DM Deshpande
The Indian automobile sector, especially the EV cars segment, is facing acute shortage of supply of rare earth magnets and elements. While the issue is ongoing for the last few months, now it seems to have reached crisis proportions.
The global disruption is akin to similar scarcity that occurred in supply of semiconductors, also called chips in general parlance. There is a difference, though; while chips are extensively used in automobiles, electronics and electrical appliances, use of rare earth materials is rather limited in comparison. However, they remain critical elements in manufacture of EV vehicles though they are relatively very small value items.
Rare earth magnets are made from alloys of rare earth materials. They are widely used in EV’s because of their high torque (force that causes rotation), energy efficiency and compact size that fits very well as components in passenger cars. China is the dominant exporter of rare earth materials.
It controls 70% of the production and 90% of the refining capacity. It has built this dominance quietly and studiously for over three decades. Now, it is using it as a major bargaining power. As per some reports it has been able to reach a deal with the U.S to supply ‘full magnates and all necessary rare earth materials’.
It is pertinent to recall here that China imposed export restrictions of rare earth materials in April this year. Export licenses were made mandatory for firms to supply these items to any foreign nation. The trigger obviously was the US (read Trump’s) tariffs and the Chinese retaliation as a result.
With India too, China is using the same tactics. Since border skirmishes in 2020, India has reacted to curtail trade and business with China. Consequently Chinese investments are sought to be curbed by subjecting them to Press Note 3 and rigorous scrutiny.
Visas to Chinese CEOs, engineers and technical personnel have been delayed, sometimes even canceled, frustrating business interests of China in India. Therefore, China is adopting a calculated retaliation by hitting India’s EV sector. India depends on China for more than 80% of its rare earth materials imports of 540 tons of magnets.
Export license requirements have generally caused a 45 days delay in imports. There are more hurdles in the import logistics. Bosch and Mahle are tier 1 suppliers in India. Now Chinese licensing requirements have mandated a separate license for each P.O. (Purchase Order). It means Bosch needs to apply for and get approval for supply to Maruti, Bajaj Auto and TVS individually and separately.
Worse, in what can only be described as a selective squeeze, requests from 30 Indian companies till May end for import of rare earth materials have not received response from the Chinese authorities. And at least one tier 1 request has been denied.
As of now, export controls by China apply to bare magnets not to rotors or motor sub assemblies. One way out of the current crisis is to work around the Chinese restrictions and import assemblies with magnets embedded in them. This would mean higher value addition in imports from China which would increase costs. There are problems too, on both sides-China and India.
In the case of the former, if the exporting firm has not previously dealt in supplying sub assemblies, that may invite more intense scrutiny by the authorities. And in India, this may come in the way of availing benefits under the PLI scheme as it reduces the domestic value addition in the supply chain.
The immediate scenario looks quite grim for EV manufacturers in India. As per reports in media Maruti has lowered its production target by two-thirds in respect of Vitara EVs. However, the longer term prospects aren’t that bad. India has 6.9 million tons of rare earth reserves, the third largest in the world after China and Vietnam.
However, the current production of rare earth materials is 2,900 tons which is a miniscule, just 0.74% of the global output. But the good news is that India is embarking on a Critical Minerals Mission to make big forays into this sector. It has announced a scheme in January this year involving an outlay of Rs.3,500 to 5,000 crore to increase its production of rare earth materials and derived magnets by involving both domestic and international firms.
India is making steady progress in enhancing domestic production of semiconductors due to shortage and global supply chain disruptions. There is no reason why it cannot replicate it in production of rare earths.
India has technical expertise. The Bhabha Atomic Research Centre and Indian Rare Earths is already producing magnets for use in defence related equipment. But scaling up for commercial purposes has not been attempted so far. It is more time consuming, policy clarity and continuity and industrial coordination.
With China in a dominant position in this sector, the real challenge is to build a competitive production model and establish global supply chains. A lot of experts feel that India ought to have started much earlier in this regard.
India has initiated secretary level talks with China and it is a welcome step to diffuse the situation. However, as per reports Trump took the matter directly to Xi Jinping and China is ready to supply rare earth materials to the U.S. Perhaps, India too needs intervention at the highest level to resolve the issue at the earliest. At stake is the incipient EV vehicle revolution in India.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh
