Moneycontrol Pro Panorama | Auto industry chokes on China’s rare earth curbs

Automakers are actively engaging with alternative suppliers in countries such as Vietnam, Indonesia, Japan, Australia, and the US, while also optimising existing inventories

Dear Reader,

Amid border tensions, geopolitical conflicts and tariff wars, China seems to have pulled the plug on several industries across nations by curbing exports of rare earth elements (REE). The move, which primarily seems to be a retaliation to US President Donald Trump’s tariff increases on Chinese products, has sent shock waves of supply chain and production disruptions in a host of industries such as auto, defence and energy.

At a policy level, China’s intent may not be a permanent ban on REE exports but to have these curbs until it puts a new licensing system in place based on end usage. The decision, with no timeline in place, has major ramifications for user industries, particularly the auto sector, simply because China produces nearly 90 percent of the world’s high-performance rare earth magnets. According to sectoral analysts, the rest is produced by Japanese companies mainly in Japan and in Vietnam, but mainly for use of Japanese manufacturers.

Not surprisingly, the global auto sector has been most vocal about the pile-up in inventory of unfinished vehicles, for want of critical rare earth magnets. A Reuters report indicated German auto makers’ worries about a halt in production, if the export curbs continue.

Cut to the Indian auto industry, there are mixed reactions. Some automobile original equipment manufacturers (OEMs) such as Bajaj Auto and TVS Motor and component makers indicate production disruptions soon, if the issue is not resolved, while a few such as Maruti Suzuki India remain blasé. Moneycontrol’s report indicates a serious impact on EV makers.

To be sure, China’s actions appear to be more targeted towards the US rather than India, writes Kanchi Shah from MCPro Reseach in this article on the impact for India’s auto universe. Of course, since India’s share in automobile exports is relatively small, the impact may be limited. But it is the time consuming process for Indian companies to obtain government permission (at both ends, India and China) that could take a toll on sales and revenue growth.

It's a déjà vu scenario for the global auto industry -- not long ago, the auto industry was battling supply chain disruptions during the Covid outbreak and subsequently the semiconductor chip shortages that paralysed the industry for some time.

That said, industry veterans are confident of a solution that will bring back normalcy. When is the question. If the problem takes long to resolve between nations, it could impact sales and profits of Indian auto OEMs. Component makers have a bigger issue in that exports could be affected if the user OEMs (be it in auto, energy or defence areas) have restrictions imposed by China as a result of trade negotiations and tariff wars. While the Indian auto and component sector stocks have not seen any knee-jerk reaction, a de-rating of the sector cannot be ruled out.

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