EconoScope | GM's exit exposes cracks in U.S. rare-earth ambitions

(ECNS) -- General Motors' cancellation of a major supply deal has dealt a blow to U.S. rare-earth ambitions.

GM, the biggest customer of a U.S. factory making rare-earth magnets for electric vehicles, canceled its long-term supply deal with the manufacturer, Reuters reported recently.

Last November, U.S. Treasury Secretary Scott Bessent stood inside a rare-earth permanent magnet plant in Sumter, South Carolina, holding up a neodymium-iron-boron magnet. Speaking to Fox Business, he said that this was the first magnet manufactured in the U.S. in 25 years, adding that “we’re ending China’s chokehold on our supply chain.”

One year later, however, the plant’s biggest customer — GM, which accounted for 90% of its orders — has walked away from a 10-year supply agreement, dealing a major blow to the project, Reuters reported.

The plant, with an investment of about $500 million and an annual production capacity of nearly 2,000 metric tons, is owned by German magnet maker Vacuumschmelze, or VAC. GM and VAC announced plans to build the facility in the U.S. in 2021 and signed a long-term supply agreement in 2023.

In effect, the factory was built around the prospect of supplying GM for a decade. With its biggest customer now pulling out, the value of a facility once touted as a strategic U.S. industrial asset has taken a serious hit.

GM’s decision to withdraw, however, was also a move to protect its own business.

VAC had been willing to place nearly all its eggs in one basket because it counted on the U.S. government to support the project. This was no ordinary commercial venture, but a strategic asset fostered by government subsidies and policy support.

In its early operating phase, the plant received funding from the Pentagon, as well as $111.9 million in tax credits under the qualifying advanced energy project credit program, according to a Goldinvest report.

Apart from the 90% of output earmarked for GM, almost all the remaining 10% was intended for the U.S. government, VAC told Reuters.

The magnets reserved under the 10-year agreement were originally intended for motors in GM electric vehicles. But after taking office in 2025, the Trump administration rolled back federal incentives and tax credits for electric vehicles. GM’s electric vehicle business has long been unprofitable, and with those subsidies gone, cutting output was a rational choice.

Even if GM had honored the agreement, would that have been enough to establish a self-sufficient U.S. rare-earth industry? Not necessarily. The challenge facing the U.S. supply chain is not simply securing orders, but ensuring consistent delivery at competitive costs and acceptable quality.

The real barriers in the rare-earth industry lie not in mining, but in the expertise required for separation and magnet manufacturing.

Marina Yue Zhang, an associate professor at the Australia-China Relations Institute at the University of Technology Sydney, said core technological knowledge resides not just in equipment but in the decades of process experience and knowledge held by engineers, according to The Star.

In the 1990s, the U.S. moved much of its rare earth processing overseas because of high environmental compliance costs and low profit margins. Now, rebuilding a domestic rare earth supply chain means training a new generation of skilled workers from the ground up.

Gavin Harper, a critical materials research fellow at the University of Birmingham, told The Star that specialist skills in rare earth separation, metal making and alloy production had atrophied as knowledge withered.

“It is not only [the] operating processes that need to be rebuilt but also the knowledge of how to manufacture the machinery and equipment to create those processes from scratch that needs to be rebuilt,” Harper said.

Capital can finance the construction of a magnet plant within a few years. Building a workforce of engineers capable of keeping the production line running reliably, however, could take a long time.

Even if the U.S. can gradually make up for its technological and talent gaps, domestically produced magnets still face a major obstacle in the marketplace: cost.

According to data from Fudan Development Institute, producing one kilogram of medium-grade neodymium-iron-boron magnets costs about $26 in China, compared with around $34 in the U.S. and other Western countries — a difference of roughly 30%. Chinese manufacturers also typically operate on thin profit margins of less than 10%, relying on high-volume sales. By contrast, new U.S. projects require profit margins of around 30% to attract investment. As a result, the price gap for finished products could reach as much as 80%.

Government contracts and guaranteed high prices may sustain a limited amount of American domestic production. But civilian markets are unlikely to pay a premium simply for a product’s country of origin. GM’s withdrawal is a case in point.

A White House executive order requires U.S. defense contractors and other manufacturers to stop purchasing rare-earth magnets, tungsten, molybdenum, tantalum and other critical materials from China, Russia, Iran and North Korea starting Jan. 1, 2027.

But is the U.S. really ready?

(By Gong Weiwei)