Rare Earth Crisis: Auto Industry Hangs On Mix Reserves Of Hope & Fear

Entrepreneur

3 days ago

Till date, about 50 large companies, including auto component manufacturing firms, have applied for the license and there have been no developments as of now, according to sources with direct knowledge of the matter
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Since April, China has restricted the exports of rare earth magnets (REMs), a critical component in motors, especially in electric vehicles. Even Internal Combustion Engine (ICE) vehicles need rare earth magnets for motors, driving power steering, windscreen wipers, etc. This suspension of exports has the potential to choke the entire supply chain, resulting in a mayhem for the auto industry.
"While the situation is getting alarming by the day, the industry is well engaged with the government and we are hoping that a solution will be found to resolve the issue at an earliest," said Vinnie Mehta, director general, Automotive Component Manufacturers Association of India (ACMA).
China, the world's dominant exporter of rare earth magnets, imposed export restrictions on seven rare earth elements and finished magnets, mandating export licences. Restrictions are imposed on Samarium, Gadolinium, Terbium, Dysprosium, Lutetium, Scandium, and Yttrium. These elements are used to produce REMs like neodymium iron boron (NdFeB) and samarium–cobalt (SmCo) magnets. China accounts for over 90 percent of global processing of rare earth elements, effectively controlling the entire supply chain.
Source: Nomura
The revised framework demands comprehensive end-use disclosures and client declarations, including confirmation that the products will not be used in defence or re-exported to the US. With the clearance process taking at least 45 days, this added scrutiny has significantly delayed approvals. India, which sourced over 80 percent of its ~540 tonne magnet imports from China last fiscal, has started to feel the impact.
As of mid June, about 50 large companies, including auto component manufacturing firms, have applied for the license and there are no developments, according to sources aware of the matter.
Where did it start and how is it going?
China's export control of rare earth magnets to the rest of the world was in response to the aggressive US tariffs against China. This was also a retaliation against the US embargo on export of semiconductors to China.
While the primary response was against the US, other countries, mainly, auto manufacturing nations have also been caught into crossfire. The issue has a blanket impact, from the European Union, Japan, South Korea, to India, all are affected. While a lot of the nations have been able to wriggle out in some sense or the other, the problem remains acute when it comes to India.
"Some licenses are being issued to German companies. Interestingly, German companies, wherever their footprints are in the European Union, are getting licensing. However, those same companies in India, are yet to get approvals," a source revealed, adding that US companies and other geographies have also started to get licenses.
The auto industry has always championed just in time inventories. In certain crucial items, companies would keep inventories of around two months or at the most four months. And as June is the third running month, without import of the magnets, it could soon lead to stagnancy. Given the current scenario, if the inventories were to completely run dry, then it might lead to a stoppage of manufacturing lines in the component industry, adversely impacting the assembly of vehicles. Speculations suggest inventory will stretch only till July, August.
"The situation is a bit of an emergency. There is a lack of inventory and it might stretch only till July/August. We really need to get out of this whole scenario of being dependent overtly on one country, and that too, where we don't have the best of relationships with. In the short term, we need to work on getting supplies from China somehow. In the medium term, we have to make sure that we also build up our strategic reserves with other countries," said CS Vigneshwar, president, Federation of Automobile Dealers Associations (FADA).
Most impacted: ICE or EVs?
According to a Nuvama report, REMs make about 0.1 kg per ICE car, but that number shoots up in EVs and hybrids, where usage jumps to 0.8 kg and 0.5 kg, respectively.
"The magnets go in both ICE and EVs, as well as some parts of two wheelers. There is a bigger chance that EV production will be impacted rather than ICE production. But we are yet to find out what the exact impacts are going to be because all these are estimates. This will definitely affect the new launches coming up in EVs," added the FADA president.
However, Mehta of ACMA, shared a different view, "The effect will be overall, as REMs are an integral part of safety components used across vehicles."
The Indian automobile industry is urging the government to expedite approvals for importing these critical materials. India's biggest carmaker by volume, Maruti Suzuki India, has said that there is no disruption in its operations due to the rare earth magnet issue as of now. "There is a lot of uncertainty and the situation is continuously evolving. We are monitoring the situation and pursuing multiple solutions to ensure continuity in our operations," the company said in a statement. The announcement was issued after reports claimed that the Japanese carmaker reduced its short-term production plans for its maiden electric vehicle, the e-Vitara, by around two-thirds due to REMs shortage.
Similarly, Tata Motors, too shared a 'no immediate impact' notice and said it is working with industry associations SIAM and ACMA to actively engage with the government, "We are hopeful," a company spokesperson said.
A few weeks earlier, the Chinese government rejected Sona Precision Forgings' application to import REMs, making it the first Indian company to face such a decision under China's tightened export control regime.
The supply squeeze comes just as the auto sector is preparing for aggressive EV rollouts. Anuj Sethi, senior director, Crisil Ratings, explained, "Over a dozen new electric models are planned for launch, most built on PMSM platforms. While most automakers currently have 4-6 weeks of inventory, prolonged delays could start affecting vehicle production, with EV models facing deferrals or rescheduling from July 2025."
A broader impact on two wheelers (2W) and ICE PVs may follow if the supply bottlenecks persist for an extended period. Bajaj Auto in a statement said that If there is no relief on shipments, EV production will be seriously impaired in July.
In FY26, domestic PV volumes are expected to grow 2-4 percent, while electric PVs could rise 35-40 percent, albeit on a low base. Electric 2Ws could grow ~27 percent, outpacing overall 2W growth of 8-10 percent. However, sustained supply tightness could soften this momentum, especially in the EV segment, said a CRISIL report released in June second-week.
Despite contributing less than five percent of a vehicle's cost, these magnets are indispensable for EV motors and electric steering systems. With applications across EVs and ICE vehicles, a prolonged supply squeeze could disrupt production of PVs and 2Ws, making this low-cost component a potential high-impact bottleneck for the sector. In a constrained supply scenario, magnets may also get diverted to ICE models, which require fewer units, potentially impacting EV growth.
"Today, there is huge amount of electronics used in the automotive industry. Electronics integration has a lot of rare earth usage, such as electronic braking systems, sensors, etc. This could impact the entire automotive industry, if it is not handled in time," Mehta added.
As per global consulting firm AlixPartners, usage of REMs is highest in double motor BEVs, followed by single motors BEVs. Hybrids have a higher REM presence, with limited scope for restricted usage. Conventional ICE vehicles will escape the brunt as REMs find use in sensors and other applications which can be replaced by ferrite magnets, especially in lower-end vehicles. Hence, the major impact of a supply shortage will be felt in EVs (be it 2W or PV) as almost all EVs use REMs in their motors.
Looking ahead: Short & long term measures
Automakers are actively engaging with alternative suppliers in countries such as Vietnam, Indonesia, Japan, Australia, and the US, while also optimising existing inventories. As diversification of supply sources is being actively explored, aligned with policy efforts, the situation continues to evolve for automotive players in their quest to have a steady flow of rare earth magnets.
"China's curbs on rare earth exports threaten not only India but also global EV supply chains, impacting battery and motor production reliant on Neodymium and Dysprosium. With China controlling about 60 percent of global rare earth mining and over 90 percent of processing capacity, automakers are likely to face bottlenecks despite localizing production. Ironically, exports of finished cells and motors from China may rise, boosting its EV value chain dominance. Indian OEMs and Tier-1 suppliers are likely to accelerate efforts to diversify rare earth sourcing from regions such as Australia, Africa, and Myanmar. At the same time, we expect a stronger push to develop domestic refining capabilities. The government may also ramp up exploration and extraction of rare earth reserves in Andhra Pradesh and Odisha to strengthen long-term self-reliance in critical materials," said Soumen Mandal, senior analyst, Counterpoint Research.
"Today we're living in a very disruptive world. So, we also probably need to make sure that we are ready for any eventuality. The auto industry and the complete dealership networks all have actually gone through various churns in the past, and I'm sure we'll do it in the switch-ups," added FADA president.
The government will decide on a subsidy scheme to support domestic production of rare earth magnets within 15 to 20 days, Union Minister for Heavy Industries and Steel, H D Kumaraswamy said on Tuesday, this week.
While India has the fifth-largest reserves globally, it currently relies heavily on imports for many rare earth elements due to limited domestic infrastructure for extraction and refining. The government is actively working to boost domestic production and reduce reliance on foreign sources. Talks with companies are on to build long-term reserves of rare earth magnets by providing fiscal incentives for local production. "The Ministry of Heavy Industries, External Affairs and the Ministry of Commerce, are trying to support the industry. The government is seriously working towards a scheme where they want to incentivize manufacturing of rare earth magnets. While India may have reserves, manufacturing of rare earth magnets is not a very easy process. Once a scheme is in place, the government will induce industry players to manufacture these magnets. This has a horizon of a minimum two years, and we are concerned about the immediate future, as we are staring at drying inventories," said another source with direct knowledge of the matter.
While China has the largest deposits of REEs at 44 million tons, India also has a substantial amount at 6.9 million tons, according to the U.S. Geological Survey. However, in order to use REE reserves, countries need the ability to mine and extract raw materials, as well as the capacity and technology to process and refine them for final use. There are limited alternatives to China's REM supply. While mining capabilities exist in the US, Myanmar and Australia, the bottleneck lies in metal refining and the manufacturing of magnets. Besides China, refining/manufacturing capabilities exist with Vietnam and Thailand/Japan. China is uniquely placed as it has the entire capability of the supply chain starting with mining to refining and manufacturing.
Opinions have also surfaced around recycling of REMs in the long run. However, even if we recycle, only 10 percent of the demand can be met as it's not a primary process of production.
Talking about other alternatives to REMs, Mehta explained, "There is no immediate solution to the REMs. Theoretically, you do have solutions, but they may not be as effective or as efficient. Hopefully, in coming times, as part of deal-making, companies have started to work on alternates. However, this is not going to help us in the near immediate."
Industry bodies such as the ACMA and Society of Indian Automobile Manufacturers (Siam), are following up on the meeting with Chinese representatives, along with ministries including heavy industries, external affairs, and commerce.