India’s automotive sector is navigating an emerging supply-side challenge as China’s recent export controls on rare earth elements and magnets begin to disrupt shipments and strain global supply networks. According to a report by Crisil Ratings, the situation could evolve into a serious constraint for India’s electric vehicle (EV) ecosystem if the bottlenecks persist beyond a month. Rare earth magnets, while relatively inexpensive, are essential components in electric and hybrid vehicle technologies, making the disruption a potentially high-impact issue.

In April 2025, Beijing tightened export regulations for seven key rare earth elements and finished magnet products. China, which dominates the global rare earth magnet processing chain with over 90% market share, now requires exporters to obtain licences under a new approval framework. The revised rules mandate detailed documentation outlining the final use of the materials, along with declarations from customers confirming non-defence applications and non-re-export to sensitive markets, notably the United States. The added scrutiny has extended clearance times to a minimum of 45 days, resulting in growing backlogs and delayed shipments.

This regulatory shift has sent ripples across the global automotive supply chain, especially in countries like India that rely heavily on Chinese imports for these materials. Rare earth magnets are central to the functioning of permanent magnet synchronous motors (PMSMs), the preferred propulsion system in EVs due to their superior torque output, energy efficiency, and compact form factor. Hybrids, too, depend on these magnets for efficient power delivery. Even internal combustion engine (ICE) vehicles use them, although to a lesser extent, in electric power steering systems and other electrically driven functions.

Crisil Ratings noted that India imported nearly 540 tonnes of rare earth magnets last fiscal, with over 80% of this volume sourced from China. This heavy reliance has left the sector particularly vulnerable to recent policy changes. By the end of May 2025, nearly 30 import requests from Indian firms had been endorsed by the Indian government. However, none had received final clearance from Chinese authorities, resulting in a complete halt in shipments so far.

The effects of this disruption are beginning to surface in inventory management across the industry. Automakers normally hold 4–6 weeks of rare earth magnet stocks. If the current delays persist, production schedules for EVs may begin to feel the strain by July 2025. Over a dozen new EV models, most based on PMSM platforms, are slated for launch in the second half of the year. A sustained shortage could compel companies to revise launch timelines, cut back on production, or reallocate resources towards ICE models that require fewer magnets.

India’s auto sector had been poised for a strong FY26, buoyed by the momentum in electrification. Passenger vehicle (PV) sales are projected to grow by 2–4%, with electric PVs expected to expand 35–40% from a smaller base. Electric two-wheelers are forecast to grow around 27%, well ahead of the overall 2W market’s anticipated 8–10% rise. However, Crisil warns that ongoing supply-side disruptions could dampen these projections, especially for smaller manufacturers that operate on thin inventories and limited supplier networks.

The sector’s current predicament is partly rooted in past supply chain assumptions. During the Covid-19 pandemic, rare earth magnet supplies remained relatively stable, unlike semiconductors, which faced severe shortages. This led to complacency in inventory planning, with manufacturers continuing to rely on just-in-time models. But while the semiconductor supply chain is geographically diversified, rare earth magnet processing remains highly centralised in China. This concentration leaves little room for short-term adjustment.

In response, automakers are exploring alternative sourcing arrangements with suppliers in Vietnam, Indonesia, Japan, Australia, and the United States. However, building reliable and scalable supply relationships in these regions will require time and investment. Meanwhile, companies are focusing on optimising current inventories, prioritising ICE vehicle production, and potentially deferring lower-priority EV models.

Despite accounting for less than 5% of a vehicle’s cost, rare earth magnets have now emerged as a critical choke point. Crisil notes that the shortage is prompting auto manufacturers and suppliers to revisit procurement policies and build more resilient, diversified sourcing strategies. Industry players are also collaborating with government bodies to seek long-term policy support and structural interventions.

Recognising the strategic implications of the shortage, the Indian government has initiated action on multiple fronts. In the short term, efforts are centred around building stockpiles, easing port clearances, and expediting domestic assembly of critical components under existing Production Linked Incentive (PLI) schemes. For the longer term, the focus is on reducing import dependency by investing in rare earth mineral exploration, setting up domestic refining and processing units, and developing recycling capabilities to extract valuable materials from discarded electronics and end-of-life vehicles.

While these initiatives offer a roadmap toward greater supply chain independence, their results will take time to materialise.