How China’s Rare Earth Metals Controls Are Disrupting Automotive Sourcing Strategies

A few weeks ago, China suspended exports of seven critical rare earth metals. As a result, EV manufacturers, electronics suppliers and aerospace players began reassessing their sourcing strategies and cost baselines. This action revealed once again how concentrated the global supply chain for critical materials truly is.

Rare earth elements refer to a group of 17 metals that are widely distributed in the Earth’s crust. While not geologically rare, they are essential for the development of modern technologies. These materials play a critical role in the production of everything from wind turbines and semiconductor chips to electric vehicles and military systems.  

Germany’s carmakers also play a leading role in global trade. In 2019, German motor vehicles were exported globally to a value of €225 billion, accounting for nearly 17 percent of the total German exports. This industrial strength has always been underpinned by engineering precision and manufacturing quality. But as labor costs continue to rise, the economics of this sector is becoming increasingly volatile. While German vehicles still set standards for reliability and innovation, the cost of producing them is increasing to a level that challenges their place in a highly competitive global supply chain.  

China controls over 70% of the global rare earth supply chain, and it owns nearly all of the refining capacity for these materials. When this single source is interrupted, the consequences are not limited to a delay in logistics or procurement. Instead, the disruption travels deep into the product lifecycle, from the bill of materials right through to the final assembly. The latest restrictions specifically target what industry experts describe as “heavy” and “medium” rare earths, including dysprosium, terbium and samarium. According to the Financial Times, these are essential not only for high-performance magnets that can tolerate extreme heat but also for critical systems such as jet engines, missile guidance components and electric vehicle powertrains. 

Inventories across the automotive sector are growing worryingly thin. According to Jan Giese, a metals trader at Frankfurt-based Tradium, most car manufacturers and suppliers appear to hold only two to three months’ supply of magnets. Broader estimates suggest that companies have between three and six months of supply, at most. This concern is not hypothetical. One senior executive from the automotive industry described the situation as “consequential” for Tesla and other global EV carmakers. On a severity scale of one to ten, the executive rated the impact as a seven or eight. 

Cost Engineering Has Become a Strategic Function

The latest rare earth restrictions have highlighted an important shift in the role of cost engineers. Executives across procurement, product development and finance are turning to cost engineering teams to help navigate a complex and volatile environment. 

To respond effectively to these challenges, cost engineers must support decisions such as: 

• Recalculating sourcing decisions with should-cost calculations for region-specific data

• Guiding sourcing managers through material substitution scenarios

• Assessing the carbon footprint implications of alternative materials

• Providing real-time data to finance teams on how raw material cost shifts affect margin projections 

In today’s market, there is limited time available for analysis. When suppliers announce shortages, or governments impose restrictions, then cost engineering and sourcing teams must respond within hours instead of days or weeks. This in turn makes the ability to react swiftly and collaborate across departments absolutely essential. 

Why Legacy Costing Tools Fail Under Geopolitical and Sourcing Pressure 

While procurement and supply chain teams are scrambling to locate new sources, cost engineering departments are struggling with an equally urgent issue. Many of the costing tools they rely on are fundamentally outdated. These tools assume stable inputs, predictable pricing and long-term supplier continuity, but that assumption no longer holds. 

Most legacy costing systems are built around spreadsheets or enterprise tools that rely on static historical data. These systems are not equipped to handle the volatility of geopolitical risk or model the impact of rapid changes in material availability. As a result, engineers cannot simulate regional price variations or explore alternative BoMs (Bill of Material), nor can they quantify the trade-offs between cost, lead time and sustainability - at least not fast enough to support time-sensitive decisions. 

Moreover, even if manufacturers are indeed prepared to invest in alternative supply paths, considerable structural challenges still remain. Financiers are often reluctant to support new projects due to China's ability to influence market prices by increasing production and flooding the global supply. This level of control makes it almost impossible to establish price stability for new entrants in the market. Additionally, critical materials are often produced according to customer-specific requirements, which makes substitution slow and difficult. 

However, such structural changes will take time. In the meantime, businesses need adaptive tools to remain competitive and resilient. 

How Cost Engineering Software Supports Smarter Sourcing Strategy 

Unlike legacy costing systems built on static libraries and offline Excel models, Tset’s product costing software continuously integrates real-time market data and supplier input, thereby enabling users to proactively respond to cost changes and potential risks before they impact the bottom line. Tset enables manufacturers to understand, simulate and act on cost-related changes across the entire product lifecycle.  

Tset’s cost engineering software helps companies move through the three necessary phases of disruption response: 

• React: By identifying exposed cost drivers, engineers can quickly model feasible changes and support initial supplier conversations. 

• Recover: With accurate simulations and integrated data, sourcing and product teams can develop mid-term solutions that preserve functionality and maintain financial performance. 

• Reinvent: Over the long term, Tset helps companies build cost models that account for geopolitical volatility, ESG requirements and diverse sourcing strategies.  

Tset offers cost engineering teams the ability to: 

• Simulate supply chain configurations and anticipate geopolitical risk by modeling the cost, lead time and carbon impact of alternative sourcing strategies. 

• Identify cost drivers at component and process level to support redesign and localization decisions. 

• Rapidly adapt cost scenarios in response to disruptions, ensuring cost efficiency and business continuity across programs. 

• Compare supplier costs against industry benchmarks and build transparent cost models to support data-driven negotiations. 

• Centralize cost data and insights in one easy-to-navigate software for strategic alignment and seamless collaboration with procurement, finance and engineering.  

These capabilities not only speed up tactical responses but also enable structural change in how companies approach cost engineering.