The chip war and the fight over rare earth

A tale of two systems reacting to chokehold moves

A lot of people may be surprised that the biggest market mover for the past few months is not Nvidia, the darling of the race for AI supremacy. The honor goes to a once obscure Nevada-based mining company called MP Materials. While Nvidia stock rose from $136 to $174 year to date, MP Materials went from $16 to $60.

The reason for the meteoric rise is simple – MP Materials is the sole US producer of rare earth, minerals critical to modern high tech production from EV, drone, robotics, wind turbine, semiconductor, to military weaponry.

While its production is miniscule compared to Chinese rare earth miners and its refining capabilities are quite limited, MP Materials has just attracted $400 million investment from Pentagon, which is now its largest shareholder.

The unprecedented US government investment in a private mining company is in reaction to China’s flexing its rare earth dominance in the face of the tariff and tech wars Trump and Biden have waged against Beijing.

US industries, especially the military industrial complex, are running scared that their reliance on Chinese rare earth to power high tech production and military applications are increasingly under stress in the intensifying geopolitical and geoeconomic contests between the two countries.

Ever since Trump launched the tech war against Huawei in his first term and Biden upped the stakes further by cutting off advanced semiconductors, Beijing has gradually tightened its stranglehold on rare earth in retaliation.

As the old saying goes, what is good for the goose is good for the gander, the US weaponization of the semiconductor supply chain has been met with counterattacks.

The fight over critical technologies and critical minerals will define China US relationship and is the foreplay before a hot war breaks out.

I have written a few pieces on both rare earth and China’s chip plans (https://huabinoliver.substack.com/p/rare-earth-and-reindustrialization). It is interesting to contrast the different approaches taken by the two superpowers to counter the other party’s move.

China and the US have taken different approaches to resolve their respective bottlenecks, reflecting how the two vastly divergent economic and political systems tackle technological challenges.

The US approach is focused on financial incentives and legislative greenlights, major levers in a highly financialized economic/political system.

Such financial and regulatory maneuvers are supplemented with extortions over Greenland and Ukraine, standard pirate tactics long practiced by western colonizers – if you don’t have something, just steal it from people who have it.

The US approach

Trump regime’s solutions to the rare earth bottleneck are multifaceted -

1. pause the tariff war to gain temporary relief from China for non-military applications (military end use is off the table, hence the panic in Pentagon)

2. boost domestic producers to replace Chinese supply, exemplified by the Pentagon investment in MP Materials

3. accelerate permitting process through legislations, for example using the Defense Production Act and Executive Order 14241 to expedite rare earth mines

4. acquire access to mining rights in vassal states such as Australia or through outright land grabs, the idea behind invading Greenland and the Ukraine mineral deal

On the surface, the US plan seems to have covered many actionable areas. If you ever need evidence that a large part of the US economy is based on military Keynesianism, using DoD to fund dual-use mineral development is exhibit A.

However, the holes in the US plans are easy to spot. First, where will the rare earth production technologies come from, even if (a big if) it can secure enough mines?

As discussed in my earlier essays, rare earth is hardly rare and the real challenge lies in the extraction, separation, refining, and processing technologies involved in the production of rare earth metals and permanent magnets (the so called “mine to magnet” supply chain).

China’s monopoly in the sector (70% global mining and 90% processing & refinement) is the result of decades long investment in technology and human capital development along the entire supply chain.

Beijing has long realized the importance of rare earth to modern industry and has heavily invested and developed, since 1980s, the requisite chemical solutions, specialized machinery, environmental solutions, refining technologies, and related engineering talents to achieve dominance in the industry.

According to Stanford Magnets, a mining trade journal, “At present, the United States does not have enough R&D capabilities to manufacture rare earth permanent magnets. For example, the United States does not have the ability to produce high-temperature and corrosion-resistant samarium-cobalt rare earth permanent magnets, which can be used to make permanent magnets for precision-guided missiles, smart bombs, radars, and military aircraft. However, China has this technology. (Note that Lockheed Martin is the largest user of samarium-based permanent magnets in the US – author).

At present, China’s rare earth processing capacity is nine times the total rare earth processing capacity of other regions in the world combined. This means that it will take at least a few years to build a processing plant that can match China’s rare earth production capacity.”

The US simply cannot replicate these core competencies in the short term by throwing money at the problem. Just the human capital problem alone will take years to overcome, if at all – for instance, no US university offers a rare earth mining major while dozens in China do.

For the US to catch up technically will take years, if not decades.

The second problem for the US is that even assuming the US can catch up technically, US and western rare earth miners are unlikely to be able to compete with Chinese producers for scale and cost.

Chinese producers dwarf western rare earth miners like MP Materials or Australia-based Lynas (the only two non-Chinese producers) in production scales today, at an order of 300 to 1 for the critical neodymium magnets (NdFeB magnets) for example.

According to MP Materials, NdFeB magnets are “the world’s most powerful and efficient permanent magnets — essential components in vehicles, drones, robotics, electronics, aerospace and defense systems.”

However, according to trade journal The Northern Miner, MP Materials expects to produce 1,000 tonnes of NdFeB magnets annually when it is fully scaled up with current processing capabilities by 2027. By contrast, China produced an estimated 300,000 tonnes of NdFeB magnets in 2024, up from 280,000 tonnes in 2023.

As the largest industrial nation, China is the world’s largest end user of refined rare earth products. China consumes over 80% of the rare earth products it produces.

Essentially China dominates both supply and demand of rare earth minerals for the foreseeable future, therefore deciding the economics of the industry such as pricing and profitability.

Western producers simply don’t have a viable economic model to support market-based competition against Chinese suppliers.

Rare earth minerals are critical to military productions, but the quantity needed is in fact quite small, compared with non-defense uses such as auto or green tech.

How long will US taxpayers subsidize for-profit private businesses like MP Materials if its only customer is Pentagon with its niche demand? Will Pentagon continue to bankroll a private business when it needs only a small fraction of the total production?

In fact, US dependency on Chinese critical mineral inputs for Washington’s war machine is not limited to rare earth and magnets. According to the Hague Center for Strategic Studies, another bottleneck mineral for the US military industrial complex is high purity graphite.

According to the Hague Center, “the US military could not function without graphite and the US currently does not produce any graphite from domestic mines. Meanwhile, China is by far the world’s biggest graphite producer at about 80% of global production. It also controls almost all graphite processing and is the dominant player in every stage of the supply chain”.

Graphite is also used widely in steelmaking, lithium-ion batteries, refractories, automobile, aerospace, electronics, and nuclear power industries.

While graphite is not a topic of much discussion at present, supply of graphite is already under strain in 2025 as new graphite mines fail to keep up with surging demand from global automakers.

Conceivably, graphite could be a future supply chain bottleneck Beijing can press in further confrontations with the US.

In short, there is no short-term or inexpensive fix to the US rare earth problems. The financial and regulatory maneuvers may deliver a partial solution but hardly enough to meet the growing demand for rare earth and other critical minerals such as graphite, where China has built a full supply chain dominance.

On the other hand, China’s approach to chip self-sufficiency is based on market economics and focused on developing the foundational capabilities for a breakthrough.

China’s approach reflects leadership’s strong engineering culture and its state/private mixed industrial economic/political system.

The Chinese approach

China has long been preparing for an eventual decoupling with the US and the west. Tech self-sufficiency is the primary motivation behind the Made in China 2025 plan.

The chip war has simply accelerated Beijing’s push in chip independence –

1. semiconductor investment funds by both central and local governments to incentivize domestic innovation and substitution of western technologies

2. mobilize big tech firms to build full chip and AI stacks to ensure their compute demands can be met without US/western tech. The big tech firms making a full throttled push include Huawei, SMIC, Alibaba, Xiaomi, ByteDance, and Baidu

3. break chip embargo through smart engineering such as “stacking and clustering” to improve domestic data center performance without the most advanced semiconductors, for example Huawei’s CloudMatrix 384

4. joint collaboration among academia, research institutes, big business, and the state in leapfrog technologies for next-gen chip development such as third-generation semiconductors (I’ll discuss in detail later), photonic chips, open-sourced RISC-V architecture, etc.

5. build ever greater human capital for chip and AI technologies, including setting up related STEM majors in more universities and funding more PhD graduates

As I wrote before, China represents the largest chip demand globally. It spent more on semiconductor imports ($400 billion plus in 2023) than oil when the country is already history’s largest oil importer. The economic rationale for chip self-sufficiency is evident.

While the US solution to its rare earth bottleneck is a typical financialized response, Beijing’s fix for the chip bottleneck represents an engineering and industrial response on top of increased funding.

When Ren Zhengfei, the founder of Huawei Technologies, was asked about the company’s chip strategy in a recent interview, he admitted Huawei’s Ascend chip still lagged behind the best Nvidia chips “by a generation”.

However, Ren pointed out Huawei was achieving state-of-the-art data center performance by using methods like “stacking and clustering”. Huawei has patented techniques to package chiplets on top of each other to make processors smaller.

Through smart engineering and optimized algorithms, Huawei shows it can reach performance parity for data centers with inferior chips.

Ren emphasized China’s many advantages in developing AI, including “millions of young people studying engineering” and “sufficient electricity generation and transmission grid, and the most developed communications networks in the world”.

I wrote about Huawei’s full tech stack in an earlier article (https://huabinoliver.substack.com/p/huawei-is-transforming-and-building).

In addition to smart engineering to get around chip embargo, China is also focused on a two-pronged strategy to improve its position in the global chip supply chain –

- capacity building across the entire semiconductor value chain with particular emphasis on its downstream leverage as the biggest chip customer and its strength in testing, packaging and mature nodes

- invest in leapfrog technologies, such as the third-generation semiconductors, also known as wide bandgap semiconductors

First, around existing chip technologies, China has built a dominant position in raw materials, assembly and test market, and select legacy logic chip fabrication nodes. Beijing has been rapidly expanding its position in memory chip fabrication.

China is the leading international producer and processor of a wide range of semiconductor-relevant raw materials, including gallium, germanium, magnesium, natural graphite, scandium, tungsten, and the entire range of rare earth elements.

In the mature process market (>22 nm), China is nearing parity with Taiwan with upward of 30% of global market share. China’s share is projected to reach 40% and overtake Taiwan by 2030.

In packaging and testing, China is expected to account for 25% of the global market by 2027. In packaging alone, China leads the world with a 38% market share.

In the memory chip segment, according to South Korean analysis, China’s capacity has already surpassed Samsung and SK Hynix, the global memory chip market leaders. Yangtze Memory Technologies (YMTC) and Changxin Memory Technologies (CXMT) are now the leading players in NAND flash memory and DRAM respectively.

China’s true strength is even more evident downstream. China dominates global production of electronics such as mobile phones and home appliances, and the subsystems and commercial products built on top of them.

As a result, China is one of the largest customers for many top global chip makers such as Intel, Qualcomm, and Nvidia. In 2023, China accounted for 27% of Intel’s revenue, compared to 26% for the US. China represented 46% of Qualcomm’s global revenue while the US accounted for less than 5%.

Beijing is also adept at identifying in-demand growth areas like data centers and artificial intelligence, toward which it can direct its mature node technologies, and do so on a relatively blank competitive canvas, and then scaling to that end.

Beyond improving its competitive position in the existing chip technology arena, China has identified the third-generation semiconductor technology as a potential leapfrog opportunity.

Third-generation semiconductors, also known as wide bandgap semiconductors, refer to materials and integrated circuits made with them such as Silicon Carbide (SiC), Gallium Nitride (GaN), and Indium Phosphide, that have wide energy bandgaps.

Such materials offer superior properties compared to traditional silicon (first-generation) and gallium arsenide (second-generation) and able to handle higher power levels, temperatures, and voltages than silicon semiconductors.

These materials are characterized by high breakdown voltage, high thermal conductivity, high electron saturation velocity, and high radiation resistance, making them ideal for high-power, high-frequency, and high-temperature applications such as EVs, data centers, and clean energy production.

As a result, third-generation semiconductors present multi-billion-dollar addressable markets in the immediate term and are projected to see considerable growth rates in the years ahead.

While third-generation semiconductors constitute a relatively new field and one with applications to new industries, their properties are not necessarily at the bleeding edge of design and fabrication, affording China a market niche that doesn’t require the cutting technologies it has been denied.

China faces a largely open space, unprotected by a defensive moat of western patents and IPs, to develop its own suite of intellectual properties and proprietary technologies.

And Beijing has prioritized the field. In a May 2023 speech, Xiang Libin, vice minister of China’s Ministry of Science and Technology (MOST), highlighted China’s emphasis on and support for third generation semiconductors: “Third-generation semiconductors represented by silicon carbide and gallium nitride have excellent performance and have huge potential in new energy vehicles, information communication, smart grids, and other fields. The Ministry of Science and Technology has attached great importance to the technological innovation and industrial development of third-generation semiconductors and has given the field long-term continuous support.”

This emphasis and support are reflected in China’s 14th Five-Year Plan period (2021 to 2025), which explicitly elevated wide bandgap semiconductor materials to the level of national strategy, calling to “develop silicon carbide, gallium nitride, and other wide bandgap semiconductors.”

Prioritization in government strategy has translated into competitively oriented actions. The elevation of wide bandgap semiconductors in China’s highest-level blueprint for strategic development kicked off a wave of supporting, operationalizing policies and plans at both central and local government levels.

These plans have outlined financial support measures for companies, market share and technological targets, and industrial initiatives. They have prioritized the entire wide bandgap semiconductor value chain, including applications.

For example, Shanghai’s 2022 “Action Plan to Build a Future Industrial Innovation Highland to Develop and Expand Future Industrial Clusters” described an end-to-end focus from upstream to downstream: “Promote the development of silicon carbide, gallium nitride, and other wide bandgap semiconductor compounds; improve the energy level and mass production scale of crystal preparation technology of wide bandgap semiconductor compounds; actively lay out the wide bandgap semiconductor wafer manufacturing technology; enhance the product design ability of wide bandgap semiconductor chips; and expand the application fields.”

Sorry about the boring language. This is why most people don’t read Chinese government plans, which can be really technical and dense, unlikely the entertainment provided by clown Trump.

Another example is the Shenzhen Action Plan to Cultivate and Develop Semiconductor and Integrated Circuit Industry Clusters (2022-2025) describes a gallium nitride and silicon carbide project intended to “seize the commanding heights of the industry and enhance product market dominance and voice.”

Beijing’s Zhongguancun Science Park has declared its intention to accelerate the construction of Zhongguancun Shunyi Park as a third-generation semiconductor industry cluster with global influence, “with an emphasis on silicon carbide, gallium nitride, gallium oxide, and diamond.”

China’s industry discourse parallels national and local policy.

Zhang Rujing, the founder of state-owned chip foundry Semiconductor Manufacturing International Corp (SMIC)., has called third-generation semiconductors an area in which China can “overtake the west on the straight.”

And Yu Chengdong, CEO of Huawei’s consumer business, said that China hopes to “achieve leadership in a new era” of third-generation semiconductors. He noted, “the gap between third-generation semiconductors at home and abroad is not as obvious as that of first- and second-generation semiconductors. Domestic manufacturers can catch up with foreign manufacturers and complete domestic substitution.”

China’s emphasis on third-generation semiconductors has already yielded domestic champions in the field. Take, for example, the photonic integrated circuit module company Zhongji Innolight (Innolight).

Unlike companies like SMIC and Huawei, Zhongji is far from a well known name in the West. But, building on third generation semiconductor technology, and indium phosphide in particular, it is the world’s leading provider of optical module solutions, small hardware that helps to network data centers and transmit high-throughput data flows that propel cutting-edge artificial intelligence applications.

Zhongji Innolight is also the only manufacturer in China that mass-produces and supplies 100-gigabit data center optical modules. It has become a key provider for global big tech companies developing data centers, including AI hyper-scalers such as AWS, Oracle, Alibaba, and Tencent.

The third-generation semiconductor ecosystem also demonstrates how Beijing can leverage its underappreciated dominance within the semiconductor supply chain.

Gallium nitride is a key material in third-generation semiconductors. And China is the dominant global gallium producer, accounting for approximately 98% of the world’s supply. China enjoys similar monopoly in many other critical minerals as discussed earlier.

In short, third-generation chip technology does not rely on the most cutting-edge of ever-shrinking transistor size. The utility of third-generation semiconductors for processing aligns neatly with the demands of contemporary critical, and growing, applications, like data centers and electric vehicles.

And China has been quietly developing a decisive upper hand in the sector for years, leveraging its materials advantages, its manufacturing capacity, and an emphasis on cultivating research and commercial champions.

Across the board, the third-generation semiconductor case underscores the futility of a US semiconductor industrial policy that does not account for China’s resilience and innovation.

In summary, as China and US continue to intensify their geoeconomic and geopolitical competition across multiple technological domains, each has to adapt and counteract the chokehold moves by the other.

China’s strategy is to focus on market economics, engineering innovations, industrial scale, and investment in human capital to overcome US challenges. The end goal is to use the tech embargos its adversaries have imposed as a catalyst to achieve tech self-reliance and sovereignty.