Caught in China’s magnetic grip, the Indian auto industry is looking to its own country for rare earth safety

The issues related to the rare earth supply chain have been going on since the beginning of the current fiscal, creating anxiety and uncertainties for the Indian automakers. The rare earth magnets in question, namely neodymium-iron-boron (NdFeB), are valued for their strength and efficiency. Modern passenger vehicles rely on these rare earth magnets for several essential components, from traction motors to infotainment systems. These magnets enable the performance and miniaturization that defines next-generation automotive technology. By comparison, the more conventional ferrite magnets are used for less performance-sensitive applications such as windshield wiper motors, window regulators and starter motors.

China dominates the global rare earth supply chain, accounting for about 69% of global production and about 90% of processing capacity. This overwhelming share makes it the backbone of global technologies – from electric vehicles to sustainable energy systems – where these magnets are indispensable.

This gives China significant control over the availability and pricing of these crucial materials. This dominance and influence is likely to continue for decades unless meaningful capabilities are established in other regions. As China has tightened controls on exports and clearance of shipments, stocks of rare earth magnets are being judiciously managed by Indian automakers with a view to minimizing disruptions to production and supply. The rare earth shortage is hitting electric vehicles (EVs) the hardest due to their greater reliance on permanent magnet motors and advanced electronics. Within EVs, passenger EVs are the worst affected, followed by commercial EVs, while electric two- and three-wheelers face moderate disruption. Vehicles with an internal combustion engine (ICE) remain relatively less affected, with minor impacts on components such as alternators and power steering.

The shortage of these rare earth magnets is changing the automotive landscape, prompting Original Equipment Manufacturers (OEMs) and governments to respond flexibly and innovatively. OEMs are actively identifying and securing alternative global sources to reduce their dependence on China’s rare earth magnets.

At the same time, the Government of India (GoI) is encouraging rare earth exploration and development of a manufacturing ecosystem to build self-sufficiency. This becomes imperative at this time as self-reliance in rare earth magnets is not just about reducing import bills but about securing India’s technological sovereignty. Without this, India’s ambitions for EV leadership and clean energy transition will remain dependent on external forces. To this end, the Union Cabinet in November 2025 approved Rs 7,280 crore for the ‘Scheme to Promote Production of Sintered Rare Earth Magnets’ to promote indigenous production of rare earth magnets and promote self-reliance. The financial expenditure includes sales related incentives of Rs. 6,450 crore on sale of rare earth permanent magnets (REPM) over five years and a capital subsidy of Rs. 750 crore, with the total tenure of the scheme being seven years.

This initiative aims to establish 6,000 tonnes per annum (MTPA) of integrated REPM production in India, increasing self-reliance and positioning India as a key player in the global REPM market. This can secure supply chains for the automotive, aerospace and electronics industries and increase industrial resilience, reducing the risks of global supply disruptions. It is expected that by 2030, 70-75% of India’s REPM requirements will be met and import dependence will be significantly reduced.

While this initiative by the Indian government aims to promote self-reliance and reduce import dependence by building indigenous manufacturing capabilities, it is not alone in this journey. The private sector also remains committed to reducing dependence on China and preventing such a scenario in the future.

In view of this, players in the automotive supply chain, including OEMs and auto parts suppliers, have taken measures such as diversifying global supply sources and developing ferrite-based motors in an effort to reduce import dependence. In the medium to long term, investments aimed at developing domestic reserves, refining capacity and infrastructure for recycling rare earth metals from e-waste would strengthen India’s domestic supply chain.

By promoting localization, recycling and the use of alternative technologies, India aims to build a more resilient supply chain. In this respect, the REPM program is a step in the right direction to promote local production and self-reliance, which in combination with the other diversification and risk reduction initiatives should help reduce dependencies in the medium to long term.

The bottom line is that India’s rare earth strategy is no longer optional, but absolutely necessary. Through localization, recycling and technological innovation, the country is taking decisive steps towards a safe and sustainable automotive future.

Sruthi Thomas, Vice President and Sector Head, Corporate Ratings, ICRA Limited.