China restricts exports of gallium and germanium

On 3 July 2023 China announced export controls on gallium and germanium, two metals essential for chips and solar panels, in force from August. Critical raw materials thus entered visibly into the field of trade competition between major powers.

The news went unnoticed by the general public, but it worried industry. Neither gallium nor germanium are names that often appear in the business press, and yet they form part of products that reach everyday life: electronic devices, communications, solar energy. Their availability therefore conditions entire sectors. These metals rarely make headlines, because they are used in small quantities and are obtained largely as by-products of other industrial processes, but their absence can halt entire production lines.

What was announced

The restrictions on exports of these two metals, in force from August, concern materials little known outside industry, but essential for making chips and solar panels.

An export control is not a total ban, but a system under which sales abroad require authorisation. That gives whoever establishes it the ability to brake, slow or condition shipments, with effects on delivery times and on prices for manufacturers that depend on those materials. Export licences can be applied variably over time, granted more or less quickly depending on circumstances, so the practical effect of such a measure is not fully known until one sees how it is applied.

A silent dependence

Technology supply chains depend on materials that few countries produce. When one country concentrates a large part of supply, it can condition access for others through export restrictions, with effects on costs, delivery times and availability for the manufacturers that use them.

This dependence tends to be invisible until a tension arises. In normal conditions, the material arrives, is paid for and is processed without anyone asking where it comes from. But the concentration of production in few hands means that a political decision in a single country can disrupt the operations of companies on another continent. The geographic concentration of production of certain materials is a known risk, but it is hard to correct in the short term, because opening new sources of supply requires investment, permits and often several years of development. For European manufacturers of electronics, telecommunications equipment or solar power, this translates into a possible rise in costs and the need to look for alternatives that do not always exist with the same quality or at the same price.

Strategic autonomy

Europe was beginning to talk about strategic autonomy in earnest. The idea is to reduce dependence on a single supplier in key products, by diversifying origins, building up stocks or promoting domestic production.

For an industrial or technology company, the practical lesson is to know which critical components or materials go into its products, where they come from and what alternatives exist. A simple map of suppliers, showing country of origin and degree of substitutability, already makes it possible to spot the most exposed points and decide whether it pays to hold stocks, qualify a second supplier or redesign a component. Even companies that do not manufacture directly may be affected if they depend on suppliers that do. It is worth asking key suppliers which critical materials they use and what plan they have if supply is interrupted. Reviewing contracts to see who bears the risk of a delay or a cost increase from external restrictions, and what room for price review exists, completes that practical look at the supply chain.

A supply chain is only as strong as its most concentrated link.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.