Crisil Ratings : Shortage of rare earth magnet can decelerate India's automotive ride

Supply-chain disruption may impact production and growth trajectory of the automotive sector

Rare earth magnets, low in cost but critical in function, could emerge as a key supply-side risk for the India's automotive sector if China's export restrictions and delays in shipment clearances persist. A disruption lasting beyond a month can impact electric vehicle (EV) launches, affect production and weigh on the sector's growth momentum.

Rare earth magnets are integral to permanent magnet synchronous motors (PMSMs) used in EVs for their high torque, energy efficiency and compact size. Hybrids also depend on them for efficient propulsion. In internal combustion engine (ICE) vehicles, the use of rare earth magnets is largely limited to electric power steering and other motorised systems.

In April 2025, China - the world's dominant exporter of rare earth magnets - imposed export restrictions on seven rare earth elements and finished magnets, mandating export licences. The revised framework demands detailed end-use disclosures and client declarations, including confirmation that the products will not be used in defence or re-exported to the US. With the clearance process taking at least 45 days, this added scrutiny has significantly delayed approvals. And the growing backlog has further slowed clearances, tightening global supply chains.

India, which sourced over 80% of its ~540 tonne magnet imports from China last fiscal, has started to feel the impact. By end-May 2025, nearly 30 import requests from Indian companies were endorsed by the Indian government, but none have yet been approved by the Chinese authorities, and no shipments have arrived.

Says Anuj Sethi, Senior Director, Crisil Ratings, "The supply squeeze comes just as the auto sector is preparing for aggressive EV rollouts. Over a dozen new electric models are planned for launch, most built on PMSM platforms. While most automakers currently have 4-6 weeks of inventory, prolonged delays could start affecting vehicle production, with EV models facing deferrals or rescheduling from July 2025. A broader impact on two-wheelers (2W) and ICE PVs may follow if the supply bottlenecks persist for an extended period."

In fiscal 2026, domestic PV volumes are expected to grow 2-4%, while electric PVs could rise 35-40%, albeit on a low base. Electric 2Ws could grow ~27%, outpacing overall 2W growth of 8-10%. However, sustained supply tightness could soften this momentum, especially in the EV segment.

During the pandemic, rare earth magnet supplies remained stable, unlike semiconductors, reinforcing reliance on just-in-time inventory without building strategic buffers. However, while semiconductors have a globally diversified supply base, over 90% of rare earth magnet processing is concentrated in China, with limited short-term alternatives.

Says Poonam Upadhyay, Director, Crisil Ratings, "The shortage of rare earth magnets is forcing automakers to reassess supply-chain strategies. Despite contributing less than 5% of a vehicle's cost, these magnets are indispensable for EV motors and electric steering systems. Automakers are actively 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 get diverted to ICE models, which require fewer units, potentially impacting EV growth."

Recognising the risk, the government and automakers are taking action on two fronts. In the short term, the focus is on building strategic inventories, tapping alternative suppliers and accelerating domestic assembly under Production Linked Incentive schemes. For the long term, reducing import dependency will hinge on fast-tracking rare earth exploration, building local production capacity and investing in recycling infrastructure.

As diversification of supply sources is being actively explored, aligned with policy efforts, the situation continues to evolve for automotive players in their quest to have a steady flow of rare earth magnets. The pace of China's export approvals for these magnets remains the immediate monitorable.

Source : Equity Bulls

Keywords

CRISILRatings INE007A01025 RareEarthMagnet Shortage Automotive SupplyChainDisruption