China Cuts Off Rare Earths to Japanese High Tech. Who's Next? [Update]

What has been obvious in its inevitability may finally have happened for the first time: China blocked shipments of rare earths to Japan as part of a dispute. The implications are disturbing for Washington -- finally. They should be equally a concern for every company that is in or used high tech. With a wave of its massive pudgy hand, China has the power to single-handedly shut down much of commerce, and the country has shown that it is unafraid to wield the hammer.

Although Beijing denies this, experts in the rare earths market said that China had suspended shipments to Japan as part of a diplomatic dispute over the Japanese detention of a Chinese captain of a trawler that was in Japanese territorial waters and which collided with two government patrol boats. On Friday, Japan said that it would release the captain, but there was no word on resumption of shipments. Instead, the captain returned to China a hero.

This story should send a chill down the collective spine of the high tech industry, because there but for the grace of something or other goes it. Rare earths are essential materials in manufacturing computers, digital cameras, light bulbs, electric cars, and some significant weapons systems. China produces about 97 percent of the ores that provide the raw metals after processing, and it has begun to cap exports.

The geopolitical dispute is yet another example of how companies must factor international relations into their strategic planning the way the petroleum industry has for a hundred years or more.

Think that countries could conceivably go to war over oil reserves? Rare earths are in even shorter supply, and a single huge country has an effective lock on supply and a willingness to twist arms to its ends. Before planning a new product, companies will need to determine what amount of rare earths it needs for the expected run and the probability that it can get the material.

It's also an example of how myopic and insane the U.S. government and industries have been. All have wanted to blithely proceed with business as usual without looking at obvious risks. According to the U.S. Geological Survey, companies stopped mining rare earths in this country in 2003. It's not that we ran out of them. For years prices plummeted until it was easier and cheaper to get them from China. Until, of course, you can't. [Update: Although, as my BNET colleague Kirsten Korosec notes, the only rare earth mining company in the U.S. is trying to raise money to reopen a major rare earth mine.]

As I pointed out at the end of August, rare earths force virtually all companies to effectively single source critical materials, even though any businessperson would say that single sourcing is a disaster waiting to happen. And, as I noted, China's expanding manufacturing will soon give it a reason to divert more and more material to its own economy and to hell with the rest of the world, which would certainly be welcome to buy Chinese goods.

It's painful to see someone driving headlong into a brick wall. It's far worse when the driver ignores the obvious and you're sitting in the passenger seat.

Related:

• Andy Grove Is Right, Industry Needs Its Own Manufacturing
• China as No. 2: Why Its Days as a Manufacturing Outsourcer Are Numbered
• Google Says Whew! and Pulls the China Gun Away from Its Head
• Apple, Dell, and HP: Shocked, Shocked at Foxconn Suicides
• Geopolitics and High Tech: Big Surprises Await in Afghanistan and North Korea