Auto sector faces slowdown due to rare earth magnet shortage: Crisil

Business Standard

2 days ago

India's automotive industry is staring at potential slowdown due to shortage of rare earth magnets, a critical component for electric vehicles (EVs) and hybrids, ratings agency CRISIL has said.
China's recently imposed export restrictions and prolonged shipment delays are disrupting the supply chain, which could impact production and the sector's growth trajectory.
Rare earth magnets are integral to the permanent magnet synchronous motors (PMSMs) utilised in EVs, valued for their high torque, energy efficiency, and compact design.
Hybrids also rely on these magnets for efficient propulsion. In internal combustion engine (ICE) vehicles, their use is primarily confined to electric power steering and other motorised systems.
Anuj Sethi, Senior Director at CRISIL Ratings, said, 'The supply squeeze coincides with the auto sector's preparations for aggressive EV rollouts. Over a dozen new electric models are scheduled for launch, primarily on PMSM platforms.'
He added, 'While most automakers currently possess 4-6 weeks of inventory, sustained delays could begin to affect vehicle production, with EV models potentially facing deferrals or rescheduling from July 2025. A broader impact on two-wheelers and ICE passenger vehicles may occur if supply bottlenecks persist for an extended period.'
The Chinese wall
In April 2025, China, the primary global exporter of rare earth magnets, implemented new export restrictions on seven rare earth elements and finished magnets.
This revised framework necessitates export licenses, demanding detailed end-use disclosures and client declarations, including assurances that the products will not be used for defence or re-exported to the US. The clearance process now takes a minimum of 45 days, causing significant approval delays and exacerbating global supply chain tightness.
India, which imported over 80 per cent of its approximately 540 tonnes of magnets from China in the last financial year, is experiencing the effects.
By the end of May 2025, while the Indian government endorsed nearly 30 import requests from domestic companies, Chinese authorities had not approved any, resulting in no shipments reaching India.
Poonam Upadhyay, director at CRISIL Ratings, said, 'The shortage of rare earth magnets is compelling automakers to re-evaluate supply-chain strategies. Despite contributing less than 5 per cent of a vehicle's cost, these magnets are essential for EV motors and electric steering systems.'
She noted that automakers are engaging with alternative suppliers in countries such as Vietnam, Indonesia, Japan, Australia, and the US, while also optimising existing inventories.
'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 be diverted to ICE models, which require fewer units, potentially impacting EV growth,' Upadhyay explained.
During the pandemic, rare earth magnet supplies remained stable, unlike semiconductors. This led to a reliance on just-in-time inventory without the establishment of strategic buffers. Unlike semiconductors, which have a globally diversified supply base, over 90 per cent of rare earth magnet processing is concentrated in China, offering limited short-term alternatives.
The Indian remedy
In response to this risk, the Indian government and automakers are taking action on two fronts.
Short-term efforts focus on building strategic inventories, securing alternative suppliers, and accelerating domestic assembly under Production Linked Incentive schemes. Long-term objectives involve fast-tracking rare earth exploration, establishing local production capacity, and investing in recycling infrastructure to reduce import dependency.
Diversification of supply sources is an ongoing effort, aligning with policy initiatives. The pace of China's export approvals for these magnets remains an immediate concern for automotive players.
Domestic passenger vehicle volumes are projected to increase by 2-4 per cent in the financial year 2026, with electric PVs potentially rising by 35-40 per cent from a low base. Electric two-wheelers could see approximately 27 per cent growth, exceeding the overall 2W segment's 8-10 per cent growth. However, continued supply tightness could temper this momentum, particularly in the EV segment.