Rare earth elements (REEs) play a vital role in the technology sector, particularly in the production of semiconductors that power servers and cool data centers. As of November 2023, a new trade agreement between the United States and China aims to stabilize the supply of these critical materials by suspending export controls on REEs from China. This deal ensures a short-term supply, yet the potential volatility in the supply chain remains a concern for Chief Information Officers (CIOs).
China currently dominates the global rare earth market, mining approximately 70% of the total supply and refining around 90%. These 17 essential metals are utilized in a wide array of products, ranging from smartphones to electric vehicles and crucial data center infrastructure. Although there are no significant delays in the delivery of necessary server equipment at this moment, CIOs are advised to remain vigilant about the underlying risks in the supply chain.
Cori Masters, a senior research analyst director at Gartner, emphasizes that while the recent trade agreement offers some stability, it does not address the fundamental issue of dependency 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,” Masters noted. This reliance is complicated by the fact that the risks often remain hidden within the intricate layers of the supply chain.
Understanding the Supply Chain Complexity
The complexity of the technology supply chain presents challenges for CIOs trying to trace the role REEs play in their operations. Equipment such as hard drives and high-efficiency cooling systems rely on components sourced from various tiers of the supply chain, making it difficult to pinpoint the influence of rare earths on delivery timelines. According to research compiled by Masters, REEs are often found deep within the supply chain, specifically in the Tier 3–5 segments, which pertain to refinement and chemical separation processes.
CIOs typically focus on securing fair prices and timely deliveries, rarely considering the specific materials involved. Ashish Nadkarni, group vice president at IDC, explains that the costs associated with rare earths may manifest as subtle price increases rather than outright shortages. “When you go to buy groceries, if you ask the grocery vendor why your lettuce is $2 more, do you think they’re going to know why?” Nadkarni said. This analogy highlights the limited visibility that vendors have into their own suppliers.
Despite this complexity, the costs associated with rare earths could hint at deeper availability issues, according to Masters. “It’s creating that longer lead time in order to get goods out,” she stated, adding that these delays often register as part of a larger supply chain picture that may not be easily identifiable to most CIOs.
Strategies for Managing Supply Chain Risks
To effectively manage the risks associated with rare earths, CIOs should not only monitor REE markets but also push for greater transparency and commitment to diversification from their Tier 1 suppliers. Both Masters and Nadkarni advocate for a more scrutinized approach to vendor relationships, emphasizing the importance of asking strategic questions regarding supply chain stability.
CIOs should actively seek indicators of potential material shortages within their supply base. Masters suggests that Tier 1 vendors may be unaware of the presence of REEs in the finished products they procure. “CIOs should be looking for indications within their supply base that they’re running out of materials,” she advised.
Utilizing supply chain risk management software can also enhance visibility for CIOs, especially given that direct contact with chip manufacturers is rare. Masters highlighted the need for centralized systems to track supply chain risks across various sectors, as REEs are not limited to high-tech products. They are also integral to industries like defense, healthcare, and clean energy.
Encouraging alternative sourcing and innovation is another avenue for mitigating reliance on China. While the country currently holds a near-monopoly on REEs, nations such as the United States and Australia are exploring sustainable extraction methods. CIOs are encouraged to support these initiatives and stay informed about suppliers who utilize these alternative sources.
Recycling existing devices for REEs presents another option, although it remains a time-consuming and costly process. The feasibility of extracting rare earths at scale from used products has yet to meet the high demands of semiconductor manufacturing.
As CIOs navigate this complex landscape, focusing on diversification and transparency will be crucial for long-term resilience in the face of ongoing supply chain challenges. By implementing these strategies, organizations can better prepare for potential disruptions and ensure a more stable supply of the critical materials that power their technology infrastructure.