Thread by @Trinhnomics

Rare earth is in the news again. Of course it is not rare, just that you gotta dig deep and then obvs process it. That entire process is polluting, costly and the output itself doesn't yield a lot.

That's how China has captured the market. It's willing to do polluting working and basically sells more not a lot. But having cornered that market, it also sees it as leverage, which it has used since 2010 (with Japan). The weaponization of supply chain is what we call it.

The free market economics of it makes sense for people to just leave it to China to do rare earth & then focus on the more market profitable business. Until, well, dun, dun dun.

So how should a firm or government view rare earth? Should you go and pay HIGHER price than what the Chinese rare earths are going for to then secure resilience of supply chain?

Most say, well, "Nah." That is a costly move because well, others will outcompete you with cheaper Chinese inputs while you go dig and refine your rare-earth magnets. Not an economically worthwhile endeavor.

But not everyone has taken that decision. Here is a story of a company that didn't: General Motors.

Here I summarize the great reporting of the WSJ Jon Emont and Christopher Otts.

As you know, we have known this issue for a long time & Japan knew about it since 2010. So the Japanese usually have about 1 year of this stockpile, just in case. Not the Americans.

The car industry is pretty dependent on rare-earth magnets. GM decided that Covid shocks, which left it with semiconductor shortage, that it should secure non-Chinese rare earth magnets.

This sort of decision takes years to bear fruit so it is one with risks. Why? Well, your competitors can buy cheaper Chinese rare earth while you are trying to get more expensive non-Chinese.

wsj.com/business/autos…

It is one that pays off if China chokes off rare-earth supply but one that doesn't if say US-China tensions chill and cheap rare earth flows again. You ended up having invested for more expensive supply vs competitors.

What what did GM do?

In 2021, it realized that supply chain diversification is RESILIENCE and there is something called too-much China-supply-chain-concentration risk.

Okay, easy to understand so what to do about it. What they did was they found German VAC, one of the few Western producers of rare earths that haven't gone bankrupted and was like, let's do business together to create care-earth magnets."

So VAC CEO Erik Eschen was obvs happy because they were being outcompeted by cheaper Chinese rare-earth and here is a customer that is willing to invest long-term for MORE EXPENSIVE NON-CHINESE RARE-EARTH MAGNETS.

Btw, you also need rare-earth to make the magnet. So GM also signed with MP Materials, who is the largest rare-earth miner in the US. so here we go. We go investor, client etc. Again, also a risky multi-year bet to buy something MORE EXPENSIVE.

The US government, along with GM, also poured money into VAC and MP to sustain the mine and the refiner so to speak.

So what is this? It is called industrial policy when the government supports something that the market may fail. The market wants you to only buy Chinese rare-earth magnets cuz, well, it's way cheaper.

GM is set to receive most of the magnets produced by MP materials when it first produce its factory this year.

Btw, in the 1980s, GM and Sumitomo invented a stronger -rare-earth magnet that is the dominant type today. That spun off to a magnet division called Magnequench and supplied US firms like auto, electronics, and defense.

And comes China. It started to tolerate a lot of environmental costs (pollution) that come with mining and refining rare-earth.

So equipment's were dismantled and shipped off to China to make magnets. Magnequench shipped off to China literally. GM divested.

So here we have GM trying to UNWIND the clock. It is a costly bet but one that pays off as US-China tensions worsen and China weaponizes its supply chain dominance.

We don't know what they secured onshore is enough but it certainly helps when supply is being choked.

And China's move on rare-earth this week isn't just on the US. It has used it on other countries (EU, India, Japan etc). And so this idea of globalization and specialization or comparative advantage miss one key idea - TRUST.

So if you don't have trust and dealing with strategic rivalry, then this globalized world we live in is coming to an end. You can still have globalization but CHEAP is can become very expensive when you are totally dependent on cheap goods from a source that has geopolitically unstable ties.