UPDATE: A significant trade agreement announced in November 2023 has temporarily stabilized the supply of rare earth elements (REEs), crucial for the semiconductor industry and data center infrastructure. This development comes as China continues to control approximately 70% of the global supply and 90% of the refining processes for these essential materials.
As concerns about potential disruptions to semiconductor production rise, Chief Information Officers (CIOs) must act swiftly to mitigate associated risks. While current reports indicate no major delays in server equipment deliveries, the potential for longer lead times remains, according to Cori Masters, a senior research analyst at Gartner.
“It’s still viewed from a supply chain perspective as a single source of supply — detrimental reliance on a single geography,”
Masters stated, emphasizing the urgency for CIOs to reassess their strategies.
CIOs face a complex challenge as rare earths are deeply embedded within the supply chain, often hidden from view. The equipment necessary for operations — including hard drives and high-efficiency cooling fans — relies on REEs, which are often sourced from Tier 3-5 segments of the supply chain, making them virtually invisible to most decision-makers.
As Ashish Nadkarni, group vice president of IDC, explained, “The cost will show up in a premium.” He provided a stark analogy: “When you go to buy groceries, if you ask the grocery vendor why your lettuce is $2 more, do you think they’re going to know why? They’re probably going to tell you that it’s due to inflation.” This lack of transparency may mask deeper availability issues, creating longer lead times for critical equipment.
To address these risks, Masters and Nadkarni recommend that CIOs enhance their scrutiny of vendor suppliers and embrace risk-monitoring software. “CIOs should be looking for indications within their supply base that they’re running out of materials,” Masters said, urging executives to demand better visibility from Tier 1 partners about the components in their products.
Furthermore, CIOs are encouraged to consider alternative sourcing strategies to mitigate the reliance on China. Countries like the U.S., Australia, and several Asian nations are ramping up efforts to sustainably extract rare earths. Monitoring these developments could foster resilience in supply chains.
CIOs should also explore the potential of recycling REEs from existing devices, although this method remains expensive and time-consuming. As the industry evolves, the demand for semiconductors that minimize REE usage is growing, but commercially viable options are not yet widely available.
In conclusion, while the recent U.S.-China trade agreement provides temporary relief, the underlying risks remain. CIOs must act decisively to enhance their supply chain visibility and develop diversified sourcing strategies to safeguard against future disruptions. This ongoing situation is critical for companies relying on technology and infrastructure, making it imperative for CIOs to stay informed and proactive.
As the landscape evolves, staying ahead in the game will require vigilance and strategic foresight.
