China's grip on rare earths for chips far exceeds direct supply role, report says

Key facts

• China controls over 90% of certain rare earths essential for semiconductor manufacturing.
• US chipmakers source 95% of their manufacturing equipment and materials from the US, Europe, and Japan.
• Semiconductors are crucial for AI, quantum computing, and the Internet of Things, and are of strategic national security importance.

China's influence in the global semiconductor supply chain is more extensive than direct equipment and material provision suggests, with the country controlling over 90% of certain rare earths critical for chip manufacturing, according to the Semiconductor Industry Association (SIA).

While US chipmakers source 95% of their nearly $27 billion annual spending on manufacturing equipment and materials from companies headquartered in the US, Europe, and Japan, China's dominance in essential raw materials presents a significant vulnerability. The semiconductor industry is characterized by strong global interdependencies and high R&D and capital expenditures, making it difficult and expensive to create new supply sources.

Research from Rabobank highlights the complexity of the semiconductor supply chain, noting that disruptions in one link can have widespread consequences. The industry is vital for emerging technologies like artificial intelligence, quantum computing, and the Internet of Things, and is considered strategically important for national security. A report by Epoch AI suggests that China is more exposed than the US to semiconductor supply disruptions due to the higher proportion of semiconductors in the cost of goods it imports, indicating that a combined shock scenario involving Taiwan and a China-West decoupling would impact China more severely.