Rare earths are crucial to the semiconductors that power servers and the infrastructure that cools data centers. Given that one country controls most of the global supply, how should CIOs monitor and mitigate this volatile supply chain risk?
The rare earth panic has subsided — for now. A trade agreement announced in November ensures that export controls on rare earth elements (REEs) from China will be suspended, guaranteeing supply of these critical elements in the short term.
China mines some 70% of the global supply of rare earths — a group of 17 metals used in everything from smartphones and electrical vehicles to fiber optic cables and data center cooling systems. It refines around 90%.
While serious interruptions to semiconductor production have raised concern, CIOs are not currently seeing major delays in the delivery of necessary server equipment — though longer lead times are not entirely unusual.
Still, risk remains, said Cori Masters, senior research analyst director at Gartner. The recent agreement between the U.S. and China, while stabilizing, is not a permanent solution.
“It’s still viewed from a supply chain perspective as a single source of supply — detrimental reliance on a single geography,” Masters said. This reliance is compounded by the fact that the actual risk is virtually invisible in a complex delivery
Where the risk lives: Deep in the supply chain
For CIOs, the difficulty lies in the complexity of the tech supply chain. Delivery of the equipment CIOs rely on — including hard drives, high-efficiency cooling fans and fiber optic network components — is upstream, making it challenging to isolate the role REEs play in its availability.
According to research compiled by Masters, rare earths lurk deep within the supply chain in the Tier 3–5 segments, which refer to the refinement and chemical separation stages. They are essentially invisible to most CIOs. When CIOs are sourcing and purchasing equipment for their organizations, they are rarely thinking about its components, she said — they simply want to get a fair price and ensure that it is delivered in a timely fashion.
The distance from the point of purchase means that the risk presents as a subtle pressure rather than an obvious shortage, said Ashish Nadkarni, group vice president of IDC’s worldwide infrastructure research group.
“The cost will show up in a premium. You’d have to ask if the vendor is passing along the cost increase. If I’m procuring servers from Dell or HP or Cisco or Lenovo, REEs are more likely to impact their component suppliers,” Nadkarni said, offering up a stark analogy for the limited visibility these Tier 1 vendors have into their own suppliers:
“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? They’re probably going to tell you that it’s due to inflation.”
Even so, this hidden cost can indicate a deeper availability problem, Masters said, noting that the supply chain risk still has an effect: “It’s creating that longer lead time in order to get goods out” — but this likely registers as part of a larger picture to a typical CIO, she added, who lacks the tools to pinpoint the specific cause.
CIO playbook: Strategic security and diversification
The solution is not to track REE markets directly, but to demand better visibility and commitment to diversification from Tier 1 partners. Both Masters and Nadkarni suggested this requires CIOs to sharpen their scrutiny of vendor suppliers and consider the strategic use of risk-monitoring software.
Demand supplier visibility — indirect monitoring. A vendor’s lack of transparency about problems in the supply chain may simply be a matter of efficiency, as many clients are unlikely to care. But it is critical that CIOs ask their vendors the strategic questions they’ll need answered to develop a diversified long-term strategy.
This includes actively looking for clues, beginning with Tier 1 partners. “[CIOs] should be looking for indications within their supply base that they’re running out of materials,” Masters said, in part because the Tier 1 vendors “may not know that these materials are actually in the finished goods that they’re procuring.”
Nadkarni supports this focus on the immediate supplier: “If I’m procuring servers from Dell or HP or Cisco or Lenovo, REEs are more likely to impact their component suppliers.”
Utilize supply chain risk software. Since CIOs typically deal with resellers or systems integrators who work with OEM vendors, direct contact with chip manufacturers is rare. Masters suggested this is where technology becomes essential.
“There are many supply chain risk management solutions that can help you based on your industry,” she said, adding that the need for a centralized system is clear because REEs are not just contained within IT hardware.
“When you look at where REEs live, it’s not just high tech. You’ve got defense segments, you’ve got consumer segments, clean energy, healthcare, industrial. All of them have REEs somewhere within the process or the finished goods,” she noted.
Reward alternative sourcing and innovation. The ultimate path to mitigating single-source risk is through geographic diversification. Although China, as noted, currently maintains a near-monopoly on REEs, the U.S., Australia, and several Asian countries are attempting to counter this by extracting rare earths in sustainable quantities.
CIOs should encourage these efforts. Masters recommends staying attentive to suppliers who may utilize these alternate sources — and price accordingly — which may be helpful in building future resilience. While upstream effects from these new geographical resources are a relatively distant prospect, they are the foundation of a long-term strategy.Recycling is another option, though it is currently time-consuming and expensive. Extracting REEs from existing devices has not yet proven viable for meeting high-volume semiconductor demands. Likewise, semiconductors that minimize the use of REEs are appealing, but commercially viable options are not yet widely available.
