China’s tightened export regulations on rare-earth magnets have once again exposed the critical weakness in India’s automotive supply chain and policy planning.
The Indian industry and policy establishment has been caught unprepared by the Chinese crackdown despite the fact that rare earth and critical minerals are the fundamental components for major applications ranging from electric vehicles to defense production, and critical to India’s ambitious high-tech manufacturing push.
China currently has monopolistic control over the global supply of rare earth metals. This gives it significant geopolitical and economic power, and allow them to potentially dictate terms or disrupt industries that rely on these vital materials, a power it is now starting to use.
Beijing has intensified its control over rare earth exports since April, and companies and the government are urgently working to secure alternative supply chains before their production lines are forced to a standstill.
India Vs China?
Industry experts say the West’s China Plus One strategy, positioning India as a counterweight to China by shifting parts of the global supply chain away from Chinese shores to India and Southeast Asia, has not gone unnoticed in Beijing.
“The West’s China Plus One strategy aimed at repositioning global supply chains toward India and Southeast Asia to counterbalance China, has certainly caught Beijing’s attention,” said a senior partner at one of the big four consulting companies.
Experts note that while China appears to be easing magnet supplies to western nations, there’s no indication of similar relief for India. “In light of India’s protracted policy of restricting investments from Chinese entities, as stipulated by Press Note 3 of 2020, the potential for extended supply chain disruptions or comparable retaliatory measures from China remains a significant concern,” said an advisor at a consulting company.
He is referring to the practice of subjecting Chinese investments in India to increased scrutiny since April 2020. Such proposals are put before an inter-ministerial committee, often leading to prolonged approval timelines or outright rejections.
Earlier, many sectors were under the “automatic route,” meaning no prior government approval was needed. Though India has 6.9 million tons of rare earth reserves, accounting for around 6% of the global reserve, the country mines only a small fraction of them.
While the state-run Indian Rare Earth Limited (IREL) mines rare earth materials, its output primarily serves the atomic energy and defense sectors. Most other domestic applications depend on imports from China. India’s Commerce and Industries minister Piyush Goyal has said this is a wake-up call for the world.
“In a way, it is a wake-up call for all those who have become over-reliant on certain geographies. It is a wake-up call for the world that you need trusted partners in the supply chain,” Goyal recently said.
The industry and government are proactively collaborating on solutions to reduce reliance on unpredictable external supply chains, including developing magnet-free motors, boosting domestic mineral production, and enhancing processing and recycling capabilities. However, these solutions are long term fixes, not immediate remedies.
Domestic Push
China has carried out decades of investment in rare earth R&D, spanning extraction, separation, metal-making, and magnet manufacturing, while India is still in its early stages.
This is reflected in the data from the U.S. Geological Survey (USGS.gov) that shows India’s annual rare earth production was limited to around 2,900 metric tons in 2022 and 2023, despite a reserve of 6.9 million tons. The government recently launched the National Critical Mineral Mission for self-reliance in the critical mineral sector.
As part of this initiative, the Geological Survey of India (GSI) is tasked with executing 1,200 exploration projects, including rare earth minerals, between FY25 and FY31.
“More than 100 critical mineral blocks are set to be auctioned, and exploration will be expanded to offshore regions rich in polymetallic nodules containing cobalt, rare earth elements (REEs), nickel, and manganese,” according to the Ministry of Mines.
A couple of years back, GSI conducted reconnaissance surveys for rare earth elements, including neodymium, in Sirohi and Bhilwara districts of Rajasthan. The Department of Atomic Energy has also discovered around 1.19 lakh tonnes of in-situ Rare Earth Elements Oxide (REO) in Balotra, Rajasthan.
The Atomic Minerals Directorate for Exploration and Research is actively exploring India’s coastal, inland, and riverine sands for reserves of heavy rare earth elements (REEs)like monazite and xenotime (which also contain thorium and yttrium).
They also conduct exploration in several potential hard rock geological domains across the country. Between FY22 and FY24, the GSI has taken up 368 mineral exploration projects focusing on critical minerals, including REEs. In FY25, the GSI undertook an additional 195 exploration projects to assess the potential of these vital minerals.
IREL is mandated to produce high-purity Rare earth oxides (REOs)from India’s monazite mineral deposits. It currently operates integrated mining and processing facilities at three locations, along with dedicated rare earth extraction and refining plants.
The public sector undertaking operates a rare earth extraction plant in Chatrapur, Odisha, and a refining unit at Aluva, Kerala. With Letters of Intent granted for three additional reserve deposits across India, IREL plans to significantly boost domestic rare earth production.
“India possesses a significant quantity of REEs. What is now needed is to accelerate the processes of its extraction and processing within India so that some of the lead that China has taken in this space may be neutralized,” Ernst & Young LLP said in a report recently.
“Substantial additional resources need to be allocated by central and state governments as well as the private sector for research and development in the field of rare earths. Strategic partnerships are also needed with countries that are known to have large REE reserves like Myanmar, Vietnam, Brazil, South Africa and Tanzania,” it added.
Strategic Mining, Foreign Reliance
China controls 90% of the processing of magnets globally. “India is now becoming the alternative that the world is looking up to. With India, they have the confidence that they will never have to suffer these kinds of problems,” Goyal said.
The government is exploring offering production-based fiscal incentives to companies for rare earth mineral processing as part of a broader strategy to diversify its supply chain and mitigate its substantial dependence on Chinese sources.
“We have been in discussions with the Ministry of Mines [for providing incentives for rare earth magnet processing]. Both ministries are working on it. The ultimate decision will be taken soon,” Minister of Heavy Industries HD Kumaraswamy recently said.
The minister noted that a Hyderabad-based company—likely Midwest Advanced Materials—has expressed interest in magnet production. The company has committed to supplying 500 tonnes of magnets by the end of this year, with plans to increase production to 5,000 tonnes next year.
“We do not know the quantum of subsidy required yet. Stakeholder consultations are going on. So, varied responses have come. Somebody wants 50%, somebody 20%. So, it will be subject to a competitive bid, then we will know the quantum of support required,” said Kamran Rizvi, secretary at the Ministry of Heavy Industries.
The secretary emphasized that the magnet made in India must be competitive globally. He highlighted that the price difference between rare earth oxides and rare earth magnets on the Shanghai stock exchange is minimal, hardly 5%. “So, there is a feeling that since China has a monopoly on it, it keeps the price of magnets very low,” the secretary noted.
“Therefore, we need to determine the level of incentives needed. Specifically, we must calculate the investment companies need to convert rare earth oxides into magnets and decide on government support.”
IREL is the sole repository of rare earths in India. They have enough rare earths to make 1,500 tons of magnets in a year, the minister noted. Meanwhile, government officials noted that rare earth oxides are available in Japan and Vietnam as well, and efforts are ongoing to bring them from the countries.
Short-term Fix?
For a short-term solution, the government is considering sending a team of automotive industry leaders to China to discuss the restoration of magnet supplies.
In the first week of June, Kumaraswamy said the industry delegation will be in China in 2-3 weeks to find a solution for this supply issue. Even though executives from major OEMs and component makers secured Chinese visas in June, their anticipated visit to China has not materialized.
This is due to the lack of an official appointment for the delegation from the Chinese government. “The status remains the same. There has been no development after receiving the visas,” a senior executive from an OEM stated. He noted that the companies are now left to find their own solutions for procuring magnets.
“In the US-China context, we have seen both countries indulge in high-level talks to resolve the issues,” noted a component maker executive. “However, we have yet to hear such a move between India and China.”
With direct magnet exports halted, companies are looking to import magnet-containing complete or sub-assemblies, or motors from China, ensuring their production lines remain uninterrupted. Kumaraswamy noted that each company is trying to make sure that their disruption is minimal.
“There was a fear that there could be some disruption, but as of today, things look better. Nobody has come back to us and said they are halting production because you are aware that fully-assembled components can be imported,” he said in June.
However, industry experts noted that the import of complete or sub-assemblies comes at a premium. The basic customs duty on the import of assemblies is higher compared to the duty on the import of magnets. This, together with logistical costs, results in higher costs and imported content.
The higher import content has to be seen in the context of India pushing for higher localization. The strategy of importing assemblies poses a significant challenge for electric vehicle manufacturers, as they rely on incentives from the PLI-AUTO and PM E-Drive schemes, which mandate specific domestic value addition (DVA) requirements.
While magnets and batteries are typically exempted from DVA calculations, importing full assemblies of motors or other components could significantly reduce their DVA. The government has indicated its willingness to revisit the DVA criteria if the magnet supply disruption extends over a prolonged period.
When asked about a potential review of the DVA criteria for the PLI-AUTO and PM E-Drive schemes as companies might have no alternative but to import full assemblies if the magnet supply does not resume, Rizvi recently said: “If the disruption is for a long-term, then we might look at it.