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BW Businessworld

Innovate Or Negotiate

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Japan stands to lose its technology leadership in many areas and along with that its export revenues, if the recent trickle of high technology Japanese companies moving to China turns into exodus. While manufacturing moving to China has been the usual trend in the last decade but this recent movement is a result of a unique new crisis —the strangle hold of the Chinese over the rare earth metals that are a very vital input to many high technology and cleantech goods. As I had written before (The Rare Advantage) that Chinese dominate the production of rare earth metals. And to the extent that they can starve off to death many of the Japanese firms producing SLR cameras to auto parts who depend upon the extraordinary properties of these metals to produce high performance goods. And while the Chinese were already cutting off the supplies of rare earth through restrictive export quotas, their recent actions seem to have gained much more urgency. China is now undertaking an aggressive drive to shut down and nationalise many mines, as if to accelerate its ultimate bet.

The bet as I'd pointed out in the aforementioned  column earlier is not driving up the prices for its rare earth produce but the possibility of manufacturing the value added products using rare earths that can generate way higher export revenues. Further clue to its plans can be reflected in the way it has structured its new rare earth production regime. The new regime will make available twice as much quantity of rare earth metals available domestically as compared to that allowed to be supplied in world market based on figures here. Since most companies who consume rare earths are outside China, therefore prices would be low within the country while the prices outside the country are sky rocketing. That should push the manufacturers to move to China. Prices of neodymium, another rare earth have multiplied fourteen times since 2008.   High prices would at first knock off those manufacturers who use rare earths in low value addition products. Such manufactures may therefore rather migrate to alternatives or shut their production lines rather than absorb or adjust the cost. For e.g. a similar absolute price increase on CFLs (that also use rare earths) will more severely impact CFLs than SLR camera makers. Those manufacturers that use rare earths for high value addition products such as some niche Japanese manufacturers may at least be initially able to adjust to the high prices. But if Chinese are eyeing those highly protected, high technology companies then gradual tightening of the noose may hit them but will not bring them running to China immediately. It will take a much more drastic supply cut. This probably explains the more aggressive perhaps drastic recent Chinese efforts to reduce rare earths exports.

But ultimately there is no denying the fact that if the supplies keep dwindling- while the alternative supplies may not be able to entirely replace the Chinese supplies; it may force the world countries to come to the negotiation tables and warm up the Chinese for other favors, such as its territorial claims. China would be very willing, perhaps eager to take that route. Given the diplomatic flare up China has had with the Japan in the recent past; they would be eager to gain an upper hand on the Japanese.

And this is where the choices for the world countries and global industries including many of the Japanese firms will become difficult. Would they give in to the Chinese stance and let the companies relocate in a China where intellectual property rights are weak and give away their long kept technological superiority? Will the global countries try to get at a negotiated settlement that will help share the riches emanating from rare earths in a cleantech led future? Or would they innovate their way out? Negotiate or Innovate?

Atleast for the time being the Japanese want to innovate and keep their fingers crossed that it is already not late enough. Nidec Corporation, a Japanese company engaged in manufacturing of niche motor products hopes to produce rare earth metals free motors by 2012. Nidec is betting its chances on a new motor technology called ‘switched reluctance'.  The Japanese government is also extending liberal subsidies to Japanese manufacturers to invest in facilities that produce rare earth free products. Elsewhere NEDO another Japanese research agency is working with the Japanese universities to accelerate development of such motors to be used in Hybrid vehicles. The overall effort will require synchronisation between corporation, governments and the educational fraternity of a higher order to avert the crises.

If the Japanese manufacturers succeed in replacing the rare earths they can completely reinvent the motor supply chains. More than the diplomatic dividends, it should set forth new systems in which market economies can respond and act towards new challenges that the new order of globalisation will pose. The technological dividends of such a success will also be interesting to look at. For one such motors will cut down the costs of electric/hybrid vehicles or other cleantech goods that use such motors and give a greater push to the cleantech technologies.

The Japanese obviously do not want to depend upon negotiations as a solution to the crisis, although they may use it as a temporary reprieve. And quite obviously so. Innovation and not negotiations can produce lasting solutions and the Japanese have their sight set on that. It is immaterial what the WTO provisions about the rare earth exports say. Years of dead locked rounds on WTO or frequent distortion of WTO spirit by ‘import duties', ‘anti dumping cases' or ‘hidden subsidies' show that countries will only accept what is economically beneficial to them or what they can be negotiated down to, irrespective of what the international treaties may outline.

A number of our current technologies, that may hold immense future prospects, are dependent on rare earths and leaving that to the outcomes of negotiations is akin to kicking the can down the road and hopefully we will see a different outcome this time.

Yash Saxena is a sustainability consultant with Emergent Ventures, a climate change mitigating consultancy. He also works on innovation evangelism with Techpedia
yash (dot) saxena (at) emergent-ventures (dot)com