Rare earth elements (REEs) are vital components in the semiconductors that power servers and maintain data center infrastructure. With China controlling approximately 70% of the global supply and refining about 90%, Chief Information Officers (CIOs) face significant risks in managing this crucial resource. A recent trade agreement announced in November 2023 has temporarily alleviated concerns by suspending export controls on REEs from China, ensuring supply stability in the short term.
Despite the trade agreement, the reliance on a single-source supply chain remains a point of concern for CIOs. According to Cori Masters, senior research analyst director at Gartner, the situation is precarious. She emphasizes that while the current agreement provides temporary relief, it does not eliminate the risks associated with depending heavily on one country for these essential materials. “It’s still viewed from a supply chain perspective as a single source of supply—detrimental reliance on a single geography,” Masters stated.
Understanding the Complexity of Supply Chains
For CIOs, the challenge lies in the intricate nature of the technology supply chain. Equipment critical for operations, such as hard drives and cooling systems, are influenced by REEs, but their role is often obscured within the supply chain’s deeper tiers. Research indicates that these materials are located in Tier 3–5 segments, which pertain to refinement and chemical separation stages—making them largely invisible to CIOs.
While CIOs focus on securing timely deliveries and competitive pricing for their organizational needs, they may not consider the underlying components that contribute to these costs. Ashish Nadkarni, group vice president of IDC’s worldwide infrastructure research group, explains that the costs associated with REEs might not be apparent until they manifest as higher prices from suppliers. “If I’m procuring servers from major vendors, REEs are more likely to impact their component suppliers,” Nadkarni noted.
This lack of visibility can create a subtle pressure in pricing rather than an overt shortage, which often registers as part of a broader supply chain issue for CIOs. Masters points out that, “It’s creating that longer lead time in order to get goods out,” highlighting the need for CIOs to recognize the implications of this hidden risk.
Strategies for Mitigating Supply Chain Risks
To address these vulnerabilities, CIOs should not only concentrate on tracking REE markets directly but also advocate for increased transparency and diversification among their Tier 1 partners. Both Masters and Nadkarni recommend that CIOs enhance their scrutiny of vendor suppliers and explore the use of risk-monitoring software.
Demanding supplier visibility is essential, as a vendor’s lack of transparency may stem from a generic approach to efficiency. CIOs need to engage with vendors proactively, asking strategic questions that will inform their long-term diversification strategies. “CIOs should be looking for indications within their supply base that they’re running out of materials,” Masters advised, noting that Tier 1 vendors may not be fully aware of the REEs embedded in their products.
Furthermore, adopting supply chain risk management solutions can be beneficial. Since direct communication with chip manufacturers is rare for CIOs, leveraging technology to gain insights into supply chain risks can enhance decision-making. Masters highlighted that, “There are many supply chain risk management solutions that can help you based on your industry,” underscoring the need for a centralized approach to managing these complexities.
Encouraging alternative sourcing and innovation is another avenue for mitigating risks associated with reliance on a single geography for REEs. While China currently dominates the market, countries like the United States and Australia are exploring sustainable extraction methods. CIOs should monitor suppliers who utilize alternative sources and adjust pricing strategies accordingly to build resilience against future disruptions.
Although recycling REEs from existing devices is a time-consuming and costly process, it represents a potential avenue for future supply. Similarly, the development of semiconductors that minimize REE usage is appealing, although commercially viable options are still in the early stages.
In conclusion, the current landscape of rare earth supply chains presents unique challenges for CIOs. By demanding better visibility from suppliers, utilizing risk management software, and supporting diversification efforts, CIOs can better navigate the complexities of this critical resource. The ongoing geopolitical dynamics surrounding REEs necessitate a proactive and informed approach to ensure the stability and efficiency of data center operations.
