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In a significant development, China's recent implementation of export restrictions on seven rare earth elements has caused a ripple effect across the global automotive sector. These elements, crucial for the production of magnets used in both internal-combustion engines (ICE) and electric vehicles (EV), have led to supply shortages and production disruptions.
## Impact on the Automotive Sector
The automotive industry is feeling the brunt of China's decision, as the country accounts for over 90% of global rare earth magnet production. The introduction of export controls in April 2025 has resulted in a substantial drop in rare earth magnet exports, by approximately 75%. This reduction has triggered supply shortfalls, particularly for components like magnets used in both ICE and EV production.
ICE vehicles, while less reliant on rare earths compared to EVs, still use these elements in certain components. However, the primary impact of these restrictions is more pronounced on advanced technologies and components that are more common in EVs and hybrid vehicles. EVs, on the other hand, are more heavily affected due to their reliance on rare earth magnets for electric motors.
## Specific Challenges
The restrictions have caused significant supply chain disruptions, particularly for automakers relying on Chinese exports. This has resulted in delayed production and potential factory shutdowns as companies struggle to source essential components. The trade and diplomatic tensions between China and major economies like the U.S. and the EU further complicate the situation, with China using rare earths as a strategic tool in trade negotiations.
There has been a slight easing in the approval rate for export licenses, rising from 25% to 60%, but shipments to the U.S. remain deprioritized. This partial easing does not fully address the supply chain challenges faced by the automotive sector. Companies such as Bosch, ZF, Ford, Suzuki, and BMW have reported bottlenecks affecting their suppliers, and Mercedes-Benz is advising its suppliers to stockpile rare earths.
## Response and Future Outlook
In response to these challenges, there have been calls for broader reforms in Germany, including lower charging-related taxes and the expansion of charging infrastructure. The UK was the only major European country to avoid a monthly decline in used-car demand in May. However, used-car demand decreased sharply in major European markets, including Germany, Spain, France, Switzerland, Italy, and Austria.
Autoliv has set up a task force to deal with the restrictions, but does not expect a halt to production in the coming weeks. Hybrid powertrains performed strongly in Germany's new-car market in May, recording their best month of the year so far. Germany's new-car market showed a modest recovery in May, with registrations up 1.2% year-on-year.
As the situation continues to evolve, it is clear that the global automotive sector will need to adapt and find alternative solutions to mitigate the impact of China's rare earth export restrictions. The ongoing trade tensions and diplomatic efforts will continue to influence the availability of these essential materials, making it a critical issue for the industry to monitor closely.
- The financial sector is closely monitoring the situation in the automotive industry, as the industry is grappling with supply chain disruptions due to China's rare earth export restrictions, which could potentially lead to increased costs and lost revenue for businesses.
- The energy sector may play a significant role in mitigating the impact of these restrictions, as advancements in battery technology could reduce the reliance on rare earth elements in electric vehicles, providing an alternative solution for the automotive industry.
- The transportation industry could also be affected, as potential factory shutdowns could disrupt the delivery of vehicles, leading to supply chain disruptions and increased transportation costs for both manufacturers and consumers.
