [3].

The second variable is whether the commodity export monitoring system of DSI under Danantara actually leads to strengthened industrial control [16]. If this system takes root, the Indonesian government may regain some negotiating power over Chinese capital. Conversely, if it remains a formality, the existing dependency structure is likely to become further entrenched.

The third variable is the U.S. response. If the U.S. pursues a policy based on the "Pax Silicia" concept to exclude countries that simultaneously join China's AI framework [6], ASEAN member states, including Indonesia, could face pressure to choose sides. If this pressure becomes more overt, the Prabowo administration's room for conditional hedging will narrow, and the current balance of pursuing practical interests while maintaining non-aligned rhetoric could be shaken.

The fourth variable is the level of tension in the Taiwan Strait. The nature of this issue will change depending on whether the joint exercise near Taiwan ends up being a one-off event or becomes regularized. If it becomes regularized, it will be recorded as a case of expanding participation in gray-zone provocations and could trigger a stronger response from Taiwan and the United States. If it remains a one-off, Indonesia's hedging will likely stay within a manageable range.

The fifth variable is the response pattern of other ASEAN member states. Whether South China Sea claimant states like the Philippines and Vietnam will also pursue expanded military cooperation with China similar to Indonesia will be an indicator of ASEAN's cohesion. So far, due to differing national interests, fragmented individual hedging is more likely than a uniform expansion [9].