Urgent Update: CIOs Face Rare Earth Supply Risks Amid China Deal
UPDATE: Recent developments reveal that CIOs must closely monitor the volatile supply chain of rare earth elements (REEs) as a trade agreement announced in November 2023 temporarily suspends export controls from China, which dominates the market. This agreement ensures the short-term availability of REEs, essential for semiconductors and data center infrastructure.
China currently controls approximately 70% of the global supply of rare earths and refines around 90% of these critical materials used in the production of smartphones, electric vehicles, and cooling systems for data centers. Although the immediate panic has subsided, experts warn that CIOs should remain vigilant.
Cori Masters, senior research analyst director at Gartner, emphasized that while this agreement stabilizes supply, it does not eliminate the risks associated with relying on a single source. “It’s still viewed from a supply chain perspective as a single source of supply — detrimental reliance on a single geography,” she stated.
CIOs are currently not facing major delays in server equipment delivery. However, longer lead times are common, and the hidden risks in the supply chain could manifest as increased costs rather than obvious shortages, according to Ashish Nadkarni, group vice president of IDC’s worldwide infrastructure research group.
CIOs often overlook the complexities of the tech supply chain, with REEs lurking deep within the Tier 3–5 segments. These segments involve the refinement and chemical separation of materials, making them nearly invisible during procurement processes. Masters noted that during sourcing, CIOs typically focus on price and delivery timelines without considering the underlying components.
The hidden costs associated with rare earths may only become apparent when vendors raise prices due to increased supply chain pressures. “The cost will show up in a premium,” Nadkarni explained, drawing an analogy to grocery shopping where customers may not understand price increases tied to specific supply chain issues.
To effectively manage these risks, CIOs are encouraged to adopt a proactive approach. Instead of tracking REE markets directly, they should demand greater visibility and commitment to diversification from Tier 1 suppliers. This includes asking critical questions regarding the supply chain and the presence of rare earths in the products they procure.
Masters advised that CIOs should focus on their immediate suppliers and seek indications of material shortages. “They should be looking for indications within their supply base that they’re running out of materials,” she said.
Additionally, supply chain risk management software can provide crucial insights. Many CIOs interact with resellers or systems integrators rather than direct manufacturers, limiting their visibility into chip production. Masters highlighted the importance of centralized systems to track REEs across various sectors, including defense, clean energy, and healthcare.
Encouraging alternative sourcing and innovation is essential for mitigating risks associated with single-source dependencies. While China maintains a monopoly, efforts are underway in the U.S., Australia, and several Asian nations to extract rare earths sustainably. CIOs should support these initiatives and consider pricing strategies that reflect the use of alternative sources.
Recycling existing devices for rare earths presents another potential solution, although it is currently inefficient and costly. The path to achieving high-volume semiconductor demands remains challenging without commercially viable alternatives.
As the landscape evolves, CIOs must remain engaged with their suppliers and adapt their strategies to address the underlying complexities of the rare earth supply chain. The urgency of this situation cannot be overstated, as the potential impacts on technology procurement and operational efficiency are significant and immediate.
Stay tuned for further updates as this situation develops.
