Dragoman Digest

China targets foreign stockpiling of rare earths

China’s actions, whilst providing short-term leverage, risk accelerating global supply chain diversification

China is tightening export restrictions on foreign companies seeking to stockpile rare earths, reinforcing its grip on a market it dominates. China processes approximately 90 percent of the world’s rare earth supply. It also makes 94 percent of permanent magnets, which include rare earths and are used in a range of products including EVs, wind turbines and defence equipment. In April, Beijing placed export controls on seven categories of medium and heavy rare earths, including permanent magnets and other finished products. The restrictions triggered major shortages across a range of industries, particularly automobiles. Under the controls, foreign companies are required to give potentially sensitive information to Chinese authorities, including details of the production of items on the list, and ultimate end customers.

The tentative truce in the second China-US trade war has led to a resumption of Chinese exports of permanent magnets and other rare earth products to the US. However, the situation remains very different to the pre-April status quo. Chinese customs officials have begun scrutinising orders that exceed company’s historical averages, interpreting them as attempts at hoarding.  The measures are clearly an attempt to prevent companies from building up stock against any future export disruptions.

China’s weaponisation of rare earths, whilst politically potent, is not without risk. Restricting exports will likely raise prices, making Western rare earth projects – which have struggled to compete on price – more commercially viable and hardening the resolve of governments. This is illustrated by historical precedent. After China circumscribed rare earth exports to Japan in 2010, Tokyo funded mines abroad and reduced its dependence on Chinese rare earths supply from 90 to 60 percent. Today, Washington is already acting. The US government has signed an offtake agreement with miner MP Materials to purchase the majority of its permanent magnet production. The deal also included a price floor for critical rare earth inputs, which will help MP Materials compete with Chinese competitors. The complexity of building out alternative supply chains nonetheless means that it will be years, if not decades, before China’s dominance is fully diluted.

Toyota turns to Chinese parts to help cut EV cost production in Thailand

Japanese dominance is steadily dissipating

Toyota’s decision to source Chinese-made auto parts for its Thai production hub underscores both cost pressures and intensifying competition from Chinese manufacturers. As it moves towards local EV production by 2028, Toyota has asked its Japanese suppliers to incorporate Chinese components, including moulds from Zhejiang Kaihua and plastics from Kingfa Sci. & Tech. By doing so, Toyota aims to reduce production costs by as much as 30 percent, using parts that are already present in its budget EV models that have been released in China. This marks the first instance of a major Japanese automaker drawing Chinese suppliers into Southeast Asia, reflecting a broader recalibration of Toyota’s supply chain strategy. The decision highlights not only the attractiveness of Chinese parts – which are 20–30 percent cheaper than Japanese equivalents – but also Toyota’s recognition that to remain competitive, it will need to adopt some of the cost efficiencies underpinning China’s rapidly expanding auto sector.

For their part, Chinese automakers are rapidly gaining ground in what has historically been a Japanese stronghold. Japanese brands accounted for roughly 90 percent of Thai vehicle sales for decades. This year, their market share has slipped to 71 percent. Chinese competitors such as BYD have captured roughly 16 percent of the Thai market through aggressive pricing and expansion of electric and plug-in hybrid offerings. There are now 190 Chinese parts companies operating in Thailand, a fourfold increase from 2017. Still, this is a long way behind the 1400 Japanese suppliers, who constitute a plurality of Thailand’s 3100 parts manufacturers. Toyota will be hoping that adoption of Chinese parts, combined with enduring advantages like consumer finance and after-sales service networks, will help head off Chinese competition.

Japan advances plans to build first nuclear reactor since Fukushima

Government-backed return to nuclear power is strickling down to private sector

Kansai Electric Power is the first Japanese utility since the Fukushima disaster in 2011 to advance plans to build a new nuclear reactor. On July 22, Kansai Electric announced it would resume a feasibility study into constructing a new reactor at its Mihama site in Fukui Prefecture, where several of its existing units already operate. Nuclear power constitutes 8.5 percent of Japan’s electricity, far below the 30 percent share before Fukushima. So far, Tokyo’s nuclear revival has been reflected more in the re-opening of previously mothballed plants rather than in new builds. 14 nuclear power plants have resumed operations, overcoming at times fierce local opposition.

The return to nuclear energy has been driven by a combination of decarbonisation and energy security imperatives. Former Prime Minister Fumio Kishida’s decision to commit to net zero emissions by 2050 forced Japan to reappraise its nuclear power strategy. This was given added urgency by the surge in global gas prices following Russia’s invasion of Ukraine in 2022. Added demand from energy-intensive data centres and semiconductor factories has reinforced the need for stable, low-carbon baseload power. Whilst Japan has made strides in developing renewables, it faces fundamental constraints because of its densely populated, mountainous landmass.

Tokyo’s 2024 energy plan targets nuclear plants supplying 20 percent of Japan’s electricity by 2040, an ambitious goal given that many existing reactors are slated for decommissioning. Japan’s nuclear strategy will hinge on extending the lifespan of existing plants while pursuing new builds. The government has already signalled willingness to allow reactors to operate beyond the current 60-year limit, a move intended to maintain capacity as many facilities approach retirement. 11 additional reactors are in the process of reopening, which will help Japan inch closer to its 2040 targets, but the ageing fleet raises long-term safety and reliability questions. Rebuilding supply and public confidence in nuclear power will be key challenges. Mitsubishi Heavy Industries’ effort to rally more than 200 component suppliers for its advanced light water reactor illustrates the scale of the challenge, as many firms exited the sector during the post-Fukushima freeze.

Vietnam accelerates infrastructure spending amid export headwinds

State-led investment surge faces potential financing and bureaucratic obstacles

Vietnam is launching 250 infrastructure projects worth US$49 billion – 10 percent of GDP – aiming to stimulate domestic demand as a counterweight to its reliance on export-led economic growth. This comes as part of Communist Party chief To Lam’s broader reform agenda, which aims to transform Vietnam into a high-income country by 2045. The reform agenda tacitly acknowledges that Vietnam’s reliance on cheap labour assembling goods with limited local value-add is fast approaching its limits. US tariffs of 20 percent and penalties of 40 percent for the trans-shipment of goods substantially originating in China have accelerated the need to find other growth drivers. Of the 250 projects, 59 involve transportation infrastructure including airports, railways, roads, and ports, with another 57 industrial projects and 36 technical infrastructure initiatives.

However, there remain significant obstacles. The government will fund only 37 percent of the infrastructure spending, leaving banks, foreign investors, and the private sector to fill the gap. A separate state-directed US$20 billion loan package involving 21 Vietnamese banks requires the four largest banks – Vietcombank, VietinBank, BIDV, and Agribank – to each commit US$2.3 billion at below-market rates for infrastructure and technology projects. Banks must provide these decades-long loans despite holding predominantly short-term deposits, raising liquidity concerns. Red tape and bureaucratic inertia are another looming challenge. Prime Minister Pham Minh Chinh has acknowledged that US$235 billion worth of previously announced projects remain frozen by legal obstacles – nearly five times the announced stimulus.

The distribution of infrastructure contracts will be an interesting early test of To Lam’s commitment to elevating the private sector. Resolution 68, adopted by Vietnam’s Communist Party leadership in May to boost private firms previously overshadowed by state-owned enterprises, promises to level the playing field through new incentives and support. Yet Vingroup, originally a real estate developer and one of Vietnam’s largest state-aligned conglomerates, has declared infrastructure as its next core business, targeting high-speed railways and ports. Vingroup winning major contracts would not be much of a departure from the status quo. Whether independent private companies gain meaningful project access will serve as a bellwether for Vietnam’s commitment to genuine economic reform.

Fusion’s breakthrough moment triggers race to harness artificial stars

Scientific milestones accelerate commercial timeline, but formidable technical challenges remain

Efforts to develop nuclear fusion achieved a historic milestone in December 2022 when US scientists achieved “ignition” – producing more energy from a fusion reaction than was required to trigger it. Fusion merges atoms to release energy, mimicking how the sun generates power. China followed with a milestone of its own this year, sustaining plasma at 100 million degrees Celsius for 18 minutes. Keeping plasma at such extreme temperatures is critical for maintaining the continuous fusion reaction needed for power generation. These breakthroughs have convinced some investors that the technology, perpetually “30 years away”, might be achieved within a decade. Unlike nuclear fission, which splits atoms in today’s power plants, fusion produces no long-term radioactive waste and cannot trigger runaway chain reactions. This potential has triggered unprecedented investment, with American startups raising US$5.6 billion in recent years, supplemented by US$800 million in annual federal funding. China has channelled at least US$1.5 billion annually into fusion development.

Both superpowers have pursued contrasting strategies to commercialise fusion. American startups are making more individualised technological bets. For example, leading startup Commonwealth Fusion Systems is developing smaller magnetic reactors with proprietary super-magnets, while other companies pursue laser-based pellet compression. Meanwhile, China is spreading its bets more widely, with a stronger state role and heavier focus on the supply chain – from high-temperature superconducting materials to grid infrastructure – leveraging its industrial scale advantages in manufacturing. Beijing is building both a larger version of America’s national laser facility in Mianyang and advancing its own magnetic containment program. In July, Beijing established China Fusion Energy, a state venture backed by US$1.6 billion from major state-owned enterprises which aims to integrate the entire fusion supply chain.

China’s industrial heft may prove decisive in commercialising fusion, even though the US retains its edge in breakthrough fusion science. This would reprise a pattern that has seen technologies like solar panels, permanent magnets, and lithium iron phosphate batteries first discovered or commercialised in the US before being produced at scale in China. That pattern is reinforced by talent flows: China graduates ten times more fusion PhDs annually while prominent US researchers increasingly return to Chinese institutions. With both nations targeting operational reactors by 2035-2040, the fusion race will serve as an important case study in determining the strengths of the US’ venture capital agility versus China’s state-orchestrated industrial planning.