HANOI, VIETNAM — During a May 2026 government meeting on Vietnam’s materials industry, President To Lam stated that the country “must neither export raw resources nor sacrifice its environment gains”, with the former focusing pointedly on Vietnam’s rare earth reserves. This comes on the back of Vietnam’s ongoing efforts to move its rare earth sector up the value chain, following similar policies to other Southeast Asian states with regards to their own critical mineral sectors. Aware of their significant reserves, regional countries have been trying to capitalize on the global race to secure critical mineral supply chains in recent years. Results have been mixed so far and there is a real risk of becoming too dependent on foreign capital to fund local development agendas.
The region’s first major value-upgrading strategy - commonly referred to as ‘downstreaming’ - was Indonesia’s 2020 decision to ban exports of its raw nickel ores, requiring firms to process and/or refine them domestically. Malaysia has adopted a similar initiative in late 2023 by banning exports of its own raw rare earths. However, Vietnam becomes the latest to officially enforce downstreaming after its parliament passed amendments to a minerals law last December, prohibiting raw rare earth exports and placing rare earths under strict state control. Other countries in the region have no comparable policies yet.
Same Region, Uneven Progress
Despite their shared strategies of strengthening domestic industries and boosting national economies, Vietnam, Indonesia, and Malaysia have varying starting points due to different resource endowments, governance structures, and existing downstream capacities. Indonesia has the biggest initial advantage owing to its massive nickel reserves - the largest in the world - and a strong central government. While both Malaysia and Vietnam have small rare earth deposits, Malaysia’s ability to pursue a unified national strategy is limited due to the authority held by its constituting states over land and exploration permits. However, Malaysia has hosted the Australia-based Lynas refinery since 2012 (the second largest in the world) which gives some of its workforce the ability to run refining operations.
Indonesia’s downstreaming policy is often hailed as a success story. From a purely economic perspective, it is regularly evoked as a model for countries in other regions of the world. The data backs it up: the number of nickel processing facilities (smelters) rose from under 20 in 2019 to 44 by 2024, while nickel export earnings have grown about tenfold from 2013 to 2022. In fact, the country now accounts for almost two-thirds of global mined supply and just under half of refined products.
On the other hand, downstreaming has been slower in Malaysia. Conflicting jurisdiction and strategies between federal and state governments mean that mineral-related activities take longer to approve, compared to other Southeast Asian countries. Most of the major post-ban investment plans or agreements have taken place between firms and state governments. Significant developments at the federal level have still taken place: the October 2025 signing of the Agreement on Reciprocal Trade (ART) with the US and the 10-year renewal of Lynas licence in early 2026. Notably, the ART stipulates that Malaysia shall refrain from restricting critical mineral exports to the US and partner with US companies to develop its critical mineral sector.
Vietnam has succeeded in courting several foreign firms to invest downstream since the minerals law amendment. Its approach is notable for the emphasis on diverse international partnerships. Australia, Korea, and most recently Japan are the countries involved in major deals so far. Given that Vietnam’s initiative is rather recent compared to Indonesia and Malaysia, it remains to be seen how far it will aid the country’s downstreaming goal.
Technological and Market Dependence Risks
Southeast Asia’s downstreaming strategy looks promising on paper. Across the three countries surveyed, however, there is a visible divide on each country’s dominant investment partners: Chinese companies in Indonesia and Western/West-aligned countries in Vietnam and Malaysia. This bifurcation has consequences for the three countries' technological development and positioning in the global critical mineral value chain.
About 75% of nickel smelters in Indonesia are owned by firms from China, which is the destination of 98% of Indonesia’s nickel product exports. The industry also relies on Chinese-engineered High-Pressure Acid Leaching (HPAL) technology to process limonite nickel ores into battery-grade intermediate products.
This situation poses three largely unaddressed challenges for Indonesia. First, Indonesia has become heavily dependent on Chinese technology to drive its downstreaming agenda forward. Beyond isolated academic and firm-to-firm cooperation agreements, there is no national policy concerning technology transfer. This hampers Indonesia’s ability to create a long-term downstreaming ecosystem, particularly exposing it to forces outside its control such as the ceasing or relocation of company operations. Second, China’s own EV industry is rapidly shifting to lithium iron phosphate (LFP) battery technology, which doesn’t require nickel. If Indonesia does not diversify its export destinations, it risks massive income loss. Related to this is the market access loss to several Western countries due to environmental and social governance (ESG) requirements. In addition to the often unsustainable reality of Chinese investments in Indonesia, export concentration in China - where ESG compliance remains voluntary - reduces the incentive for sustainable practices.
The case of Malaysia and Vietnam is different altogether. Existing and prospective investors come from a variety of Western-aligned countries such as Japan, Korea, and Australia, reflecting a global effort by firms and governments to diversify their supply chains. As such, Kuala Lumpur and Hanoi are not as vulnerable to technological dependence as Jakarta is to one dominant partner. Both countries also have stricter ESG regulations in place and hence better vetting of proposed projects.
But until now there has been no agreed technology transfer agreement between the two countries and their partners. Although China last year offered Kuala Lumpur its rare earth processing technology in exchange for access to Malaysia’s raw rare earths - despite Beijing’s own restrictions on sharing its processing technology - there has been no further development to the discussion. One of the significant obstacles to the deal is said to be regulatory hurdles due to the overlapping federal and state jurisdictions.
Malaysia’s and Vietnam’s ability to attract multiple non-Chinese investors, however, does not necessarily translate into protection against China-related pressures. More than 90% of the world’s rare earth refining and magnet manufacturing (a downstream product of refining) are done in China, making a supply chain decoupling impossible. If China intends to reimpose export controls on rare earth products, as was done initially in 2025, it would cause major economic impacts across many sectors worldwide. Involving Chinese partners beside Western ones, then, would disincentivize China from applying blanket restrictions.
The Way Forward
While downstreaming policies in several states result in steady economic benefits, they also introduce a range of new problems. This is partly a result of external forces beyond the region’s control, but also a result of loopholes in national downstreaming strategies. As the global race to secure access to critical minerals intensifies, there is considerable time for regional states to improve their respective plans and their executions. Regional cooperation through the Association of Southeast Asian Nations (ASEAN) platform should be championed to elevate the region’s bargaining power as a whole.
