Chinese restriction of Rare Earth exports - what are Toyota's options?

by kolakoca (student)

University Degree Business and Administrative studies

Question 1: Explain and assess Toyota’s options. Provide strategy recommendations?

The first option that Toyota can do is build a consensus with other parties such as other automakers, High-tech companies; military groups …etc against the free trade of the rare earth materials at the WTO. The objective of this kind of lobbying is to put pressure on China to remove the export restriction on the rare earth materials. However, it is hard to influence policies from aboard. In addition, this approach will be associated with time.

The second option is to develop a new technology that is not dependent on the rare earth material. This could be done internally by Toyota or by supporting domestic and international research firms and universities to find an alternative solution. Toyota can create consensus with other automakers to reduce its cost or it can create a competitive advantage by registering the result of the research as its own patent. If this option is consider, my recommendation is to share the cost instead of bearing it alone. The disadvantage of this approach is the time required to come up with new commercialized alternative.

The third option is to produce the rare earth from recycling the old used cars and electronics. Dowa holding in Japan built a recycling factory in 2012 in Kosaka City. Toyota can utilize the existence of such resource for its own hybrid cars as this plant will serve both Toyota and other electronic companies such as Sony. The advantage of this approach is the local availability in Japan and the government support to such industry. The disadvantage is the limitation of the produced recycle rare earth as it will be shared with others. One solution to this disadvantage is to own shares in those recycling companies to secure Toyota raw material required. Other way around is to lobby with the government to support this new industry (rare earth recycling).

The forth option is to source its rare earth requirements from non-china plants. Australia, Brazil, Canada, South Africa, Tanzania, Greenland, and the United States are other alternative sources for rare earth. Vietnam will be good option for Toyota considering the geographical location. As it is the case with Lynas regarding the environmental issues, Toyota could lobby with other companies that impacted by the high priced rare earth material to reduce the environmental pressure on those new plants development. Exhibit 2 shows huge rare earth reserved in the world but most of them lack the mining either because of the cost ...

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The fifth option is to build/open an assembly factory in China and deliver ready component to Japan for final assembly. This option will be challenge by Japan government itself but will help Toyota to lower its costs and sustain its business. The advantages of this option are that Toyota will reduce its cost as we said before and it will reduce its worry about the governments’ discussions. However, the disadvantages of it are the challenge from the Japanese government and the risk that Chinese government will demand more involvement in the other manufacturing chain.

My recommendation is a combination of the above. Toyota can outsource the assembly of its parts to a non-Japanese and non-Chinese company that will build a factory in china and export the products to Japan. At the same time, they need to find alternative sources for the rare earth from non-Chinese markets and also find alternative technology that will not depend on rare earth.

Question 2: Assess Lynas’ risks and provide strategy recommendations

The first risk is the sunk investment in Malaysia. The risk of the change in Malaysian’s regulations toward the establishment of the plant in its land is high. firms bargaining power is high before the entry and low after the entry. That was clear after the huge protestation against the building of the factory. Even though the government believed in the low environmental impact of the project and based on that they awarded the project, the public opinion and the internal political stability of the country is more important that the $1.7 billion revenue.

The second risk is loyalty of their engineers and subcontractors. As they are operating in another country, the loyalty of their engineers and subcontractors are biased toward their home country. This was clear from the information that their engineers shared about the quality of the construction and the refusal of their Cradotex who resisted installing the watertight fiberglass without fixing the moisture problem.

The third risk is the reputation. As the issues of the low safety practice adopted by Lynas in their factory in Malaysia start to be a public issue and brought to the global media, companies like AkaNobel, the main supplier of the watertight fiberglass canceled its contract with Lynas. The reason for that is the fact that AkaNobel don’t want to lose its reputation too. As a European company, the safety and environmental friendly are ones of their top priority values. Losing these value means losing their customer and reputation. Therefore, Lynas should pay close attention to its reputation as it will fire-back to it in its home country too , Australia.

The forth risk is the change in the rare earth materials prices. The study provided to the Malaysian’ government is estimated a revenue of $1.7 billion if the prices stayed at its “current lofty levels”. However, what if the prices dropped?. Will the new investment is fesabile economically considering the the 0.05% shares of revenue to Malaysian Atomic Energy Licensing?. Will this will be impact the cost reduction, 4 times cut compared to Australia?.

Lynas investment is a sunk cost. With the current stories around the new development of rare earth factory and the construction problems in the construction, Lynas should public announce an investigation team from their HQ who will look into the reality of the these problems and upon the completion of the investigation, which of course will lead to the existence of the problem, they should announce the closure of this factory for safety reasons and exit the country. At the meantime, they need to look for other geographical area for new factory such as Vietnam with low political instability and no previous bad experience.

http://www.nytimes.com/2010/10/05/business/global/05recycle.html?_r=0

http://en.wikipedia.org/wiki/Rare_earth_element#Outside_of_China